LIKE MOST PEOPLE, I’ve made my fair share of financial blunders. I’ve also had some successes. But I definitely spend more time beating myself up over my errors than celebrating my successes. Undoubtedly, my biggest mistake fits into the relatively obscure category of asset location. If you aren’t familiar with the term, I can explain it by way of an example. Suppose you have two investment accounts: a retirement account and a standard, taxable account. In these accounts, you want to buy some stocks and some bonds, and you also want to hold some cash for a rainy day. The question: How much of which assets should you buy in each of your accounts? The answer hinges largely on taxes, but also reflects other factors. This is the heart of asset location. My asset location error was straightforward: About five years ago, I had some money to invest and was thinking through various alternatives. At the time, my children were all under 10 years old, so I thought it would make sense to establish 529 college savings accounts for them. When I asked an estate planning lawyer, however, he steered me in a different direction. Don’t focus on college costs, he said. Instead, if you want to help your family, establish a trust that’ll protect your money from estate taxes. And that’s what I did. There were at least four things wrong with this decision: I gave up one of the greatest tax gifts the government offers. With 529 accounts, all gains are completely tax-free if used for qualified education costs. Suppose I had put $100 into an S&P 500 fund at the time. With the market’s gains, it would be worth about $160 today. If it were in a 529, I could withdraw those funds entirely tax-free. Without the benefit of the 529, though, those $60 of gains would be subject to taxes, leaving me with perhaps $145. I prioritized a lower-probability occurrence over a higher one. Sure, estate taxes are real, but there are many unknowns. Among them: What will the tax rate be in the year that I die and, by that time, will I even have enough money left for the government to tax? By contrast, my children’s likelihood of going to college is (hopefully) very high, and it’s right around the corner. That should have been my priority. I took one person’s advice without considering the context. To a hammer, everything looks like a nail. And to an estate planning lawyer, everything looks like an opportunity to save on estate taxes. He wasn’t wrong, but it was my job to consider the alternatives. Trusts can be expensive. As their name suggests, trusts require trustees, and oftentimes they want to be paid. Meanwhile, 529 accounts are relatively cheap. Asset location isn’t the most exciting topic in the personal finance world. But a little bit of attention to this seemingly dull topic could yield big benefits. Adam M. Grossman’s previous articles were Contain Yourself and Take It Slow. Adam is the founder of Mayport Wealth Management, a fixed-fee financial planning and investment firm in Boston.  He's an advocate for evidence-based investing and is on a mission to lower the cost of investment advice for consumers. [xyz-ihs snippet="Donate"]

RON LIEBER, in his book The Opposite of Spoiled, describes a 2012 conversation between Chris Rock and Jon Stewart. In an interview on Stewart’s show, they got around to discussing the challenges both faced in raising children who could remain grounded amid wealthy surroundings. Rock described how his own modest upbringing differed from the comfortable life his children enjoy. “My kids are rich,” he said. “I have nothing in common with them.” Stewart agreed. “I had jobs since I was 14 years old.” That, he said, cemented his work ethic. But his own kids, for better or worse, didn’t have to work. They faced no hardship. As a result, he worried whether they’d ever develop a strong work ethic. “Maybe there should be like an Outward Bound that we should send them on,” he mused. Rock concurred. There should be a camp, he said, where kids “get their lunch money taken and get beat up....” On the one hand, this was good natured banter between two successful people. But their concerns were also real. As Lieber notes, you don’t have to be a Hollywood star to share these concerns. In the absence of an Outward Bound—or “Camp Kick Ass,” as Rock put it—what can strengthen children’s financial skills? Below are five strategies that have worked well for many families: 1. Big picture. When it comes to financial details, many parents—myself included—are wary of sharing too much with their children. I wouldn’t show my kids my tax return, and I wouldn’t expect most parents to. But that doesn’t mean you can’t share some details—the mortgage or the car payment, for example. This can be educational, I think, because it gives kids some sense of what life costs. It’s also an opportunity to educate kids on basic personal-finance concepts. I’ve walked my older children through my mortgage statement, explaining key elements. If you have a 401(k) or 403(b), that’s something else you might share. Show them a statement so they can see how these plans automate the saving and investing process. 