Bogleheads on Investing with Jonathan Clements – Episode 3

Rick Ferri: Hi everyone my name is Rick Ferri and I’m the host of Bogleheads on Investing. This program is brought to you by the John C. Bogle Center for Financial Literacy, a 501c3 corporation.

Today my special guest is Jonathan Clements the founder and editor of Humble Dollar. He’s also the author of eight personal finance books, including How to Think About Money and his newest book, From Here to Financial Happiness. Jonathan also sits on the advisory board and investment committee of Creative Planning, one of the country’s largest  independent financial advisors.

Jonathan was born in London, England and graduated from Cambridge University. Before coming to New York in 1986, his first job was covering mutual funds for Forbes magazine, and then he went to work for The Wall Street Journal. He worked at the Journal for almost 20 years, wrote over 1,000 columns for the Journal and The Wall Street Journal Sunday Edition. He also worked for six years at Citigroup where he was the director of financial education for Citi Personal Wealth Management, before returning to the Journal for an additional 15 months stint as a columnist.

Today I’ll be talking with Jonathan about his career and his new book, From Here to Financial Happiness, plus a lot of other interesting topics that we’ll get into. Right now let me introduce Jonathan Clements. Welcome Jonathan.

Jonathan Clements: Rick thanks so much for having me on your show. I really appreciate it.

Rick Ferri:  Jonathan you’ve got an interesting background. You’ve worked at some of the big financial media companies including Forbes and the Wall Street Journal for 20 years. It didn’t take you long, it doesn’t seem that you were immediately started looking at what makes performance of mutual funds tick, and what makes the performance of accounts tick. And it seemed like you caught on right away in your writing to this idea that the Bogleheads believe, low fees and indexing. Can you talk about when you first started as a financial writer, but what that process was that got you to that point so quickly?

Jonathan Clements:  So as you can probably tell from the funny accent I wasn’t born in the US, I was born in England and I had most of my education there and when I got out of university I started working in the UK and I very quickly discovered that the standard of living for financial journalists, particularly young financial, journalists in London totally sucked.  So I decided that, you know, I wanted to an upgrade so I moved to New York and I got a job as a fact checker of Forbes magazine which was the lowest form of life, and the goal as a fact checker was to get yourself promoted.  And the way I got myself promoted was to start writing about mutual funds and after almost two years of Forbes I was promoted to staff writer and given the job of writing for every issue about mutual funds.

And the standard way at Forbes to write about funds was to do these fund manager profiles; fly to Boston, fly out to Los Angeles, sit down with a money manager, have him or her describe their investment philosophy and usually they’d give you three or four or five stock picks you would describe in that particular article.  And what quickly became apparent to me was that, you know most of these guys who I considered to be top fund managers, because that’s why I was interviewing them, more often than not their moment of glory faded. The past performance was definitely no guide to future results. I got hired away by the Wall Street Journal in early 1990 to write about mutual funds for them and I continue to see the same phenomenon.

Rick Ferri:  So you went there and you actually met with these top money managers. These top mutual fund managers and you were looking at the performance and having this discussion and you’re realizing then, very soon after that, that it was then the performance started to go down.  You said their glory faded.

Jonathan Clements:  In the years afterwards you know these fund managers who had been at the top of their game, when I spoke to them, they often knew the reason I was interviewing them was because they had been identified as being top managers, and what, you know, it’s called the Forbes Honor Roll.  You know they had good performance in up markets and down markets, they seem like consistent winners… more often than not that hot performance didn’t last and and we know that right, I mean we know past performances are no guide to future results, and so the question arises:  well, what is a guide to future result? The researchers clearly shown the best predictor of future performance isn’t past performance, the best predictor of future performance is low costs. If you want a manager who’s really brilliant you want to find a manager who is smart enough to get hired by a fund company with low annual expenses because that’s what’s going to give them a performance edge.

Rick Ferri:  I want to go back, though, to that one point about the glory faded. So you’re seeing this time and time again where the glory faded of the top managers that you went out to interview.  You must at some point in your mind, did you come up with reasons why the glory faded? I mean what was it that you found that caused the outperforming managers to underperform going forward?  Was there something about just the dynamics of the mutual fund industry as a whole?

Jonathan Clements:  Well I think a couple of things go on. Obviously we have this issue with successful managers tend to attract assets and the more assets a manager is overseeing the harder it is for him or her to continue the good performance. But also the reason that managers tend to stand out is because they are in a sense cheating within their style box. If you have a good period for growth stocks the value managers that look good are those who sneak a few growth stocks into their portfolio.  So you have this value manager that’s done well and a period for growth stocks you say “okay this is a guy who really knows his stuff”, he’s been able to pick superior stocks and shine in a period when his investments out of favor. But of course what happens when styles rotate, when value stocks come into favor, the guy who’s been cheating, who’s been sneaking some growth stocks into his portfolio suddenly finds it hard to keep up with the other value managers because he’s not a true value investor.

