FREE NEWSLETTER

If you keep investing simple and make it understandable, you’ll lose half your audience, who assume success lies in their own befuddlement.

Good Old Days

SAY “1040” and most of us think of the income tax returns we file each year on April 15. But it’s only because of chance that we fill out 1040s, instead of 1039s or 1041s: That number was up next in the sequential numbering of forms developed by the Bureau of Internal Revenue, the predecessor of today’s IRS.
It all began on Jan. 5, 1914, when the Department of the Treasury unveiled the new Form 1040 for tax year 1913.

Read more »

A Little Perspective

TODAY WAS PAINFUL. How painful? Think of the financial losses:

Homeowners who closed on their house sale might have lost as much as 6% of the proceeds to real-estate commissions.
Car buyers who picked up their new vehicle probably gave up more than 10% of the purchase price just by driving off the dealership lot.
Those who signed separation agreements with their soon-to-be-ex spouse likely surrendered 50%.
Investors who bought load funds might have been nicked for 5.75%.

Read more »

Money Date Night

IN AN EFFORT to understand each other’s financial background, my fiancée and I began holding a money date night. These finance-focused conversations started out slowly. But they’ve become our way to talk about money and our future together.
As a financial planner, I don’t want to dominate the financial side of our lives. I believe household finances should be managed together and not individually. We view this date night as an opportunity to learn about our individual feelings toward money and what our goals are.

Read more »

Heading Home (IV)

DURING THE FIRST three weeks of house hunting, I looked at a dozen different properties. None met all the criteria I’d set for my “ideal” home, but a couple came close. My price point of $380,000 limited me to looking at smaller, starter-type homes. The competition for those houses was often fierce. On at least three occasions, a home I wanted to view would appear as a “new listing” one day and be marked as “pending sale” the next.

Read more »

Deadly Serious

THE MUSICIAN PRINCE died in 2016 at age 57, leaving behind a legacy of musical genius. Unfortunately, he also left behind an ongoing legal and financial mess. The issue: For reasons no one understands, Prince neglected to prepare even the most basic estate plan, leaving potential heirs squabbling over his fortune.
Under the latest tax law, passed late last year, only those with more than $11.2 million in assets ($22.4 million for a married couple) are subject to federal estate taxes.

Read more »

Money Guide

Corporate Bonds

WHEN YOU BUY BOTH corporate and Treasury bonds, you take interest-rate risk, meaning your bonds could fall in price if interest rates rise. But corporate-bond investors take an additional risk that government bondholders don’t have to worry about: There’s a chance the companies involved could default on their interest payments. In addition, corporate bonds are often callable before maturity, meaning an issuer can pay off its bonds early. This can be bad news for investors, who may have to surrender a bond with a relatively attractive yield. That’s another risk Treasury investors don’t have to worry about. To compensate for these risks, holders of higher-quality corporate bonds might collect an extra one to two percentage points in annual yield compared to Treasurys. That extra yield should provide a partial buffer against rising interest rates. Given the risk of rising interest rates, you might reduce your interest-rate risk by favoring shorter-term bonds, but stick with corporate rather than government bonds, so you don’t give up too much yield. There is, however, a price to be paid: When stocks next nosedive, corporate bonds will likely provide less protection than government bonds. Vanguard Group has a variety of low-cost corporate-bond mutual funds, both actively managed and indexed, that target securities with different maturities. A host of exchange-traded corporate-bond funds are available from iShares, SPDR ETFs and Vanguard. Next: Preferred Stock Previous: Mortgage Bonds
Read more »

Numbers

U.S. INVESTORS say they need a 9.8% after-inflation annual return to achieve their financial goals, but financial professionals believe a realistic real return is 6.3%, according to a survey by Natixis Investment Managers.

Newsletter

Fanning the Flames

WHAT COULD POSSIBLY be wrong with saving like crazy, so you can retire early? That’s the notion behind the Financial Independence/Retire Early, or FIRE, movement. Yet lately, I’ve read a lot of carping about FIRE, both in articles and in the emails I receive.
Just last week, those complaints got yet another airing in The Wall Street Journal. Earlier, Suze Orman weighed in, arguing you need at least $5 million to retire early.

