In going back over the comments on my last couple of articles, two reader concerns popped out at me. One, many of you still had faith in the Vanguard 500 S&P ETF (VOO/VFIAX) despite its concentration in giant AI-infused technology stocks. But, two, some readers would like to know how they might increase their diversification by adding a fund that did not always fluctuate in tune with one of the country’s most trusted large cap index funds. I thought it might be helpful to hunt for a fund within the family that had a relatively low correlation with the broad market as represented by VOO. (I have used the ETF wrapper here but have provided symbols for the sister mutual funds.) The most obvious place to start would be to look for an ETF whose style is less growth-oriented than the current S&P, which would be Vanguard Value (VTV; VVIAX) and Vanguard High Dividend Yield (VYM; VHYAX). I found their respective relationships with VOO to be .72 and .70, surprisingly low (to me) given that all three funds are large-cap vehicles. This only confirms for me that as currently constituted the S&P is quite growthy. Well, investment style told us something valuable to know, but what about moving down the size ladder to small companies? Vanguard has several ETFs devoted to one or another style of small stocks, but the one most popular by far is the small-blend Russell 2000 (VTWO; VRTIX). Its correlation with VOO is .66, offering even more diversification than the two large cap value funds. Now, what if we check out the one Vanguard fund that differs in both style and size from VOO--  Small Cap Value (VBR; VSIAX)? Curiously, we get hardly any greater diversification here (,64), and the Russell 2000 ETF is far more heavily traded. I figured we would reach diversification nirvana by traveling outside the U.S. via International High Dividend Yield (VYMI; VIHAX) and the FTSE All-World ex-US Small Cap (VSS; VFSAX). But the respective levels of commonality are .65 and .73, poor reasons to ditch the .66 correlation between VOO and the plain vanilla small cap Russell 2000. So what have we found? Something potentially very useful, I believe. Depending on the size of the tweak, you can somewhat effectively diversify away from VOO’s growth tilt by adding the Vanguard Russell 2000 to your portfolio. But before you start punching the keyboard, consider these caveats. Remember, you would be repositioning your portfolio for a reversal in the Magnificent 7, a return to favor of small cap stocks, or preferably both. If the promise of AI comes to fruition, how frustrated will you be to have missed out on a piece of the action? Then, there’s this. When is repositioning a trade and when is it a long-term shift in emphasis? Is it Buffett’s “forever” or something more flexible if the Zeitgeist changes? Do you say investment should be boring because you’ve learned that trading is a costly waste of time? Or is it because you’re afraid to make any changes at all because you don't feel knowledgeable enough about the market? Likewise, do you trade because you’ve truthfully found an edge denied to most of us mere mortals, or because the poolside action at the club is too slow? The answers will be different for each of us, but they’re ones we need to know.

RETIREMENT IS SAID to be a time for reviewing and reminiscing. We try to understand who we were and how we came to be who we are. But the health trials of the retirement years can also project us into the future. When couples enter their twilight years, they begin to contemplate how they’d cope if the other died first. I believe “survivor rehearsal” is one way our biology helps us to contain the fear of having to cope on our own. Some people think this rehearsal process is disrespectful or self-indulgent, and maybe that’s why it’s a phenomenon rarely discussed with partners or friends. Still, in U.S. society, I suspect survivor rehearsal is almost universal, though some folks may feel too guilty or ashamed to admit it. Ever since my wife Alberta was diagnosed with breast cancer six years ago, I’ve found myself directing my own survivor movie. My need to experiment with different scenarios—and feel how they might play out—is surprisingly strong, though it’s not at all clear what this movie will look like. As things stand, my own precarious health makes me more likely to predecease Alberta than the other way around. Knowing me so well after 40 tumultuous years, Alberta helps me discern which scenes are likely to roll out smoothly and which will require more than one take. If I’m the survivor, I know I’d have to grapple with my health on my own, be more proactive about my social agenda and maintain a mutually comfortable relationship with my son Ryan. And all the while, I’d need to work through the unimaginable grief of losing my best friend. Investing has been a major theme in my adult life, but I’ll need to control it better than I do now. Today, my modus operandi starts with a merry addiction to following market movements and developments. But should I be the survivor, I’ll also be fending alone in the social and entertainment arenas, where I have depended on Alberta to be my concierge. It would be tempting to submerge myself in the financial domain, where