When was the last time you sat down and read a book on personal finance? My guess is: not lately. Well, I just read two great new ones that I think you should too. I write about money for a living and have learned a lot from both. I understood even more when I interviewed the authors, as you will soon see.
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The first book is how to think about money by Jonathan Clements, former Wall Street Journal personal finance columnist. The second is Heads I Win, Tails I Win: Why Smart Investors Fail and How to Tip the Scales in Your Favor by Spencer Jakab, associate editor of the Wall Street Journal and former stock market analyst.
Not complicated or clever
In how to think about money, Clements provides short, to the point, and sensible advice on why you should take control of your financial life. “None of this is particularly complicated or clever,” he says.
Its main message is that money may not give you happiness, but it does. freedom. “We want to take control of our finances, so we can have more control over our lives,” Clements says.
The goal, he notes, is not to get rich. “The goal is to have enough money to live the life we want,” Clements writes. It could mean spending time with friends and family. Or have special moments like holidays. Or dedicate your days to activities that you are passionate about. “And we want those things without constantly worrying about money,” he adds.
Retirement advice from Jonathan Clements
I asked Clements for his top work tips for people over 50 who are scrambling to consider retirement in the not-too-distant future, and he was off.
“We have this idea that we should kick our ass for four decades working at a job we hate and spend our last three decades relaxing, and that’s complete nonsense,” Clements says. “I would like to see the distinction between work and retirement completely disappear.”
In other words, in Clements’ worldview (my own), retirement should be “redefined as a chance to take on challenges that we find stimulating and interesting without worrying too much about whether there is a paycheck in question. If there is a salary, even better.
Says Clements: “As you approach your 60s, you should think about reducing your budget and having more time for hobbies, but also continuing to work.” If you can get a part-time job paying $20,000 a year, that’s like having a half-million-dollar wallet bigger, he argues.
3 ways to get the most out of your money
Clements’ book is filled with insightful ideas for getting the most out of your money. Allow me to name three:
1. Keep your monthly costs fixed. “I became convinced that having low-cost living expenses is essential to financial success,” he told me. “There are millions of Americans who would love to save more, but can’t because they’re locked into high living expenses — car payments, mortgages or rent, cable TV and streaming services, etc. My advice is to try to keep these fixed living expenses below 50% of your gross income. It will free you up to save a lot of money each month and have money for vacations and going out for dinner, which are often the happiest times we have.
2. Try delaying applying for Social Security until age 66, and maybe 70, because your benefits will be greater than if you applied earlier. “Social Security is the best income annuity available to American consumers. If you’re the primary breadwinner, your top priority should be delaying Social Security until age 70, partly because you have a healthy lifetime income stream for yourself, but also, if you’re married, your spouse will receive your benefit as a survivor benefit. “, explains Clement.
3. Invest in a globally diversified mix of low-cost index funds. “Stop trying to beat the market and embrace humility in the guise of a globally diversified portfolio of low-cost index funds,” he says. “You could buy three funds: an index fund offering exposure to the broad US stock market; an index fund that will give you exposure to both developed foreign stock markets and emerging stock markets and an index fund that holds the broad US bond market.
Thirty years ago, it was controversial to buy index funds, says Clements. “Today it is accepted wisdom. The evidence keeps piling up. The best strategy is to capture market return at the lowest possible cost and the way you do that is through index funds,” he notes.
The cheap and lazy investment method
In Heads I win, tails I winJakab’s overriding mantra is to build your investment portfolio and then get out of the way.
Her advice is peppered with amusing anecdotes ranging from her days as a stock analyst at Credit Suisse to helping her mother invest better when she retired in her 50s with 94% of her portfolio in stocks (mostly corporates). technologies she heard about on CNBC).
The main message of Jakab’s book: As an investor, be cheap and lazy. “It’s really not the best advice in other aspects of life, but it’s definitely going to be very beneficial to you,” he says. The culprit of poor returns is “overconfidence and hyperactivity, not knowledge,” says Jakab.
Like Clements, Jakab is a big fan of index funds. “It’s a simple vanilla product that’s extremely simple, inexpensive, and doesn’t require a lot of attention from you,” he says.
When you factor in all the costs of an actively managed mutual fund, Jakab notes, you end up paying 2.21 points more than the largest stock index fund. This is a huge drag on the performance of your investments.
Rebalancing and Robo-advisors
Jakab also recommends that you automate the rebalancing of your investment portfolio. Otherwise, following a bear market, he writes, you risk being underinvested and not reaping the benefits of buying stocks when they’re low. “Good comebacks often come from the other side of a bad period,” recalls Jakab.
He is intrigued by the recent rise of robo-advisor services such as Betterment and Wealthfront; Fidelity and Schwab have similar offerings. A robot can often manage your portfolio for a quarter of the cost of a human, says Jakab. “It can build your portfolio, rebalance it and be extremely tax efficient. He probably pays more attention to your wallet than a human,” he says.
That said, Jakab has a caveat: “One thing that robo-advisors can not do is the day the Dow Jones plunges 700 points, they can’t reassure you and tell you to stay the course. This can be a serious shortcoming for some people, so an approved, paid financial planner can be a good person to turn to.
And here’s another way Jakab says you should be lazy as an investor: stop checking your holdings so often. Watching leads to tinkering or worrying and eventually you act on it, he says. You will then have to pay taxes and brokerage fees and risk missing out on opportunities for investment gains.
No fan of socially responsible investing
Jakab is not a big fan of socially responsible investing, however. “You should be moral and charitable, but mixing up your morality and your investment choices is just a really bad idea” because you’re likely to give up potential returns, he says. “Guns, alcohol and cigarettes are fairly recession-proof investments,” adds Jakab.
