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Exchange-traded index funds offer minimal costs and superb tax efficiency—advantages that investors merrily toss away with wild trading.

Why Am I Late?

WHEN I STARTED flying for American Airlines in 1978, the industry was regulated. Routes, fares, airline size, pretty much everything the airlines did was controlled by the Civil Aeronautics Board. Then, later that year, the Airline Deregulation Act became law. Overnight, rules governing the industry changed.
This had far-reaching effects. But the biggest change was the cost of airline tickets. They became a lot cheaper.
Over the next 40 years, established carriers went bankrupt and disappeared.

Read more »

Five Money Moves

WHEN FOLKS TALK about their best financial decisions, they’ll often mention the investments they bought. But my list is quite different. Here are the five best money moves I’ve made during my dozen years in retirement:
1. Updating my estate plan. When I was my mother’s primary caregiver, she was the major beneficiary of my estate. If something happened to me, I wanted to make sure she could afford the care she needed.

Read more »

Short Stuff

End of the Ride

BACK IN NOVEMBER, I wrote about using options to bet that shares of Peloton Interactive would decline. This was my first options trade. I purchased the put option when Peloton was trading in the low $50s. The option cost me $200, and it gave me the right to sell 100 shares at $35 per share in March 2022.
Since then, Peloton’s shares have indeed tumbled. It was recently announced that the stock will be booted from the Nasdaq-100 index,

Read more »

A 529 for Sophia

OVER CHRISTMAS, I got the sort of question I love to answer. My daughter’s thoughtful boyfriend had set aside some money for his niece’s college education. What was the best way to invest it?
I said that we’d paid for much of our children’s education with money invested in 529 college savings plans. The investment gains went untaxed because we’d spent the money on tuition, room and board. On top of that, our 529 contributions were deductible against our state-income tax in Pennsylvania,

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Winners and Sinners

LAST WEEK SAW additional gains for value stocks, while shares of once highflying growth companies continued to struggle. Meanwhile, foreign markets again rallied. Vanguard FTSE All-World ex-U.S. ETF (symbol: VEU) rose more than 1% last week, even as Vanguard Total Stock Market ETF (VTI) slipped 0.5%.
Let’s further unpack these trends.
The Nasdaq Composite has endured its worst start to a year since 2009. At the same time, blue chip stocks and some of last year’s losers are suddenly in favor.

Read more »

Call of the Wild

CRYPTOCURRENCIES have come under selling pressure over the past few months. That might have some readers thinking about buying the dip in, say, bitcoin or ethereum. Those two cryptos, the largest by market capitalization, are off more than 30% from their all-time highs.
I’ve been dabbling in digital assets, but not in the way you might imagine. I put about 3% of my portfolio into stablecoins. Stablecoins differ from the well-known cryptocurrencies we often hear about.

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Off the Spectrum

LET’S START WITH TWO definitions:
Specʹtrum, n. a trade name of Charter Communications used to market avaricious cable television, internet, telephone and wireless services.  
Vig’or•ish, n.[via Yid., from R. výigryš, lit., gain, winnings.] interest owed a loan shark in consideration for credit. Abbrev: vig.
I bought a home a few months back and, besides trying to meet the neighbors, I had the pleasure of trying to arrange internet service.

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Resolved: Less Stuff

CLUTTER IS DEFINED as “things lying in heaps or crowded confusion.” Its origin as a word dates to the 1570s. More than four centuries later, you might imagine we would have got the problem under control, but it seems not.
I had a friend in high school who lived like a monk. He had nothing on his bedroom dressers except lamps and a record player. I wish I could achieve such a pristine state in my condo.

Read more »

Longer Reads

Year-Round Planning

MANY FOLKS SPEND December frantically hunting for ways to cut their taxes, whether it’s realizing losses in their taxable investment accounts, making charitable donations or raising their 401(k) contributions for the year’s final few paychecks.
A better strategy: Manage your taxes year-round rather than just at year-end. Filing a tax return is a reactive process—a record of income and deductions that have already occurred. It takes foresight and action to shape what those lines will look like on next year’s tax return.

Read more »

Driving Lessons

THIS PAST YEAR marked my 50th anniversary of driving. Over that time, our family has owned 19 cars and driven them roughly 1.9 million miles. While latte purchases frequently evoke financial debate, cars seem less discussed, despite being Americans’ second-largest expenditure after housing. The purchase, ownership, maintenance and sale of cars can all get pretty complicated.
Cars are considered a depreciating asset, but not always. My first car was a 1967 Mercury Comet, which I bought for $400 in 1973.

