If owning foreign stocks is especially risky for U.S. investors, is owning U.S. shares especially risky for foreigners?
FIFTY YEARS AGO, when the first index funds were getting started, critics wasted no time attacking the idea. They called it “un-American” and a “sure path to mediocrity.”
But over time, indexing has grown to the point where it now accounts for more than half of all U.S. mutual fund assets. Last year, research firm Morningstar declared that “index funds have officially won.” But this victory seems to have only increased the level of criticism.
WHICH FINANCIAL dangers should we focus on? The possibilities seem pretty much endless. In fact, five years ago, I decided to make a list—and ended up offering readers 50 shades of risk.
Yet our notion of risk used to be far more circumscribed.
In the late 1980s, when I started writing about personal finance, insurance was considered important, but it wasn’t much discussed. Instead, the only risk that seemed to merit serious analysis was investment risk,
TED BENNA IS OFTEN called the “father of the 401(k).” In 1980, he implemented the first 401(k) plan based on his somewhat bold interpretation of the Revenue Act of 1978. He certainly couldn’t have envisioned the $11.4 trillion in “defined contribution” 401(k) and 403(b) accounts that we have today.
Individual retirement accounts also took off in the early 1980s, and traditional IRAs now hold an additional $11.3 trillion. Combined, that’s an impressive $23 trillion in tax-deferred retirement assets.
WHO OWNS TIME? WE speak of “my time” and “your time” as if it were a possession we hold in our hands. But we can’t stash it away for future use, nor can we trade or transfer our allotment to another person. Is it truly ours? For the moment, let’s say that it is.
Appraising time. How much do we value our time? Some days, we treat it as a precious commodity. On those days,
FORD MOTOR COMPANY introduced the world to the convertible hard top in 1957 with a car called the Skyliner. It was a marvel of engineering.
To retract, the Skyliner hard top first tilted up and away from the front windshield. Then the top folded in half overhead. The trunk lid opened wide. The folded hard top swung into the trunk, which then closed. All by flipping a single dashboard switch. You can see it in operation in this commercial featuring Lucille Ball and Desi Arnaz.
MARVIN STEINBERG was a psychologist who founded the Connecticut Council on Problem Gambling. During his career, he made some uncomfortable observations about the behavior of stock market investors. In many cases, he felt, investors’ behavior veered awfully close to gambling.
This is the sort of observation that seems like it could be true, but it also seems difficult to quantify. That’s why a recent study by Morningstar analyst Jeffrey Ptak caught my eye.
Ptak wanted to examine investors’ experience with so-called thematic funds.
RISK VS. REWARD. To earn high returns, we need to take high risk. Over the long haul, someone with 80% stocks will likely earn far higher returns than an investor with 80% bonds. Still, it’s called risk for a reason: The extra reward isn’t guaranteed—especially if we take unnecessary risk, such as betting on a handful of stocks rather than a diversified portfolio.
NO. 68: WE SPEND our days focused on goals, but achieving them rarely delivers the happiness we imagine. Instead, it’s the journey we truly enjoy. This is captured by psychologist Mihaly Csikszentmihalyi’s notion of flow. We’re often happiest when engaged in challenging activities we’re passionate about, consider important and feel we’re good at.
THROW STUFF OUT. Almost all of us have too many possessions. Those possessions come with an ongoing cost if, say, we rent a storage locker or we feel compelled to own a larger home. A suggestion: Make it a rule that, for every item of clothing or every tchotchke you buy, you have to give away at least one—and perhaps two—items that you already own.
MY COMPANY SHIFTED in the early 2000s from a traditional defined benefit pension plan, with a formula based on salary and years of service, to a cash-balance pension plan. All new employees would be put in the cash-balance plan. Existing employees had a choice to stay in the traditional plan or move to the new plan.
A generous transition credit for the cash-balance option was offered to current employees. The transition credit was based on a combination of current salary,
TERM LIFE INSURANCE is best for most people: It’s affordable, simple to understand and provides the two or three decades of coverage they need. But that doesn’t mean that permanent “cash value” life insurance is always bad.
The most obvious situation: You actually need insurance permanently. Suppose you’re a business owner and you want to provide money for your family to pay inheritance taxes. By buying life insurance, you’d make sure your family receives a pool of income-tax-free money upon your death,
IN THE BOOK OF JOAN, a tribute to the comedian Joan Rivers, her daughter Melissa shares some of her late mother’s quirks. Among them: Her mother always drove 40 miles per hour. Regardless of where she was—on the highway, in a school zone, in the driveway—she always drove 40 miles per hour. Melissa’s conclusion: For passengers, this could be hair-raising, but at least her mother was consistent.
