Keep Thy Emotions In Check – Advice From Jonathan Clements

Do market drops make you want to “do something?” Something like sell EVERYTHING and move your money to a CD or sell the one stock or mutual that is down and put that money in something that’s performing better? Sure, we all talk about keeping our emotions in check when it comes to investing but I wonder how many people actually follow that advice.

Today’s Getting Going column by Jonathan Clements is about how to stop your emotions from wrecking your returns (free). The article closes by offering a few strategies for keeping your emotions under control when things aren’t going so well in the market:

  • If the market pluncges and you have an overwhelming urget to act, do something sensible. – Clements recommends sending a $100 check to your favorite mutual fund or rebalance your portfolio back to your target mix. I think this is solid advice. The main thing is to NOT make a rash decision!
  • If you are tempted to make big portfolio changes, get a second opinion. – Or, start a blog and write about your feelings. Or even better, send me an email, which I’ll post and AFM readers will offer you some support.
  • Automate your investing, so you keep buying stocks during rough markets. – I can’t tell you enough how important this point is. If you don’t put your investment plan on automatic, you’ll find yourself putting off mailing that check to your investment account until things settle down.
  • Try the “restart” strategy suggested by Prof. Loewenstein (mentioned earlier in Jonathan’s article) – From the article:

    Take your existing savings and set them aside in a diversified portfolio, such as a target-date retirement fund. Thereafter, focus your energies on building a new portfolio.

    Your monthly savings will have a huge impact on this new account’s growth, so you will have a strong incentive to save. Your savings will likely also overwhelm any hit from a market decline. What if you make some foolish trades? Because you’re dealing with only a small portion of your wealth, you won’t do too much damage.

    I’m not so sure I like the last strategy. It seems like you’re giving in to your emotions. It’s also more work!

    That said, it is very important to keep your emotions under control. Your future depends on it.

Index Mutual Funds or Exchange-Traded Funds? How About Both!

Yesterday’s Getting Going column, Spicy or Mild? When ETFs Are Better Than Index Funds (free), in the Wall Street Journal took a look at investing in index mutual funds vs. exchange-traded funds. Jonathan recommends using both:

Use index mutual funds for accounts you’re regularly adding to or drawing on, while stashing longer-term money in exchange-traded index funds. That combo should trim your investment costs — and further boost your fund returns.

This idea has merit because exchange-traded funds typically have lower management expenses than mutual funds. The only problem is that exchange-traded funds trade like stocks, which means there are transaction expenses. Of course there are ways to reduce transaction charges by using a low-cost broker like Scottrade. Scottrade charges $7 per trade but will only trade full shares. Another route you could go is to open a basic account with FOLIOfn, which run $199 per year but gives you 200 trades per month on a select list of companies. On a small account $199 per year is pretty steep but gets more reasonable as the size of the account increases.

Account size also weighs in with mutual funds as most mutual fund companies have account minimums. One way around this is to set up an account and do monthly direct deposits into the account. Then as the account grows more options will open up to you.

One thing I have always liked about ETFs is their simplicity and the ability to set up portfolios the way I want them set up. For instance, I like the ability to break down the Dow Jones Total Market Index into ten sectors and invest an equal amount in each sector. I can do this with iShares ETFs but not with mutual funds.

Anyway, it is something to think about. I like to look at index mutual funds and exchange-traded funds as tools. One tool may work perfect for one job but be totally useless for another job. It’s better to have a tool box full of tools.

Protecting Your Ass(ets) Should You End Up In Court

Cute title, eh?

Today’s Getting Going column, Protecting Your Assets in Case You Find Yourself in Court (Free), reminded me of my own story…

Several years ago I was involved in a fairly minor fender-bender. The lady that I ran into (the accident was my fault) got out of the car and was standing on the side of the road. She appeared to fine, just a little put out by the whole deal. She was a runner for a local dental office and the car belonged to her employer. Anyway, she told me that she had been involved in another accident not to long before our accident.

Everything seemed to be fine and dandy and I had actually forgotten about the deal until a year later when I got a call from my insurance company telling me that I was being sued. The lady claimed her foot was broken during the accident and that she was suffering from a back injury. I was both scared and ticked off! Her foot was perfectly fine when she was standing on the side of the road! Her lawyer was a TOTAL jerk (as most of those kinds of lawyers are). I could tell that they were just looking for a nice little payday and that this suit was bogus.

Anyway, the case was eventually settled for a relatively small sum of money but it scared the daylights out of me. I mean, what could have happened if this case had gone to court and a judgment was found against me that beyond what my insurance company would pay? I could have lost my entire CD collection! LOL!

