A Modest Proposal

Adam M. Grossman

LOOKING BACK OVER the past two years, one word comes to mind: extreme. It’s been a period of extremes in the market and the economy. Many have benefitted, but we’ve also seen excesses that aren’t necessarily healthy—from the rise in NFTs to the craze in SPACs to the boom in day trading. That’s why, as you look ahead to the coming year, the theme I recommend is moderation. Here are six ways you can apply this notion to your finances:

Shiny objects. Among other things, this category includes the growth of meme stocks and the proliferation of cryptocurrencies. Apparently, there are now more than 8,000 currencies. The gains in these investments have resulted in a fair amount of FOMO—fear of missing out—among investors. Nonetheless, as you might guess, my recommendation is to continue to keep things simple, tuning out the noise and sticking with less volatile choices.

I recognize that, in the middle of a market boom, someone urging caution risks sounding overly conservative. That’s why I think the recent decline in some of the most highflying investments, such as the ARK Innovation ETF, is instructive. In 2020, the fund rose 157%, easily beating the overall market. But last year, it dropped almost 24%, trailing the broad U.S. market by 49 percentage points. If you’ve been feeling any amount of FOMO yourself, that’s a figure to keep in mind. The lesson: The overall stock market is volatile enough, so why seek out even more risk? Instead, seek moderation.

Politics. To be sure, the political environment today is highly partisan. Still, and maybe surprisingly, there are some similarities between the parties—at least in terms of economic policy. President Trump appointed Fed Chair Jerome Powell, for example, and President Biden reappointed him. Congress—under Republicans in 2020 and under Democrats in 2021—supplied stimulus to the economy when it needed it most.

The similarities may end there. Nonetheless, I see an important lesson, which is to set aside politics when thinking about your finances. The reality is that the market has, on average, gone up under Democrats and it’s gone up under Republicans. Use that knowledge to keep your eye on the horizon. Don’t let your distaste for one party or another impact near-term financial choices.

Pandemic. If there’s one thing that we can all agree on, it’s that the pandemic today is different from the way it was a year ago. It will be different again, in ways we can’t predict, over the coming year. The lesson: The country and the economy are resilient.

To be sure, the pandemic has generated an unusual amount of turbulence, but it hasn’t caused the depression that some feared. At the same time, it’s also been more serious than others predicted. On balance, though, we’ve collectively been putting one foot in front of the other to get through this.

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That’s why, just as with politics, I recommend maintaining a moderate mindset. Should you hold more in your emergency fund today than you might have before? Sure. But should you sell everything and hide out in cash or gold? Definitely not. Instead, rely on the aphorism I referenced a few weeks ago: Nothing is as good or as bad as it seems.

Budgeting. Last week on Twitter, I was surprised to see a debate break out on a topic I wouldn’t have expected to be so controversial: budgeting. Specifically, the question was, is it useful to track your household expenses or is it a waste of time that only feels productive? The debate generated dozens of comments.

Especially interesting was the number of replies prefaced by “I respectfully disagree.” Usually, when comments are prefaced that way, the disagreement isn’t so respectful. But in this case, the diversity of opinions was instructive. Some described how they had tracked every expense for more than a decade, while others said they’d never tracked expenses at all and saw no reason to. And there were several strategies between those extremes.

The lesson: In the world of personal finance, lots of people have opinions on how things should be done. But this debate illustrated a key truism: There are no one-size-fits-all answers. You shouldn’t worry if someone else does things differently.

Retirement income. Earlier this year, I talked about the 4% rule for retirement spending and noted how partisan the debate had become. Fortunately, research continues on this topic and, in November, Morningstar released a study that should help retirees breathe easier.

Instead of declaring any particular portfolio withdrawal rate safe or unsafe, Morningstar’s team offered a useful menu of strategies for boosting withdrawals. Their conclusion: “Simple tweaks can have an appreciable impact on your withdrawal rate.” This is thus another area where you can sidestep the shrill debate and instead chart a moderate path of your own.

Expectations. Consult a measure of stock market valuation, such as Yale University professor Robert Shiller’s CAPE Ratio, and you’ll find what looks like an alarming picture. According to the CAPE, the U.S. market is more overpriced today than it’s been at any point since the peak in 2000. It’s even higher than it was in 1929. But what does that mean for the future? Is the market headed for a significant correction? Should you be alarmed? That’s one view.

