John Rothmann – I’m Jon Rothmann and you’re listening to the Retire With More program and our guest Jonathan Clements is an absolutely outstanding, fascinating fellow, Mitch we want to continue on our theme of the following 5 themes, we’ve covered three so far, let’s hit the next one

Mitch Tuchman –  I want to go back to talk about the third theme just a little bit more, because again, Jonathan Clements is one of the top personal finance writers in America.  He writes for the WSJ every weekend and has been doing this for decades, and his perspective is second to none.  We’re talking about people as hunter and gatherers, and we are not wired to do instinctively things that relate to being financially successful.  That all those instincts that we’ve got burned into our brains have sort of moved us into making the wrong decisions in the wrong time when it comes to investing.  Jonathan, I wanted to ask you have you read about this Vanguard study where just guiding people to avoid those instincts can help an investor over many years increase his returns by 3% per year.

Jonathan Clements – I’ve seen that study and what it talks to is the value of a good financial advisor and I preface it with the word good. People make a huge number of mental mistakes, but lets lay it on the line right here.  Saving and investing for retirement is too important to mess up.  If you can’t do it on your own, if you consistently fail to save enough, if you regularly panic when the market goes down, if you find yourself chasing the hot performers, if you clearly can not get it done on your own, then find somebody qualified, whose acting as a fiduciary to work on your behalf.

John Rothmann – and that would be from our perspective Rebalance.com

Mitch Tuchman – well of course, we talk people off the ledge all of the time. it’s amazing and I would like to read some of those behavioral studies that you’ve mentioned…. that’s a lot of our value added.

John Rothmann – so I just want to be clear then, Jonathan you would then no advise me to take all of my money and put it in Enron?

Jonathan Clements –   no I would rather go to Vegas and put it on red, that would be my preference.

John Rothmann – lets keep going, we’ve got two more themes to hit, Mitch?

Mitch Tuchman –  Jonathan, talk about this sort of holistic approach that people miss that they don’t take in managing their money.

Jonathan Clements –   when you think about your finances, you really want to take a broad view that cuts across all these different financial products that you get sold. You should be thinking about your insurance, and your real estate, and your retirement portfolio, and your college savings, and your mortgage all in a single financial systems, rather than thinking of them in one bucket at a time.  And, often the central organizing element is you try to take this broad view of your finances, it’s what economist call your human capital, which is your ability to pull in a pay check.  Why is your human capital so important?  Well, in crass economic terms, your years in the workforce are all about building up enough financial capital so that one day you can live without the income of your human capital, and so if you think about that process, building up savings so that one day you no longer need a paycheck.  You should make sure that all the different parts of your finance support that.

For instance, early in your working career when you know you have decades of paychecks ahead of you, you should probably be heavily focused on the stock market, because in the sense your paycheck is like earning a pay check from a bond.  You have a big bond, that’s your paycheck, so you diversify it by investing in a lot of stocks.  As you approach retirement at the end of your human capital, what you’re going to want to do is bring bonds into your portfolio so that you replace the income of your paycheck with income from your bonds.  Similarly, because your human capital is so important, you’ll probably want to have some disability insurance in case you suffer a career ending disability so that you have income that’s going to replace that paycheck.  The riskiness of your paycheck should also be reflected in how risky of your stock portfolio is.  If you work on commission and/or there’s a great chance you’re going to get laid off you’re probably going to want to be a little big more conservative with your portfolio. Similarly, in terms of debt, the riskier your human capital, the less debt you should be taking on.

Mitch Tuchman – you know Jonathan it’s interesting, we were recently talking to a prospective client the other day.  This guy had an enormous pension, about $70,00 a year.  You add up the social security he was going to be collecting and the guy was making more money than he would ever spend.  And yet, to him, he was being very conservative in his stock portfolio and we asked him why and he said well you know, there’s this rule, that I should take the number of years that I am and that’s the percentage of debt.  When we spoke with him holistically at Rebalance, we talked to him and we said “you can look at this pension and social security and the income that’s throwing off almost like a bond portfolio, which would mean that the IRA account is really to protect you from inflation and so that holistic approach we’re finding, evades people many times when they’re thinking about it. And, of course, the key here, and you pointed it out very eloquently Jonathan, is rebalancing.