Read More »

Archive

Reflect, Pause and Focus

WANT TO GET MORE out of your money? Whether you’re spending or investing, try this three-pronged strategy:

1. Reflect There’s ample evidence that most of us aren’t good at investing or figuring out what will make us happy. Looking to improve? Spend a little time pondering the past. When during your life were you happiest—and what were you doing? This may help you figure out whether you should change careers and what you might do with your spare time or with your retirement. Also think about the money you’ve spent in recent years. Which expenditures delivered plenty of happiness—and which do you recall with a shrug of the shoulders and maybe even a touch of regret? Research suggests that spending on experiences delivers more happiness than spending on possessions. One reason: We tend to forget the incidental annoyances of vacations, dinner parties and other experiences, and instead recall the overall good time. By contrast, it’s hard to forget the annoyances that accompany possessions, because they stick around and we have to watch them deteriorate. Recalling past investments is a little more perilous because our recollection may be sanitized, as we remember our successes and conveniently forget our mistakes. In fact, we may not simply forget our mistakes, but recall doing the exact opposite. We might have two contradictory thoughts. One says, “I believe I’m smart about money.” The other says, “I sold stocks at the March 2009 market bottom.” To ease our psychological distress, we might conveniently forget our panic selling—and perhaps even decide that we were buyers of stocks in early 2009. A possible cure: Dive into the filing cabinet and pull out your old account statements. That could be a sobering reminder of all the bum investments you’ve bought over the years—and all the ill-timed purchases and sales you have made. 2. Pause I have become increasingly convinced that there’s great value in pausing between an initial thought and acting upon it. There are two reasons. First, it gives us a cooling-off period, during which we can ponder whether we have settled on the right course of action. We’ve all had snap reactions—for example, to an email from a colleague or family member—that we later regret and which, with a few hours delay, we would have handled differently. The same holds true for spending and investing decisions. We fall in love with an expensive pair of shoes or a new electronic toy, make the impulse purchase and later wonder whether it was money well spent. The market surges or sinks, we make a change to our portfolio and later wish we hadn’t been so hasty. Moving slowly doesn’t just help us avoid mistakes. It can also boost happiness. That brings us to the second reason to pause. It turns out that delaying spending, whether on experiences or possessions, can bring with it a pleasurable period of anticipation. The implication: If you plan to buy a new car or take a special vacation, start thinking about it far in advance, so you have a long time to savor the eventual prize. You may even discover the months of anticipation prove more pleasurable than the car or vacation itself. 3. Focus When one of my favorite sports teams loses, I don’t bother to read the account in the newspaper. Why upset myself further? But when they win, I go hunting for the newspaper recap—even if I had watched the game. In terms of our happiness, what matters is what we focus on. For instance, research suggests that high-income earners don’t enjoy their daily lives any more than the rest of us and yet, when surveyed, they’re more likely to say they are happy. Why? When asked about their level of happiness, those with high incomes ponder their fat paychecks—and that prompts them to say they’re happy. This mindset creates a conundrum, even for those with plenty: Unless you’re the world’s richest individual, there will always be somebody who has more money than you. Don’t want to feel relatively deprived? Don’t put yourself in a position where you feel poor. That means avoiding high-end stores and restaurants that you can barely afford, and resisting the temptation to move to a town where others are much wealthier. Even as you avoid thinking about those who have more, you should spend time considering your own good fortune. Remember the expensive kitchen renovation you undertook two years ago—and which today you barely notice? Spend some time admiring your fine kitchen and you’ll squeeze a little more happiness out of the dollars spent. This notion of focus can also help with investing. If an investment is volatile and hence likely to fall hard during declining markets, experts will often describe it as risky. But this risk is much reduced if we don’t need to sell during the market decline—and the sense of risk is diminished even further if we don’t pay attention. Indeed, I’ve heard many folks say they look at their brokerage and mutual fund accounts less often when the markets are falling. That strikes me as entirely sensible. If you are well diversified, there’s no need to torture yourself with frequent reminders that you’re now poorer. As a money manager once told me, “If you own growth stocks, you should only look at the price every 12 months. That way, you’ll only suffer one sleepless night a year.”