I saw that repeatedly in the managers I looked. I’d be trying to benchmark funds and compare them to their peers and a particular fund would look good even if, you know, his or her style was out of favor, but then when the style returned to favor they were out of step because they owned the wrong sort of portfolios. And I think a lot of that cheating goes on and that’s a lot of a reason why we think managers are good and it just turns out they weren’t true to their mandate.

Rick Ferri:  So at some point you came to the epiphany, or the aha moment, that you maybe forget about active management and we’re just going to use index funds.  When did that occur?

Jonathan Clements:  It would have been in the early 1990s.  At that point there weren’t a whole lot of index funds out there but those [that] were out there were regularly performing better than the typical actually managed fund that they were competing against. And [it] wasn’t just that I started writing about this stuff, it was also that I started investing my money in these funds.  I became a big believer in indexing, particularly in index funds if they were offered by Vanguard, and the good performance of those funds coupled with me personally benefiting was what helped to cement my view that chasing actually managed funds they’re trying to actually manage your portfolio is really a fool’s errand.

Rick Ferri: In the early ’90s you went to the Wall Street Journal and you picked up the Getting Going column.

Jonathan Clements:  1994, The Wall Street Journal, which at the time had very few, had no columnist outside of the editorial page. The managing editor announced that he was willing to experiment with columns within the news pages and being the uppity 31 year old, raised my hand and said “a column, I’d like to have one of those” and shockingly, really, the journal gave me a column at age 31. So in 1994, it was the end of the year, I started writing this column was dubbed Getting Going. And I did it for another 13 and a half years writing that column both the regular Wall Street Journal and also, once it was launched, for Wall Street Journal Sunday.

Rick Ferri: The first time you actually wrote about index funds in the Getting Going column, do you remember approximately what year that was?

Jonathan Clements:  it was part of the sort of Getting Going philosophy from the start.  I would have been writing about index funds even before the Getting Going column was launched in 1994 but precisely when I couldn’t tell you Rick.

Rick Ferri:  Did you get any blowback from the Journal because after all there is a lot of advertisers in the Journal. I mean these mutual fund companies advertise in the Wall Street Journal and when you start talking about indexing and low fees and how that is the reason why index funds outperform most active managers and you started talking about active managers, did you get a talking-to by anyone or were you allowed to pretty much say what you wanted?

Jonathan Clements: I’ve got to tell you right back in the 1990s, indeed throughout my period of the Journal, from a point of view of advertisers being allowed to influence the copy that appeared in the news pages, it was verboten. In fact advertising reps to the Wall Street Journal could be fired for calling up a reporter. On a few occasions I was called by one of the advertising guys and asked to speak at some particular event. And whenever they called, they only called after they cleared it with their boss and they called very tentatively. It was, really it was a  magnificent organization from that point of view. I can’t swear that it’s like that today, but back then there was this church and state separation between the news department and the advertising department. 

Rick Ferri: But it, I know that I’ve spoken with a lot of other journalists over my time and it’s not that way at a lot of publications. I mean that Chinese wall, if you will, has got a lot of holes in it at a lot of companies.

Jonathan Clements:  I can believe that and, you know, there were occasions when executives would come in and complain about my coverage. I remember one particular meeting there were if some guy who came in from Merrill Lynch to complain about my commentary on actively managed funds and there was a big meeting in the main news conference room on the ninth floor of the Journal building and I was down there and there’s some other people were down there and the managing editor was down there. The guy from Merrill Lynch spoke his piece and then I responded, and as we walked out after the meeting the managing editor sidled up to me and he whispered in my ear “He didn’t lay a punch on you.” 

That was pretty much the attitude of the Journal. You know they were going to, unless you were making factual errors, they were going to defend you to the hilt. But again I can’t say whether it’s that way today.

Rick Ferri: I understand, thank you. It wasn’t only mutual funds, I mean the way I met you where you were taking investment advisors to tasks as well. And that’s how you first, you and I first talked, I think it was in 2001, because I had started the company and I was charging low advisory fees and I think you were really onto this idea of what is that 1%  AUM fee buying you. And she caught on to that very quickly as well.

Jonathan Clements:  Well generally I would say that the world of investing has become much friendlier to the average investor over the course of my career. But you think about all the things that have happened. We’ve seen the collapse of brokerage commissions, we’ve seen tighter bid-ask spreads. We’ve seen this proliferation of low-cost index funds and we’ve seen a total change in the advisory model. So that while there are still financial advisors out there who are charging 1% and simply giving you a bunch of expensive mutual funds, that is less and less the case.

