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Clements: 'It's in Wall Street's Interest to Make Everyday Investors Think That They Are Stupid'

The influential financial writer on what's driving higher market valuations, the challenges of retirement drawdown, and the myth of the 'dumb' investor.

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Our guest on today's podcast is Jonathan Clements, the founder and editor of the website HumbleDollar. Clements has been a prolific and influential writer over his several-decade career. Prior to starting HumbleDollar, he was the longtime money and investing columnist for The Wall Street Journal, where he wrote more than 1,000 columns. After he left The Journal, Clements spent six years heading up investor education at Citi Personal Wealth Management. He has also authored seven investment books and a novel, including the Jonathan Clements Money Guide, How to Think about Money, and From Here to Financial Happiness.

Background Information

Related Links

Frugality and Setting Financial Goals

The Role of Advisors in Improving Outcomes

Whether Investors Undermine Their Results With Bad Behavior

Retirement Decumulation

Asset Allocation and Investing

Transcript

Jeffrey Ptak: Hi, and welcome to The Long View. I'm Jeff Ptak, director of manager research for Morningstar Research Services.

Christine Benz: And I'm Christine Benz, director of personal finance for Morningstar, Inc.

Ptak: Our guest on today's podcast is Jonathan Clements, the founder and editor of the website HumbleDollar. Jonathan has been a prolific and influential writer over his several-decade career. Prior to starting HumbleDollar, he was the longtime money and investing columnist for The Wall Street Journal, where he wrote more than 1,000 columns. After he left The Journal, Jonathan spent six years heading up investor education at Citi Personal Wealth Management. He has also authored seven investment books and a novel, including the Jonathan Clements Money Guide, How to Think About Money, and From Here to Financial Happiness. Jonathan, welcome to The Long View. Thank you so much for joining us today.

Jonathan Clements: Thank you, Jeff, and thank you, Christine, for having me on.

Ptak: It's our great pleasure. So, maybe we'll start at an obvious way. So, your site's name is HumbleDollar. Can you talk about why you thought humility was important enough to literally make it your product's first name?

Clements: Well, I guess, the idea of actually having a site called HumbleDollar actually, sort of, my own personal humility, which was, I didn't want the site to be about me. I had previously blogged for a few years under JonathanClements.com. That was the URL. And I really wanted to build a site that wasn't just about the views of Jonathan Clements. So, I launched HumbleDollar.com two-and-a-half years ago now. And one of my goals in launching it was to try and bring in guest bloggers to have different perspectives on money. But that said, it's not like, you know, half the guys who write for HumbleDollar are touting individual stocks or trying to guess which way the stock market is headed next. I mean, the people who write for me do share a similar investment philosophy. And that investment philosophy is built around humility, you know, the notion that you can't forecast the short-term direction of the stock market, that it's incredibly hard to pick stocks that will outperform the market averages. I think we should worry a lot more about risk and holding down investment costs and managing taxes, than we should be about pursuing performance. And also, in thinking about these issues, we should be thinking about more than just our investment portfolio. Probably 95% of the financial conversations are about people's investment portfolios. And I really feel that that's misdirected, that we could add so much more value by thinking about these other areas of our financial life.

Benz: So, let's talk about those other areas. I know a huge thrust for you on the site, as well as in your social media presence, is talking about the role of frugality and also talking about the role of really homing in on what you value when determining how to deploy your capital. So, let's talk about the other things that you wanted to talk about on HumbleDollar.

Clements: Well, you're absolutely right, Christine. So, while on the site, there isn't that much discussion of the market's direction or how to pick actively managed funds, there's a lot of discussion about making sure that you save enough for retirement, about making sure that you draw down on your nest egg in a prudent manner, once you are retired, making sure you have the right insurance, the right estate-planning documents. As I mentioned before, I think there's a whole lot of value that can be added in these other directions.

