This transcript is of a conversation I had with Jonathan Clements, former personal finance columnist at the Wall Street Journal and author of The Little Book of Main Street Money (listen to the podcast). You can always subscribe to Tradestreaming Radio on iTunes.
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We’ve got a great show for today. Our guest, on today’s program, will be Jonathan Clements, the author of “The Little Book of Main Street Money: 21 Simple Truths that Help Real People Make Real Money.” Jonathan Clements, if you don’t know, spent 18 years at the Wall Street Journal where he was the newspaper’s award-winning personal finance columnist. He’s now the Director of Financial Education for Citi Personal Wealth Management.
Part of the “Little Book” series, this book is a quick read. It’s only 100 plus pages, but it’s chock full of all the insight and experience and intellect that Clements had gained throughout the years of writing for The Wall Street Journal. He is one of a handful of financial journalists who make understanding complex issues easier. He doesn’t do it by false promises of being able to manage your portfolio in two minutes a month. He doesn’t do it by skewing all the wiles of Wall Street. He’s a pragmatist. He understands that Wall Street is out there to sell you things, but there are tried and true ways that investors can save for retirement, can plan for future events, and take advantage of a lot of the investment opportunities that are out there.
This conversation was extremely interesting for me. Definitely check out his book. It came out last year. It’s a quick one, but it’s definitely something that belongs on your bookshelf. It’s the type of thing you can do with your kids. He addresses specific psychology around investing, psychology around saving, behavioral finance, and also gives practical tools that people can use in terms of being able to accomplish some of the things that he talks about.
Hope you enjoy the podcast. Again, if you’re listening to this in iTunes, please go and rate us. We definitely can use your feedback. We’ll just hop right in.
First question I had was that I don’t know how long this book was in the works, but obviously your timing was very auspicious, just after one of the worst financial crises in history. Was this book written for a specific era, or is this sort of timeless information?
Jonathan: Well, you’re right.
The book did come out at a very auspicious moment. It appeared in early 2009, which for many people was probably the worst they had ever felt financially. I mean, we just had the S&P 500 fall 57%. The real estate market had been in a tailspin since mid-2006. A lot of people were discovering that they had taken on not only too much mortgage debt but also too much credit card debt. They had these hefty auto loans. So, yeah, there was a real sense of financial panic.
Sitting here today, two years later, it’s almost hard to remember just how freaked out people were. I mean, it probably was the greatest financial crisis that my generation will ever see. Of course, in that crisis there were also enormous opportunities, and the opportunities were available to people who could sort of take themselves out of that current milieu and really focus on the big picture and on the long term.
To some extent with my book that’s what I try to get people to do. Yes, the markets do all kinds of wild and crazy things. Yes, the enthusiasm of the day changes constantly. Today it’s gold. A few years ago, it was real estate. A few years before that, it was tech stocks. But if you have a long-term focus, if you really think about your finances in a broad way, that craziness shouldn’t really have a big impact on your long-term financial success. So with the book, what I’m trying to do is to provide people with the idea that helps them to achieve that long-term financial success.
Zack: It’s so interesting. One of the things that, obviously, behavioral finance is showing that obviously people don’t do what’s necessarily right for them. Obviously, short-term thinking and short-term emotions typically rule the day, particularly in times of panic, well, and in euphoria.
Having tools like yours is one tool. How do investors make sure that they are making decisions that are, I guess, more cerebral and not more emotional?
Jonathan: I think it’s really, really tough. I think that a lot of what it takes to become a good investor and a good manager of your own money, it’s just time. It’s just experience dealing with the markets and dealing with other aspects of finance.
You think about people’s sort of learning curve, in some sense we don’t really get the opportunity to become experts in money management unless we really put our minds to it. Most of us will only buy two or three or four homes during the course of our lives. We never really get the chance to become experts at that. So there’s a good chance that we’re going to mess up.
Similarly, we only get to claim Social Security once. So in terms of timing when to claim Social Security, there’s a good chance we’re going to mess up royally. Similarly, when it comes to investing, yeah, we’re going to get to see a lot more bull and bear markets than we would say opportunities to buy homes. Nonetheless, the chance to mess up is enormous, in part because people do have to cope with all this noise. That noise sort of feeds some of our instincts.
We know that we come from this hunter/gatherer background where we’re supremely loss averse, and whenever we’re faced with the possibility of big financial losses, we do tend to panic. There’s a consequence. In many ways, we’re not wired to invest well, and we don’t really get the opportunity to learn to become better investors and managers of our own money unless we put our minds to it. Just look around the world. A lot of people don’t bother to put their minds to it.
