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DON’T ASSUME YOUR PATH up the mountain is one that everybody else should also follow.
I don’t budget, I earmark 80% of my retirement savings for stocks and I’m currently well above that level, I don’t have a separate emergency fund, I expect to live comfortably in retirement on half of what I currently earn, I plan to delay Social Security until age 70 and my stock market money is entirely in index funds, with roughly half allocated to foreign shares.
Should you blindly mimic what I do? Absolutely not.
It’s called personal finance for a reason: Everyone’s approach to managing money should reflect their personal goals, circumstances and emotional makeup. Yes, it’s interesting to get a glimpse into the financial life of others—a glimpse that’s regularly offered by HumbleDollar’s articles and by readers’ comments. Those glimpses give us a chance to reassess what we do and why, and we might pick up some useful ideas that’ll help us to better manage our money.
But make no mistake: When it comes to handling money, nobody has a monopoly on truth. Yes, logic and evidence favor certain courses of action, such as buying stocks if you have a long time horizon, holding down investment costs, diversifying, indexing, saving diligently, insuring against big financial risks and so on. But in the end, each of us has to tailor such advice to our individual financial life.
That’s why I grow concerned whenever I see folks insisting that their approach is not just right for them, but right for everybody else. Where does that unwavering conviction come from? Often, it seems to rest on one or more of the following six arguments:
1. “You should do this—because it’s what I did.” I see this phenomenon all the time. Those who claimed Social Security early insist it’s wrong to delay—and those who claimed late believe it’s wrong to claim early. Ditto for those who do or don’t budget, or do or don’t own individual stocks, or do or don’t have long-term-care insurance.
I view this as a form of anchoring. Many folks find it hard to set aside what they’ve done or currently do, and imagine that a different path might work just fine for others. I don’t budget and never have. But if others find it useful or comforting, what’s the harm? I avoid actively managed funds and individual stocks. But if others actively manage their portfolio, their returns are okay and it makes them more tenacious investors, who am I to object?
Want to know what really impresses me? When I read about folks who took one course of action—and now concede they were wrong. It’s easy to protect our psyche by pounding our chest and proclaiming we’re right. It’s much harder to humbly concede our error.
2. “It worked well for me.” I’ve never had a separate emergency fund. Early on, sitting on a big pile of cash simply didn’t seem like a possibility when I was raising a family on a junior reporter’s salary, while trying to save for retirement, the kids’ college and a house down payment.
As it turns out, my nonexistent emergency fund was never a problem. But that doesn’t mean it was prudent. It means I was lucky. To use the term popularized by professional poker player and author Annie Duke, we shouldn’t engage in “resulting”—imagining a decision was good simply because it turned out well.
Today, I still don’t have a separate emergency fund. But at this juncture, I think that’s just fine. I have ample money in my retirement portfolio and could easily use some of those dollars to cover an emergency expense without imperiling my financial future, so I see no need to keep a separate stash of rainy-day money. But that doesn’t mean my failure to have an emergency fund in my 20s and 30s was a smart strategy.
3. “I heard this incredible story.” I think the case for indexing is unassailable. But if your goal is to appeal to the heart not the head, you’ll likely fare far better by sharing that anecdote about your neighbors, who claim to have beaten the stock market averages every year with ease.
Make no mistake: Stories are more powerful than logic or statistics. But I would also encourage you to be skeptical of the stories you hear. Take those market-beating neighbors. Are they including all their investments in their calculation, or are they conveniently ignoring the duds that they’ve since sold? How much risk did they take? What benchmark are they comparing themselves to? Are they counting the savings they added to their nest egg as part of their portfolio’s gain? Have they even made a calculation and have they done it properly—or do they simply believe they’ve beaten the market because their wealth has grown over time?
4. “But what if that idiot wins the next election?” I’ve heard of folks who bailed out of stocks because Barack Obama won the presidency—and others who fled stocks because Donald Trump was elected. More recently, investors are getting hot and bothered over whether a money manager does or doesn’t use environmental, social and governance criteria.
I’m skeptical of any financial advice that comes with the taint of heated political rhetoric. I think our political views should play almost no role in the investments we own. One exception: Over the years, I’ve grown sympathetic with those who avoid investing in countries with authoritarian regimes, notably China, where property rights are far less secure.