People paying 1%, they’re often getting a very low cost portfolio, and they’re getting help with their broader financial lives. So they’re getting help not just with the choice of stocks and bonds and which particular funds they’re gonna buy and so on, but they’re also getting help with a financial plan, they’re getting help with their estate plan, and help with tax management, help with insurance. I mean today for that 1%, if you’re with the right [ed: right-feeling?] financial advisor, you’re getting much more than you would have got twenty years ago. And of course, as we know, you can go if all you want is portfolio management, you can go out and you can get portfolio management for 25 basis points these days. And you’ll get a portfolio for that 25 basis points that is as good as the portfolio you would have got twenty years ago, probably better in fact and be paying 1% back then. 

Rick Ferri: And there are a lot of other models that have come out, too, like flat fee portfolio models, subscription-based organizations like XY Planning, and then hourly fee advisors as well. So it seems like it’s a much more diverse way in which you can pay for this advice rather than just AUM.

Jonathan Clements:  And I think one of the benefits of this is the [tutor] — you go back twenty years and people really believe that if you went to Merrill Lynch, if you went to Morgan Stanley, you were somehow investing with the best and the brightest. I think the messages got through that going to the big wirehouse these big brokerage firms are actually bad for your financial health. And you’re all better off looking elsewhere to some of these smaller financial planning outfits, looking to the robo-advisors, trying out an hourly planner. And it’s that the stranglehold of the big brokerage firms had on the way advised-clients manage their money is over and that is definitely a plus.

Rick Ferri: So let’s talk about the brokerage firms and such because both of us worked for Citigroup for a while. You changed jobs and you actually went over to what I call the dark side. I was on the dark side so I’m just saying that facetiously. You went to work for Citigroup and almost at the time when you did that there were some of us who have been following you were kind of questioning, scratching our heads saying you, you wrote about these companies for years and now you’re going to work for one. I mean was that an experiment or could you tell us about that?

Jonathan Clements: Sure. Back in 2008 I was pretty burned out on writing the column. I’d been doing it for thirteen and a half years and I was casting around for something new to do and I didn’t want to become an editor of The Journal. I didn’t really want to start writing about something else. So I wanted a total change, and I was approached by Citigroup to be involved in a financial startup that they were working on. And the financial start up was this: their plan was to create an advisory service for the everyday American that would deliver financial advice in return for a flat monthly fee.

And so I joined Citi in April of 2008 and that’s indeed what we worked on. We were working on this flat fee advisory program. They actually launched a pilot version of it in January 2009. Now if you remember what things were like in January in 2009, if there was a worse time to launch a new financial advisory service, I’m not sure when it would have been. I mean January 2009 and it probably wasn’t quite as bad as 1932 but we were at the height of the financial crisis and this thing went nowhere. In the months that followed, every Citigroup was in turmoil. Smith Barney was sold off. This startup I was working on fell apart and Citigroup had to make a call. 

They needed some sort of advisory offering for regular retail investors. With Smith Barney gone,  what they decided was they were going to take this startup that I was involved in that at the time was called My Fi and then what was left, which was the bank based brokers, they threw us together and said figure out what you want to do.

They brought in a woman called Debbie McWhinney who’d been at Schwab and had overseen their RIA business, and Debbie announced that what you wanted was all these bank based brokers to become fee-only financial advisors. And this innovative group of people who are part of the startup we’re sort of put in charge of this group of bank based brokers and if you might imagine it was complete turmoil.

Rick Ferri: Yeah, I can imagine.

Jonathan Clements: But that is indeed sort of what happened, and that’s how I ended up going from being part of the startup to being, as I like to put it, in this part of the mainstream of Citibank. I stayed on because they were having this experiment trying to turn these bank-based brokers into fee only financial advisors and it worked to a degree but, just from a purely, from an economics point of view, and you’ll probably appreciate this, Rick, I mean to go from charging commissions every time you buy and sell, you might be getting a four or five percent commission on a product sale, to charging one percent a year, what you effectively do is you give up right away three quarters of your annual revenue. And so this business went from being profitable to being extremely unprofitable. So after a year or so of this there was yet another u-turn and they moved towards a fee and commission model but they still continued to try to favor the fee-based business.  So I sort of, I hung on there. I actually ended up spending six years at Citigroup. Towards the end I had got to the point where I had enough money – the sort of salary I was owning there – and just decided I was sick of dealing with lawyers and dealing, sick of dealing with compliance people. So I quit.

Rick Ferri:  And you went back to The Wall Street Journal for a little while.

Jonathan Clements: Whatever it is, it isn’t for the benefit of the everyday investor who walks into the bank branch.