Seriously though, Jonathan’s column offers up five ways that people can protect themselves:

1. Get a personal umbrella policy. This is a no-brainer. You’ll have to increase your auto coverage before you can purchase an umbrella policy. However, once you do that, you’ll find that the umbrella policy will only cost you $200 – $400 per year. That’s cheap insurance.

2. Max out your retirement plans. According to the article, your 401(k) should be protected from creditors. I’m not sure why the word “should” is thrown in there but it is.

3. Know your state’s laws. Jonathan suggests typing in your state’s name and the words “asset protection” to find out more information on your particular state. It might also be worth it call your attorney and ask them the basics.

4. Consider owning assets jointly with your spouse. Consult your attorney before you make any title changes because some changes could mess up your estate plan.

5. For those who have assets of $5 million or more. Clements suggests looking into more sophisticated protection like trusts, limited partnerships and limited-liability companies. For those, you’ll definitely need an attorney.

Clements also mentions a book that might be helpful on this topic: Asset Protection: Concepts and Strategies for Protecting Your Wealth (Affiliate Link). I haven’t read this book.

Jonathan Clements’ Recession Advice: Cash is King

Today’s Getting Going column (free) by Jonathan Clements is pretty interesting. He talks about the fact that current signs point to a recession or slowdown of some sort and that one of the ways to weather the storm is to have cash on hand for two reasons:

1. In case you get laid off

2. In order to take advantage of falling asset prices (in other words to be able to buy low)

Here’s his advice for those who are worried about a recession:

  • Keep fuding your 401(k) plan to get the full employer match. – I say keep funding it even if you don’t get an employer match or at least utilize an IRA.
  • Stockpile cash in a money market fund. – Or an online bank savings account.
  • Set up a home-equity line of credit. – Excellent idea as long as you qualify and then don’t spend the money unless you really need it.
  • Pay off credit card balances. – ALWAYS a good idea

Pretty good advice.

Small Ways Wealth Begets Wealth

Today’s Getting Going column by Jonathan Clement’s is titled The Small Ways Wealth Begets Wealth (free). It’s about how saving relatively small amounts of money can help you build wealth.

For instance, by saving just $100 per month, a person can eventually build up a savings account for emergencies so that they don’t have to put unexpected needs on a credit card. Then, as the savings account continues to grow, it will allow people to raise their insurance deductibles, which reduces their insurance rates. See how this little game works?

Of course all of this is much harder to do if a person starts off on the wrong foot. That’s why this information should be taught to students while their young and not yet able to get themselves into financial trouble. Maybe we bloggers should start a financial literacy program.

Jonathan Clements: A Million No Longer Buys You a Luxe Retirement

Check out today’s Jonathan Clements’ Getting Going column titled A Cool Million No Longer Buys You a Luxe Retirement. I think most of us already know this. However, it amazes me how many magazines write about becoming a millionaire. I guess it’s because the word “millionaire” still has a nice ring to it. All I can say is that if you are in your 20s, 30s, or 40s and $1 million is your goal for retirement, you’re not going to be happy.



Take a look at the graphic below which shows the future purchasing power of $1,000,000 based on three modest inflation rates. Continue reading Jonathan Clements: A Million No Longer Buys You a Luxe Retirement

Jonathan Clements on Mortgages

I know I have been writing a lot lately about mortgages and all the issues surrounding them. It’s not my intent to beat a dead horse, but I do want to draw your attention to this Getting Going column titled Why a Mortgage May Be Your Best (and Worst) Move (free). Clements says basically the same thing I have been saying all along: use your mortgage to your advantage, but use it wisely. I thought this quote was interesting:

Economists Gene Amromin, Jennifer Huang and Clemens Sialm found that, among households striving to pay down their mortgage quickly, at least 38% could be stashing more in their employer’s 401(k) or 403(b) plan. That means these folks are missing out on their 401(k)’s initial tax deduction and tax-deferred investment growth. That combination should easily outpace the interest expense they save by paying down their mortgage.

Throw in a matching employer contribution, and the 401(k) would be even more compelling. Similarly, you could probably improve returns by taking money earmarked for extra mortgage payments and using it to fund an individual retirement account or to buy stocks in a taxable account.

Clements does say that there are times when prepaying a mortgage makes sense and that’s when the alternative to paying off the mortgage is investing in bonds or money market funds in taxable accounts due to the after-tax returns on that money.

Finally, Clements and I agree on another thing: don’t take on more mortgage than you can afford. I don’t want people to misconstrue my thoughts on mortgages and think that I’m advocating taking out as big a mortgage as possible.