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.
I WAS RECENTLY INTERVIEWED by a writer from Vanguard Group. The resulting Q&A provides a good recap of my financial thinking and various writing projects, plus you can read about my brief foray into market-timing. I won't do it again. Promise.
IT'S BEEN FIVE MONTHS since I returned to the life of the ink-stained wretch. Not surprisingly, things are a tad different from 2008, when I was last writing a regular column. Perhaps the biggest change is the comments from readers that are posted at the bottom of every column. I don't spend much time perusing these comments, in part because they're often only tangentially related to what I wrote. Instead, many of these folks seem to know each other and banter back and forth, but instead of meeting at Starbucks they meet at the bottom of my column.
The over-the-top public comments stand in sharp contrast to the emails I receive, which are typically less confrontational and more thoughtful. I recognize many of my correspondents' names and email addresses from six years ago, with the same hazy recollection you have when bumping into distant cousins at the family reunion. The tone of the emails has also changed. There are fewer performance-hungry questions about stocks and real estate, and more heartfelt questions about how to make the best of rough financial circumstances.
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