I’ve had some success and feel more confident. My romance with the stock market looms as both a blessing and a curse. Quite by contrast to my passion for the market, I dislike the responsibilities of private real estate investment. Our residential income properties served us well as an appreciation compounder and diversifier, but 40 years of direct ownership takes a toll, and I have no desire to shoulder the burden on my own. [xyz-ihs snippet="Mobile-Subscribe"] I have a wonderful property manager, but she can’t shield me from all the vulnerabilities of private real estate investing. I want to wake up Monday morning looking forward to a pancake breakfast with an old friend and not obsessing about the mold my tenant—a lawyer, no less—found growing on his bathroom ceiling. Different scenes about how I’d handle the properties play out in my imagination. I would love to shed the entire landlord business. But I’m trapped. I bought several small income properties starting in 1983 and have enjoyed substantial appreciation, which means a massive potential tax liability. I could potentially sell by taking advantage of one of real estate’s most egregious tax loopholes, the 1031 exchange, which would delay capital gains taxes. But the transaction requires identification of the replacement property within 45 days of the sale and its purchase within six months. It’s an unnerving timeline, may force settling for a less-than-ideal substitute, and is vulnerable to a time-consuming dispute at the closing or a disastrous pullout by the buyer. Besides, I don’t want to replace one set of properties with another. Rather, I want to cash out and diversify across liquid investments like cash, bonds and broad stock market index funds. I would allocate the largest amount, maybe as much as 30%, to real estate investment trust ETFs, which trade like stocks and would keep a healthy stake in property ownership without the headaches. I’m also dissuaded from cashing out entirely by another preposterous feature of the tax code. If the properties are inherited, the heir’s cost basis is stepped up to the value of the investments on the date of death. The capital-gains tax bill I face today need never be paid, and selling now would mean forgoing that governmental gift. My real estate predicament poses a dilemma: escape from a few years of bondage by unloading the properties or follow the financially prudent course. I, alas, know which course I’ll take. Ryan’s welfare and my family heritage trump my comfort zone. No, that’s not exactly a Hollywood ending for my peace of mind, but it is indeed a rational and loving final act. Steve Abramowitz is a psychologist in Sacramento, California. Earlier in his career, Steve was a university professor, including serving as research director for the psychiatry department at the University of California, Davis. He also ran his own investment advisory firm. Check out Steve's earlier articles. [xyz-ihs snippet="Donate"]

WHEN I WAS ASSIGNED a high school essay on business morals, I asked my dad if he knew of any books on the topic. “No, Stevie, I don’t. From what I’ve seen in New York real estate, it would be a very thin book.” For more than 40 years, that cynical quip has haunted me, coloring my view of rental real estate. I’m not emotionally suited to being a landlord. But I wanted real estate as a stock market diversifier—and I was drawn to the benefits of combining rental income with stock market dividends. Together, they would give me a passive income stream to pay for retirement even if Social Security in its present form were to perish. As seniors, the urge to reckon with our lives is a natural component of what’s colloquially called the “wisdom of old age.” Some of you may have already embarked on a journey of savoring the memories of your successful choices and regretting the ones that didn’t pan out. What about me? I’ve found myself reflecting on the moral tests I confronted during my years as a landlord. Lately, one particular transgression has been replaying in my mind. It’s a seemingly minor incident that happened when I was renting my first duplex in 1983. Its outsized impact on me may be attributable to the fragility of my budding values as an owner of small residential-income properties. I was a child of the Kennedy era of youthful exuberance and aspirations, and I fashioned myself as a humanitarian landlord. Faced with a moral dilemma, I imagined myself adjudicating with enlightened fairness and sensitivity. But I soon learned how my worries about financial success could corrode my integrity. I had already rented the two-bedroom side of the duplex, but—after it had sat on the market for two months—was growing worried about the more luxurious three-bedroom unit. Just as the next mortgage payment was coming due and my concern was turning to panic, I received a call from a student at the nearby university. He and his friend were looking for a place, and they were interested in the apartment. Even back then, I knew that renting to two fraternity brothers was a risk to neighborhood quiet and the property’s condition. On top of that, I suspected it might be difficult to find a renter for the remaining bedroom. But I was enamored by the idea of finally renting