Jonathan Clements –   that’s absolutely true.  Before we move off from the topic of holistic financial thinking, there’s a couple of other things along the same lines that we should talk about-  one is as you look at your overall finances you should be making sure that you’re not overcommitting to one goal and under committing to another.  And specifically you shouldn’t being buying ever-bigger homes and stuffing money into a college account if it means you’re shortchanging your retirement.  The fact is you don’t need to own the biggest house in the neighborhood, and you don’t have to pay for your kids to go to Harvard, but one day you will need to retire, and when you retire you can’t take out a loan, like you can when your kids are going to college or when you’re buying a house. When you start retirement, you have to have a great big heaping of dollar bills, and if you don’t have it you’re going back to the office

John Rothmann – I just want you to know that I’ve told both of my sons that their job is to graduate, to get great jobs and support me in my old age, but I guess I can’t count on that – talk to us about addition versus subtraction.  I did not do very well in math, but people do focus on additions not the subtractions, can you talk about that with us please?

Jonathan Clements –   when you discuss investing with individuals, their all focused on performance, are they going to be the market, what sort of return are the going to earn, and I say to people I’ve been kicking around Wall Street for 30 years, nobody knows which direction the financial markets are going to be going or what stocks are going to be another.  The crystal balls on Wall Street are all cloudy so forget trying to figure out what’s going to be the next top performer. Rather than trying to focus so much on the additions, try to limit the subtractions.  And, when I think about subtractions, I put them into two buckets.  First of all, there are the small annual subtractions that in the end can take a huge chunk out of your wealth and what we’re talking about here is subtractions from things like mutual fund expense, and brokerage commissions and trading too much.  And then there’s also the subtraction of annual tax bills.  If you trade your portfolio too much, realize your capital gains too quickly, you can end up giving away a lot of your annual gain so that your portfolio compounds at a lower rate.  So, that’s the smaller annual subtractions that you need to be aware of, and then there’s these big hits that can set you back so far that retirement can become a decade or two further away.  And what I’m talking about is taking huge risks like putting all of your money into a couple of stocks and one of them winds up going into bankruptcy, or we have a big market decline, You are over invested in stocks, you panic when the market goes down, you lock in your losses and you’ve given up money that you will never get back.  So don’t focus so much on what you’re going to make.  Think instead a lot more about what you could potentially lose. And if you limit those losses good things will happen.

Mitch Tuchman – That’s great… we call it risk-adjusted return, it’s not the return along… but it’s the return combined with what risk you took to get it.  But Jonathan, we’re going to run out of time here but can you tell us a little bit about the Money Guide 2015, your newest, updated book and why its important for people to get a copy of that?

Jonathan Clements –   The JONATHAN CLEMENTS Money Guide 2015 is an annual updated personal finance guide.  It just came out and it really is, unique and I will tell you why.  Most books take months and months to come to market. I have wrapped up this book on Dec 31, that evening I was taking all the latest financial numbers for closing markets, plus latest numbers from the economy and I was updating the book.  Thanks to Amazon and modern technology, that book was wrapped up on Dec 31 and available for sale the next day.  How cool is that?

John Rothmann – Astounding!

Jonathan Clements –   The JONATHAN CLEMENTS Money Guide 2015 is a comprehensive financial guide, it covers ever conceivable financial topic, it really is totally up to date and it will be updated again this year and be available for sale January 1 2016

John Rothmann – last word – 30 seconds.  What do you have to say to people?

Jonathan Clements –   I, over the years, met thousands of ordinary Americans who have amassed 7 figure portfolios – a lot of these people didn’t have high incomes, they weren’t particularly good at investing, but they do all share one attribute and that attribute is that they are all great, great savers.  If you want to know what the key to financial success is  – it’s really, really simple.  You’ve got to live within your means and save as much as possible every month.  If you do that, really good things will happen.

John Rothmann – Thanks, can’t wait to read the book!

Jonathan Clements –   My pleasure.