FREE NEWSLETTER

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

Latest PostsAll Discussions »

Subconscious Frugality

Mark Crothers  |  Jul 31, 2026

"Don’t you know seniors dine at 4:30 to avoid that … or have a bottle of Tums on the nightstand😀"
- R Quinn
Read more »

Go While You Still Can

DavidHLancaster  |  Jul 22, 2026

"W were in Chicago for four days last week, too. My husband had a conference, and I tagged along and then we stayed two extra days to have some fun. Weather was fantastic. We ate a couple of excellent meals and went to exhibits at the science and industry museum. We also love the Art Institue and went on the architectural river boat tour a couple of years ago."
- DrLefty
Read more »

2025 and Medicare Rx

R Quinn  |  Jan 1, 2025

"The $2,000 out of pocket max is $2,100 this year, so I guess it will continue to be indexed. I am not complaining as the Zanubrutinib I take costs $14,750 monthly which is up $1,000 monthly over last year."
- Howard Schwartz
Read more »

Treasury Inflation Protected Securities (TIPS) are a Generational Bargain Right Now

Howard Schwartz  |  Jul 27, 2026

"Thank you! Yes, the TIPS would be held in my IRA, and the plan would be to hold them until maturity. I haven't found any inflation-adjusted annuities, but it looks like I could buy an SPIA with a 2 or 3 percent annual increase. Helpful but not an impregnable defense against 3.5 percent inflation."
- Emily Croy Barker
Read more »

Taking a Loss?

Mark Crothers  |  Jul 28, 2026

"Randy, I agree you don't buy bonds for price appreciation, though I don't hold them for the dividends either. For me, they’re more of a portfolio ballast to smooth out the ride. Nice lock-in on the 10-year TIPS, by the way."
- Mark Crothers
Read more »

What I Retired To

Andrew Clements  |  Jul 29, 2026

"I am the same way, I too have this thing about seeing net worth decline no matter how illogical it is. These past few weeks have not helped has investments have tumbled and taken me from my happy place. My son in law is a managing direct at a Wall Street firm and warned me about this summer, but it doesn’t make me feel any better."
- R Quinn
Read more »

Today in Financial History

Harold Tynes  |  Jul 28, 2026

"Notice that I said I may hire an advisor someday if or when needed? This assumes that I will recognize that time is approaching and have time to interview and hire someone. Life often does not work that way. And you answered my unasked question, that is "why pay someone now to do what I may need someday, but just not yet?" By working with your advisor now, you can reasonably expect that your advisor will continue to follow your preferred strategy in the future, with or without your oversight. Smart move."
- Jack Hannam
Read more »