two of the three bedrooms. I walked the boys through the unit and signed them up. I was one relieved neophyte real estate investor. After the guys took possession, my good fortune seemed unbounded when I received a call from a fellow in Placerville, a small city some 50 miles north of Sacramento. After an exchange of pleasantries and some questions, we agreed to meet at the property. James was morbidly obese and walked with a waddle. Although struck by his awkwardness, I was not fazed by it. He was amiable, and seemed forthright and a promising rental prospect. His references and credit were exemplary, and we scheduled a walk-through. He met his two co-renters and then drove with me to a nearby coffee shop to leisurely sign the lease. Boy, I could really cozy up to this landlord stuff. [xyz-ihs snippet="Mobile-Subscribe"] But my reverie was short-lived. Late that same afternoon, I got a call from one of the students. James was gross and disgusting, I was told. The boys would withhold their rent until I undid my arrangement with him. I did not relish the prospect of an expensive and stressful eviction process, along with the unraveling of my newfound self-esteem as a landlord. After a few days of deliberation, I called James and explained the situation. The silence on the other end of the phone told me that this was not the first time he had been the object of discrimination for an illness that was probably biological and out of his control. He stuttered that he’d been looking forward to his new home but didn’t want to pursue renting it under the circumstances. He agreed to cancel our contract. Clearly, James had more character than his landlord. It took a while before I could recognize and acknowledge my lapse. I can’t remember how I ultimately filled the vacancy, which didn’t seem to matter as much anymore. Viewing life through the lens of retirement is not always painless. How deeply had I wounded James? Does his mind still wander to that phone call as often as mine does? You may already be revisiting the decisions you made in young adulthood, regretting the missteps and delighting in the triumphs. Half a life later, I tell myself the same dilemma today would evoke a very different resolution. But I’m also aware that talk is easy—and it’s behavior that’s hard. Steve Abramowitz is a psychologist in Sacramento, California. Earlier in his career, Steve was a university professor, including serving as research director for the psychiatry department at the University of California, Davis. He also ran his own investment advisory firm. Check out Steve's earlier articles. [xyz-ihs snippet="Donate"]

PUBLIC SPEAKING WAS my nemesis throughout my academic career. Though I found it frightening, I’d always been able to tough my way through the lectures and avoid a full-blown anxiety attack. Then, during a theories of psychotherapy seminar for psychiatry residents, the panic broke through. Though only my first diagnosable episode, it portended an affliction far more sinister. It was a premorbid symptom of an underlying depression that would topple my career, derail my investment ambitions, and plunge me into an early and unplanned retirement. As 1984 unfolded, I was at the top of my game. I had just married Alberta, the woman I still love. I was granted tenure as a psychologist at a leading medical school at age 39. As director of psychiatric research, I had published more than 100 scientific articles and served as an associate editor of a prestigious psychology journal. An abundant personal and professional future seemed assured. But I was too young and immature to imagine how a cacophony of unlikely events could unravel a person’s life. In the spring, Alberta’s mother committed suicide. Then, in September, my sister was murdered by a serial killer, her decomposed body discovered in a dumpster. Years later, as a patient, I would make the connection between my sister’s suffocation and my gasp for air while teaching. My world became even more menacing a few months later. After learning of deadly assaults on a third-year-medical student and a pulmonologist in hospital bathrooms, I became afraid to enter public restrooms. By then, I realized that something ominous and powerful had taken hold. The depression exposed by that first seminar anxiety attack lasted for two decades, the heart of my adult life. I never returned to work. I crumpled as if shot from behind. Recovery was agonizingly slow. I was hospitalized with suicidal thoughts. Alberta was told my symptoms were resistant to treatment. Psychoanalytic therapy promoted my self-awareness, while cognitive therapy gave me tools to combat my negativity. But they were not cures. I was prescribed countless antidepressants and endured harrowing side effects until, miraculously, one hit. Reentry into the fabric of everyday life went surprisingly well, except for my social reengagement. I felt shame about my long battle with depression and experienced the stigma surrounding mental illness that’s still pervasive, even among health professionals. Far wiser and more empathetic, thanks to my own experience, I opened a psychology practice rather than return to research. Some years later, I realized a lifelong dream of becoming an independent