2. Credit cards. Banks are notorious for inundating college students with credit card offers. More than one parent I’ve spoken with has described seeing their children get in over their heads. The solution? It’s unrealistic to prevent children from ever signing up for a credit card. Instead, and maybe counterintuitively, I suggest getting them started before college. That’ll give you the chance to keep a close eye on things while they're still at home. It will also give you—rather than the credit card company—the opportunity to teach them how to handle that piece of plastic in their wallet or purse. A possible first step: Some financial companies offer debit cards, and associated apps, specially designed for kids, including Chase, FamZoo, Greenlight and GoHenry. 3. Allowance. In most families, allowance is pretty straightforward—a few dollars every weekend, for example. This is fine, and it does help build budgeting skills. But there are steps you can take to make allowance even more educational. In The Opposite of Spoiled, Lieber suggests this setup for young kids: Give them three jars, labeled “spend,” “save” and “give.” It’s up to each family to decide how allowance is allocated among these three categories. But however you choose to split things up, the exercise itself provides kids an invaluable lesson in managing money. [xyz-ihs snippet="Holiday-Donate"] Also, Lieber says, the jars should be clear plastic. That’s to help kids see their progress. Some parents take additional steps to maximize the educational value of allowance. One idea: Let kids decide how much to allocate to each jar, but encourage saving by paying interest each week on the balance in the savings jar. It’s also important to give kids periodic raises, to further prepare them for the day when they’ll need to manage a real paycheck. 4. Taxes. When your kids begin to receive real paychecks, they’ll need to file their own tax returns. That’s an excellent opportunity to give kids an introduction to income taxes. You may not feel comfortable sharing your tax return, but you can definitely walk your kids through their return. A child’s return is usually simple enough that you needn’t be a tax expert to understand it and explain it to your child. I’ve done this. I’ll confess that my oldest son didn't find it the most fascinating conversation. But I still think it was worthwhile, and I’ll keep doing it. 5. Major purchases. Another way to help kids learn to budget is to take a partnership approach to big purchases. For younger kids, it might be a special toy. For older kids, it might be a cellphone or a first car. Even if you can afford to—and are willing to—buy these items outright, you might consider splitting the cost. It needn’t be 50-50. Even if a child has to contribute just 10%, it’ll give him or her an incentive to save and become more familiar with the idea of making trading offs. You could also apply this idea to an investment account—ideally a Roth IRA—for your children, matching the dollars that they contribute. Over the years, I've asked parents with adult children what factors contributed to their children's success. In most cases, the answer has been the same: "I really don't know." It's possible that these parents were just being modest, not wanting to give themselves too much credit. But I think there's another interpretation: In the end, there really is no single magic formula. As Chris Rock and Jon Stewart lamented, it would be difficult to artificially impose hardship to build resilience. Instead, what many parents have told me is that they simply employ strategies like those above whenever there’s the opportunity for a teachable moment. Adam M. Grossman is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam's Daily Ideas email, follow him on Twitter @AdamMGrossman and check out his earlier articles. [xyz-ihs snippet="Donate"]

I’LL ACKNOWLEDGE THAT today’s topic isn’t the most upbeat. I want to talk about risk—and, specifically, some of the underappreciated risks related to retirement. In thinking about risk, the hardest part—in my view—is that it defies a single definition. Because of that, there’s no uniform yardstick for measuring it and thus no single strategy for managing it. As Howard Marks states in his book The Most Important Thing, “Much of risk is subjective, hidden and unquantifiable.” Still, a lot of discussions about risk fall back on quantitative measures, such as portfolio volatility or sequence-of-return risk. While I agree that both of those are important aspects of risk, they aren’t the only ones, especially for retirees. As Marks notes, even Benjamin Graham, the father of investment analysis, whose major book is full of formulas, acknowledged that, “The relation between different kinds of investments and the risk of loss is entirely too indefinite... to permit of sound mathematical formulation.” Drawing up your retirement plan? Here are some risk-related topics to consider: Stock market malaise. What’s the biggest risk for stock market investors? Ask most people—myself included—and