If you bequeath your stamp collection, your kids will remember you. If you bequeath your Roth IRA, they’ll remember you fondly.

Choosing Badly

TIME VALUE of money, asset class, diversification, dollar-cost averaging: This is the language of investment professionals. But it isn’t the language of everyday Americans, including those saving for retirement in their employer’s 401(k) plan.
Trust me, I know. During my nearly 30 years overseeing 401(k) plans, including providing financial education to participants, it became clear to me that using such plans as intended wasn’t easy for most people.
For diversification, employees would often invest in several different mutual funds all focused on a similar collection of U.S.

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Exposing Yourself

PUT YOURSELF in their shoes. I’ve been doing that in recent weeks, thinking about how I’d design a portfolio if I lived in, say, Australia, Japan or the United Kingdom. What prompted this navel-gazing? I’m in the middle of revising my 2016 book, How to Think About Money, for an international audience.
One conclusion: Here in the U.S., we have it far easier than foreign investors—and a big reason is currency exposure.

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Protect Your Privacy

ERIC SCHMIDT SAID THIS when he was Google’s chief executive: “If you have something that you don’t want anyone to know, maybe you shouldn’t be doing it in the first place.”
In his Congressional testimony last week, Facebook chief executive Mark Zuckerberg didn’t say anything nearly as condescending or abrasive. But his testimony was a good reminder that we’re in a very different world privacy-wise than we were even 10 years ago,

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Choosing Badly

TIME VALUE of money, asset class, diversification, dollar-cost averaging: This is the language of investment professionals. But it isn’t the language of everyday Americans, including those saving for retirement in their employer’s 401(k) plan.
Trust me, I know. During my nearly 30 years overseeing 401(k) plans, including providing financial education to participants, it became clear to me that using such plans as intended wasn’t easy for most people.
For diversification, employees would often invest in several different mutual funds all focused on a similar collection of U.S.

Read more »

Exposing Yourself

PUT YOURSELF in their shoes. I’ve been doing that in recent weeks, thinking about how I’d design a portfolio if I lived in, say, Australia, Japan or the United Kingdom. What prompted this navel-gazing? I’m in the middle of revising my 2016 book, How to Think About Money, for an international audience.
One conclusion: Here in the U.S., we have it far easier than foreign investors—and a big reason is currency exposure.

Read more »

Protect Your Privacy

ERIC SCHMIDT SAID THIS when he was Google’s chief executive: “If you have something that you don’t want anyone to know, maybe you shouldn’t be doing it in the first place.”
In his Congressional testimony last week, Facebook chief executive Mark Zuckerberg didn’t say anything nearly as condescending or abrasive. But his testimony was a good reminder that we’re in a very different world privacy-wise than we were even 10 years ago,

Read more »

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Numbers

JUST 31% OF U.S. WORKERS with nonmortgage debt are saving for retirement outside the workplace, vs. 69% of those with no nonmortgage debt, according to LIMRA. Nonmortgage debt includes credit card debt and car, student and home equity loans.

Act

IMAGINE STOCKS PLUNGED 30%. That’s not a prediction, but it is always a possibility. Think about your portfolio’s loss in dollar terms, so it seems more real. Ponder whether the financial hit would unnerve you—and whether it would imperil any upcoming goals. If the answer is “yes,” you might want to lighten up on stocks.

Think

TAX EFFICIENCY. We should minimize our portfolio’s tax bill, so we keep more of what we make. That means making full use of retirement accounts, while thinking carefully about which investments to hold in our taxable account. For instance, we might allocate bonds and restrict trading to our 401(k) and IRA, while using our taxable account to buy and hold stock index funds.

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Unanswered

THERE ARE MANY FINANCIAL DEBATES that shouldn’t be debates at all. Folks strike strident poses, but often their positions don’t reflect a careful weighing of the arguments. Rather, they either have a vested interest or their ego is invested. Think of commission-hungry insurance agents who pound the table for cash-value life insurance, or retirees who took Social Security early and then insist that early is always best.
In most of these cases, if we marshal the facts and apply some reasoning,

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Jonathan Clements

About Jonathan

Jonathan Clements is the founder and editor of HumbleDollar. He spent almost two decades at The Wall Street Journal, where he was the personal finance columnist. His latest book: How to Think About Money.

Money Guide

Everything you need to be smarter about money—all in one place.

Start Here

Whither Stocks?

