IN OCTOBER, LUCINDA and I spent a week in Venice. We rented an apartment with no Wi-Fi, so every day for 30 minutes we’d settle into a café with Internet access. While my wife dealt with work issues, I’d catch up on the news, check email, see how the markets were performing and look at the Amazon rankings for my various books.
There was nothing extraordinary about this—except that I was doing it just once a day. By contrast, when I’m home in New York, I’m constantly checking the news, markets, email and my book sales.
But there’s a difference between information and insight. Here at home, I may be getting a lot more information. But it also chews up a heap of time and I doubt it’s making me any wiser. In fact, I suspect the constant flow of financial information is bad for investors, prompting them to fret too much over their investments and make too many trades.
YESTERDAY'S WORK DAY started shortly after 4 a.m. and ended just before 9 p.m. Admittedly, I did take time off for lunch (30 minutes), the gym (40 minutes) and to talk to my mother (50 minutes). But the rest of the time was devoted to updating my Money Guide with all manner of financial data, including yesterday's stock- and bond-market close.
Result? You can now order a print edition from Amazon. In addition, the Kindle edition, which also has data through Dec. 15, can be pre-ordered. That version will be distributed to buyers on Friday. I created the early edition, in part, because some folks had asked whether they could buy the Money Guide in time for the holidays.
On New Year's Eve, I'll be creating a second edition with data through Dec. 31. That version should be available Jan. 1. But beyond small tweaks to the numbers, the Dec. 31 edition will be the same as the Dec. 15 version. And, yes, there will be a version for the Nook--but not until next week.
PAST PERFORMANCE IS NO GUARANTEE of future results—and that’s especially true once an investment goes from backwater to broad acceptance. Take real-estate investment trusts. Over the past 15 years, they have been embraced by investors, leading to great returns as folks loaded up on REITs. But that widespread acceptance was a onetime event—and returns from here will likely be more modest, especially with equity REITs yielding just 3.4%, versus almost 9% at year-end 1999.
Or consider inflation-indexed Treasury bonds. When they were first sold in 1997, the yield above inflation was a handsome 3.45 percentage points. But that yield fell as the bonds gained broad acceptance, and today the 10-year note yields a slim 0.5% above inflation. Emerging-market bonds and commodities tell the same story: The early adopters enjoyed great performance, but results from here will probably be far less stellar.
Hedge funds are an investment vehicle, not a market sector. Still, I suspect a similar phenomenon is at work. There are now so many hedge-fund managers hunting for an investment advantage that returns will almost inevitably be lower—and lower still once you figure in the hefty costs that the funds charge.
That raises an intriguing question: Are there investments that haven’t yet entered the mainstream and where early adopters could reap outsized returns? One obvious possibility: so-called frontier markets like Kenya, Kuwait, Nigeria and Pakistan. But this is dicey stuff. Even if you were going to invest—and I haven’t—you’d probably want to allocate no more than 2% or 3% of your stock portfolio.
MY STANDARD ADVICE has always been to keep roughly two-thirds of a stock portfolio in U.S. shares and a third in foreign stocks. As I see it, we invest now so we can spend later. Come retirement, most of us will spend our savings on U.S. goods and services, so it makes sense to have the bulk of our assets in dollar-denominated investments.
But I’m having second thoughts. U.S. and foreign stocks each account for roughly half of global stock-market capitalization, and I’m toying with whether a stock portfolio should mirror those weightings.
What about matching our assets with our liabilities, which means investing mostly in U.S. investments because we’ll eventually be buying mostly U.S. goods and services? Think about how our portfolios change as we approach retirement. Over the 20 years before we quit the workforce, we might move from 80% stocks to more like 50% or 60%, with the balance going into bonds—typically U.S. bonds.
Factor in those U.S. bonds, and suddenly our assets are closely aligned with our liabilities, even if half of our stock portfolio is in foreign stocks. Let’s say we’re 50% stocks and 50% bonds, with the stocks divided equal between U.S. and foreign shares but the bonds invested entirely in U.S. securities. Overall, our portfolio would be 75% in dollar-denominated investments, which seems about right, given that the bulk of our retirement money will be spent on U.S. goods and services.