5. “Everybody’s doing it.” We’re social creatures whose spending and investing is heavily influenced by others, including our parents, neighbors, colleagues and—increasingly these days—those we follow on social media.
Indeed, the internet in general, and social media in particular, seem to be megaphones that promote all kinds of dubious information and bad behavior. How many people have made financial decisions in recent years that they now regret because of the online frenzy generated over meme stocks, cryptocurrencies, special purpose acquisition companies, real estate and even Series I savings bonds?
6. “Trust me, I’m successful.” Sure, you’ve led a life marked by career accomplishments. But that doesn’t automatically make you a whiz at managing money. Think of this as the “doctor phenomenon.” Just because you can save lives—or started a successful small business or became CEO—doesn’t mean you can pick the next hot stock or know which way the financial markets are headed.
Yet such folks often have abundant, unjustified confidence in their own investment abilities. Worse still, others often hang on their financial pronouncements. This is not a good idea. I once had the chance to view the feverish trading activity of a retired CEO. It was almost as if his goal was to violate the wash-sale rule. The number of buys and sells was impressive. The results weren’t.
Jonathan Clements is the founder and editor of HumbleDollar. Follow him on Twitter @ClementsMoney and on Facebook, and check out his earlier articles.
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I find this interesting because since the 1990s when I read your WSJ column, I’ve thought of you as proselytizing index funds.
I am — and have long been — a huge fan of index funds. But in the end, investments are owned by humans. Does owning a few individual stocks or actively managed funds make an investor more engaged in his or her financial future and more tenacious during down markets? In that case, who am I to argue that he or she should be 100% indexed, even though I believe that’s the rational course of action?
We all do “resulting” in every aspect of our lives, not just investing. Whether I met my spouse in church or on Match.com, that’s what I’m going to recommend to a single friend. Wherever I found my last job, that’s where I’m going to send you for yours. Heck, every time I use Yelp to pick a breakfast place or a plumber, I’m using somebody else’s “great for me” scenario. From either side of the equation, it’s just human nature at its finest. There’s no way to avoid doing it, so just recognize the behavior and assess accordingly.
I agree. I generally don’t see the need for so much arguing about tactics and / or bragging about outcomes.
The First Articles are often interesting / amusing but not very useful to me.
Great as always! We could all be a little more humble in the opinions we hold.
Six great arguments. You have a humbling way getting the point across, yet some still don’t get the message.
Jonathan, great article, full of wisdom. I also think the comments today from the HD community were great.
My stock portfolio is managed by a local group in St Paul. ( withholding name) Since inception ( 1930’s) they buy and hold mostly upper Midwest companies. They have not done well for the last 5 years. I had Schwab wealth Mgmt take a look. They said not diversified, too much large growth, lacking in value, and no international exposure. Plus no bonds. I’m 69, and I’m leaning towards Schwab. But these 2 guys are in Colorado. Am I right thinking I need a bigger group like Schwab to diversify, and also a better research department? Lastly, I want to buy individual bonds, I think it’s stupid to buy bonds in a fund. I don’t want to pay 80 basis points to watch paint dry. I have no one else to ask, sorry to have to ask you.
love humble dollar, it’s helped me out a lot.
I don’t understand buying bond funds when rates are low. This isn’t about market timing; it’s basic math.
How would buying individual bonds be any different? Yes, you’ll know precisely what the individual bonds are worth at maturity — assuming you ignore inflation and hence the inconvenient truth that you don’t know precisely what the bonds will be worth at maturity. Meanwhile, a bond fund that targets intermediate bonds will have very similar results to an individual intermediate-term bond, plus you get the safety of diversification and the convenience of easy reinvestment of distributions. What about the short-term hit from rising rates? Both individual bonds and bond funds would lose you money if you sold at that juncture. The only difference with individual bonds is that you can pretend you’re better off because you know what the principal value will be down the road. But again, that value down the road won’t be much different from that of a comparable bond fund.
I would add that a bond fund gives you more flexibility. Say you need $500 and own an individual bond with a $1000 par value. You can’t sell a portion of the bond. With a bond fund, withdrawing $500 is easy and the rest of your investment remains intact.
Agree that’s a good step but a broader review might be helpful here.