Widow Tax

ArticleJohn Urban  |  Jul 25, 2026

THE WIDOW TAX is sold to the wrong households. It gets pitched to affluent couples as the reason to convert to a Roth or buy life insurance. The pitch says that when one spouse dies, the survivor files single, lands in a higher bracket, and gets clobbered. I ran the numbers for three couples at three incomes, and at the comfortable end the widow tax often costs nothing, or even less than nothing. The real cost lands lower down, on households nobody is selling anything to. What follows uses 2026 federal figures to show what the widow tax actually does in dollars, not in scary percentage points. The pattern runs opposite to the marketing. The higher your income, the smaller the hit, and the lower you go, the more it bites. Three Things Move When the first spouse dies, three things change, and they get bundled under one frightening label. One Social Security check stops, and a pension may shrink or end. That is lost income, and it is usually the largest of the three. It is not a tax. Spending shifts as well. The survivor pays one Medicare premium instead of two, but the mortgage still comes out of the same account. The third change is the only one the tax code causes: narrower single brackets, a smaller standard deduction and lower thresholds for the Medicare surcharge. The widow tax is that third piece alone, and the three households below measure how big it really is. The Affluent Couple Both spouses are over 65. Their income is about $360,000: $80,000 from Social Security, $210,000 from a pension and required minimum distributions, plus $30,000 in qualified dividends and $40,000 in long-term gains. They sit in the 24% bracket, and both already pay the Medicare surcharge. One spouse dies. The survivor keeps the larger Social Security check and most of the other income, landing at roughly $308,000. As a couple, they paid about $53,900 in federal income tax and a Medicare surcharge of about $9,240. As a single filer, the survivor pays about $55,000 in federal tax and a surcharge of about $6,355. The effective rate rises from 15.7% to 18.7%, which is the headline people remember. But the federal tax barely moves, up only about $1,100, because the survivor has less income to tax. The Medicare surcharge actually falls about $2,900, because two enrollees in the couple's joint tier cost more than one survivor a tier above. Net it all out, and the survivor pays about $1,800 a year less than the couple did. The rate went up, and the dollars went down. At the high end, the widow tax measured in money hands back a small refund. This is why the Roth conversion pitch aimed at comfortable couples misfires. If converting to Roth would cut the survivor's future taxable income without cutting the couple's lifestyle, the converted money was surplus. Surplus is money the survivor never needed to replace. Edward McQuarrie, a finance professor emeritus at Santa Clara University, made a version of this argument in a 2023 paper. He found the dollar hit inconsequential for affluent couples, and located any real cost lower down, where the Social Security torpedo bites. Where It Actually Bites Drop down to a couple with $180,000 of income: $60,000 from Social Security and $120,000 from a pension and required minimum distributions, all ordinary income. Both are over 65. The couple files jointly at $180,000; the survivor files single at about $150,000. As a couple, they paid about $17,148 in federal tax and no Medicare surcharge. The survivor pays about $22,737 in federal tax and a new surcharge of about $2,885. The federal tax rises about $5,600, and a surprising chunk of that comes from the collapse of the new $6,000 senior deduction, which phases out against a lower income threshold for singles. Then the survivor crosses into a Medicare surcharge tier the couple never paid. The total cost of widowhood here is roughly $8,500 a year, set against a $30,000 income loss. This is the one band where both the dollars and the rate move the wrong way. Now take a couple with $90,000 of income: $38,500 from Social Security, about the national average for two retired spouses, plus $51,500 from a pension and distributions. The survivor keeps the larger Social Security check and the full pension, landing at $73,500. As a couple, they paid about $3,433 in federal tax, at an effective rate of 3.8%. The survivor pays about $5,278, at an effective rate of 7.2%. There's no Medicare surcharge at this income, and there never will be. But the survivor's effective rate nearly doubles, because more of the Social Security benefit becomes taxable, up to the 85% ceiling, when the single thresholds replace the joint ones. The added tax is about $1,845, and the lost income is $16,500. Real money for a household least able to absorb it. It doubles the effective rate, and it hurts.  Read the three together and the widow tax points the wrong way from the marketing. At $360,000 it costs less than nothing, roughly a $1,800 annual saving. At $180,000 it costs about $8,500. At $90,000 it costs about $1,850, but the effective rate doubles. The affluent couples being sold protection don't need it. The middle couples who feel the sting are not being sold anything, and they're the ones for whom a few thousand dollars a year actually constrains a life. The tax code has three different mechanisms, and which one finds you depends almost entirely on your income. At the top, the Medicare surcharge does the work, and it falls. In the middle, the surcharge appears from zero. At the bottom, the Social Security torpedo raises the taxability of the benefit from 75% to 85%. The mechanism changes with the income, and so does the household's ability to absorb the hit. Plan Ahead This is where the widow tax conversation usually stops, and where I think it should start. The moves most likely to leave a survivor better off are the ones you make years before, and they help whether or not the widow tax ever bites. Converting traditional IRA money to Roth over several years before retirement smooths your taxable income. It lowers the required minimum distributions that will later push a single filer into higher brackets. It can also keep a survivor under a Medicare surcharge tier the couple never worried about. Drawing accounts in a sensible order, spending down the right buckets first, reduces the future tax base that a single bracket structure will tax more steeply. Managing required distributions as they grow, rather than letting them balloon off a rising balance, limits the single bracket exposure that builds across a long widowhood. A more tax-efficient bequest helps the people who inherit what is left. None of that is widow rescue. It is good multi-year planning that happens to compound in the survivor's favor. The widow tax is one input to that planning, not the reason for it. The reason is that the year your spouse dies is the worst possible year to be making financial decisions, and the more of those decisions you have already made, the fewer you hand to someone who is grieving. You can do a rough version of this at your own kitchen table, and you should, ideally long before you need to. Estimate the survivor's income after the smaller Social Security check and any pension change, then estimate the survivor's spending from your actual budget, not a generic rule of thumb. Subtract. If reliable after-tax income still supports the life the survivor wants, with margin, the tax rate was never the thing to worry about. Then project the survivor's federal tax, the net investment income tax where it applies and the Medicare surcharge as a single filer, and compare it to the couple. Keep the tax separate from the lost income, so you can see what the tax code actually did. Sometimes, as the affluent couple shows, it does you a small favor. Only then does a planning move earn a look, and only if you can answer what it costs today, what it might save later, who benefits and what has to come true for it to work. The widow tax is real, but it isn't the catastrophe it's sold as. At higher incomes it's not a cost at all. Lower down it is a real cost, and the lower you go, the more it's worth measuring, because the households it constrains have the least margin to spare. The planning that matters most is the kind you do years ahead, smoothing income, holding down future distributions, managing the surcharge tiers and putting the estate in order. Do that, and you've done right by your survivor, for reasons that have little to do with fear and a great deal to do with care. You'll have done it in the years when you still had the time, and the clarity, to do it well. ________________________________________________________________________________ John Urban is the founder of RetireSmartIRA, a retirement tax-planning app. Earlier, he founded GT Nexus, a supply-chain software company acquired by Infor in 2015. He lives in Northern California with his wife, Kathy, and enjoys time with family, travel, reading, Bay Area sports, and the occasional deep dive into the fine print of the tax code.
Read more »