CONSUELO MACK, anchor of public television's Consuelo Mack WealthTrack and one of my favorite people, interviewed me last week for her website's weekly podcast. Check out the conversation.
U.S. STOCKS are expensive. What about foreign shares? They’ve been lackluster performers, not only in 2014, but also over longer holding periods. While the S&P 500 clocked an 8% annualized total return over the past 10 years, Morgan Stanley’s Europe, Australasia and Far East index gained just over 5%.
Foreign stocks also appear to be cheaper. Consider the stocks in Vanguard Group’s developed markets index fund and those in its S&P 500 fund. The foreign stocks are trading at 1.6 times book value (or assets minus liabilities), vs. 2.8 times for the S&P 500, and they sport a price-earnings (P/E) ratio of 17.6, compared with 19 for the S&P 500. Moreover, given weak economic growth in Europe and Japan, earnings at foreign corporations are likely somewhat depressed, making P/Es seem richer, while U.S. companies are enjoying historically high profit margins.
That tepid overseas growth goes a long way to explain why foreign stocks are cheaper. Still, history suggests that, if you want decent stock returns, you should focus less on economic growth and more on valuations—which is why I suspect foreign stocks will outpace U.S. shares over the next 10 years.
I STARTED WORK on the Jonathan Clements Money Guide in April 2013 after a particularly bad week at Citigroup, when I realized I wanted to get back to what I truly enjoyed--writing about personal finance, without a lawyer staring over one shoulder and a compliance officer peering over the other. Today, I'm less than five weeks from the finish line.
This fall, I got the cover designed (that was fun), dealt with the copyeditor's questions (unpleasant) and double-checked every fact in the 111,000 words (excruciating). This morning came the parting of the ways. I started the process of creating two versions, one for the e-book and the other for the print edition. After months of hunting for spelling, grammatical and factual errors (and I can say with total confidence I haven't found all of them), it's a nice change of pace to worry about typefaces and point sizes.
Still ahead: I need to update various facts and figures. We now have 2015 tax thresholds from the IRS, quarterly household debt numbers from the New York Fed and the latest on education costs from the College Board. Through December, I'll be pulling data from the monthly economic reports--and, of course, waiting for the close of trading on Dec. 31, so I can grab year-end market numbers.
GOLD HAS NEVER been an investment I've been comfortable with. The problem: It has no intrinsic value. Unlike a bond, it doesn't pay interest and, unlike a stock, it doesn't have earnings or pay a dividend. Instead, gold has value mostly because the supply is limited and because owners have faith that others will also view it as valuable.
And yet, today, I consider myself a fan -- though I favor owning gold-mining stocks, rather than the metal itself. I still have no firm sense for what gold is worth. But gold -- and gold-mining stocks -- have been crushed over the past four years, so they're certainly better value than they were. More important, gold has often, but not always, fared well when the broad stock market is suffering.
You might earmark 2% or 3% of your portfolio for a gold-stock mutual fund or exchange-traded fund, and then regularly rebalance back to that target percentage. If global stock markets sink and gold rallies, you'll be happy for the added diversification. What if gold stocks continue to slide? There's a silver lining: Continued poor performance likely suggests that the broad stock market is performing well--and any loss on your gold stocks will probably be more than offset by gains in the rest of your portfolio.
STOCK INVESTORS often grow more enthused as share prices climb, which doesn't make a whole lot of sense. After all, shoppers don't rush enthusiastically to the department store the day after the sale ends and prices go back up.
One possible solution: Think like a bond investor. If bond yields drop from 6% to 3%, investors immediately grasp that their nominal return will be lower. Similarly, stock investors might feel less cheery about rising share prices if they focus on earnings yields, which is the amount of corporate earnings you buy with every dollar invested. The earnings yield is the reciprocal of the price-earnings ratio: Instead of dividing a company's share price by its earnings per share, you divide the earnings by the price.
The more earnings you get for every dollar invested, the happier you should be. Those earnings might be paid out as dividends, used to buy back stock or reinvested into the business with a view to boosting future earnings growth. For today's buyer, the earnings yield on the S&P 500 is 5%, vs. more than 7% three years ago. That means every dollar invested buys you a claim on 30% less in earnings. A bond investor wouldn't be happy to get 30% less in interest. Shouldn't stock investors feel the same way?