Betsy, you might want to give Adam Grossman (Mayport) a call. He’s a fee-only fiduciary, CFP, and also a HumbleDollar regular. He’d look more broadly than just what changes your retirement portfolio might need but would also be great for that. My sister’s a client and super happy.
https://www.mayport.com/
Betsy, listen to Jonathan. I doubt you need any of the complexity you currently have.
Agree completely.
Btw, re the bond index fund suggestion, FXNAX is gold rated by Morningstar and has a fee of 0.025%. Also, if you really want some individual bonds, you can buy some short to intermediate Treasuries by yourself with a few keystrokes, with no fee, and without the research required for other bonds.
Why do you need an expensive manager to buy stocks for you, when you could get diversified global market exposure with a couple of dirt-cheap index funds? And why wouldn’t you own a bond market index fund, which might cost just 0.04% a year, not the 0.8% you cite? Check out this story from a few years ago. The expense ratios mentioned would be very similar today.
https://humbledollar.com/2020/07/almost-zero/
Great article, very insightful. Thanks. On #4, l also over the years have changed my thinking on investing in China and other repressive regimes, and try to avoid if possible.
I agree with everything you say here. So true. I do not budget either, but if money is tight for some, budgeting works.
Also, you don’t need to figure out what percent of your working income you need to live on in retirement. Look at your fixed expenses and then your variable expenses, which can be adjusted if need be. That determines what you need.
If you make a lot of money and do not live a super ultra lavish lifestyle, you will not need the 60-80% of working income certain different ‘experts’ say you will. I live off 10-20% of my working income, because the income was high. Adjust it to your individual situation. Many expenses when younger and working will be gone at retirement, in most cases.
if you have enough in liquid investments during or after working years, you probably do not need an emergency fund (they will be your emergency fund), unless it is something that makes you more comfortable.
I had 100% in equities all my working years, and didn’t diversify into fixed income until after retirement, for 2 reasons.
The first reason was because, as someone once said, “if you beat the game, why keep playing”? But I did not want to get out of the game completely, so #2.
Number 2 was I simply wanted more liquid assets to draw from rather than drawing from equities that could be in a down cycle. I do not need more growth but did not want to get out in a down market.
So, help me out, what percentage of your base salary are you living on, not total income/compensation just salary? Does that “living on” include things like charity and steady discretionary spending for enjoyment?
I think the term “pre-retirement income” needs to be a little better defined. It should be ” pre-retirement cash income”; ie: you need to subtract from your salary whatever you pay in income taxes, SS tax, employee stock purchase plans, and contributions to your retirement account such as a 401k to determine your pre-retirement income.
Or you can just look at your expenses pre and post retirement from a cash flow perspective.
Bill
Nice brief article filled with wisdom. Thanks for reminding us of the fact that personal finance is indeed personal. There are many ways to skin a cat.
I don’t view personal financial management as a competitive sport with winners and losers. When someone in my lunch group casually mentions netting a profit over 100% in a recent trade, it is like hearing someone else’s golf score, or how many fish he caught. Entertaining, but hardly news that might encourage me to invest any differently.
To me, choosing at what age to start drawing retirement SSA benefits, optimal asset allocation, and various distribution strategies, are my attempts to optimize the tradeoffs between time and money. I have read and learned from many wise writers, including yourself, and then implemented a strategy which balanced risk and reward sufficiently so that I could comfortably live with it, and ignore the fireworks in the financial press.
Thanks for maintaining Humble Dollar as a useful forum with so many talented contributors!
Please don’t say skin a cat. Honest. It’s on of those horrible sayings from years ago Thanks for the consideration Signed, a multiple cat owner
Right on Jonathan. Personal finance is Personal. Thanks for reminding us that but also providing the varied schools of thought on this blog for all to consider.
Nice post Jonathan. I noticed it ties into one of your Share Your Wisdom queries this week, asking people to share the worst financial advice they ever acted on.
I think there’s a difference between fundamentally bad advice based on someone else’s positive experience with it, someone with no understanding of hedging using options using it anyways comes to mind, and sound principles like budgeting or maintaining a cash reserve that simply are not yet important or possible for some people at a given life stage.
I can personally relate to both the latter examples, having never had a budget or a cash reserve until I retired. Then it became clear to me that I needed to know my spending rate; and more recently I needed to have a big enough cash position to live on for 2-3 years in the case of a bear market and depressed portfolio values.
