With Jonathan Clements, Founder and Editor of HumbleDollar
Steve’s guest, Jonathan Clements, is the Founder and Editor of HumbleDollar, a website dedicated to personal finance. Jonathan has also authored multiple books, including From Here to Financial Happiness and How to Think About Money. Steve speaks with Jonathan about his Money Guide for 2019.
Pay Down Your Debt
Back at the end of 2017, just after the new tax law had been passed, Jonathan wrote an article titled “Best Investment 2018.” He urged consumers to pay down their debts because bond yields were low and interest rates were only going to go back up. And, like the lucky gambler in Vegas, he got it right!
With rates still low and with the possibility of a weakening economy, he’s tempted to extend this advice to his Money Guide for 2019. Paying down debt would make consumers less vulnerable should they lose their jobs down the road.
For instance, if you have a 401(k) loan, pay it off. If you lose your job and cannot repay the loan, it becomes a taxable distribution, in which case, you will owe taxes and penalties.
Setup A Home Equity Line Of Credit
As insurance against a slowdown, consumers should also think about setting up a home equity line of credit (HELOC). If you lose your job, a HELOC could help you cover your bills while you look for work.
Diversify Beyond Stocks Into Bonds
Steve adds that employees in cyclical industries face greater income instability. In such cases, consider diversifying your 401(k) beyond stocks to include some bonds. If an economic downturn causes you to lose your job and leads to a drop in the stock market, you could liquidate bonds for emergency cash and not have to withdraw stocks at low valuations.
For instance, Jonathan knows that a lot of Wall Street’s traders tend to get laid off when the stock market tanks. Consequently, these traders keep the bulk of their savings in Treasury bills.
Steve adds that with bonds, traders don’t have the added burden of making bad calls on their own portfolios when the market is tanking.
Are You A Stock Or A Bond?
In his “Money Guide for 2019,” Jonathan likens physicians and government employee jobs to bonds because their salaries remain fairly steady, even through economic downturns. Traders on Wall Street or real estate broker jobs are like stocks because job security and earnings can be fairly volatile, especially in bad economic times.
The airline industry’s fortunes, for instance, are closely tied to the economy. Consumers and businesses cut back on travel when the economy is struggling. Since pilot and flight attendant jobs have the uncertainty of stocks, they should hold a substantial amount of their savings in bonds.
Selling Ain’t Easy
With high market volatility nowadays, investors are worried about portfolio strategies for 2019. However, selling decisions aren’t easy. In the “Money Guide for 2019,” contributor Adam Grossman goes through the steps in deciding when to sell a stock.
First, you have to predict what’s going to happen in the future and when. And that’s pretty much a coin toss. Then you have to predict the impact of that event on the economy, the financial markets, and the stocks you own. Step three is to take action quickly enough to benefit from your predictions. In essence, you have to be ahead of the market and its high-frequency traders. And that’s not easy.
Assuming you did everything right, you need to know when to reverse course and get back into the market. That’s a difficult decision because market bottoms are really hard to call.
And, finally, you have to think about taxes on your gains.
With all this uncertainty, in his “Money Guide for 2019,” Jonathan believes a do-nothing strategy may be your best bet to ride out whatever lies in store in 2019.
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: I’m very happy to welcome back Jonathan Clements, who’s the founder and editor of HumbleDollar, it’s a website. He’s also the author of a fistful of personal finance books, including From Here to Financial Happiness and How to Think About Money. I’d like to have him on at every year end, to discuss his money guide for the new year and whatever is percolating in his mind now for 2019. And you can find his money guide on humbledollar.com. That’s humbledollar.com, and I highly recommend it. And I welcome him back. Jonathan, thanks for coming back on.
Jonathan Clements: It’s my pleasure, Steve. Thanks for having me on the show.
Steve Pomeranz: Now you were telling me off air that in 2018, the beginning of 2018 or your forecast which is always a scary thing for all of us, was quite correct. Tell us quickly about your 2018 forecast and what happened.
Jonathan Clements: So back at the end of 2017, just after the new tax law had been passed, I wrote an article that was headlined “Best Investment 2018.” And it was a little bit out there for me, Steve. I don’t normally make anything that looks like a prediction, especially a short-term prediction. When I put together the fact that suddenly it’s going to be much harder for people to have itemized deductions because of the cap on the mortgage interest deduction and the cap on the deduction on state and local and property taxes, coupled with the fact that bond yields were so low, coupled with that stock market valuations were so rich, my advice to 2018 was pay down debt and even mortgage debt. That was potentially your best investment of 2018. And lo and behold, like the lucky gambler in Vegas, I got it right.
Steve Pomeranz: [LAUGH] Yeah, so the idea would be if rates were going to go back up, there’s some kind of a low plateau. What a great place to, if you’re paying, gee, if you’re paying 12% on your credit cards, there’s a guaranteed 12% return that you can get from paying down your credit cards, that would be where your savings would go. I wonder if you can take that further to 2019 now. I’m not suggesting in any way that this is going to be your 2019 prediction. But if you think it’s possible where we are in the cycle that the economy starts to move towards recession, wouldn’t it be also smart to continue to think about paying down debt so you’re less vulnerable?
