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Each year, the market is skewed higher by a minority of stocks with spectacular performance—which means most stocks end up as laggards.

Newsletter No. 41

LOOKING BACK, our financial choices almost never seem optimal. Why not? When we stared into the future and made those choices, we didn’t know what we were going to get—and that meant the only prudent course was to hedge our bets. I explore this issue in HumbleDollar’s latest newsletter.
While we ought to prepare our finances for a host of possible outcomes, we’re simply not very good at doing so. In the newsletter, I offer a slew of statistics on our prowess when it comes to risk management.

Read more »

Rewriting the Script

WHAT DO YOU believe about money? I’m talking here about money scripts—subconscious beliefs developed since childhood that influence your financial behavior.
These beliefs have been studied extensively by Ted and Brad Klontz, the father-and-son team who founded the Financial Psychology Institute and authored Mind Over Money. Here are some common money scripts:

“Avoid debt at all costs.”
“Money is the root of all evil.”
“We can always make more money.”

While there’s an element of truth to each,

Read more »

Say Yes

“I DON’T GET IT.” That’s what my friend said when I told him I would consider marrying my significant other.
“Why do you feel you need to get married?” he continued. “You’re both in your 60s. You’re not going to have any children. There’s no reason you should get married. If you did, you would make the relationship more complicated. You both probably would want a prenuptial agreement protecting your assets. That, in itself,

Read more »

Saint Jack

WITHOUT A DOUBT, John C. Bogle is the greatest man I’ve had the privilege of knowing. Tomorrow, the newspapers will run obituaries detailing his many accomplishments—how he launched Vanguard Group, started the first index mutual and was, right up until the end, a fierce advocate for the everyday investor.
I first met Jack in 1987, when I was a callow 24-year-old reporter at Forbes magazine. I last saw him in October, at the Bogleheads’

Read more »

The Gift of Life

GLOBAL LIFE expectancy for almost every nation will rise during the next two decades, with Spain overtaking Japan as the country with the longest life expectancy. Meanwhile, on the list of 195 countries, the U.S. will fall 20 places, from 43rd to 64th. The average U.S. lifespan as of birth is still projected to increase slightly, from 78.7 years to 79.8, but at a slower rate than the rest of the world.
That isn’t great news for the U.S.—but it isn’t necessarily bad news for you,

Read more »

Money Guide

Hybrid Policies

INSTEAD OF BUYING pure long-term-care insurance, you could purchase cash-value life insurance that offers long-term-care benefits. We discuss cash-value policies later in this chapter. If you need to pay for a nursing home, you could tap into the death benefit—and sometimes receive even more, depending on the policy—to cover long-term-care costs. If you don’t end up in a nursing home, the policy’s proceeds pass to your heirs. Hybrid policies appeal to folks who hate the idea of paying years of premiums for long-term-care insurance, but never getting anything back. Sales of these policies have been picking up, even as demand for traditional long-term-care insurance has waned. Still, hybrid policies are a costly way to protect yourself. After all, you are buying life insurance at an advanced age, which is an expensive proposition, and yet you may not need life insurance at that juncture, because you don’t have dependents who would suffer financially if you died suddenly. You can also purchase tax-deferred fixed annuities that have a long-term-care rider. If you don’t need long-term care, the money continues to collect interest. If care is needed, you can usually get access to a sum equal to some multiple of your original annuity investment. With the fixed annuity, you avoid buying life insurance you may not need—but you will likely be locking up a large sum that will then earn modest returns. Next: Medicaid and Nursing Homes Previous: Long-Term-Care Insurance
Read more »

Numbers

GENWORTH’S 2018 Cost of Care Survey puts the average annual cost of a semi-private nursing home room at $89,297. You might pay $351,495 in Alaska, $151,475 in Connecticut and $144,175 in Massachusetts, but just $57,579 in Texas and $55,663 in Oklahoma.

