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If folks claim their home has been a great investment, ask to see their detailed financial records—and their degree in advanced mathematics.

Getting Played

“IS CBS PIPING fake birds into its Masters coverage?” That was the headline on a recent Slate article, which speculated that the television network might be adding “enhanced audio” of fake bird chirping to its coverage of the golf tournament.
This is not a scandal for the ages. But it serves as a timely reminder that we have fantasized notions of life that marketers and the media don’t hesitate to exploit.
Make no mistake: The PGA,

Read more »

More to Come

SINCE ENTERING the workforce in late 2010, I’ve been giving advice to others on how to put their money to good use. There are few things I enjoy more than having a conversation with a couple about such a complex subject. Along the way, I’ve pushed myself to learn more about specific financial planning strategies, as well as about human behavior and psychology.
These readings have not only taught me how I can better help my clients,

Read more »

Not So Easy

I RECENTLY CAME across an academic paper with an attention-grabbing title: “It has been very easy to beat the S&P 500.” Not just easy, but very easy
That got my attention because, in recent years, beating the S&P 500 has been anything but easy. In fact, it’s been maddeningly difficult. In eight of the past 10 years, domestic markets have outperformed international markets—by a wide margin. A dollar invested 10 years ago in the S&P 500 would be worth $4.37 today.

Read more »

Singled Out

“FINANCIAL WRITERS always seem to assume everybody’s married.” That’s a complaint I’ve heard more than once—and it came to mind as I reviewed our 2018 tax return.
That tax return reflected the impact of 2017’s tax law, which—among other things—roughly doubled the size of the standard deduction, while capping the itemized deduction for state, local and property taxes at $10,000. One result: Many couples now get little or no tax benefit from either the mortgage interest they pay or the charitable contributions they make.

Read more »

Over Coffee

SITTING IN a coffee shop, I struck up conversation with a middle-aged woman. We were talking about winning the lottery and then, as if one thought naturally followed the other, we got onto the topic of retirement. She mentioned how difficult it was for her and her husband to pay the mortgage and the monthly bills.
“After saving for retirement?”  I interjected.
“We can’t save for retirement,” she responded. “Our plan is to get our mortgage paid off,

Read more »

Unloaded

“YOU’RE FIRED” was made famous by Donald Trump as host of The Apprentice. Imagine my surprise when my broker delivered the same message to me two years ago.
In 2015, my job was transferred to Texas. I opted to become a long-distance commuter, while my family stayed in Maryland. Around that time, we moved homes, so our son could attend a better high school. In addition, I was helping to launch two huge long-term work projects.

Read more »

Money Guide

Grandparents and 529s

IF YOU HAVE grandchildren, funding 529 plans is an intriguing option with three big benefits and one significant problem. First, as mentioned in the previous section, you can gift as much as $75,000 in 2018 and count it as your gift for the next five years. That can get a big chunk of money, as well as its future investment growth, out of your estate. If, however, you die before the five years are up, a pro-rated share of the gift will be added back to your estate. Second, if you open the account rather than funding a 529 opened by the parents, you remain in control of the money. That means that, if your grandchildren’s parents divorce, there’s no risk the money will get divvied up and spent. Third, unlike with other education accounts, your contributions to a 529 aren’t irrevocable. In other words, if you later discover that your retirement portfolio is becoming depleted, you can reclaim the money in your grandchildren’s 529s, though you’ll owe income taxes and tax penalties on any investment growth. What’s the problem? If it turns out your grandchildren are eligible for financial aid, you’ll want to time your 529 withdrawals carefully. When applying for financial aid, a grandparent-controlled 529 doesn’t show up as an asset belonging to either the parents or the child, which is a plus. But when a grandparent makes a 529 withdrawal to pay college expenses, it counts as income for the student, which can badly hurt aid eligibility. To get around this problem, you might use the 529 to pay college expenses after your grandchild has filed his or her final aid application, so the 529 withdrawal won’t affect aid eligibility. Problem solved? Maybe not. If your grandchildren go to a private college that requires the CSS Profile financial aid form, they may be asked to disclose whether they are beneficiaries of a 529—including those funded by grandparents. Next: Prepaid Tuition Plans Previous: 529 Savings Plans Blog: Preconceived Notions
Read more »