Jonathan Clements: You’re absolutely right, Steve. And at this point, given that stock market evaluations are looking so much more attractive, given the bond market yields have come up, the argument, the focusing solely on paying down debt is not nearly as strong. Nonetheless, if you’re in a job where you think there’s a chance of layoffs, getting your finances in shape ahead of a potential job loss makes a ton of sense. We know that unemployment tends to be a lagging indicator. That means that it takes a while for employers to start laying off people once the economy slows, so you might have a year and potentially somewhat more to get your finances in shape in case there is a recession. And what should you be doing?
Well, getting rid of that credit card debt is obviously a smart move. If you have a 401K loan outstanding, you want to get that 401K loan paid off. If you lose your job and you don’t immediately repay that loan, that loan becomes a taxable distribution, which means you’re going to get hit with not only income taxes but also tax penalties, potentially. I would also think about setting about a home equity line of credit. That way, if you end up out of a job, and you run out of your cash, one of the things you can do is to tap into your home’s value, in order to cover the bills while you try to find another job.
Steve Pomeranz: Yeah, perfect, perfect. Yeah, so that’s something to think ahead of time. Not that you will necessarily use it and don’t get it and then start using it on frivolous stuff. It’s there as little kind of insurance policy, a little extra money should you find yourself in that situation. Jonathan, you were talking about your 401K and getting your finances in shape. And the one idea that’s come to me over the many years I’ve been practicing, is this idea that is people are in jobs in industries that are cyclical, and there’s a chance that they may lose their job during a down cycle, and at the same time they have all their money in their 401K.
They have it all in stocks because they’ve been told, hey, I’m in my 20s, I’m in my 30s, I should really have the vast majority of my money in stock, which theoretically is right if you’re really not going to touch it. But if you do get laid off, and you do need to go into that money, and the economy is weak, and the stock market’s going to be weak, now you’re pulling that money out at the worst possible time. And that sounds kind of dangerous to me, so I’d want to be careful as to what my mix would be, based upon the cyclicality of my job. What do you think about that idea?
Jonathan Clements: I think you’re absolutely right, Steve. In theory, according to the academic theory, if you’re young and you have a job, that job is like earning interest from a bond. You’re getting a steady paycheck week after week, month after month, and therefore, if you invest heavily in stocks, you’re essentially diversifying your paycheck.
The problem comes, as you suggest, Steve, is when your paycheck isn’t like a bond-like stream of income. Instead, it fluctuates a lot because, say, you work on commission because you’re in a more cyclical industry where people tend to get laid off when the economy slows. Maybe you’re in real estate sales, and a recession might bring a slow-down in the housing market. If you are in that sort of situation, when you invest your 401K, you don’t want to be 100% in stocks. Instead, you want to have some bonds in there because, essentially, you yourself is a stock, you have a lot of fluctuations in your value from one week to the next. And to compensate, to diversify that, what you want to is have more of your 401K in bonds.
Steve Pomeranz: Okay, so, I have to ask myself am I a stock or a bond?
Jonathan Clements: That’s actually what you want to do. And if you’re a Wall Street trader,
Steve Pomeranz: Yeah.
Jonathan Clements: And I’ve got quite a few of these guys, you would answer I am a stock and so I’ve got a lot of Wall Street traders who are smart enough to keep the bulk of their savings in Treasury bills. Because they know the next time the economy turns down, they’re going to get laid off.
Steve Pomeranz: Yeah.
Jonathan Clements: And they want a pool of cash that they can turn to to tide themselves over until they get rehired.
Steve Pomeranz: Not only that, if they were really smart and their compensation is based upon the vagaries of the market and speculating and all of that, they’re not going to want to worry about their personal portfolio at the same time, that would cloud their judgment. So that’s probably pretty wise there. Let me ask you this question. So, physician, government employee, stock or bond?
Jonathan Clements: Bond.
Steve Pomeranz: Okay, your physician, why, because pretty much steady income, it may go down, it may go up, but it’s a steady-Eddy kind of job. Most healthcare, I guess in many ways, could be bonds. Real estate sales, I guess anything in sales, what would you say that is?
Jonathan Clements: Yeah, if you’re in real estate sales or any sort of job where you’re on commission, you’re much more like a stock.
Steve Pomeranz: Okay, Uber driver, you’re a stock, I guess, right?
Jonathan Clements: Yeah, you’re more like a stock. People will continue to take cabs even if the economy slows down. They may not have to take them quite as much, but the [inaudible]company is probably going to be relatively modest. It’s not as steady as being a funeral director, people are going to keep dying.
Steve Pomeranz: [LAUGH] If you want steady work, be a funeral director. What about like a pilot or a flight attendant or something?