So for me it was a life stage thing, not a case of “bad advice” or otherwise blindly following what worked for someone else.
Maybe the takeaway really is to be clear about what you’re doing and why regardless of where it came from. I guess that was the point you were making to begin with. See? I got there… 🙂
This is the primary reason folks like Orman and Ramsey make me want to rip the radio out. They generalize about everything and have one solution for all and it must be theirs. It drives me insane.
And both of them really are not experts at all. Orman worked less than a year in the industry, and she and Ramsey got rich from telling others what to do, not from their expert investing acumen. As a matter of fact, Ramsey is being sued for $150 million for promoting a product that did not work, yet paid him $40 million over time. They both got rich from selling products and from books and tv shows.
I don’t approve of their hype and redundant selling.But,
I’ve known several people who went from financially lost to financially wise, based on what they learned from those “experts”. The gimmicks and endless selling is obviously how they make their money. But their message can be life changing for some.
I read an old Orman book called “The Road to Wealth”, It was filled with easy to read, timeless information. I was shocked at how good it was. Old as it was, I think it stood the test of time. All the books and shows that followed were unnecessary.
Sometimes people see through my stealth wealth. When the less experienced ask me for advice, I tell them to read that book (if they can find it). Most don’t read it, but a couple have thanked me later.
What? Don’t engage in resulting?
Party pooper.
What’s next, some theory that bacon isn’t good for me?
A lot of these differences are a function of how much money you actually have.
As a retiree, I’m took Social Security at age 65, and I don’t really have a budget. Every month I take some money from my investment account and receive social security, but I can’t even spend that. The extra money that builds up in my investment account is used to buy more individual stocks.
This works for me, because I am naturally frugal and have always spent much less than I make. But it wouldn’t work for 95% of the population, because they could never save that much money, and if they did, they’d start living high on the hog.
My buddy, the Apple king, has 400,000 shares of Apple computer, and maybe $20 million in a couple of other stocks. He can tell the entire history of Apple, chip by chip, application by application, who made each decision for the entire 40-year history of the company. When asked about concentration of risk, he just says he has so much money that even if he loses 75% of his wealth he will still be OK. Now there’s a retiree who’s a real outlier, not to mention a real character.
I started investing in individual stocks in the early 1980s. I bought small amounts of around 10-15 stocks at a time and usually held them for several years. I did so well that I was able to stop working full time in 2000 when I was 50.
Would I do the same thing if I had to do it over again or advise someone else to do it? Absolutely not, I was very lucky. Most of my investments were mediocre or outright duds but I had three stocks that performed spectacularly. In one case, a new co-worker and his wife lamented that their favorite store didn’t have any local branches. I did a little research and ended up buying Walmart stock a couple of years before I ever saw one of their stores. My other two big winners, PepsiCo, and Paychex were in equally mundane industries. My big financial worry then was that most of my net worth was in three stocks.
I’ve never considered myself a great stock picker. I’m now content with sticking with index stocks.
What type of stock analysis did you do? Did you go through the 10-K reports and study every number and footnote? How did you analyze the abilities of management?
Great read. Thank you!
Of course you are right because there is no way to prove you wrong and there are many examples to support the path just about anyone chooses. Any approach works until it doesn’t.
How does one come to the key decisions though? How can they be confident that what they choose will stand the test of time?
As you already know I am often a contrarian driven by conservative financial views and the overwhelming desire to try to anticipate every possible adverse event. The way I look at it if I’m wrong somebody will get the extra money, but if the person less affected by a lack of a nights sleep is wrong – there may be no do over.
It all kind of puts pundits and advisors in a pickle though.
Your observation about HD is spot on. The great value is in the diversity of views, the real life experiences (proving different approaches can and do work) and the give and take of comments. That’s why I get frustrated when my fellow writers sometimes fail to become part of the comment exchanges or never comment on other writers posts. Seems to me we have an obligation to clarify our positions and perhaps at time defend them.
I have to say though the thought of living on 50% of my pre-retirement salary knowing what I do after 13 years retired still gives me the jitters – and I have a pension. 😎
My contribution to the comments here is that I mostly agree with Jonathan. But, who am I to argue? I’m the student when it come to the how of finances. The why, however, it what drives many of my decisions. I do budget because I’ve found it’s the best way to communicate with my wife. It integrates our spending styles. I mostly don’t spend, while she spends up to a specified limit. An emergency fund, and other named funds, mostly covers the things I can’t think of in the budget.
