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Jonathan Clements

Money Guide

TODAY MARKS THE LAUNCH of my new book, How to Think About Money. It’s a small book—just 41,000 words—but I like to think it contains some big ideas. My hope: How to Think About Money will change the way folks view their financial life, so they worry less about money, make smarter financial choices and squeeze more happiness out of the dollars that they have.

I’m anxious for the book to garner a large readership and have priced it accordingly. The paperback costs just $13.99, while the Kindle and Nook editions are a mere $9.99. If you buy it and like it, please post a review to or Want to learn more about the book, which includes a foreword by William Bernstein? You can find additional details at
Thinking Differently About Money

FOR MORE THAN THREE DECADES, I have written and thought about money—and I like to believe I’ve been fairly consistent in my financial philosophy. Today, I still live by the same principles I championed starting in 1994, when I became The Wall Street Journal’s personal-finance columnist. I remain almost entirely invested in index funds, my portfolio is heavily tilted toward stocks, I’m a big believer in global diversification and I continue to argue that the key to financial success is great savings habits.

Yet, today, certain ideas loom much larger in my thinking, in part because of upheaval in the financial markets and changes in the economy. I discuss those ideas in How to Think About Money. In particular, here are nine financial notions that strike me as especially important for today’s investor:
1. Demographics Are Destiny

Over the past 50 years, the U.S. economy has grown roughly three percentage points a year faster than inflation, with half that growth coming from an expanding workforce and half from rising productivity. But with the workforce projected to grow at just 0.5% a year, well below the 1.5% historical average, economic growth is likely to be slower—and that’ll also mean more modest corporate earnings growth. Result: Stocks probably won’t match their strong historical performance, though they will likely still outpace the returns from bonds and cash investments.

2. Start With Everything

When thinking about my portfolio, I used to begin with U.S. stocks and then consider which investments I should add to diversify that core holding. Today, my thinking begins with the so-called global market portfolio—the investable universe of stocks, bonds and other investments owned collectively by all investors—and then I decide what I want to subtract. I end up in roughly the same place, though this second approach has made me even more willing to invest abroad.

3. Ponder Your Paycheck

For most folks in the workforce, their most valuable asset is their so-called human capital—their income-earning ability. I have come to believe that we should design our financial lives around that paycheck, or the lack thereof.

For instance, those who are employed may need disability and life insurance, in case they can’t provide for themselves or their family. But they also have the freedom to invest heavily in stocks, because they don’t need income from their portfolio. By contrast, those who are retired don’t need to protect their human capital with disability and life insurance, but they probably ought to hold more bonds now that they no longer have a paycheck.

4. Stay Grounded

In late 2008 and early 2009, many investors inflicted huge financial damage on themselves, by bailing out of stocks at deeply depressed prices. How can we avoid that mistake in future? We need a sense of the stock market’s value that’s distinct from current prices.

To that end, consider this approach: Imagine a line climbing steadily at 6% every year. That’s my forecast for long-run U.S. stock returns, based on current dividend yields and likely growth in corporate earnings per share.

In the short run, however, stock performance will be all over the map. If returns are above the 6%-a-year growth path, we should smile at our good fortune, but realize we’ll likely pay a price later, in the form of lower returns. When performance is below 6% a year, we may not smile as much, but we should take comfort in the notion that—at some point—stock performance will likely play catch-up.

5. Consider the Consequences

We should think less about the odds of some risk becoming reality and more about the consequences. For instance, it’s highly improbable that U.S. stocks will suffer the same fate as Japanese shares, which today languish at less than half their year-end 1989 price. But if the improbable came to pass, it would be devastating for anyone invested exclusively in U.S. shares—which is why we should probably keep 30% or more of our stock portfolios invested abroad.

6. Fix Your Future

Over the past three decades, we’ve seen a collapse in the U.S. savings rate. I think many Americans would like to save more, but simply can’t—because they have boxed themselves in with high fixed living costs. At issue here are items like mortgage or rent, car payments, phone plans, student loan payments, cable bills and more.

My advice: We should aim to keep fixed living costs to 50% or less of our pretax income. That way, we’ll suffer less financial stress, have a greater ability to save and have more money for discretionary “fun” spending. An added bonus: These low fixed costs will give us extra financial breathing room should we lose our job or we’re retired and our portfolio takes a battering from rough financial markets.

7. Don’t Ever Retire

As the developed world’s population ages, the typical retirement age needs to rise, or we won’t have enough folks producing the goods and services that society needs. This should not be a cause for despair. I’d like to see the distinction between work and retirement disappear, not just for the good of the economy—but for the good of our collective happiness.

The fact is, many folks get a lot of satisfaction from work. I have come to believe that retirement should be seen as a chance to take on new challenges—both paid and unpaid—rather than deliberately avoiding them.

8. Dying Isn’t the Problem

Americans are an optimistic people—except, it seems, when it comes to their own life expectancy. For proof, look not only at the pitifully low sales of immediate fixed annuities that pay lifetime income, but also at the many retirees who claim Social Security at age 62, the earliest possible age. Both strategies make sense if you think you’ll die relatively young.

Yet, for retirees, their biggest financial concern shouldn’t be dying early in retirement. Rather, the big risk is living longer than they ever imagined—and running out of money before they run out of breath. If that’s the big risk, we should delay Social Security until age 66 and perhaps age 70, and also consider using part of our bond-market money to buy lifetime income annuities.