And Now, a Word from Our Sponsor

Want signed copies of my new bookHow to Think About Money? To get your autographed copies, send a check—made payable to Jonathan Clements—to P.O. Box 247, Ardsley-on-Hudson, NY 10503-0247. To cover the cost of the book, shipping and handling, I’m charging $16 each for one or two copies, $15 each if you buy three to nine copies, $13 each if you purchase 10 to 49 books and $12 each if you buy 50 or more. In other words, if you want, say, five copies, it would be $75. Be sure to specify where the books should be sent. Don’t care about having my scrawl at the front of the book? You can buy the $13.99 paperback or $9.99 Kindle edition directly from Amazon. Full disclosure: If you purchase the book through these two links, HumbleDollar earns a small fee.

Greatest Hits

I continue to blog regularly on this site. You can keep up with my writing by returning here every week or so, following me on Twitter and liking my Facebook page. Here are four blogs from the past few months that were especially popular:

This Is a Test, This Is Only a Test

The current grudging economic recovery is in its seventh year and the stock market rally is in its eighth year. Here I earn nobody’s admiration by stating the obvious: These things don’t go on forever—but nobody knows when the music will stop. That makes this a good time to hold a financial fire drill. Focus on three key questions. How would you react if the stock market dropped 30% next week? Would a market plunge derail your upcoming financial goals? How would you cope if an economic downturn put your job at risk? This first question is about emotional fortitude, while the second and third questions are practical ones—but all three have profound implications for how you position your portfolio. Let’s start with first principles: Most folks should own a portfolio that has healthy exposure not only to stocks, but also to bonds and other more conservative investments. That way, you should earn handsome long-run returns, but your overall wealth shouldn’t be too badly bloodied by a stock market crash and you shouldn’t find yourself selling stocks at fire-sale prices to buy shoes for the children. Not sure you have the right balance between stocks and bonds? The tricky issue: What counts as a bond—and what counts as a stock? Looks Like a Bond Bonds typically deliver a steady stream of regular income. If that’s the defining characteristic, many parts of our financial life look like bonds. Think about all the income streams you collect: There might be Social Security retirement benefits, income from immediate annuities and any traditional employer pension you’re entitled to. If these provide a hefty portion of your retirement income, that can free you up to invest more heavily in stocks—and potentially earn higher long-run returns. As you consider the bond-like income you receive, also give some thought to the regular drains on your finances—in the guise of mortgages, auto loans and other debts. You can think of these debts as negative bonds. Got $400,000 in bonds and a $300,000 mortgage? Arguably, your net bond exposure is just $100,000. Between student loans, car loans and mortgages, many folks reach their 30s with what seems like an alarming amount of debt. But typically, their net position in bonds is still substantial—thanks to their paycheck, which can be viewed as another bond-like source of income. Indeed, among academics, the four decades of income that we collect from our so-called human capital provides the intellectual justification not only for taking on debt early in our adult lives, but also for investing heavily in stocks. By taking on debt in our 20s and 30s, we can buy items—think college degrees, cars and homes—that we couldn’t afford if we had to pay cash. This has the added benefit of smoothing out our consumption over our lifetime. Meanwhile, the debt involved shouldn’t be of great concern, because we know we have plenty of paychecks ahead of us to service these debts and pay them off by retirement. Those paychecks, with their steady bond-like income, also free us up to invest the bulk of our portfolio in stocks. We don’t need income from our portfolio while we’re in the workforce, so we can go light on bonds and instead shoot for higher returns with stocks. But as we approach retirement and the last of our paychecks, most of us will want to cut back somewhat on stocks and invest more in bonds. Are You a Stock? Keep in mind that not everybody’s paycheck is bond-like. Let’s say you work on commission, you’re a Wall Street trader or you’re involved with a Silicon Valley startup. Your income isn’t bond-like. Instead, it looks more like a stock. Maybe you will have a huge payday—or maybe you won’t be so lucky, and you will find yourself with far less income than you had hoped and perhaps even out of work. To reflect this risk, you might want a healthy stake in bonds and other conservative investments, even if you’re in your 20s. Whether it’s bonds, a regular paycheck, a pension, an immediate annuity or Social Security, you’ll likely discover that much—and maybe most—of your assets are in bonds and bond lookalikes. And, of course, you likely own other assets, notably a home and perhaps even a second home. The implication: Even if the stock market tumbled 30% tomorrow, the hit to your overall net worth would probably be modest, so there’s scant reason to panic. But to avoid feeling unnerved, it’s important to stay focused on your overall net worth, or you won’t get the emotional benefit that comes with spreading your money across a broad array of assets. Owning multiple assets doesn’t just make for a less unnerving financial life. It also has a practical benefit: If the stock market plunges, you can draw on these other financial resources to buy groceries and pay the mortgage. For retirees, those resources might include their monthly Social Security check and their bond portfolio. For those in the workforce, they have a paycheck. What if that paycheck is at risk, because there’s a chance you’ll get laid off if the economy turns down? This may be the moment to accumulate cash and set up a home-equity line of credit—so, if the need arises, you can get your hands on enough money to make it through a long spell of unemployment.
Read more »

