Steve’s guest, Jonathan Clements, spent almost two decades at The Wall Street Journal as a personal finance columnist. He is the founder and editor of Humble Dollar, and the author of How To Think About Money.
Steve kicks off the show with a particularly funny list of Jonathan’s daily tweets that cover common investing conundrums on his website, Humble Dollar.
Tweet #1: “We get just one shot at making the journey from birth to retirement. Flirting with financial disaster is not advisable.”
Jonathan’s point is that one shouldn’t invite financial disaster by, say, betting everything on a single stock, buying shares using borrowed money, not having disability insurance, or ignoring life insurance even though we have a family that depends upon us financially. The cost of taking unnecessary financial risks is simply too high.
Steve adds that when things are good, risky financial decisions may make you rich, but if things go bad, they can destroy your financial life. Moreover, these are risks you don’t need to take. Instead, do sensible things—save regularly, diversify broadly across the stock and bond markets, make sure you have a reasonable amount of insurance—and everything’s highly likely to turn out okay.
Tweet #2: “Picking superior investments is a crowded trade. Saving more is an easy win.”
A crowded trade in Wall Street terms refers to a lot of people making the same bet, such as trying to beat the market. Instead, Jonathan Clements, in his book, How To Think About Money, says don’t try to beat the market but simply capture returns of broad indexes over a 20 or 30-year period, and you’ll do fine.
In addition, saving more money and investing a larger chunk can really boost your returns and build wealth over time.
Tweet #3: “If your kids can borrow it, or your friends can admire it, it doesn’t count as an investment.”
Here, Jonathan Clements refers to the things we buy trying to kid ourselves that they’re investments, such as a fancy car or a lovely piece of art. Such things don’t count as investments. Instead, focus on simple pleasures such as a nice cup of home-brewed coffee or the Friday evening glass of wine that don’t involve being super rich.
Tweet #4: “When you’re ill, you realize how great it is to feel healthy. Money is similar. When you’re broke, you realize how great it is to be solvent.”
Jonathan Clements says there are three things that money can do for you: allow for special times with friends and family, provide financial freedom to spend your days doing what you love, and keep you worry free—all of which will enormously boost your happiness. On the flip side, not having money will gnaw at you and make you unhappy.
Tweet #5: “What’s the difference between an equity indexed annuity and an index fund? One needs an army of salespeople, the other sells itself.”
Jonathan points to the flow of money out of actively-managed funds and into low-cost index funds and recommends index funds because they deliver higher returns.
Tweet #6: “A boat is not your financial friend, but a friend with a boat is.”
Here, Jonathan refers to an article which listed a boat among the top three things people most wanted to buy, as well as being among the three things people most regretted buying. Boats are expensive to buy and maintain, are little used and depreciate over time, and aren’t good for your finances.
Tweet #7: “If you keep investing simple and make it understandable, you’ll lose half your audience who assumes success lies in their own befuddlement.”
Jonathan Clements calls this tweet “the story of my mediocre career” where he spent 30 years trying to make investing simple and understandable. Then, he realized that simple is not what people want. What they really want are articles that sound sophisticated and clever, so they can boast about complicated strategies at social dos.
Jonathan Clements’ website offers other pithy financial aphorisms in tweet form, which tell you How To Think About Money in simple terms. For the full list of Jonathan Clements 41 witty financial tweets, head over to his January newsletter.
Disclosure: The opinions expressed are those of the interviewee and not necessarily United Capital. Interviewee is not a representative of United Capital. Investing involves risk and investors should carefully consider their own investment objectives and never rely on any single chart, graph or marketing piece to make decisions. Content provided is intended for informational purposes only, is not a recommendation to buy or sell any securities, and should not be considered tax, legal, investment advice. Please contact your tax, legal, financial professional with questions about your specific needs and circumstances. The information contained herein was obtained from sources believed to be reliable, however their accuracy and completeness cannot be guaranteed. All data are driven from publicly available information and has not been independently verified by United Capital.
Steve Pomeranz: My next guest is Johnathan Clements. He is the founder and editor of Humble Dollar. Jonathan spent almost two decades at the Wall Street Journal and he was the personal finance columnist there, very well respected, very well known. Kind of an institution in Wall Street Journal. And he’s got his latest book out called How To Think About Money.
