I FEAR I AM GROWING WEALTHY at my children’s expense. My investing life began in the late 1980s. Yes, there have been stock market bumps since then, notably the 2000-02 and 2007-09 market crashes, and even a minor hiccup over the past week. But if you look at the broad trend, it’s been three decades of rising stock market valuations.
From year-end 1987 to year-end 2017, the S&P 500’s price-earnings multiple climbed from 13.8 to 24.6,
AS I WAS PREPARING for HumbleDollar’s January 2017 launch, my web developer suggested I add a mission statement to the top of the homepage. That mission statement morphed into a daily insight, which then became a daily Tweet that also found its way onto my Facebook page. Like the family that moves from a three-bedroom house to a one-bedroom apartment, I embraced the challenge of shoehorning financial ideas into 140 characters or less.
Twitter has since expanded the allowable character count to 280,
IMAGINE AN IDEALIZED chart that summarizes our finances over the course of our lives. What would the chart look like? Picture these five lines:
Our nest egg grows, slowly at first and then ever faster, hitting a peak of around 12 times our final salary when we retire.
Our portfolio in our 20s stands at perhaps 90% or even 100% stocks. We dial down our allocation in the years that follow, especially during our final decade in the workforce,
TO IMPROVE OUR BEHAVIOR, we first need to realize we’re on the wrong path and then figure out the right way forward. Often, this isn’t especially difficult. If we have no savings, obviously we need to sock away some money. If we’re overweight, we should cut back on the calories. If we’re out of shape, we need to hit the gym.
Instead, the real problem is getting ourselves to act.
The contemplative side of our brain is fully aware we ought to eat and spend less,
“WHEN YOU’VE WON THE GAME, stop playing with the money you really need.” That’s something my longtime friend and fellow author William Bernstein is fond of saying—and lately it’s been on my mind.
There’s been much handwringing over 2017’s stock market rally. Looked at objectively, it hasn’t been that startling. As of Sept. 29, the S&P 500 was up 14.2% for the year-to-date, with dividends reinvested—a good year, but nothing compared to the 25%-plus years we saw in 1991,
IF WE HAVE DINNER with half-a-dozen others, we might all share the same meal and yet each of us will have a different experience—sometimes radically different. Even as we talk politics, crack jokes and swap gossip, we’ll each have our own thoughts whirling in the background: errands we can’t forget, work issues we need to resolve, incidents from the day we keep replaying, worries we can’t put behind us.
For me, those whirling background thoughts often concern financial notions I want to write about.
WE ARE ALL CONSTRAINED by the income we have and the wealth we’ve either amassed or had handed to us. Result: Those on low incomes struggle to cover daily expenses. The middle class pay for today, while also socking away money for their own future. What about the rich? They often use their wealth not only for themselves, but also to help future generations.
These are, of course, gross generalizations. Some folks on low incomes manage to save surprising sums for their own retirement.
OVER THE 50 YEARS through year-end 2016, the per-share profits of the S&P 500 companies rose a cumulative 1,604%, equal to 5.8% a year, while inflation ran at 4.1%. If share prices had climbed in lockstep with corporate earnings, $1,000 invested at year-end 1966 would have been worth some $17,000 at year-end 2016. On top of that price appreciation, investors would also have collected dividends.
But in fact, over this 50-year stretch, investors fared far better.
TO BE PRUDENT MANAGERS of our own money, we need to read the small print—but we also need to keep an eye on the big picture.
To that end, whenever we make a financial decision, we should ponder three key questions: What’s the tradeoff, does the choice make sense given our broader financial life, and will we feel as good about the decision tomorrow as we do today?
Trading Off. Suppose we remodel the bathroom,
IS “SMART BETA” TRULY smarter and better?
The world of smart beta, sometimes called factor investing, used to be fairly easy to grasp. In 1981, academic Rolf Banz noted that small-company stocks didn’t just outperform their larger brethren. Rather, they outperformed by more than could be explained by their extra risk, as reflected in greater share price volatility. Similarly, in 1992, finance professors Eugene Fama and Kenneth French documented the strong performance of bargain-priced value stocks—and noted that this couldn’t be explained by volatility,
MOST OF US WILL NEVER be fabulously wealthy and we’ll never earn huge incomes. Self-help authors, get-rich-quick seminars and motivational speakers might try to convince us otherwise. But if we turn to these folks for assistance, they’re the ones who typically make heaps of money—at our expense.
Such hucksterism doesn’t just carry a short-term cost, however. It also causes us to think about our lives in the wrong way, leaving us with an unwarranted sense of failure and distracting us from the right path forward.
WE’RE A NATION DIVIDED, two camps clinging fervently to their own unshakeable beliefs and baffled at the nonsense that the other camp accepts as truth.
Yes, you guessed it: We’re talking about money management. Let’s call the two camps the Sharks and the Jets. What divides them? Here are seven fault lines:
1. Get Rich vs. Meet Goals. The Jets have one overriding goal—they want to make heaps of money—and they’ll hop any investment train that can get them there.
WANT TO MAKE YOUR DOLLARS work harder? Here are 11 of my favorite strategies. In each case, you can find additional information by clicking through to HumbleDollar’s online money guide.
1. Fund a Roth IRA—and let it double as your emergency fund. Ideally, you want to leave your Roth untouched, so you milk as much tax-free growth from the account as possible. But if you need to repair the car or replace the roof,
IT’S A NEW YEAR—and with it comes our new address: HumbleDollar.com. Why the change? If you spend some time on the site, you’ll discover I have made some big changes:
The entire contents of the Jonathan Clements Money Guide, my annual financial guide, are now housed on HumbleDollar and available at no charge. HumbleDollar is, I like to think, the internet’s best organized, most comprehensive source of personal finance information.
WANT TO GET MORE out of your money? Whether you’re spending or investing, try this three-pronged strategy:
There’s ample evidence that most of us aren’t good at investing or figuring out what will make us happy. Looking to improve? Spend a little time pondering the past.
When during your life were you happiest—and what were you doing? This may help you figure out whether you should change careers and what you might do with your spare time or with your retirement.