PREDICTING SHORT-TERM STOCK MARKET returns is impossible. Even forecasting long-run returns is tough to do with any precision. Still, it’s important to have some sense for what you might earn over the next 10 years, so you don’t save too little or spend too much. Where to begin? Don’t simply extrapolate recent returns or rely on long-run historical averages. Instead, consider stock market returns in terms of three components: the dividend yield, earnings growth and the price put on those earnings, in the form of the price-earnings ratio. If you buy the stocks in the S&P 500 today, you will get a dividend yield of roughly 2%. You might assume that the economy—and hence corporate profits—will grow at a nominal 4% a year, comprised of perhaps 2% inflation and 2% real economic growth. Combining the 2% dividend yield and 4% nominal growth would give you a 6% return. But what about the market’s P/E? It’s higher than the long-run historical average based on cyclically adjusted 10-year earnings, so the odds suggest P/Es are more likely to fall over the next 10 years than climb. But that’s not a certainty. A 2012 study by Vanguard Group looked at a variety of financial metrics, and found that both cyclically adjusted P/E ratios and P/Es based on trailing 12-month reported earnings were the best predictors of stock returns over the next 10 years. Even so, they explained just 40% of returns. In addition to falling P/Es, stock investors face three other risks. First, profit margins may shrink—and, indeed, we've already seen some of that. Second, earnings per share may lag behind economic growth because of share dilution. Third, economic growth may be even more sluggish than the tepid growth of recent years. All this suggests there’s a risk of disappointment. Result? Over the next 10 years, stocks might have a total return—share-price gain plus dividends—of less than 6% a year, while inflation runs at 2%. This sub–6% return doesn’t reflect the hit from investment costs and taxes. The outlook for foreign stocks appears brighter, thanks to lower valuations, and thus a globally diversified portfolio might return somewhat more than 6% a year, before costs and taxes. What if the stars align, the bad stuff doesn’t happen and the U.S. market’s P/E climbs from current levels? While that might seem like a happy prospect, don’t be too quick to cheer: You may discover that you’re effectively borrowing from the future. Next: Borrowing From the Future Previous: Historical Valuations
Read more »

Money Guide

Everything you need to be smarter about money—all in one place.

Start Here

Whither Stocks?

PREDICTING SHORT-TERM STOCK MARKET returns is impossible. Even forecasting long-run returns is tough to do with any precision. Still, it’s important to have some sense for what you might earn over the next 10 years, so you don’t save too little or spend too much. Where to begin? Don’t simply extrapolate recent returns or rely on long-run historical averages. Instead, consider stock market returns in terms of three components: the dividend yield, earnings growth and the price put on those earnings, in the form of the price-earnings ratio. If you buy the stocks in the S&P 500 today, you will get a dividend yield of roughly 2%. You might assume that the economy—and hence corporate profits—will grow at a nominal 4% a year, comprised of perhaps 2% inflation and 2% real economic growth. Combining the 2% dividend yield and 4% nominal growth would give you a 6% return. But what about the market’s P/E? It’s higher than the long-run historical average based on cyclically adjusted 10-year earnings, so the odds suggest P/Es are more likely to fall over the next 10 years than climb. But that’s not a certainty. A 2012 study by Vanguard Group looked at a variety of financial metrics, and found that both cyclically adjusted P/E ratios and P/Es based on trailing 12-month reported earnings were the best predictors of stock returns over the next 10 years. Even so, they explained just 40% of returns. In addition to falling P/Es, stock investors face three other risks. First, profit margins may shrink—and, indeed, we've already seen some of that. Second, earnings per share may lag behind economic growth because of share dilution. Third, economic growth may be even more sluggish than the tepid growth of recent years. All this suggests there’s a risk of disappointment. Result? Over the next 10 years, stocks might have a total return—share-price gain plus dividends—of less than 6% a year, while inflation runs at 2%. This sub–6% return doesn’t reflect the hit from investment costs and taxes. The outlook for foreign stocks appears brighter, thanks to lower valuations, and thus a globally diversified portfolio might return somewhat more than 6% a year, before costs and taxes. What if the stars align, the bad stuff doesn’t happen and the U.S. market’s P/E climbs from current levels? While that might seem like a happy prospect, don’t be too quick to cheer: You may discover that you’re effectively borrowing from the future. Next: Borrowing From the Future Previous: Historical Valuations
Read more »
Home Call to Action
Jonathan Clements

About Jonathan

Jonathan Clements is the founder and editor of HumbleDollar. He spent almost two decades at The Wall Street Journal, where he was the personal finance columnist. His latest book: How to Think About Money.

Free Newsletter

Unanswered

THERE ARE MANY FINANCIAL DEBATES that shouldn’t be debates at all. Folks strike strident poses, but often their positions don’t reflect a careful weighing of the arguments. Rather, they either have a vested interest or their ego is invested. Think of commission-hungry insurance agents who pound the table for cash-value life insurance, or retirees who took Social Security early and then insist that early is always best.
In most of these cases, if we marshal the facts and apply some reasoning,

Read More »