Just Because
Jonathan Clements | Nov 5, 2021
WHAT SEEMS OBVIOUS isn’t always true. Here are seven examples from the financial world:
- Just because an investment has performed well doesn’t mean that’s a good guide to the future. This is usually mentioned with regard to stocks. But today, my bigger concern is folks who are extrapolating past bond fund returns. Their strong past performance was driven by a huge drop in interest rates over the past four decades—something that can’t be repeated starting from 2021’s tiny yields.
- Just because it’s a safe investment doesn’t mean you won’t lose money. Today, after inflation and taxes, cash investments and many high-quality bonds look like a sure bet to lose money.
- Just because you’ve notched spectacular investment returns doesn’t mean you’ve made wise investment decisions. In fact, just the opposite is likely true. Huge short-term gains are almost always a sign of a risky, badly diversified portfolio.
- Just because it’s a government bond doesn’t mean it’s as safe as Treasurys. Recall what happened in February and March 2020. Even as Treasurys proved to be a safe haven during the pandemic-induced economic and market swoon, municipal bonds got pummeled.
- Just because you’re paying minimal taxes doesn’t mean you’re being financially smart. For instance, many seniors find themselves paying little or no tax in their initial retirement years because they’re living off their taxable account, while avoiding withdrawals from their retirement accounts. But if that means a much higher tax rate from age 72 on, when required minimum distributions (RMDs) from their retirement accounts kick in, they’re likely making a big mistake—and they should be using those early retirement years to whittle down their traditional IRA, either by making withdrawals or by converting part of their IRA to a Roth.
- Just because an IRA withdrawal is mandated doesn’t mean you should spend that amount. Those taking RMDs can always opt to reinvest a portion of their withdrawals in a regular taxable account. That said, RMDs seem to be a pretty good guide to drawing down a portfolio because they take life expectancy into account.
- Just because you’re retired doesn’t mean you should claim Social Security. Quitting the workforce and claiming Social Security should be two separate decisions—and the wise choice is often to delay benefits until age 70, especially if you’re the family’s main breadwinner.
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Like the “intrinsic value” of any given asset, I think it also has “intrinsic risk”. I suspect much of what contributes to the risk of owning various assets is the behavior of its owner. Ignoring the common advice to not invest money you expect you will need within the next five years in stocks, then selling early and incurring a loss, is an example of risky behavior. On the other hand, being in a position to hold that same asset over a long time period, and being able to sell only when it makes sense to do so, is an example of low risk behavior.
Thanks JC. With the stock market continuing to hit record highs, I’m perfectly happy to have a guarantee of a losing return due to inflation on the portion of my account that’s in cash than a likelihood of losing far more than that by being invested too much in stocks.
I did a lot of planning for my retirement at age 66 about 11 years ago. 2 things I missed were taking SS at age 66 instead of 70, and not doing Roths before my RMDs began at 70. Although pretty savvy about taxes, a review with a CPA or CFP might have helped me with those 2 items, especially Roths.
If you really need to reduce your income, you should probably both take SS early and take withdrawals from your IRA/401K before you turn 72.