When it comes to investing,
RETIREMENT PLANNING videos and books can be frustrating because of the conflicting advice from so-called experts. Often, these experts are outside the mainstream. They retired in their 30s, or saved 50% of their income, or claim to be living so frugally in retirement that they need to replace just half of their old salary.
I prefer to think more about average Americans facing the reality and challenges of planning for retirement in the real world.
I JUST FINISHED rereading a book every serious investor needs to reread: Moneyball: The Art of Winning an Unfair Game. It was written by Michael Lewis in 2003, but it’s still quite relevant to baseball—and to investing.
It’s the story of the Oakland A’s general manager, Billy Beane, and his struggle to create a competitive baseball team on a limited budget. How does this relate to personal finance? Well, first let me explain my connection to Moneyball.
NO. 43: IF OUR GOAL is investment growth, we should almost never buy insurance products. That means no cash-value life insurance, costly variable annuities or indexed annuities.
RISK VS. REWARD. To earn high returns, we need to take high risk. Over the long haul, someone with 80% stocks will likely earn far higher returns than an investor with 80% bonds. Still, it’s called risk for a reason: The extra reward isn’t guaranteed—especially if we take unnecessary risk, such as betting on a handful of stocks rather than a diversified portfolio.
NO. 68: WE SPEND our days focused on goals, but achieving them rarely delivers the happiness we imagine. Instead, it’s the journey we truly enjoy. This is captured by psychologist Mihaly Csikszentmihalyi’s notion of flow. We’re often happiest when engaged in challenging activities we’re passionate about, consider important and feel we’re good at.
THROW STUFF OUT. Almost all of us have too many possessions. Those possessions come with an ongoing cost if, say, we rent a storage locker or we feel compelled to own a larger home. A suggestion: Make it a rule that, for every item of clothing or every tchotchke you buy, you have to give away at least one—and perhaps two—items that you already own.
MY COMPANY SHIFTED in the early 2000s from a traditional defined benefit pension plan, with a formula based on salary and years of service, to a cash-balance pension plan. All new employees would be put in the cash-balance plan. Existing employees had a choice to stay in the traditional plan or move to the new plan.
A generous transition credit for the cash-balance option was offered to current employees. The transition credit was based on a combination of current salary,
TERM LIFE INSURANCE is best for most people: It’s affordable, simple to understand and provides the two or three decades of coverage they need. But that doesn’t mean that permanent “cash value” life insurance is always bad.
The most obvious situation: You actually need insurance permanently. Suppose you’re a business owner and you want to provide money for your family to pay inheritance taxes. By buying life insurance, you’d make sure your family receives a pool of income-tax-free money upon your death,
IN THE BOOK OF JOAN, a tribute to the comedian Joan Rivers, her daughter Melissa shares some of her late mother’s quirks. Among them: Her mother always drove 40 miles per hour. Regardless of where she was—on the highway, in a school zone, in the driveway—she always drove 40 miles per hour. Melissa’s conclusion: For passengers, this could be hair-raising, but at least her mother was consistent.
When it comes to investing,
RETIREMENT PLANNING videos and books can be frustrating because of the conflicting advice from so-called experts. Often, these experts are outside the mainstream. They retired in their 30s, or saved 50% of their income, or claim to be living so frugally in retirement that they need to replace just half of their old salary.
I prefer to think more about average Americans facing the reality and challenges of planning for retirement in the real world.
I JUST FINISHED rereading a book every serious investor needs to reread: Moneyball: The Art of Winning an Unfair Game. It was written by Michael Lewis in 2003, but it’s still quite relevant to baseball—and to investing.
It’s the story of the Oakland A’s general manager, Billy Beane, and his struggle to create a competitive baseball team on a limited budget. How does this relate to personal finance? Well, first let me explain my connection to Moneyball.
How Are You Planning to Pay for Potential Long Term Care Expenses?
Sports Fan by Scott Martin
Do you commit Medicare fraud? Hopefully not intentionally.
Quinn ponders taxes, laws, freebies and the future of retirement. Logic need not apply.
What wisdom can you share?
Fidelity ZERO Funds