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Messing With Us

Jonathan Clements  |  Jan 1, 2017

FINANCIAL MARKETS have two primary functions: They can allow us to grow wealthy over time—and they can drive us completely batty along the way. As you mull that mixed blessing, consider six additional thoughts:
1. Spreading our investment bets widely is prudent and betting everything on one stock is foolish. But over the short term, the prudent strategy can lose us money, while behaving foolishly can earn us handsome gains. The lesson: We shouldn’t judge a long-term investment strategy by its short-term results.

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Your Risk-Free Rate

Jonathan Clements  |  Dec 10, 2016

WHEN DECIDING whether it’s worth taking an investment risk, your starting point should be the so-called risk-free rate. That’s the return you can earn by taking little or no risk. Got your eye on an investment that might perform better? You need to decide whether the potential extra return, relative to the risk-free rate, is worth the added danger involved.
When experts talk about the risk-free rate, they usually point to some sort of Treasury security.

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Selling Shovels

Jonathan Clements  |  Dec 3, 2016

REAL ESTATE SEMINARS. Initial public stock offerings. International lotteries. Hedge funds. Franchising opportunities. Penny stocks. Multi-level marketing companies.
This is the American lexicon of easy wealth—and yet the only people who seem to end up rich are those who peddle this nonsense. It’s the story of the California gold rush: Riches accrued not to the miners, but to those who sold them shovels, picks, pans and other supplies.
To be sure, hollow promises and empty hype are rife in other areas of our life.

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Looking Long

Jonathan Clements  |  Aug 27, 2016

STOCK INVESTORS this year are fretting over Brexit, tighter monetary policy and lackluster economic growth. But every year, there’s another compelling reason to bail out of the stock market.
Think about the past half-century: We’ve had wars, political crises, financial crises, double-digit inflation, a double-dip recession, terrorist attacks and more. And yet, if you had stashed $10,000 in a global stock portfolio at year-end 1969 and sat tight through all the subsequent turmoil, you would have more than $450,000 today.

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Moving Slowly

Jonathan Clements  |  May 21, 2016

IF THERE’S MONEY you’ll need to spend in the next 12 months, you don’t want to put it at risk, so savings accounts, money market funds and similar cash investments are the only prudent choice. But as your time horizon lengthens, holding cash becomes less and less appealing. The reason: Your money’s purchasing power is pretty much guaranteed to shrink, once inflation and taxes take their toll.
Got cash in your long-term investment portfolio?

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Weighing Risk

Jonathan Clements  |  Feb 11, 2016

WITH STOCKS IN turmoil, investors are once again fretting over risk. But what aspect of risk should we worry about? Whenever the notion arises, it’s worth contemplating three questions.
What are the odds of success or failure? Over the past 50 years, the S&P 500 (with dividends reinvested) has lost money in 11 calendar years, equal to once every four or five years. With odds like that, an occasional losing year should be no great surprise.

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Bonds and More Bonds

Jonathan Clements  |  Nov 17, 2015

STOCKS GET ALL THE attention, which seems a tad unfair. The value of bonds worldwide is some 35% greater than the value of all stocks—plus many other parts of our financial life look suspiciously like bonds. How so? Think about all the streams of steady income that folks collect.
We pull in interest from bank products like savings accounts and certificates of deposit. We collect Social Security retirement benefits. If we’re lucky, we are the recipients of a traditional employer pension plan.

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Mistakes Compounded

Jonathan Clements  |  Oct 14, 2015

A GOOD GRASP OF compounding is fundamental to managing money. Without an understanding of the way money grows and shrinks over time, folks can’t fully appreciate the value of starting to save when they’re young, the damage done by large investment losses or the true cost of carrying credit-card debt.
Yet I fear compounding isn’t well understood. This has dawned on me over the past month, as I’ve been teaching an undergraduate course on personal finance.

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Not So Bad

Jonathan Clements  |  Jun 5, 2015

I LOVE CORRESPONDING with readers, because I find out what’s on ordinary investors’ minds and hence what might make for a good article. And, occasionally, I learn something unexpected.
This week’s lesson: The potential return on EE savings bonds is much higher than I thought. If you look on TreasuryDirect.gov, you’ll learn that the current interest rate is a meager 0.3%. After 20 years, that would give you a cumulative total return of just 6.2%.

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