we’d point to the potential for a 30% or 50% drop, like we saw in 2000, 2008 and 2020. But there’s another risk to consider, which is that the market could go “sideways” for a period of years—in other words, that there wouldn’t necessarily be a sharp drop but that growth might simply be anemic for a long stretch. We saw something like that in the 1970s. What does this mean for retirement planning? If you’re earlier in your career, I wouldn’t worry about this particular risk. Over the long term, I’m confident that share prices will grow in line with corporate profits. In fact, if you have a decade or more until retirement, a period of malaise might be a good thing, allowing you to buy into the market at cheaper prices. But if you’re closer to retirement, it’s an important scenario to consider. To assess this risk, I suggest building a long-term cash flow model that assumes investment returns of just 1% or 2% a year over the next 10 or 20 years. See what the impact would be if your expenses continued to increase with inflation while your portfolio grew at a slower rate. Of course, you can’t control the market’s performance, but at least you’ll have a sense of whether this is a risk that would impact you. You could then develop a plan B. Note that when I suggest having a plan B, this doesn’t need to be an airtight plan. I’ve found that retirees sleep better if they have at least a rough idea of how they’d adapt to a negative scenario. Until not too long ago, the Pentagon apparently maintained a contingency plan to defend against an invasion by Canada. That’s obviously unlikely, but it never hurts to have a plan. Health. When it comes to health, there are two distinct types of risk to consider. The first is a sudden event, such as an accident or stroke. The second is a cognitive decline that occurs over time. The financial impact of the first is what you would imagine: increased expenses for care, either at home or in a facility. For working-age people, this could also result in the loss of income, potentially permanently. While an unpleasant prospect, the solution is straightforward: to secure sufficient disability insurance. I view the second type of health risk—cognitive decline—as more of a challenge. For starters, cognitive decline doesn’t manifest itself obviously at first. The result might be past-due bills or other mistakes. While a late phone bill is no problem, other errors can be more serious. The IRS, for example, might not be as forgiving as the phone company. If a whole-life insurance policy lapses, not only would the insurance be lost, but also it might generate an ugly tax bill. An error like that could be irreversible. Cognitive decline can also lead to overspending and inappropriate gifts. In the extreme, it can lead to questionable estate plan changes. Marlon Brando, for example, changed his will 13 days before his death, sparking years of wrangling. [xyz-ihs snippet="Mobile-Subscribe"] Cognitive decline also exposes people to outright fraud. Over the years, I’ve witnessed several fraud attempts targeted at older folks. I recall a neighbor who was convinced that someone in Nigeria was going to pay her top dollar for her old TV. We found out about it when she knocked on our door, looking for packing tape. My wife tried to dissuade her, but she was absolutely convinced. Fortunately, FedEx refused to ship the package, but it was a close call. Others aren’t so lucky. While, sadly, there’s no cure for cognitive decline, what I recommend is that older folks begin to involve their children in their finances. There may be resistance because money is seen as a private matter. But whether you’re the parent or the child, I would try hard to push through that resistance. If you don’t have children, try to involve a trusted friend. Even a light helping hand on the tiller can help. Latent risks. Investment worries tend to change from year to year. But by the time a worry becomes significant enough to notice, it’s often too late to do anything about it. Inflation is today’s example. As I mentioned a little while back, Treasury Inflation-Protected Securities (TIPS) were a good deal a year ago. But after the inflation we’ve experienced over the past year, these bonds are now much less of a good deal. That said, I view the current bout of inflation as a good reminder that risks that may appear to be latent can often resurface. What other latent risks should you potentially consider? An example might be pension risk. If you have a traditional pension from a private company, you might view it as “guaranteed” income. But it’s worth periodically checking the health of your old company. Be aware of whether your pension benefits fall within the benefits cap set by the Pension Benefit Guaranty Corp. Again, you don’t need an airtight plan, but ask yourself how you might adjust if your benefits were reduced. Condo associations represent another type of latent risk. Anyone who’s ever owned a condo knows about the dreaded special assessment. These can be particularly unpleasant for folks who have downsized specifically for the purpose of better managing their housing costs. While some assessments are impossible to predict, condo owners often report that they saw certain big ones coming—roof and window projects, for example. The solution? While you can’t move to avoid every assessment, it helps to keep your ear to the ground in your community—and that might prompt you to sell sooner if you were already planning to move. Adam M. Grossman is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam's Daily Ideas email, follow him on Twitter @AdamMGrossman and check out his earlier articles. [xyz-ihs snippet="Donate"]