But as you mentioned, the site also spends a lot of time really dealing with two distinct issues. One is how can we lead a happier financial life? And second, what does it take in order to improve our financial behavior? It is very easy to figure out what to do with your money. You should diversify broadly, save diligently, get the right estate-planning documents, get the right insurance. I mean, we could list these things off and put them down in 10 bullet points and buy a billboard on Times Square and announce it to the world and it probably wouldn't make one iota of difference unless we can figure out how to change people's behavior. And that is really a huge conundrum. And I think it's going to be the next cutting edge of research in finance. It's trying to figure out what it takes to change people's behavior.

Ptak: So, maybe we can focus on the two of those twin objectives that you mentioned, sort of this notion of financial happiness. I'm curious, you know, just in your time covering the industry and working with investors, have you seen investors redefine success or happiness? Did it used to mean one thing and now it means something else? And how do you think as a profession we're doing to adapt maybe those evolving definitions of success and happiness?

Clements: I think in many ways, Jeff, the financial conversations we have today are so much better informed than the financial conversations we had 20 or 25 years ago. I mean, you think back a quarter of a century, and there was so much talk about raw investment performance and what it means. And similarly, there was just a prevailing assumption that more possessions were better. There's this prevailing assumption that once you reached retirement, simply kicking back and doing nothing for the rest of your life was going to make for a happy retirement. I think these sorts of notions were widespread. And today, they're widely questioned. People, for instance, have become very focused on this notion that experiences deliver more happiness than possessions. It's certainly true among my generation, among the baby boomers. But also, to their credit, I mean, millennials, woke up to this very early on. Among millennials there's huge scorn for possessions and great interest and having the enriching experiences. So, I think the conversations that we're having today are much better than they were 25 years ago, and I think that's a good sign.

Benz: Jonathan, what do you think about the FIRE movement, the Financial Independence Retire Early movement? Do you think it's a healthy trend?

Clements: In a country where people don't seem to save enough money, I'm not sure why we get so riled up about a group of people who are committed to saving as much as they possibly can. I think that, overall, there is a lot to like about the FIRE movement. But I can also understand why people have some reservations about it. When we think about the FIRE movement, we tend to be talking about people who are relatively affluent, in high-paying careers, who have substantially more financial wiggle room than the typical American, and hence, they are able to supersave through their 20s and 30s and quit the workforce early. I mean, I also think that one of the things that needs to be changed about the FIRE movement, and you're starting to see this, is that the goals should be less about simply amassing enough money so that you never have to work for a paycheck again, and more about, "What are you going to do once you have that financial freedom?" Because if the financial freedom itself is the goal, people might be disappointed the same way my parents' generation was disappointed by reaching retirement and discovering that relaxation didn't make for fulfilment. You need to figure out what you're going to do with that financial freedom. That is the extra part of that conversation that I think the FIRE movement often overlooks.

Ptak: One of the things you've written is that we're not very good at knowing what we want. And so, I was curious, what counsel you'd have for an advisor who's sitting down with individuals to help them define and achieve goals, that in reality might be misplaced? Is it the advisor's role to help the clients define the goals themselves? Or do you feel like it's really their job to sort of step back and let the client sort of express their feelings and articulate their own goals?

Clements: When you think about the role of an advisor, and again, go back 20 or 25 years, and it was--the measure of an advisor was in the investment performance. And we know from all the research that there is very little room to add measurably to performance. Yes, you can improve somebody's asset allocation, you can diversify them somewhat better, but the likelihood that you're going to deliver market-beating returns over the long haul is so slim as to be barely worth considering.

So, what is an advisor's role? Well, one, it's these other areas of somebody's financial life: estate planning, insurance, buying the right-sized house, managing their debt. But also, they do indeed need to be helping clients figure out what their goals are. And the issue here is that we don't instinctively know what we want. In fact, it takes many years, oftentimes, to figure out what it is that we really want from our financial lives. And also because it changes over time, what I wanted in my 20s is quite different from what I want today. So, if advisors are going to be truly invaluable to their clients, they really need to help clients with that journey. And mostly, that consists of getting clients to slow down, put down in writing what it is that they think they want, and then revisiting it often enough that they get to take a second look at those goals that they thought they were so committed to and figure out whether it really is what they want, is what they instinctively want what they truly want after a period of contemplation, or is it that they're instinctively going astray and they really need to think again.