YESTERDAY MORNING, I spoke at career day at the Philadelphia school where my daughter teaches. My two fellow panelists were a city planner and a fundraiser for a local ballet company. What did we tell the 11th grade kids? Interestingly, all three of us focused on the same themes:
- You're unlikely to have a single career. Instead, you'll switch direction as you discover what you're good at, the world changes around you and you grow weary of your current job. Those born in 2000 can expect to live until age 86, versus age 47 for those born in 1900. The implication: You'll have many decades in the workforce and one career likely won't suffice.
- There's a tradeoff between money income and psychic income. You want work that you're passionate about, finding challenging, think is important and feel you're good at. Sometimes, getting that job will mean accepting a lower income.
- Employers are swamped with applicants, so they're looking for quick and easy ways to trim the list of potential employees. Two obvious cutoffs: An applicant didn't graduate college--and his or her application has grammatical or spelling mistakes.
- Identify people in your chosen field and ask for their advice. Most folks are more than happy to help--and that initial meeting may eventually lead to a job.
IN MY MOST RECENT COLUMN, I discussed how expected U.S. stock returns for the next 10 years were modest--and how it would take a 25% decline to get me enthused about the market. That raises an obvious question: What should investors do?
Forecasting returns for the next 10 years is tricky. Forecasting returns for the year ahead is impossible. The implication: We need to base our investment decisions on something other than a short-term market prediction (a.k.a. guess). My advice? Focus on risk.
There's the obvious risk--that you're taking too many chances with your portfolio by, say, betting heavily on a few stocks or a single market sector. But I'd also think about the risk you pose to your portfolio. Will you need to cash in stocks in the next few years to pay for a house down payment or the kids' college tuition? Would you panic and sell if shares tumbled 25%? If the answer to either question is "yes," you should probably do some selling now. In addition, I'd consider whether low returns over the next decade would leave you without enough money for your investment goals. Worried you might come up short? You might want to compensate by boosting your savings rate.
THE KINDLE VERSION of the Jonathan Clements Money Guide 2015 is now available for preorder through Amazon.com. The cover was created by David Glaubke, a talented designer my son met when they were both undergraduates at Washington University in St. Louis.
The Money Guide's Amazon page says the Kindle edition will be available January 11, 2015. I suspect that reflects Amazon's concern that authors won't deliver manuscripts on time. I fully intend to have both the e-book and print-on-demand edition finished on December 31, updated for that day's stock and bond market close, and I hope Amazon will have the book available for sale the next day.
RETURNING TO JOURNALISM has been a heck of a lot of fun. But it's also meant a return to long-forgotten worries. My biggest worry? Making factual mistakes.
I was recently reading another writer's personal-finance article and quickly spotted two errors. At that point, the story lost all credibility. This is very much on my mind, as I wrap up the Jonathan Clements Money Guide. It's a huge piece of work--I estimate the print edition will run about 400 pages--and somehow, in the weeks ahead, I have to double-check everything in the book.
MY MOST POPULAR COLUMNS often focus on the intersection between money and the rest of our lives--topics like money and happiness, teaching kids about money, and how to tweak a portfolio to reflect our human capital, debts, real-estate holdings and other aspects of our finances.
I have been toying with pulling these various threads together into a long essay that I might publish as a 99-cent e-book. In part, I'm inspired by William Bernstein's success with If You Can, his guide for millenials. As Bill and I have discussed, we're both much more interested in reaching readers than making great gobs of money, so a low-priced book with an important message seems like a worthy undertaking. I hope to turn my attention to the book in 2015, after I finish the Money Guide.
MY COLUMN ON FINANCIAL BELIEFS, published August 24, unleashed almost 500 emails from readers. I try to respond to all messages, except those from folks who are foaming uncontrollably at the mouth, so this was a mixed blessing--but, two weeks later, I've finally cleared the backlog.
That brings me to a sad insight from the columnist's life: I can devote weeks to writing a nerdy article, and get almost no response from readers. Meanwhile, I can spend a few brief hours on a simple, punchy column, like the one on financial beliefs, and readers love it.