Read more »

Risk Doesn’t Retire

I’LL ACKNOWLEDGE THAT today’s topic isn’t the most upbeat. I want to talk about risk—and, specifically, some of the underappreciated risks related to retirement.

In thinking about risk, the hardest part—in my view—is that it defies a single definition. Because of that, there’s no uniform yardstick for measuring it and thus no single strategy for managing it. As Howard Marks states in his book The Most Important Thing, “Much of risk is subjective,

Read more »

A Day to Remember

JUST AS ANYONE around on Sept. 11, 2001, Nov. 22, 1963, or Dec. 7, 1941, remembers where they were when they first heard the news, one date resonates for investors of a certain age: Oct. 19, 1987.
As a young practicing physician, I was just finishing up the day’s charting when I took a call from one of my colleagues: “Did the Dow fall enough for you today?” Indeed it had, by 508 points,

Read more »

Wasted Journey?

WE OFTEN WRITE at HumbleDollar that saving and investing aren’t everything. Spending money on the right things—such as fulfilling experiences—can also be a great investment, especially if the dollars bring ample happiness.
Nearly seven years ago, I thought I’d wasted $4,000 on a foreign trip. But the law of unintended consequences has since worked in my favor.
The 2015 trip was supposed to be an investment in my career. I thought I could make a difference in the world and become a freelance foreign correspondent.

Read more »

Anomaly Ahead

COULD I BE WRONG about indexing?
Every investor soon learns that being wrong is a frequent malady, particularly on the day-to-day decisions of when to buy. Those minor errors are, as we also learn, part of the “game” of investing and are best ignored. But what if there’s evidence that conflicts with your longer-term thinking and expectations? What if evidence conflicts with your central beliefs?
I suspect it could happen to me.
After 60 years of experience and study of investing,

Read more »

Voices

What’s the best strategy for collecting and using credit card rewards?

"I try to keep it simple with 2 cards: An Amazon visa that gives me 5% back on Amazon purchases (which for me is a lot of money on an annual basis) and a Citicard that gives me 2% on everything else. I prefer cash back to "points" because I can use it for anything with no effort. But I am considering a United card that will give me 70,000 bonus miles in anticipation of a big vacation in the next year."
- Jackie
Read more »

Does it ever make sense to buy actively managed funds?

"Given current conditions, yes if you feel the need to have short-term bonds."
- Moesha
Read more »

Money Guide

Asset Location

YOU KNOW WHAT sort of portfolio you want, thanks to the chapters on portfolio building, investing and financial markets. What's next? Once you’ve settled on your asset allocation, you need to consider your so-called asset location: Which investments should you hold in your retirement accounts and which in your taxable account? The goal is to minimize your investment tax bill by keeping investments that generate a lot of immediately taxable income in your retirement accounts, while favoring relatively tax-efficient investments in your taxable account. For your retirement accounts, that might mean holding corporate bonds, real estate investment trusts, actively managed stock funds and individual stocks you plan to trade in and out of. These investments will tend to generate a lot of ordinary income or short-term capital gains, so they would usually be taxed at income tax rates, rather than at the lower long-term capital gains rate. By keeping these investments in a retirement account, you defer that tax bill, plus you avoid the hassle of reporting all this activity on your tax return. What if you're dealing with a Roth account, with its tax-free growth, rather than a traditional retirement account, where withdrawals are taxed as ordinary income? For your Roth, you might ignore the above advice about holding corporate bonds and instead favor stocks. Why? Because all gains within a Roth should be tax-free, you want to take maximum advantage of that—by gunning for the higher potential long-run returns offered by the stock market. Meanwhile, in your taxable account, you might favor tax-efficient investments that you intend to hang onto for the long haul, such as stock index mutual funds, exchange-traded stock index funds, tax-managed stock funds and long-term individual stock holdings. These investments will tend to generate modest annual tax bills and, when there are taxes to be paid, they will typically be paid at the long-term capital gains rate. What about index funds that invest in foreign stocks? If you hold these in a taxable account, some of the dividends received by the fund may not be qualified, and hence you’ll have to pay taxes at the income-tax rate. On the other hand, by holding international stock index funds in your taxable account, you benefit from the fund’s credit for foreign taxes paid—a benefit that’s lost if you hold the fund in a retirement account. For your taxable account, you might also favor tax-free municipal bonds, especially if you are a conservative investor and you’re in a high tax bracket. Even Treasury bonds have lately looked like a reasonable holding for a taxable account. As of the start of 2022, with Treasury yields at 2% or less, the bonds wouldn't trigger a big federal income tax bill if they were held in a taxable account, plus the interest would be exempt from taxes at the state level. Our Humble Opinion: Don’t let your mix of retirement and taxable money drive your asset allocation. Yes, it makes sense to hold tax-inefficient investments in your retirement accounts and tax-efficient investments in your taxable account. But if, say, you are young and inclined to put much of your money in stock index funds, you’ll likely end up holding these tax-efficient funds in your retirement accounts—and there's nothing wrong with that. Next: Step 3: Low-Tax Years Previous: Munis vs. Taxables (II)
Read more »

Manifesto

NO. 22: IF WE’RE saving enough each month for retirement and other goals, it doesn’t much matter how we spend our remaining money—and there’s likely no need to budget.