I RECENTLY LEARNED a new expression, TL;DR, which stands for “too long; didn’t read.” Twitter users and bloggers use it when they want to summarize an idea for readers who are short on time. It's the modern equivalent of saying, “Here's the executive summary.” Coincidentally, this week, two people separately asked me what I see as the most important principles in personal finance. In other words, they wanted the TL;DR version, without too much commentary. In that spirit, here are 10 principles that, in my opinion, can help you achieve a happier, more successful and less stressful financial life: Remember what Stephen Covey, the productivity guru, used to say: Start with the end in mind. Financial plans don't need to be long or overly complicated, but you do want to have a specific idea of where you're headed financially. For example, “I want to retire at 67, purchase a condo in Arizona and be able to spend $75,000 a year.” It's much easier to know whether you are on track when you have a specific goal in mind. Know your “big four”—assets, liabilities, income and expenses—and get them on one sheet of paper. This will make it much easier for you to measure progress toward your goals. Insure yourself, but only against losses you couldn't absorb on your own. In many cases, it's possible to significantly cut insurance premiums by increasing deductibles. For example, if you have a seven-figure net worth, there is no reason to have a low deductible on your homeowner's insurance. Instead, ask your insurance company how much you could save by raising your deductible to $5,000 or even $10,000. Similarly, you should re-evaluate your life insurance as your net worth grows. You will likely become “self-insured” at some point, and then you can simply drop that coverage. Avoid rules of thumb when investing. In the investment world, there are all sorts of rules. For example, some say that the percentage of your portfolio that should be allocated to stocks should be equal to 100 minus your age. To me, that's silly. Everyone's financial situation is different, and your investments should reflect that. Recognize that personal finance is only partly objective; a much larger part is subjective. For example, clients often ask me how much cash they should keep on hand. While we can work out the optimal number mathematically, the real answer is that the “right” amount is the amount that helps you sleep at night. Be especially wary of the psychological bias known as recency, which causes us to place disproportionate weight on our most recent experiences. This is a particular concern today, when the stock market has been going up, in more or less a straight line, for so many years that it seems hard to imagine it doing anything else. When investing, follow an evidence-based approach that relies on the best academic research, including insights into the difficulty of beating the market and the risks associated with higher expected portfolio returns. Avoid financial fortunetellers, who believe that they can forecast the future of the economy, the market or particular investments. Also, avoid making financial decisions based on gut feel, anecdotes, stories, tips, fear, fables and, perhaps most important, things your brother-in-law tells you. Keep your financial life simple. Avoid letting anyone sell you an investment that you don't fundamentally understand. Not only does this help to keep your costs down, but it also makes it much easier to monitor your financial picture. Avoid high fees. The research firm Morningstar once wrote, “If there's anything in the whole world of mutual funds that you can take to the bank, it's that expense ratios help you make better decisions. In every single time period and data point tested, low-cost funds beat high-cost funds.” Understand that estate plans aren't just for the ultra-wealthy. You definitely want to have some plan on paper, especially if you have children. Be sure to include a health care proxy, so someone can make medical decisions on your behalf if you become incapacitated. Adam M. Grossman’s previous articles include Right but Wrong, Growing Up (V) and By the Book. Adam is the founder of Mayport Wealth Management, a fixed-fee financial planning firm in Boston. He’s an advocate of evidence-based investing and is on a mission to lower the cost of investment advice for consumers. Follow Adam on Twitter @AdamMGrossman. [xyz-ihs snippet="Donate"]