Credit Card Debt.

Michael l Berard  |  Nov 23, 2024

"I pay off credit debt monthly, but I don’t limit myself to one card because part of your credit score is based on the percentage of credit utilization. Your utilization rate will be lower (and credit score higher) if you have multiple credit card accounts."
- corrupt
Read more »

Can we be completely safe?

Ben Rodriguez  |  Dec 17, 2025

"My BIL was a victim of ID theft… They took control of his phone, and resetting all his password's was impossible since he no longer had a phone to use as the second factor. It took months to straighten out."
- corrupt
Read more »

Degrees of Doubt: When Higher Education Misses the Mark

Mark Crothers  |  Jul 16, 2025

"The widely cast net is catching students that require remedial classes in math, English and reading. Is it any surprise that today’s students are unable to think critically?"
- corrupt
Read more »

Inflation, prices, COLAs, retirement and the last 16 years

R Quinn  |  Jul 27, 2026

"Not early, but when I claimed I was still working and collecting a pension. Otherwise it would be unlikely we could have saved it all, but that stopped several years ago. My point was if a person can delay until age 70 presumably they don’t need SS until then so collect sooner and invest it until you do need it. Of course the tradeoff is a lower SS benefit for life vs accumulated assets that may or may not provide income to offset the lower SS benefit. The gamble also depends on how long the person lives past age 70. On the other hand, the invested funds are always available to someone. I’m not selling the idea, just something I am happy with the result."
- R Quinn
Read more »

Subconscious Frugality

Mark Crothers  |  Jul 31, 2026

"Don’t you know seniors dine at 4:30 to avoid that … or have a bottle of Tums on the nightstand😀"
- R Quinn
Read more »

Go While You Still Can

DavidHLancaster  |  Jul 22, 2026

"W were in Chicago for four days last week, too. My husband had a conference, and I tagged along and then we stayed two extra days to have some fun. Weather was fantastic. We ate a couple of excellent meals and went to exhibits at the science and industry museum. We also love the Art Institue and went on the architectural river boat tour a couple of years ago."
- DrLefty
Read more »

2025 and Medicare Rx

R Quinn  |  Jan 1, 2025

"The $2,000 out of pocket max is $2,100 this year, so I guess it will continue to be indexed. I am not complaining as the Zanubrutinib I take costs $14,750 monthly which is up $1,000 monthly over last year."
- Howard Schwartz
Read more »

Treasury Inflation Protected Securities (TIPS) are a Generational Bargain Right Now

Howard Schwartz  |  Jul 27, 2026

"Thank you! Yes, the TIPS would be held in my IRA, and the plan would be to hold them until maturity. I haven't found any inflation-adjusted annuities, but it looks like I could buy an SPIA with a 2 or 3 percent annual increase. Helpful but not an impregnable defense against 3.5 percent inflation."
- Emily Croy Barker
Read more »

Taking a Loss?