But we’re going to do something a little bit different with Jonathan. Let me get him on the phone first. And here we go. Hey, Jonathan, glad you’re here, always love to have you. Welcome.
Jonathan Clements: Hey, Steve, thanks for having me back on the show, I really appreciate it.
Steve Pomeranz: You know you sent me the running list of your tweets and normally I would think that would just be okay but these were particularly funny and covered many of the common investing conundrums. So I thought we’d go through them. What do you say?
Jonathan Clements: Sounds like a plan.
Steve Pomeranz: All right, let’s start with Number 1. This is from Jonathan Clements. Well, before we go on, tell me how these tweets come out. Are they daily? Are they just when you get an idea?
How do they even develop?
Jonathan Clements: So, I launched this website, humbledollar.com, just over a year ago. And when I was having the site built by a Web developer, James said to me, “hey, why don’t you have a mission statement across the top of the home page?” Well, here, journalists, the idea of having a mission statement seems absolutely absurd.
But then I thought, well, how about just putting out one thought every day, so I started putting that thought up, and then I had the site coded so it would go straight to Twitter and then from Twitter, it goes straight to my professional Facebook page, the Jonathan Clement’s Money Guide. And so I got in a roll and starting putting these up every day.
I had been collecting them and I had vague plans at some point to turn them into a book, but for the list that you saw, I pulled together 41 of the ones that I thought were particularly good, and I’m happy to talk about them.
Steve Pomeranz: All right, let’s go to number one. Here we go. “We get just one shot at making the journey from birth to retirement. Flirting with financial disaster is not advisable.” When you say flirting with financial disaster, what do you think of when you say that?
Jonathan Clements: There are all kinds of excessive risks we can potentially take. We can bet everything on one or two stocks or in a single sector in the stock market. We can buy stocks using borrowed money, using in margin accounts. We cannot have any disability insurance. We can not have any life insurance, even though we have a family that depends upon us financially.
All of those things invite financial disaster. It may be that you can get through your entire life and not suffer the consequences of this foolish behavior. Maybe you’ll never need your disability insurance. Maybe your family won’t suffer because you don’t have life insurance. But you are running a major risk, and that risk could derail your chances of successfully making it in one piece financially from here to retirement.
Steve Pomeranz: I remember back in 06, the fact that a lot of people were mortgaging their homes to buy other homes. There was a period when the stock market was hot and you hear about people pulling money out the equity of their homes to buy stock.
There are some anecdotal stories now about people doing the same, borrowing money to buy BitCoin and other cryptocurrencies. I think this is what you’re talking about with flirting with disaster. While things are good, you may feel rich and make a lot of money, but as soon as things start to turn around and go bad, so many things can happen that can destroy your financial life.
Jonathan Clements: And the sort of added point to make here is these are risks you don’t need to take. If you do the sensible things, you save regularly, you diversify broadly across the stock and bond markets, if you make sure you have a reasonable amount of insurance, everything’s highly likely to turn out okay. So why take these risks? They are unnecessary.
Steve Pomeranz: Yeah, so actually you talk about saving. So here’s a tweet. “Picking superior investments is a crowded trade. Saving more is an easy win.” First of all, what does a crowded trade mean?
Jonathan Clements: A crowded trade in Wall Street terms means a lot of people are trying to win at this particular game, and one of the games that a lot of people are trying to win at is beating the stock market averages. There are, by one estimate, a million professionals around the world trying to figure out which stocks are going to do better than average over the next year. So, when you go out and try to buy investments, that’s who you’re competing against. And the reality is, you don’t need to beat the market in order to accumulate a decent amount of wealth. I mean, you look at those long-run performance charts of the broad-market indexes, of the S&P 500 or the international markets. If you simply capture the returns of those broad indexes, you would be extremely happy over a 20 or 30-year period. So why take the added risk of trying to beat the market? But-
Steve Pomeranz: You know, let me stop you there. The other part of this tweet though, I want to concentrate on, this idea that saving more is the easy win. Now, when people come to see me, and they want to start investing, I think the first thing they need to know is that most of your wealth is going to be created through your savings.