Truths

NO. 48: RISING interest rates hurt your bond portfolio’s value—and raise its long-run return. As interest rates climb, existing bonds drop in price. But thanks to the rise in rates, you can reinvest your interest payments at higher yields, boosting long-run performance. This reinvestment is easy with bond funds—a reason to favor them over individual bonds.

Act

SET PRIORITIES for the year ahead. What are your most important financial goals? Your priorities might include saving for retirement, funding college accounts, buying a house, paying down debt and building up your emergency fund. Also think more broadly—pondering whether, say, you need to tweak your estate plan or your insurance coverage.

Think

SELF-ATTRIBUTION. We tend to ascribe our investment successes to our own talents, while blaming our failures on bad luck, bad markets or the advice of others. This makes it harder to learn from our mistakes, while also causing overconfidence. That, in turn, can lead us to trade too much and make big investment bets that hurt our portfolio’s results.

Second Look

Retirement

Missing the Target

USE THE RIGHT TOOL for the job and you’ll get the best result. If you need to connect two boards, you could use a hammer and a nail or a screwdriver and a screw. Either methods work—and they’re certainly better than banging in a screw with a hammer, which I’ve seen tried. It was not effective.
Participants in 401(k) plans, alas, display similar behavior with target date funds, or TDFs. A TDF offers a diversified portfolio in a single fund,

Read more »

Family Finance

The Last Word

I FREQUENTLY FIELD inquiries from people who know they ought to get a will. Others have wills, but may need to revise them because they’ve moved to a new state, entered into a marriage or ended one. But either way, most folks—in my experience—never get beyond that simple first step.
And those who do often overlook an additional step that’s almost as necessary: drawing up a “letter of final instructions” that provides their heirs with an informal personal financial inventory.

Read more »

Investing

Beware Groupthink

ECONOMIST JOHN Maynard Keynes once observed that, “It is better for reputation to fail conventionally than to succeed unconventionally.” This is probably true in many realms. It’s certainly true in the investment world.
As the last 12 months have demonstrated, extreme and unexpected events can and do happen. But analysts whose job it is to make economic forecasts rarely go too far out on a limb. Sure, there are some forecasters who will take a chance with a view that’s far outside the consensus.

Read more »

Lists

Thinking It Through

ON JAN. 10, 2000, America Online co-founder Steve Case stood on stage in New York to announce the largest corporate takeover in American history, buying venerable Time Warner for $165 billion. At the time, commentators called it the merger of the century. But just five years later, Case acknowledged that it was actually “the worst merger in history” and argued that it was time “to take it apart.”
Making financial decisions is difficult even in good times.

Read more »
Home Call to Action

Mindset

Prime of Life

I WAS 51-YEARS-OLD when I ate prime rib for the first time. As it turned out, it was a life-changing moment. It might be difficult to believe eating a choice cut of beef could lead to an altered understanding of financial priorities, but it did.
I grew up in a fairly typical 1970s middle class family. Hamburger Helper, tuna casserole and peanut butter sandwiches made up the bulk of my diet. Our family rarely ate out and,

Read more »

Longer Reads

Year-Round Planning

MANY FOLKS SPEND December frantically hunting for ways to cut their taxes, whether it’s realizing losses in their taxable investment accounts, making charitable donations or raising their 401(k) contributions for the year’s final few paychecks.
A better strategy: Manage your taxes year-round rather than just at year-end. Filing a tax return is a reactive process—a record of income and deductions that have already occurred. It takes foresight and action to shape what those lines will look like on next year’s tax return.

Read more »

Driving Lessons

THIS PAST YEAR marked my 50th anniversary of driving. Over that time, our family has owned 19 cars and driven them roughly 1.9 million miles. While latte purchases frequently evoke financial debate, cars seem less discussed, despite being Americans’ second-largest expenditure after housing. The purchase, ownership, maintenance and sale of cars can all get pretty complicated.
Cars are considered a depreciating asset, but not always. My first car was a 1967 Mercury Comet, which I bought for $400 in 1973.