Rick Ferri: No, not that but – not for that. I haven’t heard that one yet but that’s what the M. O. is to me. But it’s not what I saw anyway. So you went to The Wall Street Journal and you were there for about a  year and a half, and then you decided to go out on your own and start your own business, The Humble Dollar in 2017, which is a great blog and a lot of good advice there, and you continue to author books. In fact you wrote How to Think About Money, and also your latest book, From Here to Financial Happiness. Can you talk about the transition to starting your own business and going from a paycheck, if you will, to starting from scratch and seeing how it goes?

Jonathan Clements: So I wouldn’t claim that I’ve been the most courageous person in the world, at least not courageous financially. So I wouldn’t have ended up in the position I am now if I depended on the income I earn today in order to cover the bills. So essentially, you know, this is my retirement job, it just happens I’m working harder than ever.

Rick Ferri: Yeah, I know how that goes.

Jonathan Clements: If the books don’t sell and the website doesn’t make any money, it’s okay, nobody’s going to starve tonight. So I do this more than anything at this point, out of a sense of public service. I know this stuff backwards and forwards. I love writing about it and I love being part of the conversation. And that’s what the books and the website allow me to do.

Rick Ferri: Well I read From Here to Financial Happiness recently. Thank you for sending me the copy. I appreciate that. In typical Boglehead fashion if I can get a free book of course I’ll get one for free, and I did here, so thank you. I started reading the book a few weeks ago, and the subtitle is: Enrich Your Life in Just 77 Days, and it occurred to me as I was reading the book, I needed much longer than 77 days to enrich my life. The book is only – let me see how many pages it is – it’s got 77 chapters, it’s 240 pages roughly. But as I began to work through the book, and it’s not just a book, it’s a workbook and a book. And looking day 1, day 2, day 3, day 4. There are some of  these days where I was reading about, where my god, I mean I had to put the book down. I mean I literally had to say, I really have to think about that. That’s going to take a long time for me to process what you just wrote.

Now some of the days went by pretty easy, but some of them were much more difficult. In fact, it was, I found it aggravating in some ways to have to think about some of the things you wrote about in the book. But as I kept on going through it, I realized it was a method to the madness. And then I read about why you did it this way, why you wrote the book this way. Could you talk about that — your thinking of how you put this book together as opposed to all your other books. 

Jonathan Clements: The book grew out of a couple of different things I’ve been thinking about. And one of the ways I describe the book to people is that I like to think that it’s the conversation that you should be having with a really good financial advisor. A really good financial advisor isn’t going to be purely concerned with making sure that you end up with the right seven mutual funds. A really good financial advisor should be trying to figure out what it is that you really want from your financial life. What’s going to improve it today. What’s going to make you happy in the future. What are the goals that you truly care about, not simply that you want to retire, but what sort of retirement you want. What is it you’re going to do with this last twenty or thirty years of your life. 

So a good financial advisor is going to figure out that stuff, and then he or she is going to help you figure out how to get there, and it’s not just about building the right portfolio. There’s so much more to managing money than having those six or seven mutual funds. You need to figure out your estate planning, you need to figure out whether you should be paying down your debt faster than it is required. You need to be figuring out insurance. You need to be figuring out what’s the house you can afford to buy. What you should be doing with your cars. All of this stuff is part of building a robust financial life and that’s what the seventy seven days are about. It’s about figuring out where you stand, what you want and how you’re going to get there. And the premise is that you know you can do it with these seventy seven steps. The seventy seven steps are a mix. Some days it is about information gathering. Some days it’s about teasing out what you want. Some days it’s giving you a brief financial lesson about some topic that I think is crucial to understanding money, and some days it’s setting up specific steps that you ought to take.

Rick Ferri: The book gets deep into, call it behavioral finance without calling it behavioral finance. What I find is that you’re able to describe things in layman terms without having to put a hundred footnotes in there and references to behavioral finance studies and such. But you’re able to take a lot of the biases and behavioral finance things that we know in academia and you’re able to very efficiently and very cleanly use it to describe what people should do or shouldn’t do, or at least get people to think about their behavior and how their behavior affects their finances. And that’s what I found very interesting about the book is most of the time when you read a book like this you’re constantly seeing footnote, footnote, footnote, footnote, footnote. You know this study, that study, this study, that study. You’ve avoided all of that in the book and I commend you for that, I think that’s great. But this is a very well researched and very well-written book that encompasses just so much, and I think you really hit what you were trying to do here with this book. 