investment advisor affiliated with a large discount broker. More important, I’ve been enjoying a meaningful retirement that includes contributing to HumbleDollar. Here are six strategies that helped me stagger through the darkness and emerge a healthier person. Perhaps they offer a roadmap for you or for a loved one blindsided by mental illness or other health catastrophe. But first and foremost, get professional help in the form of psychotherapy or medication, and preferably both. 1. Accept reality. Unfairly or not, you’ve been targeted. As my son Ryan likes to say, “It is what it is.” You will have a career, friends and retirement, though it may not be how you envisioned it. Some bitterness and denial are understandable, but you need to get beyond them to restore good mental health. 2. Have a purpose. Everyone needs to find meaning, all the more so if you wake up with the world looking bleak. It doesn’t have to be something heavy like deepening your spirituality. It could be volunteering for a charity or supporting a political candidate. For me, it meant preparing Alberta to manage our investments in the event I did not regain full functioning. I tried my best under the circumstances to do the financial coaching and make the necessary arrangements. 3. Mine your favorite activities. By now, hobbies have likely become your loyal allies, and you can turn to them for sustenance and replenishment. Like to read, go to the theater, exercise at the gym, putter in the garden? Do it. [xyz-ihs snippet="Mobile-Subscribe"] Once a sideline, the stock market became the lifeboat that transported me across all those failed treatments and dwindling hopes. With hours to spare, I became a voracious reader of investment classics like Benjamin Graham’s The Intelligent Investor and Peter Lynch’s One Up on Wall Street. Saturday mornings were a special treat. I would bound out of bed and ride my bike to Tower Books to pick up the new edition of Barron’s. I often walked to the library to devour the latest update to the daunting Value Line Mutual Fund Survey like it was a John Grisham thriller. I had my analyst, I had my Prozac—and I had stock therapy. 4. Fight off the doldrums. Emphasize more complex activities that get your mind off all that pessimism. Routine tasks like household chores are useful in keeping busy, but they’re so automatic that they aren’t as effective in replacing the disturbing thoughts. Like to walk but can’t shake the blues? Don’t forget your headset. In my case, there’s nothing like classic rock and roll while I’m rummaging through the mail. 5. Dump the downers. You’re a skilled handyman and notice a tile has fallen from the roof, a sure sign of trouble brewing. You’ve repaired the roof before but dread the thought of another go-round. Ditch the problem for now. The fact is, you’re compromised and the roof probably has three more years of wear on it anyway. I felt I needed rental properties to diversify from the stock market, but I loathed the responsibilities and nuisances. In my condition, I couldn’t muster the energy or will to perform critical tasks like renting a vacant unit and, besides, I was hapless as a do-it-yourself handyman. Overcoming longstanding anxieties about delegating authority and piling on additional expenses, I hired a property manager. It was a home run and a lesson in trust. Debbi has been a godsend for almost 40 years. 6. Seek out emotional support. In this respect, I was blessed. I have a devoted family that accepted I had a severe depression, as well as several close friends who witnessed my fall. This last strategy is crucial. Whether family member or friend, find at least one intimate relationship with someone you can be totally yourself with, a person you can count on to “be there” for you. If you feel the need to be “on” or would be afraid to go down into your emotional abyss with the person, he or she isn’t the right one. That’s the gist of how I groped from personal tragedy to renewal. It’s hardly a precise formula, but perhaps it’s a rough roadmap for people struck by a random catastrophe in financial matters, health or otherwise. I’m thankful for another go at life, but under no illusion that a single bout guarantees a future free pass. I stand vigilant yet humble, ever aware of how fleeting the good times can be. Steve Abramowitz is a psychologist in Sacramento, California. Earlier in his career, Steve was a university professor, including serving as research director for the psychiatry department at the University of California, Davis. He also ran his own investment advisory firm. Check out Steve's earlier articles. [xyz-ihs snippet="Donate"]