RETIRED HEDGE FUND manager Jim Cramer is the host of Mad Money, a staple of financial television. For years, critics have derided his investment recommendations—to the point where there’s now a fund designed specifically to bet against him: the Inverse Cramer Tracker exchange-traded fund (symbol: SJIM). For investors who see Cramer as the P.T. Barnum of finance, this fund offers the ability to make bets that are precisely the opposite of what Cramer recommends. “We watch Mad Money so you don't have to,” reads the fund's website. “Find out what Jim likes so you can sell it, and what he doesn't like so you can buy it.” While colorful, the Cramer fund is just one of more than 500 new exchange-traded funds (ETFs) introduced last year. Investors in the U.S. now have more than 3,500 ETFs to choose from. Among them: COW to invest in agriculture and KARS to bet on electric vehicles. The latest development: The SEC recently approved 11 new bitcoin-tracking ETFs. With thousands of options, you may be wondering how to make sense of the investment universe. Which funds are worth considering? To help answer this, I would start with this basic principle: Every investment can be evaluated through three simple lenses. In order of importance, they are: Risk level Growth potential  Tax efficiency Since risk is first on this list, that—I think—is the easiest way to decide if an investment is worth your time. How can you assess risk? While every investment is different, most can be plotted somewhere on the spectrum outlined below—going in order from most risky to least: Alternatives. In the world of investments, stocks, bonds, cash and real estate represent the basic building blocks. But there are many alternatives, including gold, commodities, managed futures and cryptocurrencies, all of which are available in the form of exchange-traded funds. Some ETFs are even set up to mimic hedge funds and other strategies typically found only in private funds. These alternatives carry above-average risk, in my view. Why? In most cases, the underlying investment is one that lacks intrinsic value, meaning the investment doesn’t produce income in the way that stocks produce dividends or bonds produce interest. That poses a risk because it means there’s no logical basis for valuing these assets, and thus there’s no floor to support their prices. That, for instance, is why the price of bitcoin is so volatile. Unlike a stock or a bond, there’s no fundamental basis for determining the “right” price for bitcoin. That makes cryptocurrencies and other alternatives among the riskiest investments out there. Leveraged single stocks. Stocks generally do have intrinsic value, and that makes them inherently less risky than alternative asset classes. But any individual stock still carries risk simply because adverse events can affect any one company. Unfortunately, Wall Street has found a way to amplify this risk. Suppose you like Tesla. You could buy the stock, but if you wanted to dial up the risk in your portfolio, you could buy a fund like GraniteShares 2x Long TSLA Daily ETF (TSLR). This fund uses leverage to promise investors 200% of the daily performance of Tesla’s shares. If Tesla’s stock gains 5%, this fund should rise 10%. If, on the other hand, you have a negative view of Tesla, GraniteShares offers a fund (TSDD) that promises 200% of the inverse performance of Tesla’s stock. Some funds take this a step further, using leverage to bet on alternative investments. That’s what the 2x Bitcoin Strategy ETF (BITX) does. This is very far out on the risk spectrum. Leveraged index exposure. Using leverage to bet on a single stock is very risky. Lower down the risk ladder are funds that use leverage to bet on the entire market. A fund like Direxion Daily S&P 500 Bull 3X Shares (SPXL) is designed to give investors 300% of the daily return of the S&P 500-index. Last year, when the S&P 500 rose 26%, this fund soared 69%. The fund’s cousin, the Direxion Daily S&P 500 Bear 3X Shares (SPXS), is designed to do the opposite: It provides 300% of the inverse of the S&P 500’s daily return. Last year, it declined by 46%. Narrow indexes. Investment commentators—myself included—spend a lot of time talking about the differences between actively managed funds and index funds. The reality, though, is that there are thousands of index funds, and some are much riskier than others. If you’re evaluating an index fund, make sure it isn’t limited to a narrow corner of the market. Very common, for example, are funds that hold stocks in just one sector—technology, for example. That can be risky because stocks in a given industry tend to rise and fall together. Instead, look for a broadly diversified fund, such as one that includes the entire S&P 500-index of large-cap stocks, or one that covers the entire U.S. market. Actively managed funds. Why do actively managed funds have so many detractors? The problem is that they rely on human judgment, and no one can see the future. That’s why—counterintuitive as it may seem—index funds, which have no real manager, have beaten the performance of funds run by well-informed, hard-working and highly compensated