FREE NEWSLETTER

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.

Want to receive our weekly newsletter? Sign up now. How about our daily alert about the site's latest posts? Join the list.

Browse Articles

Subscribe
Notify of
43 Comments
Newest
Oldest Most Voted
Inline Feedbacks
View all comments
Peter Blanchette
1 year ago

How people view the overall situation in the world depends very much on the particular situation we find ourselves in.

If we find ourselves in good physical and financial health it is easy to say that money is not so important or crucial in our lives as we navigate the non-financial aspects of our lives in the retirement phase of life. If someone has worked a very physical or mentally exhausting work existence, retirement is a respite in a very busy life. For the latter person, in retirement money can be an emotionally fraught topic in one’s life if money is not so easy a topic to think about because of one’s previous actions as pertaining to job history, poor health, family disruptions etc. The emotional and financial life that a child is faced with in his or her family, depending on how they react, can have a profound effect on whether or not the child will eventually see their future retirement period as a time of daily life reflection or a time of daily money reflection.

And by the way, $10K investments in FSPSX Fidelity International Index vs the S&P500 on 8/31/2013 would have quite different balances on 8/31/2023. The former would have a balance of $16,397 while the latter would have a balance of $33,379.

Casey Campbell
1 year ago

Jonathan, regarding your point #5 about the global market portfolio, how much credence do you give to the rationale to dial back the portfolio’s international stock allocation due some nations’ less strict regulations, potentially more corruption, and overall potential for uncompensated risk due to these and other factors? Not that the U.S. and its free markets, laws, and SEC rules are perfect by any means, but given that some nations “take more liberty” in their markets, trading practices, and governmental oversight (or lack thereof), might it be reasonable to underweight the international portion of one’s asset allocation for that reason alone? Or is that rationale overblown? I plead ignorance, although this has always been my rationale for choosing less than the global market portfolio, tilting more in favor of U.S. stocks beyond their true share of the market.

Jonathan Clements
Admin
1 year ago
Reply to  Casey Campbell

In theory, the potential problems you cite with international markets should be priced into those markets, and thus they wouldn’t be a financial reason to underweight them. Still, I have some sympathy with those who avoid or underweight authoritarian regimes, notably China. I haven’t done so. But if Vanguard offered a low-cost emerging markets fund that excluded China, I’d give it serious consideration.

Michael1
1 year ago

Not Vanguard, but here are some mentioned in this article on Morningstar today.

https://www.morningstar.com/funds/avoiding-china-has-been-winning-bet-these-equity-funds

Martin McCue
1 year ago

I still argue with myself over paying down a mortgage, and still think it is a good idea – to a point. One with a low interest mortgage, especially in a time of home price appreciation, can easily justify sitting still. But for others, it is a real debate, especially since the actual interest you pay starts out really high and then gradually declines over the life of the mortgage. Most of what you pay in the first few years of a mortgage is interest, and very little reduces your principal. In year 1 and 2, it is close to 100% interest. And the real asset in a home is the delta between its market value and what your still owe.

So I have always advocated paying down your mortgage at least in the first five or so years as best you can, for three reasons: (1) like Jonathan, I also prefer to have little debt generally and every little bit of debt reduction helps; (2) each added principal payment shifts the balance of each future monthly payment a little more toward an even greater principal payoff, too; and (3) though attractive, the mortgage interest tax deduction will always be a lot smaller than that monthly payment itself.

I have loved the extra financial space I have carved out for saving and other investments by not having a mortgage for the past 30+ years, as well as that sense of independence! (My primary bills are for taxes.) I often get beat up for my view, but I would do the same thing if faced with that choice all over again (that is, unless I, too, could ride a 2-3% mortgage for years of home price appreciation.)

Last edited 1 year ago by Martin McCue
DrLefty
1 year ago

I resonate the most with #1 and #4. I’m not very interested in investing except at the most basic levels (pick low-cost index funds). And I have zero interest in accelerating payments on my 3.125% mortgage given what interest rates are now, and especially given that even my cash savings accounts currently pay 4.25-4.5%.

John Wood
1 year ago

I think paying down the mortgage beats bonds under almost any scenario, regardless of any interest rate difference.