Another is to acknowledge that the market always has ups and downs and may indeed drop from today’s level. But unless you know when it will drop, when it will hit bottom and when it will recover, there isn’t a lot you can do about it. That’s the alternate view.

Between these two extremes, though, is another possibility. As Jonathan Clements described in a blog post back in September, the market doesn’t need to drop for its valuation to come back down to a more reasonable level. “Suppose stocks treaded water at current levels, while corporate earnings climbed 5% a year. Five years later, at year-end 2026, the S&P 500 would be at 18.8 times earnings, below the 19.9 average for the past 50 years.” In other words, we don’t need to see a market crash for valuations to return to normal. We just need the economy to keep growing.

What will actually happen in 2022 and beyond? It’s anyone’s guess. But as Clements’s example illustrates, it doesn’t need to involve an extreme scenario. As a result, a moderate mindset may serve you well.

Adam M. Grossman is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam’s Daily Ideas email, follow him on Twitter @AdamMGrossman and check out his earlier articles.

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1 year ago

Budgets ?? In retirement for years now, and I track nothing but the total spent each month via my check book. All bills are paid via the check book so it it easy to make sure I stay within my normal expenses. If one month runs $1,000 higher than normal, I will make sure the next month or two totals lower. And tracking coffee purchases?? Really? Starbucks charges as much for a fancy drink as it costs me for a pound of coffee. I would never buy a beverage outside the home, but make my coffee at home or take a thermos with me for a longer drive.
In retirement our choices are increase your income, or keep control of expenses, or do both. There are many stocks that pay 7 to 10 percent dividends. And some carefully selected options can easily pay over 20 percent on the money at risk. Stay in your comfort zone, but there are many ways to get by in retirement.
My definition of retirement is when you don’t work for others for a pay check. But you can work for yourself, keep using the ole brain, and find ways to generate extra income. The entire world is full of opportunity.

Brent Wilson
Brent Wilson
1 year ago

RE Retirement Income: There are some good strategies outlined in the Morningstar article to help ensure retirees don’t outlive their funds. But as with most safe withdrawal articles, there is little nuance.

What about the age-55 retiree who needs to bridge the next 10 years until Medicare, and won’t claim SS until 70? Would it not make sense to start with a significantly higher withdrawal rate in the first 10-15 years of retirement? Then upon receiving Medicare, that withdrawal rate is lowered, and when SS kicks in, it is lowered further. This is why I despise most safe withdrawal rate articles. They’re not just “safe,” they’re incredibly conservative for retirees who are not yet receiving SS.

I tend to gravitate towards some good retirement calculators that account for these variables, among others.

When my wife and I are nearing retirement, we should have a fairly good idea of our expenses. I don’t want to play with “guardrails” or dynamic strategies that force us to decrease our spending in retirement, ever. What I will want is a projected success rate for spending X amount for X years, followed by spending a significantly lower amount after SS is received.

Last edited 1 year ago by Brent Wilson
1 year ago

I am taking advantage of current trends, by buying value stocks and traditional American paintings. If you are a contrarian, there’s always something.

David Powell
David Powell
1 year ago

Always sound advice. Thanks for the pointer to the Morningstar paper, missed that when it came out!

John Yeigh
John Yeigh
1 year ago

RE: Budgeting: I’ve had budgeting discussions with three different friends who have tracked every single dollar of expense for about 30 years using Quicken. It gives them comfort but takes signficant time. We budget with more of a ‘moderation’ approach and just cut out lattes whenever the budget gets tight. They amazingly can recite how many lattes they consummed in 1996.

Last edited 1 year ago by John Yeigh
1 year ago
Reply to  John Yeigh

I disagree that Quicken takes significant time. You can download your credit card and bank transactions, so you don’t need to enter them manually, and I hardly ever spend actual cash, even for coffee. Managing my finances takes me an hour or so a couple of times a month. Thanks to Quicken I know exactly how much I have spent, by category, going back years. That is exceedingly useful information for estimating my expenses going forward, and therefore whether my income plus “reasonable” withdrawals from my portfolio will support my desired lifestyle, or I need a Plan B (I am retired and planning a move to a CCRC).

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