Jonathan Clements: Well in many ways Rick, and thank you for your kind words, but in many ways the book is a product of the decades I spent thinking about money and one of the challenges of writing regularly about money is the basics are indeed pretty basic.  You know the basics of putting together a portfolio, of figuring out how much insurance you need, what you need to do in terms of estate planning, you know paying down debt and so on. This stuff is really not that complicated and if you’re going to survive as a financial writer you need to have some intellectual curiosity and start to delve into other areas of finance. And I’ve been the beneficiary, at least in terms of my longevity as a financial writer, of some of the great research that has come out of academia. The research on behavioral finance, on neuroeconomics, on evolutionary psychology, on money and happiness. All of these four areas have produced incredible insights that are so useful to us as managers of our own money. And I’ve had really the pleasure of swimming in this research for the past 20 plus years and so, while the book reflects that research, it’s not like I sat down and read it all over in the year running up to the book’s publication, I have been absorbing this for years and years and it’s sort of become part of the way I think about money. I’m not an original thinker but you know I am pretty good at synthesizing what’s out there and that’s what the book represents.

Rick Ferri:  There’s a few things you wrote in here which caught my attention very quickly. You have these great little quotes at the end of every chapter but it’s not “this is what you’ve learned in this chapter” it’s a saying or it’s something that you put together, and I want to read you one of them because I found it very interesting. It’s actually from day forty four. You’ve said, if our net worth was displayed on our foreheads for all to see, libraries would be mobbed and used cars would be status symbols, and it took me a second to think about that.

Saying libraries would be mobbed and used cars would be status symbols.  Well of course, yeah, I started thinking about it saying sure, you, you wouldn’t buy a book you’d go to the library, get one for free, and you wouldn’t buy a new car you’d go out and buy a used car, and that would be a status symbol because what would be on your forehead is a big number.

Jonathan Clements: Yeah probably one of the most influential books I think that any of us have read over the past twenty years is The Millionaire Next Door, and this notion that it’s not the money that you see, it’s the money that you don’t see, right? It’s the millionaire next door living in the modest home, wearing clothes from JCPenney, and driving the second-hand car. That’s the millionaire, the millionaire isn’t you know, the big house with his or her European sedan and the beautifully landscaped lawn. That’s, that’s not money, that’s money that is gone. There’s money that is spent. And yet the money that is still there often isn’t visible. You see this on the Bogleheads forum. The book, that forum isn’t just about low-cost investing it’s about having sensible habits when it comes to spending money. I think this is one of the reasons why you see so much overlap between the Bogleheads and what’s become a very hot topic in recent months, which is the FIRE movement, you know financial independence retire early. That frugality cuts not just across investing but across our entire financial lives and being frugal about how we handle our money is the key to wealth. And that’s why I came up with that. If we all knew how much everybody was worth, and you saw somebody driving a BMW with a negative net worth you just laugh out loud.

Rick Ferri: I get it, yeah, that’s true.

Jonathan Clements: But because we don’t see the net worth on their forehead, we don’t get the chance to laugh at them.

Rick Ferri: Great, yeah that’s perfect, that’s great. And you in fact, you followed up with that and another day, day fifty-two. You talked about “want to hurt your happiness, buy a big house involving lots of upkeep, and a long commute.” Yeah I think a lot of us have, are guilty of that. You know, as soon as you buy the big house you’re now, you’ve got big bills to keep it up and it might be nice to show off for a while, but after a while people stop coming and you just have bigger bills.

You had one more thing in here I want to talk about and that is something you wrote on day seventy, which talked about limiting yourself to one financial advisor, one mag [magazine], and one  brokerage firm or mutual fund family. And I want to talk about that because it always comes up on the Bogleheads where people say oh I have three or four banks because I want to diversify. I have two or three different advisors because I want to diversify. I don’t want to keep all my money at one particular firm, call it Vanguard or Schwab or TD or wherever. I want to diversify because what happens if one of those companies go under? You’re actually saying no don’t worry about that here.

So in terms of what I call naive diversification, multiple financial advisors, multiple banks, multiple mutual fund companies, multiple brokerage firms, yeah I don’t see that there is much benefit to this, with one narrow exception. I mean I do appreciate that you know there is this FDIC limit of two hundred and fifty thousand, and if you have a ton of money in the bank, in order to make sure that you’re covered by that two hundred and fifty, you know you may need to use multiple banks.

But other than that, I mean why would you use two financial advisors? What you’re going to end up probably is two portfolios that have massive amounts of overlap, for which you’re paying excessive cost. You know you’re not getting anything, any added value if you can’t find one financial advisor who’s doing the job for you, you know you’ve got a big problem.

Similarly if you go to a brokerage firm, you’re getting diversification not from the brokerage firm but from the investments that you buy. If you have ten different ETFs that’s your diversification. The fact, though they’re all held at one brokerage firm is of no import. It’s not like the brokerage firm is, you know, going to go under and suddenly all your assets are gone. I mean those assets are held by a separate custodian. You have no reason to worry about that.

Ditto for using multiple mutual fund companies. I mean I don’t see any point in that. You know you can have all your mutual funds at one company. Each fund is a separate company. Each of those investments is held by a separate – by the outside custodian. There should be no extra risk involved.