For example, take those 3% mortgage holders and today’s (roughly) 5% T-Bill yields (the best “bond deal” in the market currently).

If you keep the mortgage debt to buy the T-Bill, the 3% mortgage interest becomes a cost of funds (because you could have avoided this cost by using the money to pay down the debt), so your actual return on the T-Bill is 2% (i.e. the 5% nominal return less the 3% mortgage cost of funds = 2% net return). You could earn 50% more just paying down the mortgage and capturing the 3% net return on the avoided interest charges.

But the mortgage payment return is much greater than that, because interest on bonds is a “linear return”, while the mortgage interest is front loaded.

For example — confirmed by any mortgage calculator (I used Bankrate’s) — a 30-year, $450,000 loan at 3% interest results in a $1,897 monthly Principal & Interest payment.

If we assume the homeowner bought at the beginning of 2020 (about the time when mortgage rates were 3%), their September 2023 payment would consist of $842.50 of principal, and $1,054.50 of interest.

Now assume the choice of investing $2,540.17 (a figure used to simplify the example) in a 5% T-Bill, and also assume that the 5% rate held for an entire year. The interest earned for the year would be roughly $127.

However, paying this same $2,540.17 down on the mortgage principal would eliminate the October thru December 2023 installments, and you’d avoid $3,150.83 in interest charges for those months, for a net return of $610.66 — a 24% return on your $2,540.17 investment.

Even at the historically low rates of 3%, paying down the mortgage is still likely to beat bond investments handily (for at least the first 20 years of the mortgage).

Donny Hrubes
1 year ago
Reply to  John Wood

Thank YOU Mr. Wood.
Paying extra principal has worked for me several times. I look at total finances as a ‘wealth bucket’. There is income from the top filling it. But, also streams leaking from the bottom. If the leaks are greater than the fills, the level of wealth drops. To raise the level, either of two things should happen, increase the fill, or decrease the leak. A $100 leak stopped is equal to $100 extra income.
That said, I also ran your example of the 450000 loan and got the same monthly payment of. I also ran it with a 15 year loan, and got a P. I. of $3107 or an increase of $1210 per month.

An extra principal payment of $1210, for 15 years pays the home off. THEN, with that big leak gone, the return is $1897 a month for the next 15 years. My desktop calculator shows a gain of 1.5677 which is 156.77% on the investment.
Add to that, the security of a paid for home!
Usually the gain is much higher, this example is shown with a quite low interest rate.

I have repeated this several times so far and do have a very satisfying cash flow from the homes. It works.

No financial advisor will show this, of course.
Please comment your thoughts.

Thank YOU again Mr. Wood.

John Wood
1 year ago
Reply to  Donny Hrubes

We are kindred spirits when it comes to mortgage management, Donny, and you’re correct — the bankers won’t show you this, the financial advisors wont’ show it, and it’s one of the more powerful financial tools available to build wealth safely over time.

Jonathan Clements
Admin
1 year ago
Reply to  Donny Hrubes

If you have a mortgage with a 3% interest rate, the annual return from making an extra-principal payment is 3%. End of story. Folks get confused by a mortgage’s gradually changing mix of principal and interest. To sidestep the confusion, imagine you had a $100,000 interest-only mortgage at 3%. You’d owe $3,000 a year in interest. Now, imagine you made a $1,000 extra-principal payment, so the loan balance is now $99,000. How much in interest would you avoid as a result of paying that extra $1,000? The answer is $30 a year, equal to a 3% return on your $1,000.

Donny Hrubes
1 year ago

Yes, if thinking short term, this is the result. Only making 1 or 5 or 10 extra principal payments and stopping, is almost for naught, I agree. Of course who would think of opening an I.R.A. with the goal of making 1 or a dozen payments only?
As in planning and starting a garden, we know what nature needs to thrive. In wealth building we can use certain rules to farm our money for growth, which takes time and consistency, a couple of the many ‘laws’ of wealth building.
Until, we harvest!

Jonathan Clements
Admin
1 year ago
Reply to  John Wood

If you made a onetime extra-principal payment, you don’t avoid the next month’s — or the next few months’ — interest payments. That’s not the way extra-principal payments work.

