Just Because

Jonathan Clements

WHAT SEEMS OBVIOUS isn’t always true. Here are seven examples from the financial world:

  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. 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.
  6. 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.
  7. 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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