managers. To be sure, some actively managed funds do outperform each year, so it’s important to look at industry-wide data. Actively managed funds, on average, tend to underperform index funds while generating larger annual tax bills. Broad-market index funds. How can you avoid all the risks outlined above? The ideal investment, in my opinion, is a simple, broadly diversified stock or bond index fund, such as one that tracks the S&P 500. While no investment is without risk, my view is that funds like this carry the least risk. That’s because stocks and bonds have intrinsic value, there’s no leverage amplifying the risk, the fees are low, they’re tax-efficient and there’s no risk of misjudgment by an active manager. Postscript: It turns out Jim Cramer may have had the last laugh. Last week, the manager of the Inverse Cramer ETF, which was launched just last year, announced that it’s shuttering the fund. Adam M. Grossman is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam's Daily Ideas email, follow him on X (Twitter) @AdamMGrossman and check out his earlier articles. [xyz-ihs snippet="Donate"]

WHEN IT COMES to your financial life, should you care what other people think? I’ve always found this a tricky question. On the one hand, it’s easy to fall into the trap of keeping up with the Joneses. If you care too much about what other people think, life can become very expensive—and that can be detrimental to your financial health. On the other hand, it’s also natural to want to be accepted by one’s peers. No one wants to operate too far outside societal norms. Yes, you can march to the beat of your own drum, but if you’re too far out of step with your peers, that can make life hard in other ways. In short, you don’t want to care too much about others’ opinions, but you also don’t want to care too little. This can be a difficult balance to strike.  In their book The Millionaire Next Door, authors Thomas Stanley and William Danko offered one solution: Simply choose a different peer group. To avoid judgment from wealthy neighbors, they argued, move to another neighborhood. While I suppose that might work, this always struck me as impractical. If my neighbor drives a Mercedes, do I have to pull my children out of school and leave town just to avoid the temptation to buy—or lease—one myself? That, I think, rings hollow as a solution. But there’s another way to strike a healthy balance—which is to associate with the Joneses, without feeling like you need to keep up with them financially. About two decades ago, psychologist Thomas Gilovich and colleagues discovered something they dubbed the “spotlight effect.” What they found is that the rest of the world is paying much less attention to you than you think they are. How did they prove this? In a series of experiments, the researchers outfitted college students in a variety of T-shirts and then sent them out into social situations on campus. Some students were given shirts carrying pictures of popular icons, including Jerry Seinfeld, Bob Marley and Martin Luther King, while others were given shirts carrying an image of singer Barry Manilow, designed to be intentionally embarrassing. Before they entered the social situations, the students wearing the Barry Manilow shirts were asked to estimate how many of their peers would notice their shirts. Then, some time later, the researchers polled the other students to find out how many had actually noticed the embarrassing shirts. Result: There was a wide gap between students’ expectations of how they would be perceived and how they were actually perceived. Those wearing the Barry Manilow shirts expected 50% of their peers would notice the shirts. As it turned out, barely 20% did. The lesson: Even when you're going out of your way to stand out, most people just don’t notice. How does this apply to you and your finances? In my view, the spotlight effect conveys two valuable messages. First, it tells us that there’s no point in trying to keep up with the Joneses. If I come home with a new Mercedes, my neighbors probably won’t notice and, if they do, they probably won’t care. This, I think, is liberating. If you’re stretching yourself financially to gain social acceptance, there’s no point since most people won’t notice anyway. The second lesson: If you’re feeling self-conscious about your financial standing, you shouldn’t. If you drive a minivan instead of a Mercedes, some people might notice and some people might make a remark, but far fewer than you’d expect. Even then, it's probably just idle chatter. They don’t really care. The bottom line: Don’t worry about what you think other people are thinking—since that's probably not what they're thinking anyway. Adam M. Grossman’s previous articles include Double Checking, Oddly Effective and Fact vs. Fantasy. Adam is the founder of Mayport Wealth Management, a fixed-fee financial planning firm in Boston. He’s an advocate of evidence-based investing and is on a mission to lower the cost of investment advice for consumers. Follow Adam on Twitter @AdamMGrossman. [xyz-ihs snippet="Donate"]