Jonathan Clements was a personal-finance columnist for The Wall Street Journal for nearly 20 years. He is also the author of five earlier personal-finance books (three of which are in my Investment Gems. These are "Gems" from his latest book, "How to Think About Money":
Thank you Jonathan Clements.From the Forward by Boglehead author William Bernstein:
Money can buy happiness, but only if you first save like mad, then spend those savings with care.
We lust after a Beemer and a 6,000 square foot house, only to find that they quickly lose their allure and that maintaining them commands way too much time and money.
A 20-something should get down on his knees and pray for a long, brutal bear market. He should ardently embrace risk in order to acquire shares more cheaply. For the retiree, the situation is reversed. For the retiree, stocks are Chernobyl risky.
Amassing enough for a comfortable retirement is our life's great financial task. To achieve this goal, we might need to save 10% to 15% of our pretax income every years for 30 or 40 years.
What Madison Avenue really produces is discontent.
Don't even think about purchasing a commercial annuity product of any sort until you've spent down your nest egg to make it to 70.
The investment equivalent of the lottery ticket is looking for the next Apple or Starbucks. In contrast, a portfolio of globally diversified stocks and bonds will never make you rich, but it does maximize your chance of a comfortable retirement.
Forget about trying to pick stocks; whenever you buy or sell, the person on the other side of the trade is likely Warren Buffett or Goldman Sachs.
From Jonathan:
There are those who think the goal of investing is to beat the market and amass as much wealth as possible.-- But in truth, very few of us will beat the market and money buys limited happiness.
I did all the usual nonsense: bought actively managed mutual funds, dabbled in individual stocks, though I knew what would happen next in the financial markets, and purchased stuff I was sure would make me endlessly happy. Again and again, I was proven wrong.
Growing wealthy is actually embarrassingly simple: We save as much as we reasonably can, take on debt cautiously, limit our exposure to major financial risks and try not to to be too clever with our investing."
Problem is, while the path to wealth is simple, it isn't easy.
To get ahead financially, we should think less about making our money grow and more about the dangers that could derail our financial future.
Financial firms want investors to believe that they can beat the market, because market-beating efforts are a great moneymaker--for Wall Street Firms.
Spending money on others can deliver greater happiness than spending it on ourselves.
Research suggests commuting is terrible for happiness. A study in Sweden found that a commute of at least 45 minutes increased the risk that a couple would separate by as much as 40 percent.
Research suggest that a robust network of friends and family can be a huge source of happiness.
Most of us will enjoy extraordinarily long lives--and that has profound financial implications.
If you're a single individual in good health, or you're married and you were the family's main breadwinner delaying Social Security benefits until age 70 should be a top financial priority.
Over a lifetime of investing, we will almost certainly fail to pick investments that outperform the market averages. But with brazen self-confidence, we keep on trying.
Our wealthiest neighbors are often the family with the modest house and the second-hand cars. They have heaps of money because they aren't big spenders, and instead live far beneath their means and save diligently.
By socking away money early and often, we can avoid a lifetime of financial anxiety, enjoy decades of investment compounding, buy ourselves the financial freedom to pursue our passions and insure a comfortable retirement.
It's the great Wall Street fantasy: With hard work, street smarts and maybe a little luck, we can pick the right stocks and mutual funds, and thereby beat the market. This fantasy is so powerful that it sustains an entire industry. These folks are desperate to keep the fantasy alive, because their livelihoods depend on it.
The history books tell us who won in the past but they don't tell us who will win in the future.
Suppose you picked stock funds that ranked in their category's top 25% over the past five years. A regular updated study suggest that less than a quarter of these funds will remain in the top 25% over the next five years--even worse than the result you would expect based purely on chance.
Buy a globally diversified portfolio of stock and bond index funds, and then collect the market's return, minus a modest loss to investment costs.
Abandoning efforts to beat the market, and instead sitting humbly and quietly with a diverse collection of index funds, will give us a far better shot at achieving our goals.
I believe the market is sufficiently efficient that it is extraordinarily hard for investors to earn market-beating returns over the long run.
All of us should keep holding of our employer's stock to a bear minimum. If the company gets into financial trouble, we could suffer a double whammy, losing both our job and a big chunk of our nest egg.
We should think long and hard before getting married--and even longer and harder before getting divorced, because it is a great way to lose half our wealth.
Couples will buy lottery tickets and take vacations in Vegas--even as they steer clear of stocks because they are afraid of losing money.
Folks will run screaming with excitement to the shopping mall whenever there's a 50% off sale--but they will run screaming with terror from the stock market whenever there's a 50% off sale.
Retirement should be redefined, so it is viewed not as a chance to relax after four exhausting decades, but rather as an opportunity to take on new challenges.
If there's any financial skill we should endeavor to teach our children, it's the ability to delay gratification.
We should talk to our children about how we scrimped and saved in our 20s, so they will be prepared to scrimp and save when they get into the workforce.
Unless we're banking on reincarnation, we have just one shot at making the journey from birth to retirement, so flirting with financial failure is not advisable.
Actively managed stock funds tend to generate significantly larger annual tax bills than index funds.
Bogle figures that if an investor make a onetime investment in an index fund and then held on for 40 years, the investor would accumulate 175% more wealth, after factoring in taxes, than an investor who owned an actively managed fund.
We shortchange ourselves by carrying a credit-card balance and paying the exorbitant finance charges.
If we stray from an indexing strategy, we don't just rack up greater investment costs, We also increase the risk that our investment results will fall far behind the market.
At year-end 1989 the Nikkei 225 hit its all-time high. More than a quarter century later, Japanese stocks remain stalled at less than half their 1989 level.
We should focus less on the odds of success or failure, and more on the consequences. All it takes is one loss, and our happy financial future will die a quick death.
We should drop insurance policies as our wealth grows and we are able to shoulder more financial risk.
The math of investment losses is daunting: Lose 50%, and it will take a 100% rebound to make us whole.
If we have amassed sufficient savings that we don't need great investment returns, it might make sense to throttle back our stock exposure. The odds are, we will leave less money to our heirs. But there's also less chance that we will die broke.
Got a question about index funds or investing in general? You might post it to Bogleheads.org, a great forum for those seeking sensible investment advice.
Best wishes.
Taylor