WANNA BET TOM BRADY has the real golden arm? I’ll take the other side of that wager. At the Borgata Casino in Atlantic City in 2009, Patricia Demauro's golden arm rolled the dice 154 times over four hours and 18 minutes without losing. Yup, football is back and sports gambling is on a roll. Several states have legalized it, and many others are proceeding in that direction. My 35-year-old son Ryan, a math jock and sports fanatic, has already signed on. He’s found the adrenaline rush of gambling to be a welcome break from the demands of teaching high school and coaching basketball. I was concerned about the well-known nightmares of sports gambling, so it was a relief to learn that Ryan was betting responsibly and managing to hold his own. Like other professional sports bettors, he’s developed a statistical model that discourages betting on intuition and hunches. Ryan and I speak often. He bounces ideas and tactics off his old man, a former academic researcher. As I learned more about his approach, I recognized it as eerily familiar. I had been a fervent options and individual stock trader when I, too, was in my 30s. I’ve become fascinated by the parallels between what Ryan is doing today to inform his bets and what I did when I was trading options and stocks. First, let’s take a glimpse into the machinations of the sports bettor. Assume the data suggest that the home court advantage in college basketball is exaggerated. Those who erroneously believe that a raucous arena necessarily dampens the performance of the visiting team will bet too heavily on the home team, and thereby skew the odds. The savvy sports bettor takes the other side. When I was laying bets on Wall Street stocks, I remember fortifying myself with a desk strewn with newsletters that claimed they could transport me to a lifetime of leisure and abundance. Sports bettors, similarly, have instant access to a wealth of online information on teams and players, as well as courses on sports betting. Just as I haunted numerous trading conferences back in the day, sports bettors now convene at workshops where like-minded mathematics wizards from elite universities hold court. Today, bettors—like traders—rely heavily on statistical analysis. They employ predictive models to spew out data to show when the sports bookies are off. I relied on charts and moving averages to learn what stocks had the momentum to warrant the purchase of their options. Now the hunt is on for similar opportunities created by discrepancies between the naïve money and the forecast of what the betting odds should be. In today’s parlance, most hardcore sports bettors are quants. [xyz-ihs snippet="Mobile-Subscribe"] With apologies to Warren Buffett, let’s consider value investing from the vantage point of the sports bettor. Buffett compares a company’s intrinsic value to its stock price. To paraphrase Benjamin Graham, the greater the discrepancy, the larger your margin of safety. Similarly, the size of the spread between the output of the gambler’s model and the casino projection is his margin of safety. The greater the discrepancy, the higher the probability of a profit. The drama of the Super Bowl gives savvy bettors a value play. Flush with anticipation and rooting for excitement, the public is more likely to believe that a kickoff will be returned for a touchdown than is warranted by the objective data. The emotional money on the “yes” bet is unrealistically large. This leads the sports bookies to increase the odds in favor of the “no” bet, which is now feverishly being taken by the smart money. Jim Cramer rants that diversification is the only free lunch on Wall Street. That’s also true for sports bettors, who must spread their bets across many games to avoid a wipeout. Still, stock fund managers often invest more money in their high conviction picks, or even run a concentrated fund to prevent dilution of their investment philosophy. Bettors similarly put down more money when their models flash that the sports bookies' numbers are less accurate. Of course, in the long run, the returns from owning stocks should be superior to those of all but the most skillful sports bettors. Stock investors may get an average annual return of 10% over 20 years, with almost no transaction costs. Sports bettors, on the other hand, must beat the house, which uses finely tuned computer models to make fat profits at the gambling public’s expense. Like the options traders of old, bettors must endure harrowing losses and unpredictable cash flows. I’ve come to see the sportsbooks as similar to a broad index fund, a benchmark even the most storied mutual fund managers have not been able to consistently surpass. I limped off the stock trading playground by my 40th birthday, chastened and transformed into a dedicated mutual fund investor holding for the long-term. I’ll confess to still having apprehensions about Ryan’s new pastime. I hope there comes a time when he parlays his profits as a sports bettor into stakes in mutual funds and exchange-traded index funds. There he could apply his aptitude and knowledge to enhance his financial well-being and harness the magic of compound interest. Then again, I need to remember Ryan is entitled to live out his own dream, not mine. Steve Abramowitz is a psychologist in Sacramento, California. Earlier in his career, Steve was a university professor, including serving as research director for the psychiatry department at the University of California, Davis. He also ran his own investment advisory firm. Check out Steve's earlier articles. [xyz-ihs snippet="Donate"]