Rick Ferri: It’s, it’s true, it is that way. But some people still have this belief that they need to be diversified amongst where they keep their money and I’m glad you wrote that in the book because it’s just not true. I personally have all my money at Vanguard and I don’t have any reason to put it anywhere else. Even if I wanted to buy an exchange-traded fund that was traded by iShares I could buy it through Vanguard, so I don’t need to have multiple custodians. Now if somebody has a 401k of course they have to have the money in that 401k, but once they retire they can roll that into an IRA account at the one custodian that they choose, and I’m not saying Vanguard’s the place. It could be Schwab, it could be wherever, but why complicate it. Why have a number of accounts at a number of custodians. That not only does it make it complicated for you the investor, but if you should happen to pass away it becomes ten times more complicated for the person who has to pick all this up.

Jonathan Clements: Yeah. No absolutely. I mean I do as you do Rick, I have all of my investment dollars at Vanguard, and in fact this may surprise people, I don’t own any ETFs, I own just purely mutual funds. And the goal is simplicity here. You know when I pass away, you know my kids should be able to settle my estate in a couple hours. 

Rick Ferri: Yeah I think that that’s the whole idea of simplicity is the next phase of what’s going on with financial writers. I mean personally, me, I’m– I just launched a new website, Core Four Investing, and it’s all about being simple and simplicity. And so I think that the next phase, at least baby boomers like me need to make things much more simple, need to make their portfolio simple, or need to make their estate simpler. Need to, need not to have five different IRA rollover accounts. You know if you’re not going to go back to work put them all together into one. There’s no reason to have five anymore. And if you have 401ks all over the place from different jobs, you don’t need that, bring them all together into one IRA.,make it simple. So I think simplicity and how we manage our money is important and not just for us, but for the future generations. 

Jonathan Clements: And I would just add the corollary to that, which is that Wall Street battles this notion fiercely. They want investors to believe that there is some correlation between sophistication, complexity, and investment returns and this simply isn’t the case. I know so many high net worth individuals who end up in complicated investment products because they think they’re  getting something special and they are. What they’re getting is a complicated investment product. There’s an excuse for charging high fees.If you want to be truly sophisticated you should have a simple portfolio. 

Rick Ferri: Very well put. Let’s get back to one more item before I come to questions by the Bogleheads forum. You talked about FIRE, financial independent retire early. This is getting to be quite a phenomenon especially among Millennials and first of all, could you  elaborate a little bit more on what FIRE is, and then talk more about your viewpoint of these different facets of FIRE.

Jonathan Clements: So the financial independence retire early movement is really about being extremely frugal early in your career, quickly buying yourself some financial freedom, so that, you know, you can potentially retire at a relatively early age. Now, you know, let’s unpack that a little bit. When we talk about retirement it’s really not about retiring in the sense of, you know, you’re going to go and live in Florida and spend your, all your days doing nothing. It’s really about buying yourself the freedom to spend your days doing what you love. Of course you know for many people this idea of being frugal, buying yourself financial freedom quickly and then you know using that freedom to spend your days doing what you love, that notion has been around for many decades. I mean that certainly drove a lot of my financial behavior. I was a  prodigious saver when I was in my 20s and 30s and that’s what allows me today not to worry about earning a paycheck. What the financial independence retire early movement, the FIRE movement has done is it’s conceptualized it in a single word, FIRE, and it became a rallying cry  for a certain group of devotees. But, you know it’s not that different for anything that we’ve known before. It’s simply that it has coalesced around this one phrase and it has become something of a movement. I think it’s to be applauded. I mean in a country where far too many people save way too little, the idea that we’re celebrating people who are being smart about their money and saving diligently. What’s wrong with that?

Rick Ferri: Not a thing. And parlaying that there are big companies out there are being formed and have been around now for a while, companies like Betterment, where they’re teaching young people right from the beginning, use low-cost index funds, don’t try to beat the market, just put a simple portfolio together of low-cost index funds. They’re granted, they’re using ETFs  because they’re custodying the assets at a brokerage firm but I always applauded companies like Wealthfront and Betterment and other robo-advisors because they’re teaching young people right from the beginning – don’t bother trying to beat the market, just have a consistent investment strategy, a consistent saving strategy, just put the money away. It’s all part of the same movement and I think it’s all very good.

Jonathan Clements: Yeah, I think anything that focuses on holding down costs, whether it’s you know the costs and your day-to-day living, the costs in your investment portfolio, the cost of your insurance, the cost to put together your estate plan, as long as you’re being smart in the choices you make, what’s wrong with that. You know the less money that goes to these, you know financial service providers, that’s more money that ends up in your pocket.