Newsletter

Choosing Our Future

WHEN FOLKS have financial questions, they go hunting for the right answer. But what if there’s no right answer to be found?
To be sure, in retrospect, the correct answer is often crystal clear. Looking back at 2018, we should have owned growth stocks until September and then gone to 100% cash. If our home didn’t burn down and our health was good, we shouldn’t have bothered with homeowner’s and health insurance. If we kept our job and survived the year,

Read More »

Archive

Tales to Be Told

IF THIS TURNS OUT to be a major bear market, there will be a slew of articles to be written. It’s the negative correlation enjoyed by every financial writer: Even as our portfolios shrink, our potential for pontification soars. But what if the market bounces back? It’s almost too painful to contemplate. Think of all the articles that won’t get written. If the past week’s rally continues, here are 10 stories that will have to wait for the next market downturn: 1. Don’t panic. To be sure, many of us ink-stained wretches—both here at HumbleDollar and elsewhere—have already churned out the ritual “keep calm and carry on” articles. It’s an underappreciated art form: You strive to sound intelligent as you warn that stocks could easily full much further—or, for that matter, go right back up. 2. Time to rebalance. This one is best written when stocks are off at least 20%. But deadlines are deadlines. We have to write something this week, so we’ll probably trot it out when the market is down a mere 11%. 3. She called it. There’s always some Wall Streeter—not necessarily female—who mutters “crash” before the crash occurs or, better still, actually moves clients’ money out of stocks and into Treasury bills. Our new goddess of market timing is swiftly hoisted onto a pedestal and thereafter her every pronouncement parsed by adoring investors, until her lack of clairvoyance becomes too obvious to ignore. 4. Lemons into lemonade. Without the fruit metaphor, no story on taking tax losses is complete. As share prices sink further and year-end approaches, readers will be reminded of the silver lining—that realized capital losses can be used to offset realized capital gains and up to $3,000 in ordinary income. 5. Underwater overseas. With U.S. stocks down 25%, xenophobic pundits will note that foreign stocks are even more wretched, down 29%. Where’s the diversification in that? The often-huge difference in 10-year returns between U.S. and foreign stocks is, of course, too inconvenient a fact to mention. 6. Active managers triumph. Index funds aim to keep their cash holdings to a minimum, so they track their target index as closely as possible. Actively managed stock funds often keep 3% or more in cash, so they can easily pay off departing shareholders and have money to put to work in new investment ideas. The unsurprising result—that active funds often fall a little less during market declines—will be hailed as a sign that the long-awaited revival of active management has begun. Further signs will not be forthcoming. 7. Time to rebalance (again). Okay, we ran this story before. But this time, we really mean it. Cue the hate mail. 8. Off target. After months of searching, an intrepid financial writer tracks down an investor who is shocked—shocked!—to discover his target-retirement fund has gone down in value. How could something so sensible, offering broad stock and bond market diversification in a single package, be allowed to become the default investment option in many 401(k) plans? The financial writer’s day is complete when a publicity-hungry congressman fires off a press release demanding Capitol Hill hearings. The congressman's demand is met with widespread indifference from more sensible colleagues. 9. Conversion therapy. Otherwise known as "lemons into lemonade (part II)," writers urge investors to take advantage of the depressed stock market by converting their traditional IRA to a Roth. With share prices down sharply, the resulting tax bill would be similarly shrunken. Shell-shocked investors shake off their paralysis just long enough to send the writers yet more hate mail. 10. It’s a bear trap. Share prices begin their long climb back to new highs. Every step of the way, some ink-stained wretch strikes a literary pose of world-weary sophistication—and warns ominously that the good times won’t last. Follow Jonathan on Twitter @ClementsMoney and on Facebook. Check out his three earlier blogs about 2018's market decline: The Morning AfterTaking Stock and Speculating on Speculation. Also listen to his recent podcast with Steve Chen of NewRetirement.com.
Read more »

Truths

NO. 10: WALL STREET always strives to look its best. To ensure fund expenses and advisory fees appear small, they’re expressed as a percent of the dollars we invest, not as a percent of our likely gain. To make results appear impressive, money managers pick their benchmark indexes carefully and use cumulative return “mountain” charts.

Act

ELIMINATE DUPLICATION. Many folks have multiple bank and brokerage accounts, multiple funds that invest in the same market sector and even multiple advisors. This can make sense if, say, the goal is to increase FDIC insurance. But often it reflects a naïve notion of diversification—that more accounts somehow mean greater safety. Our advice: Simplify—for your sake and the sake of your heirs.

Think

EFFICIENT FRONTIER. What mix of investments offers the highest expected return for a given level of risk—or the lowest risk for a target return? In theory, these optimal portfolios can be found on the so-called efficient frontier. Their key characteristic: broad diversification, thus reducing volatility by combining investments that don’t always move in sync.