9. Aim for Enough

The goal of managing money isn’t to outperform our neighbors, prove how clever we are or become the richest family in town. Rather, the goal is to have enough money to lead the life we want.

If that’s the overriding objective, it becomes far clearer how we should manage our money. We want to avoid unnecessary risks and pursue strategies that have a high likelihood of success. That means buying insurance against major financial risks, diversifying our portfolios as broadly as possible, and eschewing efforts to beat the market and instead buying low-cost index funds that simply replicate the performance of the market averages.
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By the Numbers
  • Since the S&P 500’s March 2000 peak, the index has notched a cumulative return of just 42.1%—a modest 2.2% annual price gain for the past 16-plus years. The market suffered a similar miserable stretch between February 1966 and August 1982, when it gained a cumulative 8.9%. This earlier period was especially grim once inflation was factored in. Another big difference: By mid-1982, stocks were at bargain prices—which isn’t the case today.
  • The S&P 500 stocks are trading at a cyclically adjusted price-earnings (CAPE) ratio of 27, versus a 25-year average of 25.9 and a 50-year average of 19.7. CAPE compares current share prices to average inflation-adjusted earnings for the past 10 years.
  • Over the past five years, roughly eight out of 10 U.S. stock managers—both those running mutual funds and those overseeing institutional accounts—lagged behind their benchmark index, even before subtracting the fees that they charge, according to a July 2016 report from S&P Dow Jones Indices.
  • A 2016 Federal Reserve study found that 46% of Americans either couldn’t cover a $400 financial emergency or, to do so, they would have to borrow or sell something.
  • According to the Employee Benefit Research Institute’s 2016 Retirement Confidence Survey, 43% of workers age 55 and older reported having savings of less than $50,000. This figure excludes the value of their home, Social Security and any defined benefit pension plan.
  • Phoenix Marketing International calculates that 5.4% of U.S. households had $1 million or more in investable assets as of 2015. Maryland, Connecticut, Hawaii and New Jersey had the highest concentration of millionaire households, at more than 7%, while Mississippi was at the bottom of the table, with less than 4%.
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Happiness Research: Five Takeaways

HOW SHOULD WE SPEND our time and money? This is a question we all wrestle with—and which I tackle in my new book. Indeed, it’s an issue that’s become an increasing preoccupation for me as I’ve grown older. Partly, that’s because time is shorter and hence seems more precious. Partly, it’s because money is less of an issue and hence I have more choice.

In all this, my thinking has been heavily influenced by academic studies. Here are five insights that have been highlighted by the research—and what they’ve meant for me: 

1. When surveyed, those with higher incomes are more likely to say they’re happy, and yet research has also found that day-to-day happiness is no greater among those with high incomes. What explains this contradiction? It could be a so-called focusing illusion: When asked about satisfaction with their life, higher-income folks may contemplate their financial good fortune—and that prompts them to say they’re happy.

This has two implications. First, folks with heaps of money are likely no happier than the rest of us, so there’s no need to be envious. Second, happiness seems to hinge partly on what we focus on. I try to keep in mind how lucky I am to spend my days doing work I’m passionate about and to spend my evenings surrounded by those I love.

2. We should use our money to purchase experiences, not possessions. The wisdom of this insight has become clearer to me as I’ve grown older. You won’t find me wasting money on expensive cars. But I’m happy to pay for dinners out and family vacations.

3. Make time for friends and family. This is closely related to insight No. 2. One reason experiences bring so much happiness is that they’re often shared with others. Eating alone in a restaurant can be a dreary experience. Eating out with friends is almost always great fun. Spurred on by the research, I’ve made a point of trying to see friends and family more often. Sometimes, it seems like an effort. But it’s an effort I rarely regret.

4. Shorten your commute. Research suggests that, for many folks, commuting is the unhappiest time of their day. Five years ago, I took this research to heart and moved closer to work, cutting my commute from more than an hour to just 20 minutes. Today, my commute is even shorter—about 40 feet, which is the distance from my bed to the coffee machine to my desk.

5. Engage in work you’re passionate about. As my financial need to work has waned, my desire to work has grown. What’s made the difference? Today, I only take on work that truly interests me. While there are many things I don’t want to do, there are also plenty of projects that I feel are worth my time and energy—and, in the two years since I started working for myself, I’ve found that I’m busier than ever.
My Writing

I ENCOURAGE YOU to forward this newsletter to friends and family, and to share it on Facebook using the button at the bottom of this email. Want to be on the distribution list for future issues? Send an email to The next newsletter will go out in early November. Don’t want to hear from me anymore? Click “unsubscribe” at the bottom of this message.

I continue to blog regularly at You can keep up with my writing by visiting my website, following me on Twitter and liking my Facebook page. I’m a board member at Creative Planning in Leawood, Kansas. Check out the investment commentary I recently wrote for the firm’s clients. And, of course, you can still buy my Jonathan Clements Money Guide 2016, which offers pointers on pretty much every financial topic imaginable.
This newsletter, a product of Jonathan Clements LLC, contains the opinions and ideas of its author. It is distributed with the understanding that the author is not engaged in rendering legal, financial or other professional services. If a reader requires expert assistance or legal advice, a competent professional should be consulted. While the author has endeavored to ensure that this newsletter is timely and accurate, the author makes no representations or warranties with respect to the accuracy or completeness of the contents. The author specifically disclaims any responsibility for any liability, loss or risk, personal or otherwise, which is incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this newsletter.
Copyright © 2016 Jonathan Clements LLC, All rights reserved.

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