Archive

Out of My Mind

IF WE HAVE DINNER with half-a-dozen others, we might all share the same meal and yet each of us will have a different experience—sometimes radically different. Even as we talk politics, crack jokes and swap gossip, we’ll each have our own thoughts whirling in the background: errands we can’t forget, work issues we need to resolve, incidents from the day we keep replaying, worries we can’t put behind us. For me, those whirling background thoughts often concern financial notions I want to write about. I get stuck on ideas, mulling them over again and again. Here are seven topics that have lately captured my attention: 1. Taming instincts. If financial education was all it took to make us better savers and smarter investors, we’d have solved those problems long ago. We are awash with great books, articles and videos on money management, and yet there’s scant evidence any of this has made much difference. Why is change so difficult? Improving behavior is toughest when it means bucking our hardwired instincts. Intellectually, we may know we should exercise more, lose weight and save more—and yet our instincts keep telling us to stay on the couch, eat Cheez Doodles and shop online. Sometimes, the contemplative side of our brain can sway the instinctual part. But only a minority of individuals seem able to discipline themselves—and only in some situations: We might persuade ourselves to eat less, but we still struggle to save more. What to do? To change our financial behavior, we could try automating our regular savings (payroll deduction into 401(k) plans, automatic investment plans), removing temptation (stay away from stores, get excess cash out of our checking account, leave credit cards at home) and raising our own awareness (set calendar alerts, post notes on the refrigerator, write down every dollar we spend). But I have come to believe that the key to success is social pressure. If I tell myself I need to sock away more money, it’s so easy to break that promise. But if I announce to friends that I’m going to save enough to make a house down payment within 12 months, I’ll feel truly committed. 2. Missing ambition. It’s a story I hear again and again: Children of comfortable middle-class families make it through college, but then drift. They might travel, work as au pairs, teach English abroad or spend time working clerical jobs for which they’re overqualified. Should we be alarmed by this lack of drive? Or is this gentle launch into the adult world a luxury that we—as an affluent society—can now afford and which we should embrace? I’m torn. I tend to withhold judgment when I hear of other people’s children doing this. But I’m sure glad my kids didn’t. Often, adult children of affluent households are able to launch slowly because they have their parents’ financial backing. Are parents killing their children’s ambition with kindness, so their kids miss out on the great pleasure that comes from working hard at something they care deeply about? I have written many times about the financial assistance I’ve provided my children. By helping them to save for retirement and for a house down payment, I’ve taught them about money, emphasized the financial goals I think are most important and taken advantage of investment compounding. But in retrospect, I wonder whether I was lucky—and whether the money I provided could just as easily have killed their ambition, rather than speeding their financial journey into the adult world.
"What’s prudent for the long haul often generates mediocre results, or worse, in any given year."
3. Recognizing luck. We often make two unconscious assumptions: that people with greater wealth are somehow superior—and that their financial success is the result of talent. Yet all it takes is a moment’s reflection to realize this is nonsense. There are many rich people who don’t deserve our admiration and who acquired their wealth more through luck than skill. It’s especially important to recognize this in the financial markets. In the short-term, the market’s biggest winners are often the lucky and maybe even the foolish—those who made big bets on a few stocks or a single sector of the market. We should be careful not to learn the wrong lesson from their success. In all likelihood, their luck won’t hold, and nor will ours if we mimic what they do. Instead, the long-term spoils are most likely to go to those who hold down investment costs, minimize taxes and diversify broadly. The problem: What’s prudent for the long haul often generates mediocre results, or worse, in any given year. 4. Falling costs. For those inclined to waste money, Wall Street continues to offer plenty of overpriced merchandise, everything from variable annuities to cash-value life insurance to hedge funds. But if you’re like me and want to keep costs to a minimum, it’s astonishing how cheap investing has become. We can now build globally diversified portfolios of stock and bond index funds, and pay less than 6 cents a year for every $100 we have invested. Meanwhile, our neighbors might be forking over $3 a year for every $100 they have in their variable annuity. How could their results possibly rival ours? It’s almost inconceivable. 5. Emerging markets. Even as my enthusiasm for U.S. shares wanes amid soaring valuations, I remain a huge fan of emerging market stocks. Quantitatively driven money managers often look for a combination of low valuations and upward price momentum—and developing markets offer both. There have been early signs of a rebound, with emerging markets posting double-digits gains in both 2016 and 2017. Those gains followed a miserable five-year stretch during which developing markets broke even in one calendar year and lost money in three others. Despite the recent revival, emerging markets’ valuations remain cheap by global standards. 6. Looking wide. I have long advocated taking a broad view of our financial lives. For instance, when settling on a portfolio’s split between stocks and more conservative investments, we should factor in our Social Security benefits, any traditional pension plan we have—and, most important, our paycheck or lack thereof. Indeed, as I can attest, the investment world looks quite different when you no longer have a regular salary and you’re no longer regularly adding fresh savings to your portfolio. That got me to thinking: When calculating our asset allocation, perhaps we should count any future savings as part of our portfolio’s conservative investments. I explored that notion in a recent blog. 7. Declaring victory. The overriding financial goal isn’t to beat the market, prove how clever we are or become the richest family in town. Rather, the goal is to have enough to lead the life we want. After the amazing stock market run of the past eight-plus years, many of us are much closer to that point—and certainly far closer than we could possibly have hoped during the dismal winter of 2008-09. Should we keep gunning for growth? Or is the rational response to reduce risk? I’ll have more on that topic in next month’s newsletter, which will go out on Saturday, Oct. 7.