About Jonathan

Jonathan Clements

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

Home Call to Action

Latest Blogs

Newsletter No. 41

LOOKING BACK, our financial choices almost never seem optimal. Why not? When we stared into the future and made those choices, we didn’t know what we were going to get—and that meant the only prudent course was to hedge our bets. I explore this issue in HumbleDollar’s latest newsletter.
While we ought to prepare our finances for a host of possible outcomes, we’re simply not very good at doing so. In the newsletter, I offer a slew of statistics on our prowess when it comes to risk management.

Read more »

Rewriting the Script

WHAT DO YOU believe about money? I’m talking here about money scripts—subconscious beliefs developed since childhood that influence your financial behavior.
These beliefs have been studied extensively by Ted and Brad Klontz, the father-and-son team who founded the Financial Psychology Institute and authored Mind Over Money. Here are some common money scripts:

“Avoid debt at all costs.”
“Money is the root of all evil.”
“We can always make more money.”

While there’s an element of truth to each,

Read more »

Say Yes

“I DON’T GET IT.” That’s what my friend said when I told him I would consider marrying my significant other.
“Why do you feel you need to get married?” he continued. “You’re both in your 60s. You’re not going to have any children. There’s no reason you should get married. If you did, you would make the relationship more complicated. You both probably would want a prenuptial agreement protecting your assets. That, in itself,

Read more »

Saint Jack

WITHOUT A DOUBT, John C. Bogle is the greatest man I’ve had the privilege of knowing. Tomorrow, the newspapers will run obituaries detailing his many accomplishments—how he launched Vanguard Group, started the first index mutual and was, right up until the end, a fierce advocate for the everyday investor.
I first met Jack in 1987, when I was a callow 24-year-old reporter at Forbes magazine. I last saw him in October, at the Bogleheads’

Read more »

The Gift of Life

GLOBAL LIFE expectancy for almost every nation will rise during the next two decades, with Spain overtaking Japan as the country with the longest life expectancy. Meanwhile, on the list of 195 countries, the U.S. will fall 20 places, from 43rd to 64th. The average U.S. lifespan as of birth is still projected to increase slightly, from 78.7 years to 79.8, but at a slower rate than the rest of the world.
That isn’t great news for the U.S.—but it isn’t necessarily bad news for you,

Read more »

Numbers

GENWORTH’S 2018 Cost of Care Survey puts the average annual cost of a semi-private nursing home room at $89,297. You might pay $351,495 in Alaska, $151,475 in Connecticut and $144,175 in Massachusetts, but just $57,579 in Texas and $55,663 in Oklahoma.

Act

ELIMINATE DUPLICATION. Many folks have multiple bank and brokerage accounts, multiple funds that invest in the same market sector and even multiple advisors. This can make sense if, say, the goal is to increase FDIC insurance. But often it reflects a naïve notion of diversification—that more accounts somehow mean greater safety. Our advice: Simplify—for your sake and the sake of your heirs.

Truths

NO. 10: WALL STREET always strives to look its best. To ensure fund expenses and advisory fees appear small, they’re expressed as a percent of the dollars we invest, not as a percent of our likely gain. To make results appear impressive, money managers pick their benchmark indexes carefully and use cumulative return “mountain” charts.

Think

EFFICIENT FRONTIER. What mix of investments offers the highest expected return for a given level of risk—or the lowest risk for a target return? In theory, these optimal portfolios can be found on the so-called efficient frontier. Their key characteristic: broad diversification, thus reducing volatility by combining investments that don’t always move in sync.

Home Call to Action

Free Newsletter

Choosing Our Future

WHEN FOLKS have financial questions, they go hunting for the right answer. But what if there’s no right answer to be found?
To be sure, in retrospect, the correct answer is often crystal clear. Looking back at 2018, we should have owned growth stocks until September and then gone to 100% cash. If our home didn’t burn down and our health was good, we shouldn’t have bothered with homeowner’s and health insurance. If we kept our job and survived the year,

Read More »