Zack: This may be heretical question and I’m a professional financial advisor, my day job. Something I deal with my clients or prospects is even opening up the question, “Do you need to be in the market at all?” The sort of prevailing wisdom for many years was that you have to be. When times get tough and people pull out, you see that they weren’t necessarily equipped or weren’t adequately prepared for that scenario. Do you think people have to be in? Is that like sort of written in stone?
Jonathan: I think that’s a really, really interesting question. I mean, to some degree if you look at prospective stock market returns and you look at prospective bond market returns, the incremental returns that people can get by going into stocks, at least on an annual basis or on an annualized basis, are relatively modest. Maybe for the risk that’s involved, the chance of these self-inflicted investment wounds, given the risk involved, maybe people don’t need to be in the stock market. I, for one, am fairly heavily invested in stocks. I enjoy it. I feel like I have the temperament to do it, but I’m not sure that everybody does.
I think for some segment of the population, maybe a substantial segment of the population, not participating in the stock market may be a sensible choice. They will pay a price over the long term. They will miss out on the opportunity to get somewhat superior returns, and they’ll have to compensate by saving more money. But maybe, in the long run, that will be a more successful strategy for them because they won’t have these self-inflicted investments wounds.
Zack: I think part of what we struggle with is just creating a language around risk, right? So everybody that walks into a professional advisor has to fill out some type of questionnaire, six basic questions. But when push comes to shove and the markets are flailing, that’s when you really feel it, right? It’s a visceral thing and not necessarily a mental thing. Are we getting better at being able to, as a profession or as a vocation, being able to describe risk?
Jonathan: Again, that’s an interesting question, and I’m not sure. I think we know what the problems are much better than we did say 20 years ago. I mean, behavioral finance has certainly raised our awareness of the mental mistakes that people make. This tendency to be loss averse, this tendency to extrapolate short-term returns, this tendency to be overly self-confident, all these things that make us bad investors, we are more aware of these mistakes, but you know the story as well as I do. Just because you know that you need to exercise, that you need to eat a healthy diet, that you need to save regularly, just having that knowledge, in and of itself, doesn’t mean that you’re going to do it. We all know how to lead better lives. It’s just getting ourselves to do it is the problem.
Zack: I don’t know if you got a chance to see. There was a Dow Jones report that was published earlier last week about the affluent and how open they are to using online on tools versus using professional advisors. They had Meir Statman on, who’s written a best-selling book and is one of the pioneers in the industry. He made this comparison to going to a doctor. With the prevalence of all the information online, we can self-diagnosis and take care of ourselves pretty well. But when push comes to shove, you’re not going to do your own surgery. You’re going to go to a professional. Where do professionals, I guess, what’s your opinion, where they fit into this entire equation?
Jonathan: I think you could think about what a professional financial advisor can do for you. Beyond providing you with some array of products, they can provide you with knowledge, with expertise, but they can also provide you with coaching. I think, historically, we’ve sort of focused on financial advisors as not only providing the products and the trading capability but also providing the expertise. I think what we’re seeing in the advisory profession – I think it’s a good thing – is more moving towards this coaching role, because just having the products and having the expertise isn’t enough. Also, in terms of the expertise, I think a lot of financial advisors are realizing that the areas where they can provide most value isn’t in telling clients which way the stock or bond markets are headed or trying to pick individual securities. Their real expertise is in things like managing risk, helping clients figure out what to do with their insurance needs, helping them to think about estate planning, encouraging them to save, and things like that.
Zack: I guess the industry itself is dealing with, I guess, redefining the value proposition where it’s not about products or access anymore, and it’s about exactly those things you just described. The old, I guess, compensation model doesn’t necessarily work as well with the new type of value being delivered. You mentioned this in the book. In certain cases, particularly when markets are volatile, it’s almost better to go with an older professional who’s been through some of these cycles before.
Jonathan: Yeah. One of the things, and this idea is not original to me. It actually came from my good friend, Bill Bernstein, who’s written a number of best-selling books. Bill had once mentioned to me that maybe the right portfolio for somebody who’s in their 20s and is new to investing and has never been through a bear market, maybe the right portfolio for that person is the classic balance portfolio, 60% stocks and 40% bonds.
Meanwhile, you fast forward 40 years to somebody who is in their 60s. They’re a grizzled veteran of numerous bear markets. They understand their tolerance for risk and so on. Often that person is going to be told you should be scaling back on stocks and putting more into bonds. But because that guy is a grizzled professional or grizzled veteran, because he or she has been through numerous bear markets, maybe the 60-40 portfolio also makes sense for them.
Zack: In the future, and this is something I’ve been writing about trying to flesh out some of these ideas, but do you see . . . we’re used to speaking about sort of this bipolar thing where people are either do-it-yourself investors and they’re doing everything alone versus people that are going turn-key and going full-service. I sort of see the emergence of this middle ground of people that are continuing to do things on their own. Maybe they want their assets custody, where they have them in reach, but then going periodically and tapping professional advice along the way for specific scenarios. What are your thoughts about where this is all leading?