Rick Ferri: In the last part of the interview today, I’m going to go to the Bogleheads forum. I asked the Bogleheads on bogleheads.org to come up with some questions for you. And a lot of people had a lot of great comments for you, saying how they followed you for years and gave you a lot of kudos, but there were a few questions so I’m going to go through a few of those questions now and, you know, sort of wrap them off one, two, three, four.

So here was the first question and this was by Rosemary11. She asked you; actually she asked you three questions. so I’ll – one, two, three and then you can put them all together if you’d like.

“I am in retirement . What is an acceptable asset allocation in retirement?” So that was her first question, what is an acceptable asset allocation in retirement. Her second one was, “What international allocation (I think she’s talking about stocks) as a percentage of the asset allocation?” and thirdly, “What is the safe withdrawal rate in retirement?” So some three broad general questions and one, two, three, if you can hit them.

Jonathan Clements: So in terms of the right asset allocation that’s going to vary for one person to the next. You know much depends on how much of your expenses are going to be covered by Social Security.  It’s going to depend on whether you have a traditional kind of employer pension. It also might depend on whether you have anything else that’s generating income, for instance for rental real estate. You know there’s a rule of thumb. You know 50 to 60 percent in stocks is probably a reasonable target. Whether I would say as sort of an upper limit on that is you should know exactly where you’re gonna get your next five years of portfolio withdrawals from, and that money at a minimum should be invested in something conservative: CDs, short-term bonds, a high-yield savings account, something like that.

So to get your third question, Rick, you know if you’re using the 4% withdrawal rate, which I think is a fine number, at a bare minimum you should have at least 20% of your portfolio in cash or near cash investments so that you can cover those next five years of portfolio withdrawals. Now, that suggested, potentially you could have 80 percent in stocks. I think that’s way too much. I would probably go for 50 or 60 percent in stocks. At a minimum, you want that 20 percent or 5 years of four percent withdrawal rates stashed in cash or cash like investments so that you’re covered  in case the market goes down steeply.

In terms of the second question about international allocation on a stock portfolio, my view on this has shifted over the years and personally I now have a market weighted portfolio when it comes to stocks, which means actually that I have half my money in US stocks and half of my money in foreign stocks. And I’d done that for one simple reason which is, who am I to think that I know better than all other investors collectively?  If all other investors worldwide collectively believe that half a global stock market value is in the US and half is outside the US, shouldn’t I, as a hardcore indexer, replicate those percentages. The caveat in that is of course you know you are introducing a fair amount of currency risk into a portfolio. If you’re uncomfortable with that degree of currency risk I would say either hold less in international stocks or potentially seek out a fund that hedges its currency exposure but as things stand I’m not sure of a fund that would give you low-cost foreign stock exposure with a currency hedge.

Rick Ferri: Well thank you Jonathan, that was a good answer. Let me go to another question which is something to do with what you just talked about so we can hit this one, too – this is from CW radio, who asks “as a safety-first investor that is in retirement, what investment should I put my safe money in?” and I think you already touched on this with the 20%, but I think he is looking for SPIA, which is a single premium insurance annuity, a bond ladder, TIPSs, and so forth. He’s asking if these are also acceptable places to put safe money.

Jonathan Clements: I think all of those are acceptable places to put safe money. If you’re going to buy an immediate fixed annuity I would buy from more than one insurance company and I would buy from insurance companies with a high rating for financial strength. An immediate fixed annuity is a great way to hedge longevity risk and ensure that you have a stable stream of monthly income. You just don’t want to get it derailed because you buy from a single shaky insurance company, and the insurance company goes under.

Rick Ferri: This is from a poster by the name of beanie. He says, “Jonathan Clements used to recommend putting fifteen to twenty percent of one’s stock allocation in diversifiers such as merger-arbitrage funds, commodity funds, gold funds and REITs. I haven’t seen him talking about this in a long time, maybe ten years or more. Have his views changed, if so why?”

Jonathan Clements: So I never recommended as much as 20%. I do remember writing a column for The Wall Street Journal when people were all hot and bothered about alternative  investments and this was a question I was getting a lot and I did indeed say that if you really want alternatives exposure in your portfolio I could see allocating 10% of a portfolio in no more than two alternative investments, and in terms of alternative investments it was the list that you recommended, real estate investment trust, gold stocks, commodity funds, and precious metals funds. I mean, I still think that that’s a reasonable allocation. I have to say I don’t particularly like merger-arbitrage funds because they involve active management. And I have soured on commodities funds – as those have become more actively traded, it’s gone from being a market where companies and farmers hedge to being a market dominated by investors. The historic impressive returns from the commodity indexes hasn’t been replicated and in all likelihood it will not be replicated, so I’m not that crazy about commodities funds. You know I still have a soft spot for gold stock funds and I still have a soft spot for real estate investment trusts but I probably wouldn’t put more than a couple percent of a portfolio in each.

