Out of My Mind

Jonathan Clements

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 next month.

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