Jonathan: I think most people have never been purely do-it-yourselfers or purely I’m just going to hand over my portfolio to a professional. I think most people have always fallen into that middle ground. They may manage their portfolio themselves, but then try to get their finances looked at periodically. Or conversely, even if they have the bulk of their portfolio sitting with a financial advisor who’s overseeing it in some sort of managed account, they have a certain amount of money on the side that they continue to invest themselves. Maybe they see it as play money, maybe they see it as a way to diversify. We know that people have this odd notion of diversification. They don’t seem to like to diversify across investments. They also like to diversify across financial institutions and even diversify across financial advisors.
People do have this tendency to build these different mental accounts and manage them in slightly different ways because it gives them some sense of greater security.
Zack: But doesn’t that lack of, I guess, assignment of a specific person, whether it’s the investor himself or a professional as a quarterback, I mean, when you look at it piecemeal, aren’t these people selling themselves short? Maybe we don’t have a model to sufficiently address that yet.
Jonathan: I think you’re absolutely right. What you want is somebody to look at your entire finances and say whether you’ve got the right mix of investments, whether there’s anything missing, whether there’s something more you should be doing. If you don’t have somebody looking at the entire pie, there could be a problem. It could be that you never got around to buying the disability insurance. It could be that you never really thought about how the beneficiary designations on your retirement accounts fit with what you’re saying in your will. There are all kinds of things that can slip through the cracks. But to some degree, we shouldn’t let the perfect be the enemy of the good.
If people are more comfortable investing by having multiple financial advisors or multiple financial institutions and that’s going to get them to invest in a somewhat prudent manner, it may not be perfect, but maybe because we give them that comfort level, it’s better than the other result, which might they just sit everything in the bank.
Zack: What I like so much about your approach, and you got this definitely during your writings at The Wall Street Journal and the book encapsulates this well, is that you’ve found sort of this middle ground stance where you’re not completely anti-Wall Street, meaning you recognize the power in investing, but you also recognize sort of the game that Wall Street plays. You found a way to educate people in a way to be aware of some of these shortfalls and shortcomings of the industry in general, but then also to have the wherewithal to steer themselves and stay clear of those things. I guess in comparison to some of the other personal finance experts out there who have taken decidedly anti-Wall Street stances or have completely bought into Wall Street, you have found this way to sort of take the best of both worlds. Do you see that?
Jonathan: I guess one of the things that I learned from all the years of writing for the Journal and for publications prior to that is that in the end what readers want and, by extension, what investors want is not a litany of don’t do this and don’t do that. People are trying to figure out what to do with their money. In the end, what they’re looking for is positive advice and advice that is actionable.
If you don’t give them that, then all you’re doing is warning them about potholes in the road without telling them what direction they should be going in. That’s not really helping them. I think that failure to give positive advice, to give specific pointers about what to do with your money is where a lot of my former colleagues in the media fall down. I think it’s one of the reasons why my column was pretty popular. I’m not saying I gave the best investment advice in the world. I’m not saying that I’m super astute about money, but people appreciated the fact that I was actually giving them something to do.
Zack: With that in mind, did you ever consider – I’m curious personally, you can answer this or not – managing money yourself?
Jonathan: Yeah, I thought about. I have to tell you that to some extent I’m in admiration of people who do it because, not the managing the money part, that to me would be relatively straightforward. It’s the managing of the clients that takes all the work. You really need to make sure that the clients that you have understand what they need to do to succeed, that their expectations of what they’re going to get from the financial markets are well honed, so that they don’t freak out when the market next declines. So they have reasonable expectations of what sort of retirement income they’re going to get out of the savings they have.
All of those are tough conversations. We know how clients are when the markets drop substantially. A lot of financial advisors really struggle at times like that. The clients blame them for what’s happened. It’s a tough job to have. That managing of the clients is really an extraordinarily difficult thing to do, and frankly, it’s not something I’m necessarily up to doing.
Zack: It’s interesting, and some of the things I’ve written about and I am studying is sort of like the severing of the client relationship versus the actual asset management piece. There was a Bloomberg piece recently about these portfolios to go, where people are sort of automating the asset management piece and then using like a web front end to sort of interact with people. Obviously, you’ve had brokers for years selling third party asset management services. Do you see that as a trend continuing, sort of people micro-focusing on the piece of the business that they like or that they’re good at?