Mark Crothers  |  Jul 28, 2026

"Randy, I agree you don't buy bonds for price appreciation, though I don't hold them for the dividends either. For me, they’re more of a portfolio ballast to smooth out the ride. Nice lock-in on the 10-year TIPS, by the way."
- Mark Crothers
Read more »

What I Retired To

Andrew Clements  |  Jul 29, 2026

"I am the same way, I too have this thing about seeing net worth decline no matter how illogical it is. These past few weeks have not helped has investments have tumbled and taken me from my happy place. My son in law is a managing direct at a Wall Street firm and warned me about this summer, but it doesn’t make me feel any better."
- R Quinn
Read more »

Today in Financial History

Harold Tynes  |  Jul 28, 2026

"Notice that I said I may hire an advisor someday if or when needed? This assumes that I will recognize that time is approaching and have time to interview and hire someone. Life often does not work that way. And you answered my unasked question, that is "why pay someone now to do what I may need someday, but just not yet?" By working with your advisor now, you can reasonably expect that your advisor will continue to follow your preferred strategy in the future, with or without your oversight. Smart move."
- Jack Hannam
Read more »

Widow Tax

ArticleJohn Urban  |  Jul 25, 2026

THE WIDOW TAX is sold to the wrong households. It gets pitched to affluent couples as the reason to convert to a Roth or buy life insurance. The pitch says that when one spouse dies, the survivor files single, lands in a higher bracket, and gets clobbered. I ran the numbers for three couples at three incomes, and at the comfortable end the widow tax often costs nothing, or even less than nothing. The real cost lands lower down, on households nobody is selling anything to. What follows uses 2026 federal figures to show what the widow tax actually does in dollars, not in scary percentage points. The pattern runs opposite to the marketing. The higher your income, the smaller the hit, and the lower you go, the more it bites. Three Things Move When the first spouse dies, three things change, and they get bundled under one frightening label. One Social Security check stops, and a pension may shrink or end. That is lost income, and it is usually the largest of the three. It is not a tax. Spending shifts as well. The survivor pays one Medicare premium instead of two, but the mortgage still comes out of the same account. The third change is the only one the tax code causes: narrower single brackets, a smaller standard deduction and lower thresholds for the Medicare surcharge. The widow tax is that third piece alone, and the three households below measure how big it really is. The Affluent Couple Both spouses are over 65. Their income is about $360,000: $80,000 from Social Security, $210,000 from a pension and required minimum distributions, plus $30,000 in qualified dividends and $40,000 in long-term gains. They sit in the 24% bracket, and both already pay the Medicare surcharge. One spouse dies. The survivor keeps the larger Social Security check and most of the other income, landing at roughly $308,000. As a couple, they paid about $53,900 in federal income tax and a Medicare surcharge of about $9,240. As a single filer, the survivor pays about $55,000 in federal tax and a surcharge of about $6,355. The effective rate rises from 15.7% to 18.7%, which is the headline people remember. But the federal tax barely moves, up only about $1,100, because the survivor has less income to tax. The Medicare surcharge actually falls about $2,900, because two enrollees in the couple's joint tier cost more than one survivor a tier above. Net it all out, and the survivor pays about $1,800 a year less than the couple did. The rate went up, and the dollars went down. At the high end, the widow tax measured in money hands back a small refund. This is why the Roth conversion pitch aimed at comfortable couples misfires. If converting to Roth would cut the survivor's future taxable income without cutting the couple's lifestyle, the converted money was surplus. Surplus is money the survivor never needed to replace. Edward McQuarrie, a finance professor emeritus at Santa Clara University, made a version of this argument in a 2023 paper. He found the dollar hit inconsequential for affluent couples, and located any real cost lower down, where the Social Security torpedo bites. Where It Actually Bites Drop down to a couple with $180,000 of income: $60,000 from Social Security and $120,000 from a pension and required minimum distributions, all ordinary income. Both are over 65. The couple files jointly at $180,000; the survivor files single at about $150,000. As a couple, they paid about $17,148 in federal tax and no Medicare surcharge. The survivor pays about $22,737 in federal tax and a new surcharge of about $2,885. The federal tax rises about $5,600, and a surprising chunk of that comes from the collapse of the new $6,000 senior deduction, which phases out against a lower income threshold for singles. Then the survivor crosses into a Medicare surcharge tier the couple never paid. The total cost of widowhood here is roughly $8,500 