Seeking Certainty
Jonathan Clements | Mar 28, 2025
WE WANT OUR STOCKS to behave like bonds, and our bonds to behave like cash investments. That leads to all kinds of portfolio contortions—some of them damaging to our investment results. Remember, risk is the price we pay to earn higher returns. Many folks want those higher returns, but they’re anxious to avoid risk. Chalk it up to loss aversion: We get far more pain from losses than pleasure from gains. Result? Think about stock-market strategies like purchasing equity-indexed annuities and writing covered call options. Equity-indexed annuities capture part of the market’s upside while guaranteeing against losses—assuming the buyer owns the annuity for long enough. Meanwhile, writing call options allows folks to collect extra income in the form of option premiums, providing a small buffer against market declines, but the price is a cap on potential stock-market gains. As investors look to limit losses, however, the biggest portfolio contortions tend to revolve around bonds, not stocks. The strategies employed typically involve favoring individual bonds over bond funds, and then holding those bonds to maturity. This can add a fair amount of complexity, especially if folks build elaborate bond ladders, with each rung designed to cover a particular year’s spending. No doubt about it, there’s some reward for this complexity. If we buy an individual bond and hold it until it matures, we know exactly how much interest we’ll receive each year and how much we’ll get back upon maturity. Sound appealing? My advice: Before buying into the notion that bond funds are riskier than individual bonds, and that holding individual bonds to maturity eliminates risk, we should ask ourselves four questions: Bailing early. Where’s the certainty if life intervenes, as it often does, and we’re compelled to sell our individual bonds before maturity? How easy will it be to sell…
Read more » Human Condition
Jonathan Clements | Jun 9, 2018
RISK IS ARGUABLY the most important financial topic. But which risks should we worry about? There are all kinds of contenders: recession, accelerating inflation, political upheaval, global conflicts, sharp market declines, individual company turmoil. But I would argue that, as we each assess our personal finances, one risk trumps all of these—and that’s the risk that we have lousy career earnings and maybe even find ourselves without a paycheck. How come? It isn’t simply that we would likely struggle to pay the bills and service our debts. Equally important, without a heathy paycheck, it’s tough to be a good saver—and that, more than anything, is the key driver of our long-term financial success. How can we protect against this risk to our so-called human capital? There are the obvious steps: Build up an emergency fund, so we can survive a spell of unemployment. Get health and disability insurance, in case of illness or an accident. Purchase life insurance if we have a family who depends on us, so our untimely demise won’t leave our loved ones in the financial lurch. But here are four additional steps we might take: 1. Get educated—prudently. Incomes, on average, are closely related to educational attainment. According to a Census Bureau study, master’s degree recipients have expected lifetime earnings of $2.8 million, figured in today’s dollars, versus $2.4 million for those with a bachelor’s and $1.4 million for those who only graduated high school. But before you rush off to get another degree, think carefully about whether the career you’re pursuing is one you really want. I’ve heard too many stories of 20-somethings who collected advanced degrees, only to find themselves with jobs they didn’t especially like. Sound bad? It’s even worse if collecting that advanced degree involved assuming hefty amounts of education debt. An added…
Read more » Declaring Victory
Jonathan Clements | Sep 14, 2019
I OFTEN FEEL LIKE the Grinch, who “puzzled and puzzled ‘till his puzzler was sore.” One question I've puzzled over endlessly: If what I do barely matters in the greater scheme of things, why in the world do I keep doing it? Here are four related thoughts that often crop up in my writing: One of life’s great pleasures is working hard at something we care deeply about. While striving toward our goals can bring great satisfaction, achieving them is often a letdown. We should worry less about the praise of others and more about doing work we find personally meaningful, because only the latter will reliably deliver happiness. Five or 10 years after we’re gone, most of us will be forgotten, except by friends and family. We know why we keep pushing forward: It’s our hunter-gatherer instincts. We’re here today because our nomadic ancestors were never satisfied with what they had and instead—in their efforts to survive—strove relentlessly for more. The feeling of satisfaction we get when we make progress is a trick played on us by our genes, so we keep working hard. But if we know this, why don’t we learn to chill out? Now that our daily existence isn’t a life-or-death struggle, doesn’t our relentless pursuit of progress start to seem like the frenzied activity of delusional men and women? This bring us back to the old battle between “more” and “enough.” Somebody once joked to me that, no matter how much money folks have, their idea of being rich was having twice as much. But today, I’m not talking about more money or more possessions. Instead, my focus is on more success—career or otherwise. We keep striving for one more big promotion or one last major achievement, so we can make our mark on the world,…
Read more » Keep the Faith
Jonathan Clements | Jul 20, 2022
INDEXING IS A GREAT strategy—and yet there’s also a constant temptation to stray. When stocks soar, so does our self-confidence, as we attribute our investment gains to our own brilliance. At such times, there’s a risk that even hardcore indexers will start dabbling in individual stocks, actively managed funds, cryptocurrencies and goodness knows what else. Meanwhile, amid market slumps, index funds suffer just as much as the market averages, and some indexers may look to sidestep the pain—by "temporarily" abandoning their funds. Tempted to give up on or lighten up on broad market index funds? Let’s not forget the virtues of what we already own. Here are six reasons to stay the course: 1. Less time. Other than adding new savings and rebalancing occasionally, a portfolio of broad market index funds involves very little upkeep. That frees up time to focus on improving other areas of our financial life, including reducing taxes, minimizing borrowing costs, planning our estate, getting the right insurance and spending thoughtfully. These are all areas where a little effort can deliver big benefits. 2. Less worry. Sure, with an index-fund portfolio, we’re at the mercy of the financial markets. But at least we don’t have to worry about whether the investments we pick will underperform the market averages. Index funds offer relative certainty: Whatever the markets deliver, we indexers know that’s what we’ll get. 3. Tax efficiency. Pursuing active investment strategies in a regular taxable account often leads to big tax bills. That isn’t something indexers need to worry about, because broad market index funds have tiny portfolio turnover, which means they’re slow to realize capital gains. Because of the way shares are created and redeemed, exchange-traded index funds can be especially tax-efficient. 4. Lower costs. Investors collectively earn the markets’ results—before investment expenses. After costs, they inevitably…