Jonathan: I think it makes a lot of sense. I mean, the fact is the ability to manage clients, to establish a rapport with them, to coach them to do the right thing, to coach them to stay in the markets when things get rough, that involves a completely different skill set from the ability to analyze somebody’s finances and select the right investments and so on. While there may be people out there who can do both and do both well, separating out those two functions strikes me as being a very smart thing to do. I think Wall Street recognizes that. I mean, that’s why a lot of big brokerage firms have been moving away from the traditional model where brokers work on commission and pick individual investments and towards these fee-based managed accounts where the responsibility to manage the money is passed on to somebody else and the financial advisor can focus on the relationship with the client.
Zack: One thing I ask of all the participants on the podcast that I find very useful for me and for our listeners is, are there certain tools that you use online – you mentioned you are heavily invested in stocks – that you use to research, whether online, offline tools, resources that you find you’re going back to keep tapping, things that you could just share with my audience?
Jonathan: I tend not to use that many financial tools. I have in the past. I’ve looked at, sort of, calculators about how much to save and so on. Really, what I do is very straightforward. I mean I own a broadly diversified portfolio of stock and bond index funds. I’m constantly looking for interesting new asset classes to add to that mix. But having set up that portfolio, my focus is on periodically rebalancing back to the target percentages I have, saving a fair amount of money every year, and trying to do things like hold down costs and hold down taxes. Beyond that, my real focus is on enjoying the rest of my life. I don’t spend a lot of time thinking about my portfolio.
Zack: Do you think that that’s a good motto? Like get things set up in a way where you periodically come in, kind of make sure you right sized everything, and then go along your merry way.
Jonathan: I think that is a great model for a lot of people, whether they’re investing on their own or they’re working through a financial advisor. When we go out and we buy stocks and bonds or stock and bond funds, we tell ourselves that these are meant to be long-term investments. Then, all of a sudden, the Dow Jones Industrial Average drops 300 points, and we find ourselves sitting bolt upright in the La-Z-Boy, gripping the armrests, and glued to CNBC and trying to figure out what’s the next trade we’re going to make. That’s craziness. If you set up this portfolio saying this is going take me from here to retirement and then from retirement through the end of my life, you should not be making changes just because the Dow decides to have a hiccup on any particular day.
Zack: Again, we can end with this question. I’m not sure it’s a fair question. But when the market’s plummeting and we know that we’ve got further to go and people are really feeling the stress, I mean, why not sell? Again, I tend to agree with you in terms of holding things through a panic, and things will typically right size themselves. If somebody knows that we’ve got another 2,000 points down on the Dow, why not go with your gut? I mean it seems almost silly.
Jonathan: I have two responses to that, Zack. One is we never know. Nobody has a crystal ball. A lot of people thought that the stock market had bottomed in October 2008. I had a lot of people I was speaking to who said that’s the bottom and now I’m going to buy like crazy. Of course, we had another five or six months to go at that juncture.
That said, even though I have these target percentages and I tend to stick with them, I do stray. I do sin a little. For instance, go back to early 2009, I did overweight stocks at that juncture. It did strike me that this was the buying opportunity of a generation and I didn’t want to let that slide by.
So, while I would advise most people to settle on a fixed asset allocation, rebalance regularly and get on with the rest of their lives, I do tweak it a little bit at times like that. To some extent, sinning in that direction strikes me as it’s a lot more sensible than the reverse. I mean, we have this tendency – we’ve already spoken about it – to chase whatever is hot.
Something goes up in value and suddenly everybody wants to buy it. That’s craziness. When something has spectacular returns, what typically happens is you’re stealing gains from the future. The more popular an investment becomes, the lower future returns are going to be. We saw that with stocks after the bull market in the late 1990s. We saw it with the housing market after the buying frenzy of 2004, 2005, and early 2006.
The really great buying opportunities occur at times like early 2009, when the headlines are terrifying, when the pundits are full of doom and gloom, and when buying stocks is even more uncomfortable than hearing your parents discuss their sex life.
Zack: Great way to put it. Jonathan, this has been an excellent conversation. I found it very valuable, and I appreciate your time.
Jonathan: All right, my pleasure.
Zack: Well, that sums it up for today’s episode of Tradestreaming Radio. I hope you enjoyed our conversation with Jonathan Clements, the author of “The Little Book of Main Street Money,” and previously the personal finance columnist for The Wall Street Journal for 18 years.
We discussed how to navigate today’s investing climate, post-financial crisis, how experience and time help create investor expertise, the struggle investors and advisers have in describing risk, and why we continue to make decisions antithetical to what we know we should do. It was a great conversation.
Again, if you’re listening to this on iTunes, please go to iTunes and give us a review or a ranking or both. We appreciate that. Come to the blog. We’ll have links to all of Clements’ material including the book. We’re always open for feedback here at Tradestreaming Radio. Let us know what you think. Let us know if you have any feedback. If you have any ideas for future episodes, we’d love to hear from you.
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