Act

BE THANKFUL. Great vacations and wonderful family events fade from memory. Similarly, we quickly adapt to material improvements in our lives, such as the new car and the remodeled kitchen. To counteract this process of adaptation, pause for a moment, and ponder the major purchases you’ve made over the past year and the great experiences you’ve had.

Truths

NO. 83: ROTTEN MARKETS early on can wreck a retirement. Coupled with our own spending needs, lousy investment results during our retirement’s first five years could devastate our nest egg’s value. Even if we later enjoy handsome returns, our portfolio may not benefit much, because it’s so shrunken—a danger known as sequence-of-return risk.

Think

DEDUCTIONS VS. CREDITS. Mortgage interest, charitable contributions and other deductions reduce your taxable income. If you have $100 in deductions and you’re in the 22% tax bracket, you’ll save $22 in taxes. By contrast, a tax credit—such as the child tax credit and the American Opportunity credit—result in a dollar-for-dollar reduction in taxes, so a $100 credit means $100 less in taxes.

About Jonathan

Jonathan Clements

HumbleDollar is edited by Jonathan Clements, author of From Here to Financial Happiness.

Home Call to Action

Latest Blogs

Good Old Days

SAY “1040” and most of us think of the income tax returns we file each year on April 15. But it’s only because of chance that we fill out 1040s, instead of 1039s or 1041s: That number was up next in the sequential numbering of forms developed by the Bureau of Internal Revenue, the predecessor of today’s IRS.
It all began on Jan. 5, 1914, when the Department of the Treasury unveiled the new Form 1040 for tax year 1913.

Read more »

A Little Perspective

TODAY WAS PAINFUL. How painful? Think of the financial losses:

Homeowners who closed on their house sale might have lost as much as 6% of the proceeds to real-estate commissions.
Car buyers who picked up their new vehicle probably gave up more than 10% of the purchase price just by driving off the dealership lot.
Those who signed separation agreements with their soon-to-be-ex spouse likely surrendered 50%.
Investors who bought load funds might have been nicked for 5.75%.

Read more »

Money Date Night

IN AN EFFORT to understand each other’s financial background, my fiancée and I began holding a money date night. These finance-focused conversations started out slowly. But they’ve become our way to talk about money and our future together.
As a financial planner, I don’t want to dominate the financial side of our lives. I believe household finances should be managed together and not individually. We view this date night as an opportunity to learn about our individual feelings toward money and what our goals are.

Read more »

Heading Home (IV)

DURING THE FIRST three weeks of house hunting, I looked at a dozen different properties. None met all the criteria I’d set for my “ideal” home, but a couple came close. My price point of $380,000 limited me to looking at smaller, starter-type homes. The competition for those houses was often fierce. On at least three occasions, a home I wanted to view would appear as a “new listing” one day and be marked as “pending sale” the next.

Read more »

Deadly Serious

THE MUSICIAN PRINCE died in 2016 at age 57, leaving behind a legacy of musical genius. Unfortunately, he also left behind an ongoing legal and financial mess. The issue: For reasons no one understands, Prince neglected to prepare even the most basic estate plan, leaving potential heirs squabbling over his fortune.
Under the latest tax law, passed late last year, only those with more than $11.2 million in assets ($22.4 million for a married couple) are subject to federal estate taxes.