August’s Greatest Hits

HERE ARE THE SEVEN most popular blogs that HumbleDollar published last month: Meanwhile, three blogs from July continued to garner a healthy amount of traffic during August: Growing Up (Part II), Bad Old Days and Retirement: 10 Questions to Ask.
Read more »

Numbers

TECHNOLOGY stock funds are the top-performing fund category so far this year, up 25.1%, followed by China region and energy stock funds. Meanwhile, bear market funds have been the poorest performers, down 20.3%, according to Morningstar.

Manifesto

NO. 8: RETIREMENT may be our final financial goal, but we should always put it first. Why? It’s easily our most expensive goal, so it takes decades of savings and investment gains to amass enough.

Truths

NO. 54: RISK GETS rewarded—usually. To earn high returns, we need to take high risk. But not all risk gets rewarded: Stocks should climb over time, but there’s no guarantee any one stock will triumph. Even entire national stock markets can suffer long periods of lousy returns, which is a reason to diversify globally and own some bonds.

Act

PONDER WHEN to claim Social Security. Start with Mike Piper’s calculator. Many folks are inclined to claim benefits as soon as they retire, but often it makes sense to delay. To understand why, learn more about Social Security, including the advantages of delaying and the different strategies that couples might use.

Think

RISK POOLING. When we purchase health, life, auto and other insurance, we contribute to a pool of money overseen by an insurance company. Those who crash their car or suffer ill-health collect from the pool. Those who get through the year unscathed pay their premiums and get nothing in return—which is what you want, because it means life is good.

About Jonathan

Jonathan Clements

HumbleDollar is edited by Jonathan Clements, former personal finance columnist for The Wall Street Journal.

Home Call to Action

Getting Played

“IS CBS PIPING fake birds into its Masters coverage?” That was the headline on a recent Slate article, which speculated that the television network might be adding “enhanced audio” of fake bird chirping to its coverage of the golf tournament.
This is not a scandal for the ages. But it serves as a timely reminder that we have fantasized notions of life that marketers and the media don’t hesitate to exploit.
Make no mistake: The PGA,

Read more »

More to Come

SINCE ENTERING the workforce in late 2010, I’ve been giving advice to others on how to put their money to good use. There are few things I enjoy more than having a conversation with a couple about such a complex subject. Along the way, I’ve pushed myself to learn more about specific financial planning strategies, as well as about human behavior and psychology.
These readings have not only taught me how I can better help my clients,

Read more »

Not So Easy

I RECENTLY CAME across an academic paper with an attention-grabbing title: “It has been very easy to beat the S&P 500.” Not just easy, but very easy
That got my attention because, in recent years, beating the S&P 500 has been anything but easy. In fact, it’s been maddeningly difficult. In eight of the past 10 years, domestic markets have outperformed international markets—by a wide margin. A dollar invested 10 years ago in the S&P 500 would be worth $4.37 today.

Read more »

Singled Out

“FINANCIAL WRITERS always seem to assume everybody’s married.” That’s a complaint I’ve heard more than once—and it came to mind as I reviewed our 2018 tax return.
That tax return reflected the impact of 2017’s tax law, which—among other things—roughly doubled the size of the standard deduction, while capping the itemized deduction for state, local and property taxes at $10,000. One result: Many couples now get little or no tax benefit from either the mortgage interest they pay or the charitable contributions they make.

Read more »

Over Coffee

SITTING IN a coffee shop, I struck up conversation with a middle-aged woman. We were talking about winning the lottery and then, as if one thought naturally followed the other, we got onto the topic of retirement. She mentioned how difficult it was for her and her husband to pay the mortgage and the monthly bills.
“After saving for retirement?”  I interjected.
“We can’t save for retirement,” she responded. “Our plan is to get our mortgage paid off,

Read more »

Unloaded

“YOU’RE FIRED” was made famous by Donald Trump as host of The Apprentice. Imagine my surprise when my broker delivered the same message to me two years ago.
In 2015, my job was transferred to Texas. I opted to become a long-distance commuter, while my family stayed in Maryland. Around that time, we moved homes, so our son could attend a better high school. In addition, I was helping to launch two huge long-term work projects.