Read more » Ten Commandments
Jonathan Clements | Apr 22, 2017
IMAGINE YOU HAD ONE shot at offering financial advice to a high school or college graduate. Your mission: Come up with 10 rules that’ll help your graduate succeed financially in the years ahead. What would you recommend? Here's my list: 1. Question yourself. No doubt you’re entering the adult world with a slew of strong opinions—about what you want from life, what will make you happy, what you’re good at, what constitutes success and how to achieve it. These opinions likely won’t age well, and yet they will have a profound impact on the lifestyle you pursue, how you invest, how much you borrow and more. What to do? Some self-doubt—and a few days’ pause before major decisions—could save you unnecessary grief and a boatload of money. 2. Consider the tradeoff. Whenever you open your wallet, you’re voting for one thing, but also voting against something else. If you buy one item, those dollars can’t be spent elsewhere. If you spend it, you can’t save it. If you devote savings to one financial dream, those dollars can’t be put toward another goal. 3. Be an owner. That means favoring stocks over bonds and buying a home rather than renting. Admittedly, this isn’t without risk: Owners can suffer steep short-term losses, so don’t purchase a house or venture into the stock market unless you have at least a five-year time horizon—and preferably far longer. 4. Favor simplicity and low cost. Wall Street firms want to make money off you—and the greater the complexity, the more they’ll make. Does a financial product or strategy require more than 30 seconds of explanation? Just say no. 5. Save automatically. If socking away money were easy, every retiree would be a multi-millionaire. The reality: Most of us spend too much today and shortchange our future self,…
Read more » Happy: 10 Questions
Jonathan Clements | Aug 17, 2017
COULD YOU SQUEEZE more happiness from your dollars? Here are 10 questions to ponder: Which expenditures from the past year do you remember with a smile? Which prompt a shrug of the shoulders and maybe even a twinge of regret? Use those insights to guide your spending in the year ahead. Could you commute less? Research tells us that commuting is terrible for happiness. You might move closer to the office or try to work at home a few days each week. When during your life do you recall being happiest? Try to figure out what made it a happy time and what role money played. Could this help you to use your money more wisely in future? Are there chores you dislike, such as mowing the lawn, cleaning the house or making dinner? Paying others to do these chores could be a good use of your money—and deliver a big boost to your happiness. Should you make more time for friends and family? Many activities, such as exercising, eating lunch and going to the movies, are far more fun when you do them with others. Which activities are you most passionate about and find most absorbing? Could you rearrange your life, so you devote more time to these activities? Are you making yourself feel poor? If you live in a town where most of your neighbors are richer, shop at stores you can barely afford or eat at restaurants where the bill is always a nasty shock, you’re likely hurting your happiness. What career would you pursue if money weren’t an issue? In middle age, many folks grow weary of their current jobs and think of changing careers. What would it take financially to make such a big change? Which major expenditures would you like to make in the…
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- Up-to-date access to your password vault on all devices, regardless of the device’s operating system.
- Updates to your vault as you create new accounts or update existing passwords.
- A random password generator that creates really strong, unique passwords. Those passwords will meet each site’s requirements for length and allowed characters.
- A security challenge which guides you through the work of replacing existing poor passwords—those which are known to be compromised, weak or easily guessed, or which you’ve used more than once.
- Emergency access to your vault by someone you choose, as well as password sharing with, say, family members for your Amazon Prime or Netflix account.
- Two-factor authentication for extra vault security.
Some of these are only available in paid versions of the service. Despite knowing better, I procrastinated in evaluating password managers. That changed the day I tried to picture life for my spouse after I leave this vale of tears. I visualized the chores I handle: Banking, bill paying and investment management all involve online accounts. That brought my password problem into focus. A list of passwords in a binder, next to our wills, isn’t secure and it’s a pain to keep up. After experimenting with a free trial, I bought a family subscription. Moving my password vault from low-ranked to the top 1% took a couple of weekends. Each weekend, I’d spend an hour or two changing passwords, guided by the security challenge and with help from the password generator. Do this on your home PC or Mac, not an office computer. I started with high-value accounts: email, cellular carrier, and then banks and brokerages. Why email? Most web sites let you reset a password by emailing a link to the address on file. If hackers have access to your inbox, they’ll use it to access every online account. The cellular account is also important if you’ve enabled two-factor authentication that triggers text messages with secure codes. What if someone hacks into your password manager’s vault? If you pick a great vault password, the odds of this are low. But when you have all your eggs in one basket, you want to ensure that basket stays safe. That’s what led me to the YubiKey 5 series hardware keys. When you use a YubiKey with a password manager, the manager encrypts your vault twice, once with your vault password and again with a secret it gets from the YubiKey. For convenience, I’m using two models of YubiKey. I use YubiKey 5 Nano with my PC and Mac. Meanwhile, YubiKey 5 NFC stays on my keyring for use with my phone. The latter should work with an iPhone 7 or newer, as well as an Android phone with NFC (near field communication).Preparing for SS at Age 70….. How Do I Transition to Monthly Part B Premium Deduction?
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