Read more »

Numbers

U.S. INVESTORS say they need a 9.8% after-inflation annual return to achieve their financial goals, but financial professionals believe a realistic real return is 6.3%, according to a survey by Natixis Investment Managers.

Truths

NO. 83: ROTTEN MARKETS early on can wreck a retirement. Coupled with our own spending needs, lousy investment results during our retirement’s first five years could devastate our nest egg’s value. Even if we later enjoy handsome returns, our portfolio may not benefit much, because it’s so shrunken—a danger known as sequence-of-return risk.

Act

BE THANKFUL. Great vacations and wonderful family events fade from memory. Similarly, we quickly adapt to material improvements in our lives, such as the new car and the remodeled kitchen. To counteract this process of adaptation, pause for a moment, and ponder the major purchases you’ve made over the past year and the great experiences you’ve had.

Think

DEDUCTIONS VS. CREDITS. Mortgage interest, charitable contributions and other deductions reduce your taxable income. If you have $100 in deductions and you’re in the 22% tax bracket, you’ll save $22 in taxes. By contrast, a tax credit—such as the child tax credit and the American Opportunity credit—result in a dollar-for-dollar reduction in taxes, so a $100 credit means $100 less in taxes.

Home Call to Action

Free Newsletter

Fanning the Flames

WHAT COULD POSSIBLY be wrong with saving like crazy, so you can retire early? That’s the notion behind the Financial Independence/Retire Early, or FIRE, movement. Yet lately, I’ve read a lot of carping about FIRE, both in articles and in the emails I receive.
Just last week, those complaints got yet another airing in The Wall Street Journal. Earlier, Suze Orman weighed in, arguing you need at least $5 million to retire early.

Read More »

Money Guide

Start Here

Corporate Bonds

WHEN YOU BUY BOTH corporate and Treasury bonds, you take interest-rate risk, meaning your bonds could fall in price if interest rates rise. But corporate-bond investors take an additional risk that government bondholders don’t have to worry about: There’s a chance the companies involved could default on their interest payments. In addition, corporate bonds are often callable before maturity, meaning an issuer can pay off its bonds early. This can be bad news for investors, who may have to surrender a bond with a relatively attractive yield. That’s another risk Treasury investors don’t have to worry about. To compensate for these risks, holders of higher-quality corporate bonds might collect an extra one to two percentage points in annual yield compared to Treasurys. That extra yield should provide a partial buffer against rising interest rates. Given the risk of rising interest rates, you might reduce your interest-rate risk by favoring shorter-term bonds, but stick with corporate rather than government bonds, so you don’t give up too much yield. There is, however, a price to be paid: When stocks next nosedive, corporate bonds will likely provide less protection than government bonds. Vanguard Group has a variety of low-cost corporate-bond mutual funds, both actively managed and indexed, that target securities with different maturities. A host of exchange-traded corporate-bond funds are available from iShares, SPDR ETFs and Vanguard. Next: Preferred Stock Previous: Mortgage Bonds
Read more »

Archive

Reflect, Pause and Focus

WANT TO GET MORE out of your money? Whether you’re spending or investing, try this three-pronged strategy:

