Doing Better

Jonathan Clements  |  January 1, 2016

IT’S JANUARY 1—a day of great hope. Those New Year’s resolutions to save more still seem achievable. Nobody’s investment results have yet fallen behind the market averages. Market pundits can still fantasize that this year they’ll be proven right. In this spirit of optimism, check out my 16 ways to improve your life in 2016. Below, you’ll also find some thoughts on bond-market risk.

16 Ways to Improve Your Life in 2016

1. Give an unexpected gift. If you give your spouse or children birthday presents, you’re simply checking the box. But if you give them a gift out of the blue, they’ll be thrilled—and, in all likelihood, you too will be happier. Research suggests we get more pleasure from spending on others than spending on ourselves.

2. Lean against the wind. Whenever the broad market declines, train yourself to think less about the dent in your portfolio’s value—and more about the bargains that are now available. Like shoppers who rush to the department store whenever there’s a sale, you should be excited by falling share prices, not fearful.

3. Take the stairs. Or work out for an extra five minutes. Or take a walk after dinner. A marginal increase in the amount you exercise may be the tipping point that helps you shed weight and feel healthier.

4. Talk to your family about money. Of the four great taboo dinner party topics—religion, politics, sex and money—only money remains truly taboo. People are more likely to complain about their sex life than be honest about their portfolio’s lackluster performance. This year, go for truthfulness: Talk to your adult children about end-of-life decisions and how much they might inherit. Have a frank conversation with your spouse about how much you spend and save. Talk to your high school freshman about how much you can help with college costs.

5. Pay more taxes. Got a year with relatively little taxable income, perhaps because you just retired or because you’re between jobs? Take advantage of your low tax bracket by converting part of your traditional IRA to a Roth.

6. Plan your summer vacation now. Often, the best part of a vacation is the anticipation. By musing about numerous possibilities, you can daydream your way through a slew of wonderful trips.

7. Say “I don’t know” more often. Will share prices and interest rates rise or fall? Which stocks and funds will beat the market? Investors spend their days seeking unknowable answers. A better approaching: Stop trying to forecast—and instead focus on things you can control, like your investment costs, your portfolio’s tax bill and how much risk you take.

8. Manage expectations. Running 10 minutes’ late for dinner with friends? Call and say you’ll be there in 15. When you turn up earlier than they now expect, you will get a warmer welcome.

9. Run a fire drill. If you’re still in the workforce, ponder how you would cope financially if you lost your job. If you’re retired, consider what it would mean if we had a re-run of 2007-09, when share prices plunged 57%.

10. Ask people about themselves. What’s the difference between a self-absorbed teenager and a mature adult? The teenager will never ask how your day was. This, alas, is a bad habit many folks never break. We tend to be great talkers and terrible listeners. By asking friends and colleagues about themselves, you can learn amazing things—and show that you’re a person who cares about others.

11. When in doubt, pay down debt. If you’re worried that stocks will tank and bond prices will be driven lower by rising interest rates, consider using savings to pay off debt, even low-cost, tax-deductible mortgage debt. Your pretax return will be equal to the interest rate charged and the reduced borrowing will lower the risk in your financial life.

12. Don’t make yourself feel poor. Avoid restaurants where the bill will be a nasty shock. Bypass stores where you can barely afford to shop. These places will just be reminders that, even if you’re in fine financial shape, others have far more—and you may be left with a gnawing sense of dissatisfaction.

13. Win the credit card game. Credit cards are a financial quagmire for many Americans, who end up carrying a balance and paying exorbitant financing charges. But for those who are careful, they can be a modest moneymaker. My advice: Get a no-fee rewards credit card and run as much of your spending as possible through the card. But for goodness sake, make sure you pay off the balance in full every month.

14. Know your fixed costs. Add up how much you pay each month for mortgage or rent, groceries, insurance premiums, car payments, utilities and any other regularly recurring expenses. If this sum is more than 50% of your pretax monthly income, you’ll likely find it awfully difficult to save.

15. Consider self-insuring. Got more than $1 million in savings? Ask yourself whether it makes sense to drop your life, disability and long-term care insurance. Got less than $1 million? Look into extending the elimination period on your disability and long-term care insurance. No matter what your age, ponder raising the deductibles on your health, auto and homeowner’s policies.

16. Revisit 2015’s best moments. Which days were especially memorable—and what role did money play? You might use these insights to guide your spending in 2016. 

Nothing Fixed About Fixed Income

Losing money, by itself, isn’t the problem. Rather, the problem is losing money when you don’t expect it. For instance, in September 2008, the share price of the Reserve Primary Fund dropped from $1 to 97 cents, an objectively insignificant 3% decline. But it was hugely significant for the fund’s shareholders, who assumed they couldn’t suffer a loss with a money-market mutual fund.

Fortunately, “breaking the buck” is a rare occurrence among money-market funds. Instead, bonds are the big source of consternation. People assume that “fixed income” investments are safe, but they’re often unpleasantly surprised. Consider what happened to Vanguard Group’s stock and bond mutual funds in 2008, when the financial crisis hit with full fury. I looked at the results of all Vanguard funds with $3,000 investment minimums, including both actively managed and index funds.

Among stock funds, returns for 2008 ranged from -18.5% for Vanguard’s health care fund to -56% for its precious metals and mining fund, a spread of 37.5 percentage points. What if you ignore sector funds? The range was -25.6% for its dividend growth fund to -52.8% for its emerging markets index fund, a spread of 27.2 percentage points.

What about Vanguard’s bond funds? The performance spread, at 43.8 percentage points, was even wider. Results ranged from 22.5% for its long-term Treasury fund to -21.3% for its high-yield corporate “junk” bond fund. Among the 26 Vanguard bond funds that were around in 2008, 14 lost money. The federal government bond funds almost all made money, while the corporate and municipal bond funds almost all suffered losses.

To be sure, most of the losses were modest, and Vanguard’s bond fund shareholders fared far better than owners of its stock funds. Still, it’s a reminder that, while stock funds are uniformly risky, bond funds are a more eclectic group. Some funds, such as those focused on short-term Treasurys, are among the safest funds you can own. But others carry interest-rate risk because they own longer-term bonds, credit risk because they own lower-quality bonds and currency risk because they invest abroad—and some funds combine more than one of these risks. The upshot: Before you assume a bond fund is safe, consider what it owns—and what risks those bonds entail.

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