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I MOVED FROM LONDON to New York City in 1986, when I was age 23. That’s when my financial education truly began.
I’d previously studied economics for three years and spent a year writing about the international financial markets for Euromoney magazine. Still, I knew almost nothing about investing, insurance, homeownership and other topics crucial to managing a household’s finances.
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I’ve learned a ton since, and the focus of that education keeps changing, providing endless fodder for articles during my long career as a financial writer. The fact is, the way we think about money today is totally different from four decades ago, and that’s a huge plus. How so? We’re now focused less on determining the “optimal” financial products and strategies—and more on how money can be used to improve the lives of everyday individuals.
Investing. As with almost everybody else, investing was where my financial journey began. I worked at Forbes magazine from late 1986 to early 1990, focusing principally on mutual funds.
The standard article was the fund manager profile. It was fairly formulaic: Interview a guy (yes, it was almost always a man) with a decent track record, cook up some theme for the article, describe his investment strategy, and then offer three or four stock picks that illustrated his approach.
I felt like I wouldn’t be a real journalist until I worked for a daily newspaper. That opportunity came in January 1990, when The Wall Street Journal hired me to write about mutual funds. But by then, it was starting to dawn on me that few star fund managers remained stars, and it was impossible to figure out ahead of time who they’d be. Thus began my passion for index funds.
As I relentlessly advocated for broadly diversified, low-cost index funds, I briefly imagined that I knew pretty much everything I needed to know about managing money. But in truth, I’d barely scratched the surface.
Personal finance. With the investing problem “solved” with index funds, I went looking for other subjects to tackle in my weekly Journal column, which first appeared in 1994. In the years that followed, I found myself writing about personal-finance topics such as taxes, Social Security, college funding, insurance and estate planning.
Unlike investing, where folks were unlikely to do better than a simple portfolio of low-cost index funds, there was ample room for improvement in these other areas of money management. Indeed, a modest effort could greatly bolster a family’s financial position, and yet these topics were largely ignored by financial advisors and Wall Street investment houses.
Behavior. Even as I dabbled in subjects other than investing, I developed an interest in behavioral finance and evolutionary psychology. Why did investors resist indexing, despite its obvious advantages? Why did they misjudge their appetite for risk? Why do folks spend so much today and save too little for retirement?
The broad parameters of what constitutes smart financial behavior are pretty much agreed upon, even if experts might quibble about the details. Problem is, knowing the right course of action isn’t enough. It’s like losing weight or improving our fitness. The big issue isn’t figuring out what to do. Rather, it’s getting ourselves to do what we know is right. That can require a huge effort—because we need to overcome our hardwired instincts.
Meaning. Money isn’t simply the vehicle we use to put a roof over our head and food on the table. Instead, our relationship with money is far more complicated. We use it to try to make ourselves happier, to recreate our most treasured memories from childhood, and to tell the world who we are and what we value. In other words, we take money and we infuse it with meaning.
Around 2005 or so, I became fascinated by happiness research, and whether money can indeed boost our satisfaction with our lot in life. The answer is “yes,” but the research also highlighted money’s limitations. For instance, the boost to happiness from a new car or a pay raise can be remarkably brief, while the impact on happiness of a seven-figure portfolio pales in significance compared to folks’ predisposition to be happy—whether they have a high or low happiness set point.
Self-knowledge. Behavioral finance helps us understand why we behave the way we do, while happiness research offers ideas for how to get more satisfaction out of our dollars. But which insights resonate the most? The answer will be different for each of us.
That brings me to what, I suspect, will be an increasing focus of the financial world: offering folks insights into who they are, so they can be better managers of their own money. How can we figure out what our true risk tolerance is? What mix of the five personality types do we possess, and how does that affect our financial decision making? What from our past continues to play a role in the financial choices we make today? These, I think, are fascinating questions—and I suspect folks will be much better able to answer them in the years ahead.
Jonathan Clements is the founder and editor of HumbleDollar. Follow him on X @ClementsMoney and on Facebook, and check out his earlier articles.
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Maybe when we open those monthly money statements, we feel like Giants at the top of a beanstalk… Looking down at the straw thatched roofs below…filled with folks who just don’t appreciate how good the economy has been?
Jonathan,
Thank you for the quick response.
“As I’ve argued before, I’m not inclined to lighten up on stocks when the market appears overheated, because there’s no limit to share prices might climb.”
“When stocks soar, I sell shares to get back to my target percentage—but I would be loath to underweight stocks.”
I appreciate these statements, but they do have a ‘qualitativeness’ to them. Do you have more quantitative guidance on indicators when to begin the adjustment from 95-100% equity back to 70-80%?
Also, sorry for the exclamation mark in my previous comment…what was I thinking ;).
No, I don’t have strict guidelines — sorry. Market recoveries can differ greatly. Consider the difference between the market recovery that started in 2009 and that which followed the 2020 pandemic crash. I didn’t feel any great urgency to rebalance after 2009 because the plunge had been so steep and investor psychology had been so damaged. By contrast, we quickly returned to exuberance in 2020.
Makes perfect sense. I was curious if you had any personal rules of thumb that you could offer, thus, the inquiry. Thanks for responding.
Jonathan,
Another great article! Your written words and conversational eloquence makes it so easy to absorb your messages.
You have mention in previous articles and during the MiB podcast referenced in this thread that you invest more (over re-balance) during times of large market dips – dot.com, GFC, pandemic – resulting in, for example, a 95% equity weighting during the lows of the GFC. Consequently I assume, as the market bounces back, your portfolio would provide even greater gains in equity exposure. Can you discuss your strategy, timing and thought process to take your portfolio back to a more comfortable allocation level? Thanks, Andy
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