When’s the last time you sat down and read a personal finance book? My guess is: not lately. Well, I’ve just read two terrific new ones that I think you should, too. I write about money for a living and learned quite a bit from both. I picked up even more when I interviewed the authors, as you’ll soon see.
The first book is How to Think About Money by Jonathan Clements, a former personal finance columnist for The Wall Street Journal. The second is Heads I Win, Tails I Win: Why Smart Investors Fail and How to Tilt the Odds in Your Favor by Spencer Jakab, a deputy editor at The Wall Street Journal and a former stock analyst.
Not Complicated or Clever
In How To Think About Money, Clements delivers short, sharp and sensible advice on why you should take control of your financial life. “None of this is especially complicated or clever,” he says.
His primary message is that money may not buy you happiness, but it buys you freedom. “We want to seize control of our finances, so we have more control over our lives,” says Clements.
The message of Jakab’s book: as an investor, be cheap and lazy. “That’s really not the greatest advice in other aspects of life,” he says.
The goal, he notes, isn’t to get rich. “The goal is to have enough money to lead the life we want,” Clements writes. That could mean spending time with friends and family. Or having special moments like vacations. Or devoting your days to activities you’re passionate about. “And we want these things without constantly worrying about money,” he adds.
Retirement Advice From Jonathan Clements
I asked Clements for his best work advice for people over 50 scrambling to envision retirement in the not-so-distant future, and he took off.
“We have this notion that we should bust our chops for four decades working at a job we hate and spend our final three decades relaxing, and that is complete nonsense,” Clements says. “I would like to see the distinction between work and retirement completely disappear.”
In other words, in Clements’ worldview (mine, too), retirement needs to be “redefined as a chance to pursue challenges that we find challenging and interesting without worrying so much about whether there is a paycheck involved. If there is a paycheck, that’s even better.”
Says Clements: “As you get into your 60s, you should think about scaling back 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 portfolio that is half a million dollars larger, he contends.
3 Ways to Get the Most From Your Money
Clements’ book is filled with insightful ideas for getting the most out of your money. Let me mention three of them:
1. Hold down your fixed monthly costs. “I have become convinced that having low-cost living expenses is crucial to financial success,” he told me. “There are millions of Americans who would love to save more, but can’t because they are boxed in by high living expenses — car payments, a mortgage or rent, cable TV and streaming services and so on. My advice is to try and keep those fixed living costs below 50 percent of your gross income. That will free you up to save a whole bunch of money every month and have money for vacations and going out for dinner, which are often the happiest times that we have.”
2. Try to hold off claiming Social Security until 66, and perhaps 70, since your benefits will be larger than if you claim earlier. “Social Security is the best income annuity available to American consumers. If you are the family’s main breadwinner, your main priority should be delaying Social Security until 70, partly because you get a healthy stream of life income for yourself, but also, if you are married, your spouse will receive your benefit as a survivor benefit,” says Clements.
3. Invest in a globally diverse 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 might buy three funds: an index fund offering exposure to the entire U.S. 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 owns the broad U.S. bond market.”
Thirty years ago it was controversial to buy index funds, says Clements. “Today, it is accepted wisdom. The evidence keeps mounting up. The best strategy is to capture the market return at the lowest possible cost and the way you do that is through index funds,” he notes.
The Cheap and Lazy Method of Investing
In Heads I Win, Tails I Win, Jakab’s overarching mantra is to set up your investment portfolio and then step out of the way.
His advice is sprinkled with fun anecdotes ranging from his days as a Credit Suisse stock analyst to helping his mother invest better when she retired in her 50s with 94 percent of her portfolio in stocks (mostly tech companies she heard about on CNBC).
The main message of Jakab’s book: As an investor, be cheap and lazy. “That’s really not the greatest advice in other aspects of life, but it is really going to be very much to your advantage,” he says. The culprit of poor returns is “overconfidence and hyperactivity, not knowledge,” says Jakab.
Like Clements, Jakab is a big index-fund fan. “It’s a plain vanilla product that is extremely straightforward, low-cost and doesn’t need a lot of attention from you,” he says.
When you figure in all the costs of an actively-managed mutual fund, Jakab notes, you wind up paying 2.21 points more than the largest stock index fund. That’s a tremendous drag on your investment performance.
Rebalancing and Robo-advisers
Jakab also recommends you automate rebalancing your investment portfolio. Otherwise, in the aftermath of a bear market, he writes, you are likely to be underinvested and not reaping the advantages of buying stocks when they’re at low prices. “Good returns often come on other side of a nasty period,” reminds Jakab.
He is intrigued by the recent rise of robo-adviser services such as Betterment and Wealthfront; Fidelity and Schwab have similar offerings. A robo can often manage your portfolio for a quarter of the cost of a human being, Jakab says. “It can set up your portfolio, rebalance it and be extremely tax efficient. It probably pays more attention to your portfolio than a human does,” he says.
That said, Jakab has a caution: “One thing roboadvisers can’t do is the day the Dow Jones plunges 700 points, they can’t reassure you and tell you to stay the path. That can be a serious shortcoming for some people, which is why a fee-only, vetted financial planner might 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. Looking leads to tinkering or worrying and eventually you act on that, he says. You’ll then owe taxes and brokerage fees and may miss out on opportunities for investment gains.
No Fan of Socially-Conscious Investing
Jakab is not a big fan of socially-conscious investing, though. “You should be moral and charitable, but mixing your morals and investment choices is just a very bad idea,” because you’ll likely give up potential returns, he says. “Guns and booze and cigarettes happen to be pretty recession-proof investments,” Jakab adds.