a year, set against a $30,000 income loss. This is the one band where both the dollars and the rate move the wrong way. Now take a couple with $90,000 of income: $38,500 from Social Security, about the national average for two retired spouses, plus $51,500 from a pension and distributions. The survivor keeps the larger Social Security check and the full pension, landing at $73,500. As a couple, they paid about $3,433 in federal tax, at an effective rate of 3.8%. The survivor pays about $5,278, at an effective rate of 7.2%. There's no Medicare surcharge at this income, and there never will be. But the survivor's effective rate nearly doubles, because more of the Social Security benefit becomes taxable, up to the 85% ceiling, when the single thresholds replace the joint ones. The added tax is about $1,845, and the lost income is $16,500. Real money for a household least able to absorb it. It doubles the effective rate, and it hurts.  Read the three together and the widow tax points the wrong way from the marketing. At $360,000 it costs less than nothing, roughly a $1,800 annual saving. At $180,000 it costs about $8,500. At $90,000 it costs about $1,850, but the effective rate doubles. The affluent couples being sold protection don't need it. The middle couples who feel the sting are not being sold anything, and they're the ones for whom a few thousand dollars a year actually constrains a life. The tax code has three different mechanisms, and which one finds you depends almost entirely on your income. At the top, the Medicare surcharge does the work, and it falls. In the middle, the surcharge appears from zero. At the bottom, the Social Security torpedo raises the taxability of the benefit from 75% to 85%. The mechanism changes with the income, and so does the household's ability to absorb the hit. Plan Ahead This is where the widow tax conversation usually stops, and where I think it should start. The moves most likely to leave a survivor better off are the ones you make years before, and they help whether or not the widow tax ever bites. Converting traditional IRA money to Roth over several years before retirement smooths your taxable income. It lowers the required minimum distributions that will later push a single filer into higher brackets. It can also keep a survivor under a Medicare surcharge tier the couple never worried about. Drawing accounts in a sensible order, spending down the right buckets first, reduces the future tax base that a single bracket structure will tax more steeply. Managing required distributions as they grow, rather than letting them balloon off a rising balance, limits the single bracket exposure that builds across a long widowhood. A more tax-efficient bequest helps the people who inherit what is left. None of that is widow rescue. It is good multi-year planning that happens to compound in the survivor's favor. The widow tax is one input to that planning, not the reason for it. The reason is that the year your spouse dies is the worst possible year to be making financial decisions, and the more of those decisions you have already made, the fewer you hand to someone who is grieving. You can do a rough version of this at your own kitchen table, and you should, ideally long before you need to. Estimate the survivor's income after the smaller Social Security check and any pension change, then estimate the survivor's spending from your actual budget, not a generic rule of thumb. Subtract. If reliable after-tax income still supports the life the survivor wants, with margin, the tax rate was never the thing to worry about. Then project the survivor's federal tax, the net investment income tax where it applies and the Medicare surcharge as a single filer, and compare it to the couple. Keep the tax separate from the lost income, so you can see what the tax code actually did. Sometimes, as the affluent couple shows, it does you a small favor. Only then does a planning move earn a look, and only if you can answer what it costs today, what it might save later, who benefits and what has to come true for it to work. The widow tax is real, but it isn't the catastrophe it's sold as. At higher incomes it's not a cost at all. Lower down it is a real cost, and the lower you go, the more it's worth measuring, because the households it constrains have the least margin to spare. The planning that matters most is the kind you do years ahead, smoothing income, holding down future distributions, managing the surcharge tiers and putting the estate in order. Do that, and you've done right by your survivor, for reasons that have little to do with fear and a great deal to do with care. You'll have done it in the years when you still had the time, and the clarity, to do it well. ________________________________________________________________________________ John Urban is the founder of RetireSmartIRA, a retirement tax-planning app. Earlier, he founded GT Nexus, a supply-chain software company acquired by Infor in 2015. He lives in Northern California with his wife, Kathy, and enjoys time with family, travel, reading, Bay Area sports, and the occasional deep dive into the fine print of the tax code.
Read more »