Especially when you’re starting out, if you want a 10 or a 20% return, I’m going to be ridiculous, but say on $100. So that gives you 120 bucks, that’s not making you wealthy. But it’s that $100 a month that you’re putting away or more or saving in your 401K that builds up to great wealth.
And then later on, the returns really start to make a difference. Any comment on that?
Jonathan Clements: No, you have it absolutely right, Steve. Over the years, I’ve met thousands of everyday Americans who’ve managed to amass seven-figure portfolios. Many of these folks had modest salaries. Most of them were mediocre investors, but almost all of them shared one attribute in common.
They were extremely frugal, otherwise known as cheap. They were great savers and that’s what drove their portfolio’s growth.
Steve Pomeranz: Yeah, I totally agree. All right, here’s one: “If your kids can borrow it or your friends can admire it, it doesn’t count as an investment.” [NOISE] Tell me about it.
Jonathan Clements: Yeah, you think about the things that we buy trying to kid ourselves that they’re investments. You know, we buy the fancy car, we buy the second home, we buy the lovely piece of art that hangs above the fireplace. If you buy something and it delivers a lot of psychic income, you really enjoy having it; it doesn’t count as an investment.
Steve Pomeranz: Okay, yeah. Let’s just say 99.9% of the time that’s probably true. And that 0.01% of the time that we all dream about, that’s unlikely to happen. And that makes buying art a great investment and so on. Draw up a list of your greatest pleasures in life then ask yourself, do you need great wealth to enjoy any of them?
Jonathan Clements: And I actually wrote an entire blog on this topic, talking about the things during my day that I really enjoy. And they are things like take first a cup of coffee in the morning or having a particularly good work out at the gym that leaves you feeling spent. Or getting home in the end of the day and sitting down and a glass of wine with my wife. Those are great moments during the course of day and they really don’t involve having significant wealth. There are just things that we can all do, even if we earn modest incomes.
So while we imagine that our lives would be so much better if we were richer, the reality is, what we do every day that we really enjoy, most of it doesn’t involve being super-rich.
Steve Pomeranz: But you know what it does involve, and this is your next tweet, it involves being solvent. It involves making the right decision so you’re not buried in debt. And you wrote when you’re ill you realize how great it is to feel healthy. Money is similar; when you’re broke, you realize how great it is to be solvent. So being solvent is a big part of happiness.
Jonathan Clements: I tell people that in terms of money and happiness, they are really three things that money can do for you. One, it can allow you to have special times with friends and family. Two, it can give you the financial freedom to spend your days doing what you love.
And three, simply having money means you don’t need to worry about money.
Steve Pomeranz: Hum.
Jonathan Clements: So being solvent, having some cash in the bank, knowing you’ll be okay if you lose your job.
Steve Pomeranz: Hum.
Jonathan Clements: That sense that everything’s going to be okay financially can deliver an enormous boost to happiness. Whereas, if you’re in the opposite situation, you don’t have any money in your bank, you’re not sure how you’d cope if you lost your job, you really don’t have any money put away for retirement. That’s going to gnaw at you. You’re going to spend days worrying about money. And that is a real buzz kill.
Steve Pomeranz: Yeah. My guest is Jonathan Clements. He’s the founder and editor of Humble Dollar, and he’s the guy that was at the Wall Street Journal for almost two decades with a personal finance column. So, here’s one that I liked, what’s the difference between an equity indexed annuity— we’re talking about investments here specifically—“What’s the difference between an equity indexed annuity and an index fund? One needs an army of salespeople, the other sells itself.”
Jonathan Clements: If you look at the past ten years, the net flows of money into actively-managed mutual funds is actually negative. People have pulled more money out of equity, actively-managed mutual funds, than they’ve put in. By contrast, index funds, those plain-vanilla, low-cost funds that simply track the performance of the market averages, those people have been buying like hotcakes. Amount of assets in index funds has exploded. Trillions and trillions of dollars have come into these funds. So, index funds by themselves don’t need an army of salespeople.
People have woken up and realized that they’re a great investment. By contrast, equity-indexed annuities, there are indeed armies of salespeople out there pushing these things because they pay huge commissions to the salespeople involved. So, what’s an equity index annuity? It ain’t an index fund. What it is, is it’s an annuity, which is an insurance product, that will allow you to capture part of the upside of the stock market each year, while providing some downside protection.