Last edited 1 year ago by Jonathan Clements
John Wood
1 year ago

Hi Jonathan,

I’d have to respectfully disagree with you on this one.

I had a 30-year mortgage that I paid off in 9 years with extra principal payments, and I definitely avoided 21 years of the remaining interest payments that I would have otherwise owed if I had not paid the extra principal (not to mention freeing that former mortgage payment up to invest in higher yielding options for 21 years).

The only way that happened was by skipping the interest payments with the extra principal payments (to get a visual of this, take an amortization schedule, pay down $2,000 of principal, see how many monthly payments that skips, and the interest associated with those skipped payments is never paid).

To your example of the 3%, that only works if the interest is applied “linearly”, like a credit card or HELOC (i.e. under your example above, the interest on every mortgage payment would be fixed at 3%).

In my example above, 3 years into the loan, the interest is over 79% of the $1,897 payment, at $1,054.50.

The 3% interest figure works out over the life of the loan because the final payments have little interest involved, but it’s definitely a higher rate than 3% for the first 20 years [at least] of the mortgage).

Jonathan Clements
Admin
1 year ago
Reply to  John Wood

You’re simply incorrect. If you pay down a 3% mortgage, the effective return is 3%. Let’s use that Bankrate mortgage calculator for a $100,000 30-year fixed-rate mortgage at 3%.

https://www.bankrate.com/mortgages/mortgage-calculator/

The total principal and interest payment is $421 starting September 2023. As of September 2038, 15 years later, the principal outstanding would be $61,187.67 and the interest you pay in October 2038 would be $152.97. That $152.97 is equal to $61,187.67 x 0.03 (the interest rate) divided by 12 months. 

What happens if you make a $10,000 extra-principal payment in September 2038, 15 years into the mortgage. It looks like there’s a number of bugs in the Bankrate calculator (which may have caused your confusion). But we can sidestep the problem by assuming that, instead of $61,187.67 in principal as of September 2038, you now have $51,188, reflecting that month’s $10,000 extra-principal payment on what’s now a 15-year mortgage. Result? The interest you pay in October 2038 would be $127.97. That $127.97 is equal to 51,188 x 0.03 (the interest rate) divided by 12 months. In other words, the interest rate remains 3% and that’s what continues to drive the interest you pay on whatever remains of the loan’s principal.

I’m a fan of extra-principal payments and, indeed, paid off my mortgage early. But it’s important not to claim the benefits are greater than they really are.

Last edited 1 year ago by Jonathan Clements
John Wood
1 year ago

Honorable gentleman can disagree, but let me offer this:

Taking your link and example above, let’s assume that, on 1/1/2024 I decide to pay all of the principal that applies for 2024, so I issue the $421 payment for the January installment (as I owe the interest for January), and then I add $1,923.81 in principal only payments, which covers the principal owed on the 2/24 thru 12/24 installments).

I’ve now skipped 11 mortgage payments, and my principal balance is $97,389.61 (i.e. the balance as of 12/31/2024 in the amortization schedule).

The interest avoided on those 11 skipped payments is $2,707.19 — a 40.7% return on my $1,923.81 “principal only investment” at the beginning of the year.

I don’t disagree that the monthly interest payment works out to 3% of the outstanding loan balance, but it’s the leverage embedded in the fact that a much smaller principal-only payment wipes out a much larger interest payment in the early years of the mortgage that produces returns far in excess of the 3% nominal rate (in 2024, roughly a $175 principal-only payment avoids roughly a $245 interest payment – about a 40% return on each additional principal payment that year).

Jonathan Clements
Admin
1 year ago
Reply to  John Wood

Assuming a 3% interest rate, a $1,923.81 extra-principal payment will save you $52.90 in interest over the next 11 months, not $2,707.19. Yes, the extra-principal payment shortens the length of the mortgage, effectively eliminating payments at the end of the loan when very little interest is charged. How could the savings over the next 11 payments be $2,707.19, as you suggest, when the mortgage balance remains $97,389.61 — and 3% interest on that would be $2,678.21 over the next 11 months, assuming no reduction in principal? In other words, your purported interest savings and the remaining interest that would be charged combine to create an interest rate approaching 6% — and yet this is supposed to be a 3% mortgage.