Credit Card Debt.

Michael l Berard  |  Nov 23, 2024

"I pay off credit debt monthly, but I don’t limit myself to one card because part of your credit score is based on the percentage of credit utilization. Your utilization rate will be lower (and credit score higher) if you have multiple credit card accounts."
- corrupt
Read more »

Free Newsletter

Get Educated

Manifesto

Jul 31, 2026

NO. 28: WE SHOULD nurture investment compounding—by buying stocks for the long run, minimizing costs and taxes, and avoiding risky investments where we could lose big.

Truths

Jul 31, 2026

NO. 105: IN INEFFICIENT markets—such as those for microcap stocks and emerging market companies—skilled investors have a better shot at earning market-beating returns. But after investment costs, most investors will still lag behind the market averages and the shortfall will often be large, because the cost of active management is so high.

think

Jul 30, 2026

ASSET ALLOCATION. This is a portfolio’s split among the four asset classes: stocks, bonds, cash like savings accounts and money market funds, and alternatives such as gold and real estate. It’s arguably the most important decision an investor makes. The more a portfolio has in stocks, the higher its expected return, but the greater the volatility.

act

Jul 29, 2026

CALCULATE YOUR monthly nonmortgage debt payments as a percentage of your pretax monthly income. We’re talking here about car payments, student loans and minimum credit card payments. Aim to keep these payments to less than 10% of monthly income, though that can be a tough target to hit if you’re a new college graduate with student loans.

Money Guide

Start Here
Planner
Portfolio
Retire
Invest
Final Book

Manifesto

Jul 31, 2026

NO. 28: WE SHOULD nurture investment compounding—by buying stocks for the long run, minimizing costs and taxes, and avoiding risky investments where we could lose big.

Spotlight: Markets

Staying Rational

Adam M. Grossman   |  Apr 18, 2026

IT’S BEEN MORE than six years since Covid first entered our vocabulary. It goes without saying that investors have experienced a lot, and for better or worse, recent market events provide some useful lessons. The first has to do with the nature of the stock market.
What drives stock prices? Open a finance textbook, and the answer will be clear: The value of a stock should equal the sum of the company’s future profits.

Read more »

How Deals Hurt Returns

Adam M. Grossman   |  Apr 4, 2026

THERE’S BEEN DRAMA recently in a normally quiet corner of the market.
This story got its start back in 2015, when Warren Buffett helped to merge food makers Kraft and Heinz. At first, it looked like a smart idea. Through cost-cutting, the combined company was expected to save more than $1 billion in annual operating expenses.
“This is my kind of transaction,” Buffett said at the time, “uniting two world-class organizations and delivering shareholder value.

Read more »

The Market’s Unpredictability

Adam M. Grossman   |  Jun 13, 2026

EARLIER THIS SPRING, Emil Verner, an economist at MIT, made an observation: The stock market, he said, seemed to be exhibiting “excess tranquility.” Despite an ongoing war, inflation and other negative headlines, investors seemed surprisingly unfazed. The market was on track for its fourth year in a row of positive returns. Through May, it had gained 11%.
But no sooner did Verner make this observation that the market did begin to wobble. Last Friday,

Read more »

Stock Tokens

Adam M. Grossman   |  Apr 11, 2026

RECENTLY, The Wall Street Journal ran a story about a new type of investment known as a digital stock token. For now, they aren’t available in the U.S., but they’re coming soon, so it’s worth taking a closer look.
What are stock tokens? At the most basic level, they’re a technology designed to make stock market investing quicker and easier than it is today. With tokens, trading won’t be limited to traditional business hours.

Read more »

Endowment Lessons

Adam M. Grossman   |  Feb 21, 2026

LAST YEAR, an unusual story made the news: The University of Chicago was reportedly looking to sell an entity known as the Center for Research in Security Prices (CRSP). The story came and went quietly, but it’s worth pausing to understand it.
CRSP’s origins date back to the 1960s. Its initial goal was to build a database of historical stock prices. This is harder than it might seem. Before trading was computerized, stock prices were maintained on paper.

Read more »

Managing Investment Risk

Adam M. Grossman   |  Feb 28, 2026

BEFORE ITS FAILURE in 2008, Lehman Brothers had been one of the most prominent investment firms in the United States. After 158 years in business, what caused it to collapse so suddenly? In a word: complexity.
Lehman had been involved in the securitization of mortgages, a process that resulted in taking something relatively simple—a home mortgage—and turning it into something much more complicated, thus obscuring its true risk level. That was the proximate cause for the firm’s failure.

Read more »