Read more »

Numbers

TECHNOLOGY stock funds are the top-performing fund category so far this year, up 25.1%, followed by China region and energy stock funds. Meanwhile, bear market funds have been the poorest performers, down 20.3%, according to Morningstar.

Manifesto

NO. 8: RETIREMENT may be our final financial goal, but we should always put it first. Why? It’s easily our most expensive goal, so it takes decades of savings and investment gains to amass enough.

Act

PONDER WHEN to claim Social Security. Start with Mike Piper’s calculator. Many folks are inclined to claim benefits as soon as they retire, but often it makes sense to delay. To understand why, learn more about Social Security, including the advantages of delaying and the different strategies that couples might use.

Truths

NO. 54: RISK GETS rewarded—usually. To earn high returns, we need to take high risk. But not all risk gets rewarded: Stocks should climb over time, but there’s no guarantee any one stock will triumph. Even entire national stock markets can suffer long periods of lousy returns, which is a reason to diversify globally and own some bonds.

Think

RISK POOLING. When we purchase health, life, auto and other insurance, we contribute to a pool of money overseen by an insurance company. Those who crash their car or suffer ill-health collect from the pool. Those who get through the year unscathed pay their premiums and get nothing in return—which is what you want, because it means life is good.

Home Call to Action

Money Guide

Start Here

Grandparents and 529s

IF YOU HAVE grandchildren, funding 529 plans is an intriguing option with three big benefits and one significant problem. First, as mentioned in the previous section, you can gift as much as $75,000 in 2018 and count it as your gift for the next five years. That can get a big chunk of money, as well as its future investment growth, out of your estate. If, however, you die before the five years are up, a pro-rated share of the gift will be added back to your estate. Second, if you open the account rather than funding a 529 opened by the parents, you remain in control of the money. That means that, if your grandchildren’s parents divorce, there’s no risk the money will get divvied up and spent. Third, unlike with other education accounts, your contributions to a 529 aren’t irrevocable. In other words, if you later discover that your retirement portfolio is becoming depleted, you can reclaim the money in your grandchildren’s 529s, though you’ll owe income taxes and tax penalties on any investment growth. What’s the problem? If it turns out your grandchildren are eligible for financial aid, you’ll want to time your 529 withdrawals carefully. When applying for financial aid, a grandparent-controlled 529 doesn’t show up as an asset belonging to either the parents or the child, which is a plus. But when a grandparent makes a 529 withdrawal to pay college expenses, it counts as income for the student, which can badly hurt aid eligibility. To get around this problem, you might use the 529 to pay college expenses after your grandchild has filed his or her final aid application, so the 529 withdrawal won’t affect aid eligibility. Problem solved? Maybe not. If your grandchildren go to a private college that requires the CSS Profile financial aid form, they may be asked to disclose whether they are beneficiaries of a 529—including those funded by grandparents. Next: Prepaid Tuition Plans Previous: 529 Savings Plans Blog: Preconceived Notions
Read more »