John, I think your heart is in the right place and, as I said before, I’m a fan of extra-principal payments. But — and I hate to be so blunt — your math is nonsense.

Last edited 1 year ago by Jonathan Clements
John Wood
1 year ago

Hi Jonathan,

Ok, I’ll give this one more go, and then I’m done, and we can agree to disagree.

If you agree that the January payment plus the $1,923.81 of extra principal payment reduces the balance owed on the loan from $99,485.71 to $97,389.61 — which is the balance owed as of 12/31/2024 if I just made the $421 mortgage payment each month in 2024 (confirmed by the amortization schedule above) — what do you call the $2,707.19 of 2/24 – 12/24 interest payments I didn’t make because I made the $1,9231.81 extra principal payment?

If I don’t make the extra principal payment, I owe the $2,707.19 of interest for the 2/24 to 12/24 monthly installments. But I skipped those installments with the $1,923.81 extra principal payment, so what is the $2,707.19 of avoided interest, if it’s not return on the $1,923.81 principal-only payment?

You agree that prepayment reduces the length of the mortgage, and perhaps you’ll agree that the $1,923.81 of extra principal payment above took 11 months off of the end of the mortgage (i.e. the 2/24 – 12/24 skipped payments noted above).

Contrary to your thesis, the return is not the interest on the final 11 payments (which, I agree, would be small) — the return is the 11 payments of $421 that I don’t make at the end of the mortgage because I made the $1,923.81 principal-only payment.

The last 11 payments of $421 = $4,631 in skipped payments, resulting from my $1,923.81 payment in 2024.

The $4,631 in skipped payments, less the $1,923.81 principal payment = $2,709.19 of return — the exact same figure as the 11 interest payments skipped in 2024.

If the $2,709.19 savings (derived in two ways above) is not return on the $1,923.81 principal payment, what is it?

Jonathan Clements
Admin
1 year ago
Reply to  John Wood

Finally, we’re getting somewhere! If you “invest” $1,923.81 today and avoid $4,631 in payments some 30 years later, the annualized return is 3%.

Shortening a mortgage’s length and avoiding 3% interest are fine goals. But the return is indeed 3%, and nothing more.

John Wood
1 year ago

I agree, Jonathan – if that was the only principal-only payment ever made on the mortgage, and you had to “claim” your 11-payment savings about 28 years and 9 months later (as in our example), the compounded annual return would be about 3% (technically, 3.10%).

But what if one continues to make other principal-only payments and pays off the mortgage in 10 years?

Would you agree that the return on these first 11 skipped payments after mortgage payoff, monetized after only 10 years of waiting, would increase the compounded annual return on the $1,923 principal-only payment to 9.19% (as the ROI calculators will confirm)?

I mentioned above that the 3% rate applies over the life of the 30-year mortgage, but the whole point of paying extra principal is to shorten the mortgage, which increases the compounded annual return on the extra principal payments above 3%.

Ok, truce. We both agree paying down a mortgage is a good thing. I say let’s focus on our agreement, and not worry if we agree on the math.

Jonathan Clements
Admin
1 year ago
Reply to  John Wood

On a 3% fixed-rate mortgage, the return on every extra-principal payment — no matter when it’s made — is an annualized 3%. Not sure why you keep insisting that the number is higher, such as your 9.19%.

Randy Cook
1 year ago

I have enjoyed your writing for years. Some thoughts on investing in my retirement now. Goal is to not touch capital and try to mitigate Inflation. With ST Treasuries over 5%, there is really little reason to have stocks. Market significantly elevated and likely to fall in next year. Even if I am wrong, 5%+ is a good return… and a positive one.

We have had an environment where you just buy Index funds and go to the beach. I believe those days are behind us. All of the S&P gain has been in a handful of stocks. No strategy lasts forever.

When equities become attractive again, we can chose from actively managed ETFs that could be the next good way for equity exposure.

I do agree that the media and pros make this all too complex. Your timeframe for needed the money is the key variable. And, in retirement, you cannot make up large bad bets.