1. Reflect There’s ample evidence that most of us aren’t good at investing or figuring out what will make us happy. Looking to improve? Spend a little time pondering the past. When during your life were you happiest—and what were you doing? This may help you figure out whether you should change careers and what you might do with your spare time or with your retirement. Also think about the money you’ve spent in recent years. Which expenditures delivered plenty of happiness—and which do you recall with a shrug of the shoulders and maybe even a touch of regret? Research suggests that spending on experiences delivers more happiness than spending on possessions. One reason: We tend to forget the incidental annoyances of vacations, dinner parties and other experiences, and instead recall the overall good time. By contrast, it’s hard to forget the annoyances that accompany possessions, because they stick around and we have to watch them deteriorate. Recalling past investments is a little more perilous because our recollection may be sanitized, as we remember our successes and conveniently forget our mistakes. In fact, we may not simply forget our mistakes, but recall doing the exact opposite. We might have two contradictory thoughts. One says, “I believe I’m smart about money.” The other says, “I sold stocks at the March 2009 market bottom.” To ease our psychological distress, we might conveniently forget our panic selling—and perhaps even decide that we were buyers of stocks in early 2009. A possible cure: Dive into the filing cabinet and pull out your old account statements. That could be a sobering reminder of all the bum investments you’ve bought over the years—and all the ill-timed purchases and sales you have made. 2. Pause I have become increasingly convinced that there’s great value in pausing between an initial thought and acting upon it. There are two reasons. First, it gives us a cooling-off period, during which we can ponder whether we have settled on the right course of action. We’ve all had snap reactions—for example, to an email from a colleague or family member—that we later regret and which, with a few hours delay, we would have handled differently. The same holds true for spending and investing decisions. We fall in love with an expensive pair of shoes or a new electronic toy, make the impulse purchase and later wonder whether it was money well spent. The market surges or sinks, we make a change to our portfolio and later wish we hadn’t been so hasty. Moving slowly doesn’t just help us avoid mistakes. It can also boost happiness. That brings us to the second reason to pause. It turns out that delaying spending, whether on experiences or possessions, can bring with it a pleasurable period of anticipation. The implication: If you plan to buy a new car or take a special vacation, start thinking about it far in advance, so you have a long time to savor the eventual prize. You may even discover the months of anticipation prove more pleasurable than the car or vacation itself. 3. Focus When one of my favorite sports teams loses, I don’t bother to read the account in the newspaper. Why upset myself further? But when they win, I go hunting for the newspaper recap—even if I had watched the game. In terms of our happiness, what matters is what we focus on. For instance, research suggests that high-income earners don’t enjoy their daily lives any more than the rest of us and yet, when surveyed, they’re more likely to say they are happy. Why? When asked about their level of happiness, those with high incomes ponder their fat paychecks—and that prompts them to say they’re happy. This mindset creates a conundrum, even for those with plenty: Unless you’re the world’s richest individual, there will always be somebody who has more money than you. Don’t want to feel relatively deprived? Don’t put yourself in a position where you feel poor. That means avoiding high-end stores and restaurants that you can barely afford, and resisting the temptation to move to a town where others are much wealthier. Even as you avoid thinking about those who have more, you should spend time considering your own good fortune. Remember the expensive kitchen renovation you undertook two years ago—and which today you barely notice? Spend some time admiring your fine kitchen and you’ll squeeze a little more happiness out of the dollars spent. This notion of focus can also help with investing. If an investment is volatile and hence likely to fall hard during declining markets, experts will often describe it as risky. But this risk is much reduced if we don’t need to sell during the market decline—and the sense of risk is diminished even further if we don’t pay attention. Indeed, I’ve heard many folks say they look at their brokerage and mutual fund accounts less often when the markets are falling. That strikes me as entirely sensible. If you are well diversified, there’s no need to torture yourself with frequent reminders that you’re now poorer. As a money manager once told me, “If you own growth stocks, you should only look at the price every 12 months. That way, you’ll only suffer one sleepless night a year.”

And Now, a Word from Our Sponsor

Want signed copies of my new bookHow to Think About Money? To get your autographed copies, send a check—made payable to Jonathan Clements—to P.O. Box 247, Ardsley-on-Hudson, NY 10503-0247. To cover the cost of the book, shipping and handling, I’m charging $16 each for one or two copies, $15 each if you buy three to nine copies, $13 each if you purchase 10 to 49 books and $12 each if you buy 50 or more. In other words, if you want, say, five copies, it would be $75. Be sure to specify where the books should be sent. Don’t care about having my scrawl at the front of the book? You can buy the $13.99 paperback or $9.99 Kindle edition directly from Amazon. Full disclosure: If you purchase the book through these two links, HumbleDollar earns a small fee.