Read more »

Risk Doesn’t Retire

I’LL ACKNOWLEDGE THAT today’s topic isn’t the most upbeat. I want to talk about risk—and, specifically, some of the underappreciated risks related to retirement.

In thinking about risk, the hardest part—in my view—is that it defies a single definition. Because of that, there’s no uniform yardstick for measuring it and thus no single strategy for managing it. As Howard Marks states in his book The Most Important Thing, “Much of risk is subjective,

Read more »

A Day to Remember

JUST AS ANYONE around on Sept. 11, 2001, Nov. 22, 1963, or Dec. 7, 1941, remembers where they were when they first heard the news, one date resonates for investors of a certain age: Oct. 19, 1987.
As a young practicing physician, I was just finishing up the day’s charting when I took a call from one of my colleagues: “Did the Dow fall enough for you today?” Indeed it had, by 508 points,

Read more »

Wasted Journey?

WE OFTEN WRITE at HumbleDollar that saving and investing aren’t everything. Spending money on the right things—such as fulfilling experiences—can also be a great investment, especially if the dollars bring ample happiness.
Nearly seven years ago, I thought I’d wasted $4,000 on a foreign trip. But the law of unintended consequences has since worked in my favor.
The 2015 trip was supposed to be an investment in my career. I thought I could make a difference in the world and become a freelance foreign correspondent.

Read more »

Anomaly Ahead

COULD I BE WRONG about indexing?
Every investor soon learns that being wrong is a frequent malady, particularly on the day-to-day decisions of when to buy. Those minor errors are, as we also learn, part of the “game” of investing and are best ignored. But what if there’s evidence that conflicts with your longer-term thinking and expectations? What if evidence conflicts with your central beliefs?
I suspect it could happen to me.
After 60 years of experience and study of investing,

Read more »

Free Newsletter

Voices

What’s the best way to teach children about money?

"One of our "go-to" strategies was to install "Quicken" on our kids laptops before they left for college and setup automated downloads of checking account expenditures from their bank. Mint (free online tool also owned by Quicken) offers comparable functionality. Playing good defense (i.e. tracking their consumption habits and budgeting) is just as important as playing offense (Saving and investing) in the early years of a young adult's journey into the workforce. Plus, and having them open Roth IRAs, with a parent match of their $50/month contributions - but match only comes at the END of the full year."
- Newsboy
Read more »

What’s your No. 1 goal for retirement?

"Work consistently on my health ... without it none of the other things (travel,golf,hobbies etc) are enjoyable"
- George Counihan
Read more »

Do parents have an obligation to pay college costs?

"Parents have an obligation to help their children become self-supporting adults. That may include helping seek a part-time job as a teenager to develop responsibility, encouraging them to assess their aptitudes and preferences honestly so they can decide what career preparation is appropriate, filling out financial aid forms, or helping pay for college. Some well-paid trades are not best learned in college. Parents should try to set aside funds to help their children get started in self-supporting adult life, but college may not be the best path for a child. Parents should not jeopardize their own financial security to fully fund college, because that results in financial stress for their children later."
- Ginger Williams
Read more »
Home Call to Action

Manifesto

NO. 22: IF WE’RE saving enough each month for retirement and other goals, it doesn’t much matter how we spend our remaining money—and there’s likely no need to budget.

Act

SET PRIORITIES for the year ahead. What are your most important financial goals? Your priorities might include saving for retirement, funding college accounts, buying a house, paying down debt and building up your emergency fund. Also think more broadly—pondering whether, say, you need to tweak your estate plan or your insurance coverage.

Truths

NO. 48: RISING interest rates hurt your bond portfolio’s value—and raise its long-run return. As interest rates climb, existing bonds drop in price. But thanks to the rise in rates, you can reinvest your interest payments at higher yields, boosting long-run performance. This reinvestment is easy with bond funds—a reason to favor them over individual bonds.

Think

SELF-ATTRIBUTION. We tend to ascribe our investment successes to our own talents, while blaming our failures on bad luck, bad markets or the advice of others. This makes it harder to learn from our mistakes, while also causing overconfidence. That, in turn, can lead us to trade too much and make big investment bets that hurt our portfolio’s results.

