On Second Thought

Jonathan Clements

WE ALL LIKE TO THINK we’re consistent in our views. I certainly do. Yet, as I recall how I thought about the financial world two decades ago and how I think about it today, I’m amazed at how much my views have changed.

Here are five pieces of advice that I give now—but which I wouldn’t have given two decades ago:

1. Don’t waste time on investing. In the early 2000s, I thought endlessly about how to structure a portfolio, including how much to keep in bonds, what mix of U.S. and foreign stocks to own, whether to tilt toward value and smaller companies, if alternative investments such as real estate, gold and commodities made sense, and which specific funds to buy.

I’m not saying these issues aren’t important. But today, I’d suggest making a decision and moving on, knowing we’ll never get it exactly right and that further tinkering will likely be counterproductive. What should we move on to? That’s where things get interesting.

While it’s hard to improve on a simple, diverse mix of index funds, there’s ample opportunity to improve other areas of our financial life. It’s worth thinking hard about whether we have the right insurance, what size home to buy, how to manage our short- and long-term tax bill, whether we’ve taken the right estate-planning steps and when to claim Social Security. It’s also worth asking whether we could boost our happiness if we used our dollars differently and whether there are steps we can take to improve our financial behavior, including how much we save and how we react to market volatility.

2. Retirement isn’t the goal. When I first started learning about the stock market, I had the notion that—if I amassed $250,000 by age 40 or so—I could then leave the money to grow at a 7% annual real return, giving me $1 million 20 years later that would then pay for my retirement. My financial fantasy: Once I had that $250,000, I could spend my remaining working years doing just enough to pay the bills.

This, of course, naively assumed that stocks would mint 7% a year like clockwork and that $1 million was the right target nest egg. More important, it assumed that doing less—and preferably doing nothing—was the goal. Yet, as time has marched on and my portfolio has gotten larger, I find my interest in leisure has waned, while my appetite for working hard at things I care about has grown.

I’m no longer much interested in retirement, at least as traditionally defined. Instead, I see the overriding goal as financial freedom—meaning the freedom to spend my days as I wish without worrying about money. What’s the key to not worrying? In large part, it’s about feeling we have enough, which is less about a specific dollar amount and more about our willingness to be content with what we’ve accumulated.

3. Money buys limited happiness. Most of us don’t know precisely how many friends and acquaintances we have, or exactly how much better we feel after taking an afternoon stroll and feeling the sun upon our face. But most of us have a very good idea of how many dollars we have—and that numerical precision can hurt our happiness.

Think about it: We all have a pretty good handle on what things cost, plus money is a yardstick that allows us to compare ourselves to those around us. Result? More money seems like an undeniably good thing, and certainly far more tangible and valuable than a fun day with friends or a good night’s sleep—and yet these latter things may give a far bigger boost to happiness. In other words, we focus on more money as the key to greater happiness, in part because it’s so easily measured, but we’re likely focusing on the wrong thing.

My contention: Money does buy happiness, though far less than I once imagined. Instead, what money really does is allow us to avoid unhappiness—the unhappiness of poverty, of worrying about how we’ll pay the bills, of fretting over how we’ll meet our long-term goals. If we have sufficient money, we get to enjoy a great luxury—the luxury of not worrying about money.

4. Paying down mortgage debt isn’t the slam dunk it once was. I paid off the mortgage on my first home within 13 years of buying the house. I saw it as a no-brainer: My mortgage was costing me over 7%, more than the 4% or 5% I could have earned by buying bonds.

I still like the idea of being debt-free, and for today’s mortgage borrowers—those who are taking out 7% loans—extra-principal payments are likely the best bond they can buy. But few folks are in that camp. By contrast, there are countless homeowners today with mortgages costing 3% or less, and the math says these folks would be better off buying bonds than paying down their home loan.

5. Start with the market portfolio. When designing a portfolio, I used to suggest starting with U.S. stocks, and then figuring out what to do to reduce short-term and long-term risk, with a particular focus on adding bonds and foreign stocks.

But today, I’d recommend starting with the global market portfolio—the collection of stocks and bonds that all investors worldwide collectively own—and then deciding what to subtract. The global market portfolio consists of four key sectors: U.S. stocks, U.S. bonds, foreign stocks and foreign bonds.

For most investors, the obvious subtraction is foreign bonds. That would leave indexers with the classic three-fund portfolio—a total U.S. stock market index fund, a total international stock fund and a total bond market fund—though there remains the crucial question of what portfolio percentage to invest in each.

I didn’t want this article to get too long. But the fact is, the above five items are hardly the only changes in my financial thinking over the past two decades. I’m now much more convinced that most folks should delay claiming Social Security. I’ve also come to emphasize the importance of holding down fixed living costs, thereby freeing up money for both savings and for discretionary “fun” expenses.

Today, I wouldn’t recommend any foreign bonds—something I used to suggest, as a reader recently reminded me in the comments section of an earlier article. In addition, I’m now a big fan of super-simple portfolios—and of simplicity in general—and I favor looking at a portfolio far less often, perhaps just once a month.

And while I’ve long advocated rebalancing, I now suggest over-rebalancing during market declines, increasing a portfolio’s stock exposure when share prices plunge. What about checking on market valuations first? I used to spend lots of time looking at price-earnings ratios, dividend yields and so on. But I’ve come to realize that we can’t divine the future with such metrics and, indeed, they often lead us astray.

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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