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WHAT’S THE FIRST RULE of personal finance? To answer this question, let’s look at the financial lives of two notable individuals, starting with musician MC Hammer.
When Hammer gained fame in the 1980s, he made millions. But unfortunately, his spending quickly outpaced his income. Hammer bought 19 racehorses, employed a personal staff of 200 and built a $30 million house with a 17-car garage. The result, sadly, was bankruptcy.
If MC Hammer represents one extreme of financial management, a fellow named Ronald Read represents the other. Read, who died in 2014, was a model of frugality. He used clothes pins to hold his coat closed when the buttons fell off, and he’d park his car several blocks outside of town to avoid parking meters. Read’s appearance was so modest that one day a stranger paid for his coffee, believing it to be an act of charity. But when Read died, those who knew him were shocked to learn the result of all of his extreme frugality. He’d amassed a fortune of $8 million.
Hammer’s and Read’s stories couldn’t be more different. But they do share one thing in common: They both represent extremes. And while no one can know for sure, my sense is that they each would’ve been happier if they hadn’t taken things quite so far.
That brings us back to the first rule in personal finance. In my opinion, the most important thing is to approach everything with a mindset of moderation. Here are nine areas in which I see a moderate approach as being the right approach:
1. Diversifying your stock holdings. Suppose you’re building a portfolio. How should you structure it? The late Jack Bogle, founder of Vanguard Group, often noted that his personal portfolio never included any international exposure. Domestic stocks, he felt, were perfectly sufficient. Meanwhile, today, Vanguard recommends allocating a hefty 40% of a stock portfolio to international stocks.
Which is the right approach? There’s endless debate on this topic, in large part because there’s no single right answer. On the one hand, international markets lack much of the innovation and dynamism of their U.S. peers. But there is also value in diversification. In my view, then, a good solution is to split the difference. You might consider allocating 10%, 20% or 30% to international stocks.
2. Diversifying your bond holdings. Last year delivered an unwelcome wake-up call to bond investors, with total bond market index funds losing about 13% of their value. Funds holding only short-term bonds, however, fared much better, losing less than 5%.
Does that mean investors should hold only short-term bonds? That might seem like the prudent course. But it would overlook the longer-term performance of these funds. Since 2010, total bond market funds have returned about 30%, while Vanguard’s short-term Treasury bond fund (symbol: VGSH) has returned just 12%. A reasonable approach, then, might be to lean heavily on short-term funds, but still hold some intermediate-term funds. It need not be all-or-nothing.
3. Individual bonds vs. funds. Another debate in the world of bonds is how best to access the bond market. Should you buy funds or purchase individual bonds? Each has its merits. Funds are easier to buy and sell, and they offer built-in diversification. Individual bonds, on the other hand, make it easier for investors to know precisely what yield they’ll earn until maturity, assuming the issuers involved don’t default. Which way should you go? I see no need to choose just one or the other. Purchase some of each.
4. Roth conversions. Suppose you do the math and determine that a Roth conversion would be of debatable value. You could table the idea, and that might seem reasonable. But whenever we do calculations, it’s important to keep in mind that things might turn out differently.
Suppose your portfolio grew faster than expected, or suppose Congress lifted tax rates. Then the Roth argument might become stronger. What should you do? In cases like this, a reasonable approach might be to proceed with a conversion, but a modest one—perhaps to the top of your current tax bracket. With that approach, you’d benefit whichever way things turn out.
5. Family gifting. As you may know, estate tax rules provide what’s known as a lifetime exclusion on gifts to others. Today, that number is $12.9 million per person, but in 2026 that’s scheduled to be cut in half. Even that might still seem like a big number. But remember that Congress can change these rules at any time. The estate tax is a political football, and the rules that matter most are the rules that happen to be in place in the year you die. What to do? There are several easy steps you could take without going to an extreme. A few weeks back, I outlined some of these strategies.
6. Selling a winning stock. Suppose you’ve been lucky with a stock like Apple or Tesla. That would be great. But if that stock now represents too large a portion of your holdings, it might also pose a risk. Let’s say one stock accounts for 30% of your portfolio. If you sell it all, it could generate an enormous tax bill. But it need not be an all-or-nothing decision. Instead, a moderate approach would be to set a target for reducing your exposure to that stock—down to perhaps 5% or 10% of your portfolio. You might then move toward that target over time, thus spreading out the tax bill.
7. Selling a losing stock. Suppose you find yourself with the opposite problem: an investment in your taxable account that’s now at a loss. You could sell it, benefiting from the tax loss, and simply move on. But that might carry a different type of risk: If the stock recovers after you sell it, it wouldn’t affect you financially, but the feeling of regret could be unpleasant. The solution: Just as with a winning stock, you might sell it incrementally.
8. How to buy. Another frequent debate among investors is whether to invest money via dollar-cost averaging or to simply invest any available cash all at once. The challenge, of course, is that you can’t know in advance whether the market will go up or down in the short term. A solution you might consider: Split the difference. If you have a large sum to invest, put half of it to work immediately, and then invest the rest over a period of months.
9. Social Security. Even though Social Security can be claimed as early as 62, I generally recommend that folks wait until 70, when their benefit would be the largest. But because of all the years of forgone payments, it can take several years to break even. Some people simply don’t want to take that risk. That’s why a popular solution, if you’re married, is for one spouse to wait till 70 while the other claims earlier. What if you’re single? You could split the difference by simply picking a year somewhere between 62 and 70 to claim your benefit. There’s no need to go to one extreme or the other.
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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I really appreciate your thoughts on Social Security. Ideally, 70 would be great, but knowing that a bit earlier might be a good choice, is helpful.
I’m single and in the 22% tax bracket for individuals with incomes between $44,725 to $95,375.
So does that mean I would convert $95,375 of my $1.2 million traditional IRA?
Nobody can answer your question based on such limited information. But here are some further questions to ask yourself: Do you have any other income in 2023 that’s counting toward that $95,375 target? Should the target be $13,850 higher to reflect the standard deduction for individuals — or will you be itemizing? Do you expect to be taxed at a 22% or higher rate in future years, and thus paying 22% on a Roth conversion today seems like a good deal? Can you pay the tax bill without dipping into your IRA?
Thanks, Adam! That’s the 2nd time in 3 weeks you’ve got me rethinking my asset allocation.