I choose indexing because of the evidence, but also because, with me, a consuming interest in investing is episodic. In between times, my mind is busy with other things. I don’t harm myself by neglecting to make a daily check.
I plan to wait until 70 for SS because I can, and the amount will cover a big chunk of our expenses. That will be a comfort.
I read all the posts contrary to my views with interest, and as a check against my thinking, and I appreciate the participation.
“How does one come to the key decisions though? How can they be confident that what they choose will stand the test of time?”
The tool which lets me sleep after a key decision is including margin for error. If having a margin or buffer means the decision I’ve just made doesn’t need to be perfectly right or my math spot on, and I can survive life’s improbable but too-frequent nasty turns, I’m happy.
Exactly- a margin for error.
I would also have the jitters if — like you — I was covering the cost of two homes and two high-end vehicles!
But isn’t that all relative to income and long-term standard of living? How would the person earning $50,000 all their life cope on $25,000 in retirement? Many do I know, but that is really living paycheck to paycheck or worse.
PS that one car is now nine years old and a book value of $11,000. It cost less in 2014 than most pickup trucks and many SUVs, the vehicles of choice in America.
I think you should realize that — as someone who knew he’d get a pension and hence didn’t need to save like a mad man — your perspective is different from that of many others.
I knew I’d never receive a pension, so I saved like crazy. Do I need to save 30%-plus of income once I’m retired? No. Do I have to make mortgage payments? No, that was paid off almost two decades ago. Will I have to pay 15.3% of income in payroll taxes, as I currently do as a self-employed individual? No, thank goodness.
On top of all that, I’ve downsized, so my property taxes are less than half what they were. You may need 100% of your pre-retirement income to live comfortably in retirement. I certainly won’t — and I suspect most HD readers are like me, not you.
I need more than my pre-retirement income. I have 2 houses. Minnesota and Florida. I couldn’t stand living in either full time. Both paid for, I have no debt. At some point I’ll have to go down to one. So I look at one house as part of my portfolio. Always wondered what anybody thought about that
Indeed, the source of my retirement income makes me different and fortunate, but I saved more than 15% of my gross income, my mortgages were paid off and college paid for upon retirement. We downsized, but didn’t save any money as intended.
Savings were largely offset by new spending mostly travel and a few other items. And, I still save in retirement which is not normal.
The thing is I never say 100% of pre-retirement income. I say 100% of base salary as many people have a standard of living based on OT, bonuses, and other compensation.
Nevertheless, one size does not fit everyone so there are as many right answers as there are people.
One of your best posts ever! And a good reminder to think outside the box and remember we’re all coming from different backgrounds with different issues.
The investing part during accumulation is the easy phase; 2-4 fund Boglehead portfolio is ideal. The distribution phase is a bit more complex but not difficult. The goal in retirement is not to optimize returns but not not to die poor. Pre retirees not to fully understand SORR.
Thanks for the good advice—and thanks for your shoutout to
my 2020 post about the risks of investing in China! A real blast from the past and I appreciate that you remembered.
Thanks for another informative post. Personal finance of HD contributors keeps everyone tuning in for more.
I’m a “pretty-much-retired” CFP(R). Most of my clients now are pro-bono, many coming into money for the first time or newly widowed and now have to handle all the finances. So, what do I tell them when they ask what they should do? I tell them that we will work together to make a plan. What kind of plan? The one that will achieve your goals and you can stick to when things go wrong.
It’s easy when the stock market is going up and the sky is blue. The value of a plan really shows itself when the market goes down, you are hit with an unexpected expense, you have to retire early because of health issues and so on.
No matter how elegant or brilliant a plan may be, if it sits on a shelf, is too much work, too complicated, or dropped when things go wrong, it is worthless.
Last and most important: Discipline beats brains. The key to financial success is discipline, not an MBA. Just my two cents.
Jonathan, thanks. Humble Dollar is great.
All good advice. Discipline beats brains is a good one.
Having a plan and diversifying is probably what the majority of advisors recommend…and of course patience is a virtue.
its interesting how consistent returns in many cases is much more effective than letting your portfolio have big swings, year in and year out.