Greatest Hits

I continue to blog regularly on this site. You can keep up with my writing by returning here every week or so, following me on Twitter and liking my Facebook page. Here are four blogs from the past few months that were especially popular:

This Is a Test, This Is Only a Test

The current grudging economic recovery is in its seventh year and the stock market rally is in its eighth year. Here I earn nobody’s admiration by stating the obvious: These things don’t go on forever—but nobody knows when the music will stop. That makes this a good time to hold a financial fire drill. Focus on three key questions. How would you react if the stock market dropped 30% next week? Would a market plunge derail your upcoming financial goals? How would you cope if an economic downturn put your job at risk? This first question is about emotional fortitude, while the second and third questions are practical ones—but all three have profound implications for how you position your portfolio. Let’s start with first principles: Most folks should own a portfolio that has healthy exposure not only to stocks, but also to bonds and other more conservative investments. That way, you should earn handsome long-run returns, but your overall wealth shouldn’t be too badly bloodied by a stock market crash and you shouldn’t find yourself selling stocks at fire-sale prices to buy shoes for the children. Not sure you have the right balance between stocks and bonds? The tricky issue: What counts as a bond—and what counts as a stock? Looks Like a Bond Bonds typically deliver a steady stream of regular income. If that’s the defining characteristic, many parts of our financial life look like bonds. Think about all the income streams you collect: There might be Social Security retirement benefits, income from immediate annuities and any traditional employer pension you’re entitled to. If these provide a hefty portion of your retirement income, that can free you up to invest more heavily in stocks—and potentially earn higher long-run returns. As you consider the bond-like income you receive, also give some thought to the regular drains on your finances—in the guise of mortgages, auto loans and other debts. You can think of these debts as negative bonds. Got $400,000 in bonds and a $300,000 mortgage? Arguably, your net bond exposure is just $100,000. Between student loans, car loans and mortgages, many folks reach their 30s with what seems like an alarming amount of debt. But typically, their net position in bonds is still substantial—thanks to their paycheck, which can be viewed as another bond-like source of income. Indeed, among academics, the four decades of income that we collect from our so-called human capital provides the intellectual justification not only for taking on debt early in our adult lives, but also for investing heavily in stocks. By taking on debt in our 20s and 30s, we can buy items—think college degrees, cars and homes—that we couldn’t afford if we had to pay cash. This has the added benefit of smoothing out our consumption over our lifetime. Meanwhile, the debt involved shouldn’t be of great concern, because we know we have plenty of paychecks ahead of us to service these debts and pay them off by retirement. Those paychecks, with their steady bond-like income, also free us up to invest the bulk of our portfolio in stocks. We don’t need income from our portfolio while we’re in the workforce, so we can go light on bonds and instead shoot for higher returns with stocks. But as we approach retirement and the last of our paychecks, most of us will want to cut back somewhat on stocks and invest more in bonds. Are You a Stock? Keep in mind that not everybody’s paycheck is bond-like. Let’s say you work on commission, you’re a Wall Street trader or you’re involved with a Silicon Valley startup. Your income isn’t bond-like. Instead, it looks more like a stock. Maybe you will have a huge payday—or maybe you won’t be so lucky, and you will find yourself with far less income than you had hoped and perhaps even out of work. To reflect this risk, you might want a healthy stake in bonds and other conservative investments, even if you’re in your 20s. Whether it’s bonds, a regular paycheck, a pension, an immediate annuity or Social Security, you’ll likely discover that much—and maybe most—of your assets are in bonds and bond lookalikes. And, of course, you likely own other assets, notably a home and perhaps even a second home. The implication: Even if the stock market tumbled 30% tomorrow, the hit to your overall net worth would probably be modest, so there’s scant reason to panic. But to avoid feeling unnerved, it’s important to stay focused on your overall net worth, or you won’t get the emotional benefit that comes with spreading your money across a broad array of assets. Owning multiple assets doesn’t just make for a less unnerving financial life. It also has a practical benefit: If the stock market plunges, you can draw on these other financial resources to buy groceries and pay the mortgage. For retirees, those resources might include their monthly Social Security check and their bond portfolio. For those in the workforce, they have a paycheck. What if that paycheck is at risk, because there’s a chance you’ll get laid off if the economy turns down? This may be the moment to accumulate cash and set up a home-equity line of credit—so, if the need arises, you can get your hands on enough money to make it through a long spell of unemployment.
Read more »
Jonathan Clements

About Jonathan

HumbleDollar is edited by Jonathan Clements, author of From Here to Financial Happiness.