Rick Ferri: Well what if nobody did any of that and just bought the three fund portfolio?

Jonathan Clements: I think a three fund portfolio is a great portfolio to own. You and I have had this discussion. Rick you know people tend to mess around way too much with their portfolios. I think I’ve done too much of that myself over the years. If you simply buy the three fund portfolio: Total US Market, Total International and Total Bond, I think that’s a great mix.

I mean you may even want to consider the two fund portfolio. You know you can now go to Vanguard and buy the Total World Index fund, add the Total Bond Market fund onto that and you could have an incredibly diversified portfolio with an asset allocation of your choice with just two mutual funds.

Rick Ferri: Incredible. It wasn’t that way years ago though things have gotten so much better in indexing space where you can really reduce the number of holdings that you need nowadays to be diversified globally. It’s really gotten a lot better and the fees have come down so much.

Jonathan Clements: I mean that Total World Index fund I believe has something in the range of 8,000 stocks in that fund. You  know for a three thousand dollar investment, or you can buy the ETF and invest even less, you can buy a portfolio with eight thousand different stocks in it. Think about that. I mean that is astonishing. Today the everyday investor with ten or twenty thousand dollars to invest can build a portfolio that many institutional investors two decades ago would have died to have. It would be lower cost and better diversified. It’s astonishing what ordinary investors can do with their money today, really astonishing.

Rick Ferri: So the last question has to do with buying happiness. This is from tom10 and I’m  gonna just paraphrase what he’s saying. You’ve always talked about, and one of the things that make you unique, is the spending side of happiness. If spending actually makes people happy. So he was wondering about your thoughts on spending. Now we talked an awful lot about investing and saving, but he wants to know specifically your thoughts about spending and how to spend correctly to make you happier. 

Jonathan Clements: As I’ve written in numerous places I believe that money can buy happiness in three ways. First, money can buy happiness simply by eliminating financial worries. So many people in America pursue happiness of the shopping mall, rack up the credit cards and end up miserable because they leave themselves in a financially perilous state and whatever they managed to buy at the mall is no solace when they wake in the middle of the night worrying about what happens if they lose their job or how are they going to pay the credit card bill. So simply being smart about money, having little money in the bank, saving for the future, avoiding debt except for mortgage debt, that alone is gonna buy you substantial happiness. So that’s the first way that money can buy happiness. 

Second, money can buy happiness if you can reach the point where you can spend your days doing what you love. There are few things in life that bring greater happiness than working hard at something you care passionately about. So if you can get yourself to that point, like the FIRE people talk about, where you don’t need a regular paycheck, or you need a much smaller paycheck and you can spend your days doing what you love, that is the second way that money can buy happiness.

But the third way and this is probably what the question is getting at is I believe the third way that money can buy happiness is we can use it to create special times with friends and family. And there are a couple of different elements to this. I mean first we know that spending time with friends and family gives an enormous boost to happiness. The research suggests that that is indeed the case. In fact the research suggests that having a robust network of friends and family not only makes you happier but it also gives a boost to longevity equal in effect to not smoking. So having a robust network of families, there’s nothing good for happiness but it’s also good for your health. 

So in terms of using money what you want to do is spend it not on material goods which are often enjoyed on your own, but on experiences. You know taking the family on vacation, organizing the family reunion, going out to dinner with friends, going to the theater with a colleague. Those experiences enjoyed with friends and family can give a big boost to happiness. But there’s another element to this, which is if you really want to get a lot of happiness out of your spending on experiences with friends and family, you should arrange these things far ahead of time so that you have a long period of eager anticipation. That way you’ll get a lot more happiness out of dollars you’re about to spend and you should make sure that you keep mementos to remind you of the event in question. When you go on vacation you should take photographs and then you should put them up around your house so that the months afterwards you can think, wow that was such a great trip, I had such a good time. And here every day when I walk to the living room is that photograph that reminds me of what a special time in my life that was. So that, in terms of  actually spending money, would be my  number one tip.

Rick Ferri: Well that’s great. Jonathan I want to thank you so much. You’ve made us all very happy by being on our program today. Well good luck with the book and again the name of your new book is From Here to Financial Happiness: Enrich Your Life in Just 77 Days. Jonathan thank you so much for being our guest on Bogleheads on Investing.

Jonathan Clements: Oh, thanks so much Rick. It’s been a pleasure talking to you.

Rick Ferri: This concludes the third episode of Bogleheads on Investing. I’m your host Rick Ferri. Join us each  month to hear a new special guest. In the meantime visit bogleheads.org and the Bogleheads wiki, participate in the forum and help others find the forum. Thanks for listening.

[Music]

[Applause]