Jonathan Clements: The airline industry is somewhat cyclical. People tend to fly less, go on vacations less, there tends to be less business travel when the economy turns down, so you are a little bit stock-like. Still, I wouldn’t be overly concerned, I wouldn’t be as concerned as somebody who is a real estate agent or a Wall Street trader.
Steve Pomeranz: Okay, yeah, so it’s kind of common sense. You can figure out pretty easily whether it’s stock or bond. Okay, good, good advice there. I want to move on to something else here, and this is particularly poignant these days when we have such a volatile market. The market had been pretty good in the middle of the year and then it just, fourth quarter just started to fall apart. And now it’s fluctuating 2 to 3% a day, and the S&P is negative as we record this and so on. So as an adviser people say well, what are you going to do? You going to sell? You going to protect me in this down market?
And it always brings up this point that this sell decision is really very, very complicated. There was an article on your site from Adam Grossman, the site is humbledollar.com. You can find all kinds of great stuff, not only Johnathan’s stuff but others as well. And Adam is talking about the decisions that you have to make when you sell. So, I want to start here. Step one, you have to predict what’s going to happen and when. Which would stop me right there [LAUGH].
Jonathan Clements: So what we’re talking about here is predicting the news.
Steve Pomeranz: Yeah.
Jonathan Clements: And news, by definition, is not known, if it was already known it wouldn’t be news.
Steve Pomeranz: Right.
Jonathan Clements: So in order to get into the market-timing business, into this business of jumping in and out of the market depending on what you think’s going to happen. The first step is to say, I know what’s going to happen in the future, and that’s pretty much a coin toss.
Steve Pomeranz: Okay, so that’s number one. So you’ve got to be pretty sure what’s going to happen in the future, which I think is kind of a contradiction in terms. Then you have to predict that the impact of this event, whatever it may be, on the economy and the financial markets as well because something political can happen. Like years ago the market sold off very dramatically because there was, the government was not going to be able to meet its obligations by year end. They were going to close the government which they did for a very short period of time. But basically, it turned into a non-event for the economy and the financial markets. Step three, take action quickly enough to benefit from what you would expect to happen.
For example, if you thought a particular legislation would result in stock market decline, you need to sell your investments before other investors did the same thing and then drove the prices down ahead of you. Which sounds like a lot of words, but basically, means that you’ve got to move when nobody else is moving. Because if they, if the event was happening, they’d be doing what you planned to do before you. So you’ve got to do it when nobody’s thinking about it. And that’s a contrarian position that’s very hard, very untenable.
Jonathan Clements: Or you have to be faster than all these high-frequency traders. So let’s not tap dance around this.
Steve Pomeranz: Yeah.
Jonathan Clements: By the time you hear this on CNBC, it is too late.
Steve Pomeranz: That’s right, exactly.
Jonathan Clements: Because the high-frequency traders, the hedge funds, they’ve already got this information, and they, in a split second, have bought and sold based on the latest news that has broken. If you’re sitting at home, watching CNBC, you see the news flash across your screen, it is already too late.
Steve Pomeranz: Yeah, it’s already in the price, especially with the speed of transactions, these days. Even Wall Street traders who are not trading the way you speak have trouble keeping up. We’re going to stop at number four because I think number four is kind of the most important one. Let’s say you sold and you sold correctly. You were right. You got out, market went down, now you’ve got to reverse course.
You’ve got to decide when to come back in, and I think that’s the hardest decision. Because the market goes down 7%, things have gotten kind of crushed, do you go in then? Well, you know it could go down another 7%, so, hey, is it over? Is the sell-off done? And I know that there were quite a number of people who, for one reason or another, got out before the ’08 crash, but they never got back in. Really until they came to see me in 2015/2016, and they really missed most of the return that was available to them. We’re out of time, Jonathan, last words for you?
Jonathan Clements: The only thing I would mention is in addition to all of this trading, if you do trade, if you get out of your stock-market positions, remember there’s often a tax-cut cost.
Steve Pomeranz: Yeah.
Jonathan Clements: So, if you sell, you pay that big capital gains tax bill, not only if you need the market to come down, you need it to come down far enough to compensate for the tax bill that you paid
Steve Pomeranz: Yeah
Jonathan Clements: And then you have to have the courage to get back in.
Steve Pomeranz: That’s right.
Jonathan Clements: Getting that all correct is really, really tough.
Steve Pomeranz: Really, almost impossible. So really, the best activity most of the time is to do nothing. Which I always say, unless you’re a teenager doing nothing actually is an activity. So [LAUGH], teenagers are exempt from this law. But anyway, Jonathon Clements, the humbledollar.com. And it’s humbledollar.com, and if you have a question about what we’ve talked about, or you just want to kind of get online and tell us what you think, go to stevepomeranz.com and sign up for our weekly update. Where you’ll get all of our segments, like Jonathon’s here, and so many others We have them in segment form, in summary form, and in transcript form as well. That’s stevepomeranz.com.