Now that turns out to be a not particularly good way to make your money grow over time, unless you happen to be the salesperson who sells it because it’s a great way for them to make a huge commission.
Steve Pomeranz: I think over time, as well, you end up earning the return of a basic bond.
Jonathan Clements: Yeah, because what happens with an equity index annuity is, one, you don’t get the dividends that you would get if you owned an indexed fund. And two, the amount that you can make every year is capped. So even if the market is up 20%, you might only make six.
So the net result is you might make a maximum of six in any one year and then years when the market is flat, you get zero.
Steve Pomeranz: And you know getting zero for a year or two can really wreak havoc on anybody’s returns.
Jonathan Clements: You’ve got to know, if somebody’s pushing something so heavily, if they’re making a 12 or 14% commission, if they’re willing to pay for you to come and have dinner-
Steve Pomeranz: That’s right.
Jonathan Clements: To listen to their pitch-
Steve Pomeranz: Remember that, right, that beautiful invitation you get in the mail to the local steakhouse, obviously, they’re paying a lot for that because they know if they can land one or two of these, they’re going to make a big commission. Also, the commission is really, it’s not disclosed. We don’t really know; it’s not transparent. It’s not a good business, and people should stay away from these kinds of annuities for sure. Let’s move on. “A boat is not your financial friend you say, but a friend with a boat is.”
I think we all can agree on that.
Jonathan Clements: So, I remember an article I read probably five years ago now. And the first list in the article was the three things people most wanted to buy. And there, among the top three, was a boat. Then later in the article that had a list of the three things people most regret buying.
And there among the three things was a boat.
Steve Pomeranz: Of course, right.
Jonathan Clements: You know, we imagine a boat is going to be this sort of wonderful Sunday afternoon sailing around the bay, soaking in the sunshine. But instead, what a boat is is it’s something expensive that you buy, that you have to put away in the winter if you live in the northern part of the country. It involves lots of maintenance; you never take it out as often as you’d like, and a couple of years down the road, you sell it for a fraction of what you paid.
Steve Pomeranz: I have to admit, I had boat fever at one time, approximately eight years ago, and man, you couldn’t talk me out of it, but I did the smart thing. There was a place locally here in South Florida that allowed you to pay a fixed amount for the year, and then you could just kind of call them and they’ll have a boat ready for you. At the end, when you are done boating for that day, you turn the keys over. They cleaned it and they put it away, and they were responsible for it. And it took about six months before I got over that fever, and I realized that this is really not for me. You know it wasn’t very interesting. I don’t fish. I don’t really do much on the water. I don’t water ski, so I did lay around in the Bay, sail the Bay so to speak, but it lost its luster really quickly, and I was so thankful that I hadn’t actually bought a boat. I leased it for a year. At the end of the year, that was it. That was over, move on to the next thing. So, yeah, all right, let’s go on. “If you keep investing simple and make it understandable, you’ll lose half your audience who assumes success lies in their own befuddlement.” [LAUGH] Tell me about that.
Jonathan Clements: Essentially, Steve, this is the story of my mediocre career.
[LAUGH] I spent 30 years trying to make investing simple and understandable. And what I’ve belatedly come to realize is, this is not what people want. What they really want is articles that sound super-sophisticated and clever, so they can boast at the country club about this complicated strategy they’re involved in, blah, blah, blah.
Many people do not want to really understand what they’re buying and much prefer to buy sophisticated stuff, like that equity-indexed annuity, like the hedge fund, like that fancy mutual fund that goes long some stocks and short the others. They don’t really want to understand what they own.
Steve Pomeranz: Yeah. Well, unfortunately, were out of time but these can be found at humbledollar.com. Is that right?
Jonathan Clements: That’s correct. It’s my January newsletter. If you go to the site and check out the newsletters, you’ll find all 41 listed in the January edition.
Steve Pomeranz: Jonathan Clements, always a pleasure to have you.
Thank you so much for joining me.
Jonathan Clements: It’s been my pleasure, Steve.
Steve Pomeranz: To hear this interview again, listen to the full show, or get a summary of the vital lessons that we’ve learned here today, go to stevepomeranz.com.And while you’re there, don’t forget to sign up for our weekly update where we will send you important lessons from the show straight to your inbox.