Money Guide

Start Here

Asset Location

YOU KNOW WHAT sort of portfolio you want, thanks to the chapters on portfolio building, investing and financial markets. What's next? Once you’ve settled on your asset allocation, you need to consider your so-called asset location: Which investments should you hold in your retirement accounts and which in your taxable account? The goal is to minimize your investment tax bill by keeping investments that generate a lot of immediately taxable income in your retirement accounts, while favoring relatively tax-efficient investments in your taxable account. For your retirement accounts, that might mean holding corporate bonds, real estate investment trusts, actively managed stock funds and individual stocks you plan to trade in and out of. These investments will tend to generate a lot of ordinary income or short-term capital gains, so they would usually be taxed at income tax rates, rather than at the lower long-term capital gains rate. By keeping these investments in a retirement account, you defer that tax bill, plus you avoid the hassle of reporting all this activity on your tax return. What if you're dealing with a Roth account, with its tax-free growth, rather than a traditional retirement account, where withdrawals are taxed as ordinary income? For your Roth, you might ignore the above advice about holding corporate bonds and instead favor stocks. Why? Because all gains within a Roth should be tax-free, you want to take maximum advantage of that—by gunning for the higher potential long-run returns offered by the stock market. Meanwhile, in your taxable account, you might favor tax-efficient investments that you intend to hang onto for the long haul, such as stock index mutual funds, exchange-traded stock index funds, tax-managed stock funds and long-term individual stock holdings. These investments will tend to generate modest annual tax bills and, when there are taxes to be paid, they will typically be paid at the long-term capital gains rate. What about index funds that invest in foreign stocks? If you hold these in a taxable account, some of the dividends received by the fund may not be qualified, and hence you’ll have to pay taxes at the income-tax rate. On the other hand, by holding international stock index funds in your taxable account, you benefit from the fund’s credit for foreign taxes paid—a benefit that’s lost if you hold the fund in a retirement account. For your taxable account, you might also favor tax-free municipal bonds, especially if you are a conservative investor and you’re in a high tax bracket. Even Treasury bonds have lately looked like a reasonable holding for a taxable account. As of the start of 2022, with Treasury yields at 2% or less, the bonds wouldn't trigger a big federal income tax bill if they were held in a taxable account, plus the interest would be exempt from taxes at the state level. Our Humble Opinion: Don’t let your mix of retirement and taxable money drive your asset allocation. Yes, it makes sense to hold tax-inefficient investments in your retirement accounts and tax-efficient investments in your taxable account. But if, say, you are young and inclined to put much of your money in stock index funds, you’ll likely end up holding these tax-efficient funds in your retirement accounts—and there's nothing wrong with that. Next: Step 3: Low-Tax Years Previous: Munis vs. Taxables (II)
Read more »

Second Look

Retirement

Missing the Target

USE THE RIGHT TOOL for the job and you’ll get the best result. If you need to connect two boards, you could use a hammer and a nail or a screwdriver and a screw. Either methods work—and they’re certainly better than banging in a screw with a hammer, which I’ve seen tried. It was not effective.
Participants in 401(k) plans, alas, display similar behavior with target date funds, or TDFs. A TDF offers a diversified portfolio in a single fund,

Read more »

Family Finance

The Last Word

I FREQUENTLY FIELD inquiries from people who know they ought to get a will. Others have wills, but may need to revise them because they’ve moved to a new state, entered into a marriage or ended one. But either way, most folks—in my experience—never get beyond that simple first step.
And those who do often overlook an additional step that’s almost as necessary: drawing up a “letter of final instructions” that provides their heirs with an informal personal financial inventory.

Read more »

Investing

Beware Groupthink

ECONOMIST JOHN Maynard Keynes once observed that, “It is better for reputation to fail conventionally than to succeed unconventionally.” This is probably true in many realms. It’s certainly true in the investment world.
As the last 12 months have demonstrated, extreme and unexpected events can and do happen. But analysts whose job it is to make economic forecasts rarely go too far out on a limb. Sure, there are some forecasters who will take a chance with a view that’s far outside the consensus.

Read more »

Lists

Thinking It Through

ON JAN. 10, 2000, America Online co-founder Steve Case stood on stage in New York to announce the largest corporate takeover in American history, buying venerable Time Warner for $165 billion. At the time, commentators called it the merger of the century. But just five years later, Case acknowledged that it was actually “the worst merger in history” and argued that it was time “to take it apart.”
Making financial decisions is difficult even in good times.

Read more »

Mindset

Prime of Life

I WAS 51-YEARS-OLD when I ate prime rib for the first time. As it turned out, it was a life-changing moment. It might be difficult to believe eating a choice cut of beef could lead to an altered understanding of financial priorities, but it did.
I grew up in a fairly typical 1970s middle class family. Hamburger Helper, tuna casserole and peanut butter sandwiches made up the bulk of my diet. Our family rarely ate out and,

Read more »