Spotlight: Ehart

Rising Risk

William Ehart   |  Mar 25, 2021

IT’S BUYER BEWARE for bond fund investors. Three big risks have snuck up on today’s fund shareholders, which—taken together—mean higher volatility and lower returns. I discussed these pitfalls with Ben Johnson, director of global exchange-traded fund research at Morningstar, the Chicago investment research firm. “In recent years, the market’s standards have loosened significantly and durations have lengthened,” Johnson told me. “People are generally willing to lend money to less creditworthy borrowers for longer terms…. That likely spells more risk and less return for the foreseeable future.”  Let’s count the ways that today’s market is less favorable for bond fund investors: Higher interest rate risk. Total bond market index funds—the bread-and-butter investment grade option for many investors, as well as a key building block for some balanced, asset allocation and target-date funds—are a lot more vulnerable to rising rates than they used to be. Johnson noted that the duration of Vanguard Total Bond Market Index ETF has jumped to 6.6 years from almost 4.8 years in 2007. Duration is a measure of interest rate risk. That means investors stand to lose nearly 7% for every one percentage point increase in interest rates, versus less than 5% just 14 years ago. That’s 40% greater risk. That said, if interest rates fell, the rewards today would also be greater. More credit risk. Total bond market funds—which typically track the Bloomberg Barclays U.S. Aggregate Bond Index—carry more credit risk in their corporate bond holdings than they used to. In other words, there’s a greater chance that some of the bonds within the index will default. Slimmer rewards. The extra yield that these riskier-than-usual investment grade corporate bonds are paying over Treasury bonds is near record lows. “You’re getting paid incrementally less to take on incrementally more risk, which isn’t all that enticing a proposition,”…
Read more »

Who’s Counting?

William Ehart   |  Oct 26, 2021

INVESTORS SHOULD diligently track two things: their portfolio’s performance and their asset allocation. To monitor overall performance is humbling. If you’re like me, you eventually realize how much your cockamamie market-beating schemes have lagged the market—and it dawns on you that you could do much better by simply mimicking the market with index funds and occasionally rebalancing. What percentage of your portfolio should be in U.S. shares, foreign stocks, cash, bonds and other assets? Only you can answer that. Question is, do you know where your assets are right now? Does that mix fit with your preferences and risk tolerance? How has it affected your performance? I monitor my year-to-date performance and asset allocation in one place: an Excel spreadsheet that’s also a kind of investment journal. In it, I have running notes about moves I’ve made and those I’m considering. While I do use some tools offered by Yahoo Finance and Morningstar, I haven’t found any online portfolio trackers totally to my liking. My spreadsheet is customizable to my precise and ever-evolving preferences, even if I do have to manually enter some data. The accompanying example is just a simplified illustration. My real spreadsheet has a lot more rows and columns. For instance, with the help of Morningstar data, I monitor how much I have invested in China, which I want to strictly limit. I use the Fidelity Freedom Index 2035 Fund (symbol: FIHFX) as my benchmark. Its stock-bond mix is similar to what I’ve chosen for myself at this point in my life, but my portfolio has unique aspects that are important to me, such as the limit on China. My return was a little behind the Fidelity fund last year and I’m a little ahead this year. One reason my returns have improved: About 40% of my…
Read more »

Reflation Nation

William Ehart   |  Mar 1, 2021

RAMPANT SPECULATION in parts of the market has been obvious for months. Less obvious is whether investors collectively will pay a substantial price for it. Can a reflation trade end up piercing a market bubble? Stocks posted solid gains in February—with the S&P 500 touching a record high on Feb. 12—but the final week felt a bit precarious, even if the benchmark ended the month down just 3.5% from that high. (Insert your favorite adjective to describe the correction so far: normal, frequent, healthy, necessary.) But some investors appear concerned that a sharp spike in Treasury yields may be changing the market calculus. The 10-year yield hit its highest level in a year at 1.51% on Feb. 25. That’s just a touch below the S&P 500’s 1.53% dividend yield. The S&P’s earnings yield—the inverse of the price-earnings ratio—is now at its lowest level in three years versus the 10-year Treasury yield. Those two points matter because higher bond yields now offer greater competition for investor dollars. While the iShares Core S&P 500 ETF (symbol: IVV) gained 2.8% in February, energy, leisure and financial shares surged double-digits. The Vanguard Energy ETF (VDE) jumped more than 22%. Indeed, commodity prices are red hot. Copper is up 20% year to date and has nearly doubled since its March 2020 low. Gold, however, has been left out. The SPDR Gold Shares ETF (GLD) fell more than 6% last month. Small- and mid-cap value gained strongly in February, followed by microcaps, despite a sharp pullback for the latter in the final week. The iShares Micro-Cap ETF (IWC), up 65% over 12 months, gained more than 6% in February, even after factoring in a nearly 5% drop in the last week. The Vanguard Small-Cap Growth ETF (VBK) also fell 5%. Large-cap growth lagged value again, with…
Read more »