Money Guide

Start Here

Hybrid Policies

INSTEAD OF BUYING pure long-term-care insurance, you could purchase cash-value life insurance that offers long-term-care benefits. We discuss cash-value policies later in this chapter. If you need to pay for a nursing home, you could tap into the death benefit—and sometimes receive even more, depending on the policy—to cover long-term-care costs. If you don’t end up in a nursing home, the policy’s proceeds pass to your heirs. Hybrid policies appeal to folks who hate the idea of paying years of premiums for long-term-care insurance, but never getting anything back. Sales of these policies have been picking up, even as demand for traditional long-term-care insurance has waned. Still, hybrid policies are a costly way to protect yourself. After all, you are buying life insurance at an advanced age, which is an expensive proposition, and yet you may not need life insurance at that juncture, because you don’t have dependents who would suffer financially if you died suddenly. You can also purchase tax-deferred fixed annuities that have a long-term-care rider. If you don’t need long-term care, the money continues to collect interest. If care is needed, you can usually get access to a sum equal to some multiple of your original annuity investment. With the fixed annuity, you avoid buying life insurance you may not need—but you will likely be locking up a large sum that will then earn modest returns. Next: Medicaid and Nursing Homes Previous: Long-Term-Care Insurance
Read more »

Archive

Tales to Be Told

IF THIS TURNS OUT to be a major bear market, there will be a slew of articles to be written. It’s the negative correlation enjoyed by every financial writer: Even as our portfolios shrink, our potential for pontification soars. But what if the market bounces back? It’s almost too painful to contemplate. Think of all the articles that won’t get written. If the past week’s rally continues, here are 10 stories that will have to wait for the next market downturn: 1. Don’t panic. To be sure, many of us ink-stained wretches—both here at HumbleDollar and elsewhere—have already churned out the ritual “keep calm and carry on” articles. It’s an underappreciated art form: You strive to sound intelligent as you warn that stocks could easily full much further—or, for that matter, go right back up. 2. Time to rebalance. This one is best written when stocks are off at least 20%. But deadlines are deadlines. We have to write something this week, so we’ll probably trot it out when the market is down a mere 11%. 3. She called it. There’s always some Wall Streeter—not necessarily female—who mutters “crash” before the crash occurs or, better still, actually moves clients’ money out of stocks and into Treasury bills. Our new goddess of market timing is swiftly hoisted onto a pedestal and thereafter her every pronouncement parsed by adoring investors, until her lack of clairvoyance becomes too obvious to ignore. 4. Lemons into lemonade. Without the fruit metaphor, no story on taking tax losses is complete. As share prices sink further and year-end approaches, readers will be reminded of the silver lining—that realized capital losses can be used to offset realized capital gains and up to $3,000 in ordinary income. 5. Underwater overseas. With U.S. stocks down 25%, xenophobic pundits will note that foreign stocks are even more wretched, down 29%. Where’s the diversification in that? The often-huge difference in 10-year returns between U.S. and foreign stocks is, of course, too inconvenient a fact to mention. 6. Active managers triumph. Index funds aim to keep their cash holdings to a minimum, so they track their target index as closely as possible. Actively managed stock funds often keep 3% or more in cash, so they can easily pay off departing shareholders and have money to put to work in new investment ideas. The unsurprising result—that active funds often fall a little less during market declines—will be hailed as a sign that the long-awaited revival of active management has begun. Further signs will not be forthcoming. 7. Time to rebalance (again). Okay, we ran this story before. But this time, we really mean it. Cue the hate mail. 8. Off target. After months of searching, an intrepid financial writer tracks down an investor who is shocked—shocked!—to discover his target-retirement fund has gone down in value. How could something so sensible, offering broad stock and bond market diversification in a single package, be allowed to become the default investment option in many 401(k) plans? The financial writer’s day is complete when a publicity-hungry congressman fires off a press release demanding Capitol Hill hearings. The congressman's demand is met with widespread indifference from more sensible colleagues. 9. Conversion therapy. Otherwise known as "lemons into lemonade (part II)," writers urge investors to take advantage of the depressed stock market by converting their traditional IRA to a Roth. With share prices down sharply, the resulting tax bill would be similarly shrunken. Shell-shocked investors shake off their paralysis just long enough to send the writers yet more hate mail. 10. It’s a bear trap. Share prices begin their long climb back to new highs. Every step of the way, some ink-stained wretch strikes a literary pose of world-weary sophistication—and warns ominously that the good times won’t last. Follow Jonathan on Twitter @ClementsMoney and on Facebook. Check out his three earlier blogs about 2018's market decline: The Morning AfterTaking Stock and Speculating on Speculation. Also listen to his recent podcast with Steve Chen of NewRetirement.com.
Read more »
Jonathan Clements

About Jonathan

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