WHEN I STARTED OUT as a mom-and-pop property owner 40 years ago, I was burdened by both my naivete and the shibboleths promoted by the real estate industry. In particular, I had to overcome two egregious misconceptions: that a well-written lease is the key to successful small-property investing and that aggressively raising rents is the surest way to maximize profits. Adopting an alternative management philosophy has saved me both money and heartache. Character counts. Few things in life are as overrated as the Los Angeles Lakers, but the rental lease is one of them. Getting that lease is important, sometimes very much so when confronting tenant malfeasance. It sends a clear message: You are legally bound to this commitment. It’s your ace when that rare eviction becomes unavoidable due to excessive damage, flagrant misconduct or nonpayment of rent. BlackRock, the multinational investment company that’s bought thousands of small income properties for its clients, has its own lawyers. But I’m not inclined to sumo-wrestle a renter over a few beer cans on the front lawn or an occasional late rent payment that would entail a $500-an-hour attorney’s fee. Indeed, gauging a prospective renter’s character is far more valuable than getting the lease. Character assessment begins with an unbiased recent history of debt repayment, which the credit report provides. A credit score over 670 establishes that, regardless of personal hardship or broader economic downturns, a prospect has fulfilled her financial obligations. It’s eminently more telling than a large bank account or professional pedigree, both barometers of financial capacity rather than actual behavior. Is the credit score all you look at? No. You have three other checks on character. First, you can ask for a tax return and judge if the figures support a prospective tenant’s self-reported financial wherewithal. Second, you can talk to her current landlord, not just about her payment record, but also about her personal suitability as a renter. Does she sound like a perfectionist who’d never be satisfied with a repair? If so, she’s history. You want a clean and tidy tenant, but not a finicky nuisance. Just make sure you aren't talking to her Uncle Billy. The third measure of character is tricky because it depends on confidence in your own social intelligence. Let’s say a rental candidate balks at the damage deposit. This person has unwittingly revealed to you that she may be a source of conflict. Is she presumptuous, and makes you feel like you’re the renter and she’s the landlord? Sayonara, my friend. Here’s where the rubber meets the road. Who would you rather have as a renter—a lessee who discovers bathroom mold and threatens to sue you, or the fellow who calls you to amicably discuss the problem? I encountered this very situation, and I’m forever thankful that I had a tenant who was reasonable. Taking it slow. That brings us to our second myth—the pervasive contention that pugnaciously raising rents is the Holy Grail of profitable real estate investing. My experience: Just as a person’s character usually trumps a lease, controlling discretionary expenses while methodically increasing rents is the key to profitability. Many expenditures are out of a landlord’s control, like those involving safety or health, or fundamental life-quality issues like adequate heat and air conditioning. But others, like upgrading the landscaping or installing double-pane windows, are distinctly optional. You can’t ignore the $15,000 new roof, but you can certainly quash that wish for blond kitchen cabinets. Invariably, the counter to this management philosophy is, “Well, you’ll get a higher rent.” Terrific. How much of a rent increase are you going to get from the next renter in return for kitchen cabinets that cost $3,600 but may not mean much to her? Maybe $50 a month. But let’s be generous and say $100. It’ll take three years to break even on your largesse. Expenses swing wildly from month to month and year to year. You might be faced with a new heating system in May and removal of a fallen oak tree after a severe December storm. Many major problems, like a cracked sewer pipe, can’t be anticipated and require the owner to set aside a portion of each month’s rent as a maintenance and repair fund. By contrast, a rental property’s insurance, taxes and utilities trend upward only gradually and, in the case of a fixed mortgage, not at all. The upshot: From month to month, your net income will largely fluctuate with your maintenance and repair costs, which is why you shouldn’t add to those unnecessarily. Meanwhile, except perhaps in instances of tenant turnover, rents also grind slowly higher. And that’s what you want, because gradual rent increases don’t scare off existing tenants, thus triggering all the expenses involved with finding new occupants and making the property appealing to them. Give me a choice between an aggressive landlord who authorizes extravagant improvements and demands big rent increases, and one who raises rents responsibly to hang on to good renters while carefully prioritizing repairs, and I’ll take the frugal manager any time. Steve Abramowitz is a psychologist in Sacramento, California. Earlier in his career, Steve was a university professor, including serving as research director for the psychiatry department at the University of California, Davis. He also ran his own investment advisory firm. Check out Steve's earlier articles. [xyz-ihs snippet="Donate"]