Jonathan Clements
Admin
1 year ago
Reply to  Randy Cook

Two thoughts. First, if and when short-term interest rates fall, those 5% Treasurys will be no more — but the fall in rates will likely propel stock prices higher. Second, the stock market’s gain is almost always driven by a minority of stocks, a phenomenon known as skewness.

https://humbledollar.com/money-guide/skewness/

David Baese
1 year ago

Some people are born into “financial freedom.” I’d like to know what that’s like.

Jonathan Clements
Admin
1 year ago
Reply to  David Baese

I imagine it’s not nearly as satisfying as getting there later in life. If you’ve travelled first class from the get-go, it’ll never seem that special. If you get there after years in economy, you’ll savor it for the treat that it is.

David Baese
1 year ago

I respect your response and agree with you. Never the less I’m contributing to Roth IRAs for our teenage grandchildren as soon as they have earned income.

Jonathan Clements
Admin
1 year ago
Reply to  David Baese

And I think that’s a great idea!

Kevin Thompson
1 year ago

As a financial professional, I often feel as if many of us (financial advisors)have a god complex. We feel as if we are all knowing and people cannot exist without our tutelage.

in reality, it’s very simple. Spend less than you make, save a minimum of 20% of gross income (depending on where you are age wise), keep investment cost low across broad indexes, minimize debt cost, and protect your assets.

I know it’s deeper than this of course, but a very good starting point.

Jack Hannam
1 year ago

Einstein or Cameron (it doesn’t matter which) reportedly said that “not all which is easily measured is important, and not all which is important is easily measured”. We all learn from experience, and very importantly, from the experiences of others, so it is logical our views will evolve accordingly. And I loved your explanation of “enough”. For me, the purpose of stocks was to make money, while the purpose of bonds was to have a dependable supply of money to tap. Ten years ago I replaced my bonds with enough cash and treasury bills to provide at least ten years worth of future withdrawals, and the rest in stocks. The fact that interest rates were near zero then was irrelevant. This is the “sleep point” for me as suggested by JP Morgan. I am now enjoying my sixth year of retirement. Your advice over the years has been helpful, so thank you!

Michael1
1 year ago
Reply to  Jack Hannam

For me, the purpose of stocks was to make money, while the purpose of bonds was to have a dependable supply of money to tap.”

Nice way of thinking about this.

mytimetotravel
1 year ago

I have always been a fan of the KISS principle (keep it simple, stupid) and am therefore also a fan of index funds. I was fortunate to discover Vanguard fairly early in my investment life and am still a loyal customer. I am not as good about rebalancing as I should be, though.

I don’t expect money to buy me happiness, but I do think it can buy comfort, convenience and a certain measure of safety, all of which are desirable.

GaryW
1 year ago

I’m 74 and I’ve realized that I’m unlikely to outlive my money so most of my financial probably don’t make a lot of difference.

  1. I took Social Security at my FRA of 66. I had been planning to wait to 70, but I realized that it didn’t matter much. In retrospect, it was probably a good decision given the high market returns since then.
SanLouisKid
1 year ago

I’ve been a student of Warren Buffett for many years. It’s interesting to see how his approach has evolved. Originally he had a “cigar butt” approach to investing (buy a cigar butt cheap and get a few puffs from it…) to a more value approach (his buddy Charlie Munger got him headed this direction). He bought airline stock, lost money, and swore he’d never buy another airline stock. Then he bought more airline stock. I think everyone changes and evolves. I think it’s very natural.

The problem would be not evolving. Life shouldn’t be the same today as it was 20 years ago. Everything changes.

Steve Cousins
1 year ago

Hard to argue with any of that wisdom. I’d add that increasing your income while your are accumulating is also very important. I realize that not everyone is able to do that, but in my case watching my income go from X to 24X across my thirty plus year career certainly made having a high savings rate very easy.