Archive

Out of My Mind

IF WE HAVE DINNER with half-a-dozen others, we might all share the same meal and yet each of us will have a different experience—sometimes radically different. Even as we talk politics, crack jokes and swap gossip, we’ll each have our own thoughts whirling in the background: errands we can’t forget, work issues we need to resolve, incidents from the day we keep replaying, worries we can’t put behind us. For me, those whirling background thoughts often concern financial notions I want to write about. I get stuck on ideas, mulling them over again and again. Here are seven topics that have lately captured my attention: 1. Taming instincts. If financial education was all it took to make us better savers and smarter investors, we’d have solved those problems long ago. We are awash with great books, articles and videos on money management, and yet there’s scant evidence any of this has made much difference. Why is change so difficult? Improving behavior is toughest when it means bucking our hardwired instincts. Intellectually, we may know we should exercise more, lose weight and save more—and yet our instincts keep telling us to stay on the couch, eat Cheez Doodles and shop online. Sometimes, the contemplative side of our brain can sway the instinctual part. But only a minority of individuals seem able to discipline themselves—and only in some situations: We might persuade ourselves to eat less, but we still struggle to save more. What to do? To change our financial behavior, we could try automating our regular savings (payroll deduction into 401(k) plans, automatic investment plans), removing temptation (stay away from stores, get excess cash out of our checking account, leave credit cards at home) and raising our own awareness (set calendar alerts, post notes on the refrigerator, write down every dollar we spend). But I have come to believe that the key to success is social pressure. If I tell myself I need to sock away more money, it’s so easy to break that promise. But if I announce to friends that I’m going to save enough to make a house down payment within 12 months, I’ll feel truly committed. 2. Missing ambition. It’s a story I hear again and again: Children of comfortable middle-class families make it through college, but then drift. They might travel, work as au pairs, teach English abroad or spend time working clerical jobs for which they’re overqualified. Should we be alarmed by this lack of drive? Or is this gentle launch into the adult world a luxury that we—as an affluent society—can now afford and which we should embrace? I’m torn. I tend to withhold judgment when I hear of other people’s children doing this. But I’m sure glad my kids didn’t. Often, adult children of affluent households are able to launch slowly because they have their parents’ financial backing. Are parents killing their children’s ambition with kindness, so their kids miss out on the great pleasure that comes from working hard at something they care deeply about? I have written many times about the financial assistance I’ve provided my children. By helping them to save for retirement and for a house down payment, I’ve taught them about money, emphasized the financial goals I think are most important and taken advantage of investment compounding. But in retrospect, I wonder whether I was lucky—and whether the money I provided could just as easily have killed their ambition, rather than speeding their financial journey into the adult world.
"What’s prudent for the long haul often generates mediocre results, or worse, in any given year."
3. Recognizing luck. We often make two unconscious assumptions: that people with greater wealth are somehow superior—and that their financial success is the result of talent. Yet all it takes is a moment’s reflection to realize this is nonsense. There are many rich people who don’t deserve our admiration and who acquired their wealth more through luck than skill. It’s especially important to recognize this in the financial markets. In the short-term, the market’s biggest winners are often the lucky and maybe even the foolish—those who made big bets on a few stocks or a single sector of the market. We should be careful not to learn the wrong lesson from their success. In all likelihood, their luck won’t hold, and nor will ours if we mimic what they do. Instead, the long-term spoils are most likely to go to those who hold down investment costs, minimize taxes and diversify broadly. The problem: What’s prudent for the long haul often generates mediocre results, or worse, in any given year. 4. Falling costs. For those inclined to waste money, Wall Street continues to offer plenty of overpriced merchandise, everything from variable annuities to cash-value life insurance to hedge funds. But if you’re like me and want to keep costs to a minimum, it’s astonishing how cheap investing has become. We can now build globally diversified portfolios of stock and bond index funds, and pay less than 6 cents a year for every $100 we have invested. Meanwhile, our neighbors might be forking over $3 a year for every $100 they have in their variable annuity. How could their results possibly rival ours? It’s almost inconceivable. 5. Emerging markets. Even as my enthusiasm for U.S. shares wanes amid soaring valuations, I remain a huge fan of emerging market stocks. Quantitatively driven money managers often look for a combination of low valuations and upward price momentum—and developing markets offer both. There have been early signs of a rebound, with emerging markets posting double-digits gains in both 2016 and 2017. Those gains followed a miserable five-year stretch during which developing markets broke even in one calendar year and lost money in three others. Despite the recent revival, emerging markets’ valuations remain cheap by global standards. 6. Looking wide. I have long advocated taking a broad view of our financial lives. For instance, when settling on a portfolio’s split between stocks and more conservative investments, we should factor in our Social Security benefits, any traditional pension plan we have—and, most important, our paycheck or lack thereof. Indeed, as I can attest, the investment world looks quite different when you no longer have a regular salary and you’re no longer regularly adding fresh savings to your portfolio. That got me to thinking: When calculating our asset allocation, perhaps we should count any future savings as part of our portfolio’s conservative investments. I explored that notion in a recent blog. 7. Declaring victory. The overriding financial goal isn’t to beat the market, prove how clever we are or become the richest family in town. Rather, the goal is to have enough to lead the life we want. After the amazing stock market run of the past eight-plus years, many of us are much closer to that point—and certainly far closer than we could possibly have hoped during the dismal winter of 2008-09. Should we keep gunning for growth? Or is the rational response to reduce risk? I’ll have more on that topic in next month’s newsletter, which will go out on Saturday, Oct. 7.

August’s Greatest Hits

HERE ARE THE SEVEN most popular blogs that HumbleDollar published last month: Meanwhile, three blogs from July continued to garner a healthy amount of traffic during August: Growing Up (Part II), Bad Old Days and Retirement: 10 Questions to Ask.
Read more »

Free Newsletter

Jonathan Clements

About Jonathan

HumbleDollar is edited by Jonathan Clements, former personal finance columnist for The Wall Street Journal.