Seeking Shelter

William Ehart   |  Jun 6, 2024

YOU'VE HEARD OF asset allocation. But how good are you at asset location? On that one, I’d have to give myself a failing grade, but I hope to pass the test someday. I’ve realized I could save myself hundreds of dollars a year in taxes by relocating much of my safe money to tax-advantaged accounts, while being more aggressive with stocks in my taxable account. Those moves would leave me with the same overall stock allocation, so my risk profile wouldn’t be much different. In some ways, I’m a cautious investor, especially when it comes to my emergency fund. I’ve got a hefty allocation to stocks—currently about 70%—but I’ve also got a year and a half of living expenses in individual Treasurys, a certificate of deposit (CD) and money market funds. I figure my fixed expenses are $5,000 a month, so that’s $90,000 in safe money sitting in my taxable account. With current short-term interest rates over 5%, my conservative stance is raking in some good bucks, but it’s too much safety and too much taxable income. One reason it’s so much: I’m trying to save up five years’ worth of portfolio withdrawals in bonds and cash by the time I retire. At that point, with Social Security benefits of more than $2,000 a month, I reckon I’ll need just $3,000 monthly from savings to maintain something like my current lifestyle. The cash cushion I’m accumulating will protect me from a prolonged bear market. Intuitively, you might think emergency funds don’t belong in retirement accounts, which experts say should be invested for long-term growth. After all, who wants to raid an IRA to pay bills before they retire? But the truth is, not all good investment advice is good for all people all the time. I’m over age 59½, so…
Read more »

Mixed Bag

William Ehart   |  Nov 12, 2021

MY LAST BLOG POST—about value-oriented Dodge & Cox Stock Fund—got me looking at the long-term returns for some highly touted large- and mid-cap growth and blend funds from 15 years ago. My surprise: Of the 15 funds in my admittedly unscientific sample, six went on to outpace both the S&P 500 and an index fund focused on the same market segment. The six winners are boldfaced in the accompanying table. Note: For two of the winners, Jensen Quality Growth and Vanguard Primecap, I used the S&P 500 as their style benchmark. The reason: Like the S&P 500, they have a blended investment style, rather than being pure growth funds. I believe it’s important to judge funds not only against a comparable style index, but also against a broad market index, such as the S&P 500 or Wilshire 5000. Why? An investor needn’t necessarily own, say, growth or value funds, or have extra small- or mid-cap exposure. That decision is on the investor. Think of it this way: When you invest in a style-specific actively managed fund, you’re certainly hoping to beat the broad market over the long haul. Otherwise, what’s the point? For my 15 celebrated funds from 2006, the range of outcomes has been quite broad. If you’d bought one of the 15, you had a 40% chance of picking a winner—meaning the fund beat both the S&P 500 and a comparable style index—and a 27% chance of ending up with a disappointingly bad loser. (Guess who bit on one of the losers at around that time? Ahem.) Interestingly, your odds of good results were much better if you stuck with the big, established fund firms. Lesson: The volatile gunslingers who occasionally shoot the lights out, like Ken Heebner who still runs CGM Focus, can be hazardous to your…
Read more »

How to Lose

William Ehart   |  Jan 26, 2021

MY OLD INVESTING self was like the guy in the meme who twists around to ogle a woman in a red dress, while his girlfriend looks ready to break his neck. Just as jumping from one relationship to another introduces new risks, the same holds true for jumping in and out of different investments. For me—and for most people, I’d wager—investing in individual stocks and narrowly focused funds involves a certain amount of trading, and we know such trading is an exercise in futility. Even the vast majority of professional fund managers can’t consistently beat the market averages. If your reaction to that is, “Yeah, but maybe I can, I’ve got a good handle on the way the world works,” you may need professional help with your portfolio. Despite ample evidence that most investors trail the market averages, we all tend to “feel lucky,” like the ill-fated villain staring down Clint Eastwood in Dirty Harry. Why? A key reason: Stock market averages get a big boost each year from a minority of stocks that post big gains, and those huge winners make beating the market look easy. So how about buying those big winners? Unfortunately, yesterday’s winners aren’t necessarily tomorrow’s top dogs. In fact, past performance has no predictive power. It may seem obvious today that we should have bought Facebook, Apple, Netflix, Microsoft, Amazon, Tesla and Google’s parent company Alphabet. But these “obvious” winners only seem that way in hindsight. On top of our unjustified confidence in our own stock-picking abilities, we have a host of other behavioral faults, including impatience, a desire for quick gratification and the feeling that the grass is always greener somewhere else. Result? In our efforts to beat the market, we flit back and forth among different investments, as our latest stock picks lose their…
Read more »
FREE NEWSLETTER
How To
Follow Us