Boomerst3
1 year ago

Great points. I’m with you. Having enough money allows you not to worry about running out of money.
Simplicity is the key in investing. I put most of my equity money in US companies, a small amount in foreign (most if not all US corporations get international exposure), and as of now, my fixed is in money markets earning over 5%. Short term bonds all headed south, so I got out of them. At some point, I will keep 20% in money markets and 20% in bonds.
i think the only folks who should delay SS are those who are in great health and will need the higher payouts way down the road. Statistically, the payouts over time are pretty similar, with the break even point for taking at your SS age somewhere in your 80’s. My wife and I took SS on time, figuring we would be more likely to use it more than we would in our 80’s.
Regarding mortgages, I agree that if you have a 3% mortgage keep it and invest in higher paying bonds. We bought our last house with cash because rates were higher and we didn’t want the debt. If we needed the cash, we wouldn’t have done that, so whether to do that depends on one’s personal situation.

Cammer Michael
1 year ago

I’m all in on the stock indexing, but I still don’t understand bond funds. Why would anyone buy a bond fund when rates are on their way up?

John Yeigh
1 year ago

I’ve come to fully agree that “Retirement isn’t the goal.” The real challenge is to determine what exactly are “the goals” for the last few decades of life. The Humble Dollar community provides many good perspectives on how folks manage their retirement year goal-posts…..and the important goals are not about money once basic financial independence is achieved.
My main goal has become to “Just Do It,” especially with family & friends, with whatever their current activity is. I find that the activity doesn’t much matter but “Doing It” does, since we just don’t know when health or other issues may arise.

Last edited 1 year ago by John Yeigh
Kenneth Tobin
1 year ago

As usual great info from JC. The 3 fund Boglehead Portfolio is ideal. I would suggest young investors be 100% Total Stock and later on add some Int’l and total bond. Time is ones greatest asset. Keep up the great work as you are making more investors well educated with the ability to be a DIY investor
Just Read Simple Wealth by N Murray-highly suggested as it will influence your investing future

James Mahaney
1 year ago

Jonathan – When you say paying down a 7% mortgage is the best bond you can buy, have you given thought to the expiration date of the TCJA changes? In a little over two years, the standard deduction is cut in roughly half and those high mortgage interest payments will be deductible as more households go back to itemized deductions on their tax returns.

jOANNE LANGER
1 year ago
Reply to  James Mahaney

James-I’m with Jonathan.You want a mortgage just to have an income tax deduction? Really? Are you in a 100% tax bracket? Even if you are in a 40% tax bracket, you are still incurring the cost of the other 60%. So what’s the advantage? You want tax deductions? Give all of your money to charity. Then you’ll owe no income tax, which is a good thing, since you will have NO MONEY to do anything else either. People who have a mortgage SOLELY for the purpose of having a tax deduction, do not understand tax law.

Jonathan Clements
Admin
1 year ago
Reply to  James Mahaney

The potential halving of the standard deduction — and hence the increased value of the mortgage interest deduction — would be another reason for those with low-cost mortgages to favor buying bonds today. But frankly, forecasting future tax policy seems about as iffy as forecasting the stock market’s direction.

Michael1
1 year ago

I suspect many of us progress in our journey along a similar path. I’d be happy to have far fewer holdings overall and more of the portfolio in index funds, and it will happen at some point. The reasons why I haven’t yet may be a suitable topic for an article; then again, they may be a good example of me “wasting time on investing.”

Last edited 1 year ago by Michael1
SanLouisKid
1 year ago
Reply to  Michael1

I think that investing is kind of a hobby for a few people. They just need to make sure it doesn’t become an expensive hobby. I have a friend who likes to tinker with individual stocks. My question to him is, “Does your wife know how to wind down your investments if you kick the bucket?” That should be part of his estate planning.

Linda Grady
1 year ago
Reply to  SanLouisKid

Responding to your last question, SanLouisKid (are you my son in disguise? 😂): The non-financial partner (if there is one) needs to have a short cheat sheet detailing exactly where the money is, which accounts are used to pay which bills, insurance policies and their purposes and, most importantly, simple and quick access to all financial passwords. Said partner needs to have read these items and clarified any questions. After a sudden death, and the initial shock and pain, comes the awful question “Can I pay final expenses and continue to live in my home?” I was very fortunate that I could quickly answer “Yes”.

Free Newsletter

SHARE