Benz: It can be particularly hard where you have married couples too, right, who might have different financial goals and different definitions of financial happiness?

Clements: Well, that's certainly true. But given that each individual is struggling, we can get at least each individual to figure out what they want, then you can figure out how the couple is going to compromise. But until each individual has figured it out, addressing it as a couple is almost a lost cause. Because if neither truly knows what their heart's desire is, it's going to be a mess from the get-go without some introspection.

Benz: One thing I know, Jonathan, is that you're not a big believer in creating the traditional line-by-line budget, as much as you believe that frugality and attention to spending on the things that you really value is important. So, why are you not a believer in that sort of traditional budgeting where I'm itemizing how much I spend on coffee or haircuts? And what's a better way to do it?

Clements: So, I think the people who budget tend to be the people who can't control their spending, just as the people who have a diet are the people who can't control their eating and the people who have a personal trainer are the people who can't get themselves to exercise. We do these things in order to try to influence our behavior. But in the end, they are likely to be failed efforts unless we truly want to change.

Many decades ago, when I was young and foolish and growing up in England, I was a smoker. And I read an article which changed the way I thought about smoking. I tried to give up smoking a couple of times and failed miserably. And I read an article where the author said the problem with people who try to quit smoking is that they say to themselves, "I really don't want to quit, but I'm going to try really, really hard." And the author said, if that's your mindset, you're never going to succeed. And it's true. Instead, he said, if you want to succeed in quitting smoking, then you have to believe that you want to quit. And once you truly believe that you want to spend less, that you want to weigh less, that you want to exercise more, you will indeed do that. If you're just trying to lock yourself in with a budget or with a diet or with a personal trainer, it's almost inevitable that you're going to slip and you're never going to lose the weight you wanted to and you're never going to create the good spending or exercise habits you hoped for.

Ptak: And so, how do you induce that? If somebody who has, say, been prone to being free-spending or maybe they just don't leave themselves a margin for error, I mean, how do you induce that mindset change that it sounds like you think is really needed in order to dispense with the budget and really live a more frugal, responsible lifestyle?

Clements: Well, I can't claim, Jeff, that this is easy. But somehow, you need to get to the point where you care as much or more about your future self as you do about your current self. So, what is it going to take to make your future self, the future self who weighs less, exercises regularly, and spends less? How are you going to make that future self so attractive that you're willing to make the sacrifices today? And I think part of it is this whole process of visualization, of thinking hard about the life that you want. And if you can make the life that you want to seem super, super attractive, you'll be more likely to make the sacrifices today.

There's no magic bullet here. You can dismiss what I just said as sort of nice words, and most people can't do it. And maybe to a degree, you would be right. But I think that is what it takes. It takes this mindset where I care as much about the person I'm going to be as they care about the person I am today. And I think one of the reasons it's so hard is because we have within us these hunter-gatherer instincts, these hunter-gatherer instincts that said let's have a great time today, because tomorrow simply may not happen. Life is nasty, brutish, and short. Well, it may have been 10,000 years ago for our hunter-gatherer ancestors. But life isn't nasty, brutish, and short today. If you are 20 years old today, in America, there is a 90% chance that you will reach retirement age, there is a 90% chance that you will be your future self. And so, if you're going to have a happy financial life, you need to have a lot of sympathy for that future self. And you ought to have a lot of simply because one day you will indeed be that person.

Benz: So, we've talked on a couple of occasions here about changing people's behavior and the importance of changing people's behavior. Jeff and I talked to Michael Kitces a little while back. And he articulated this viewpoint that the investment industry has gotten good about talking about some of the adverse behaviors that investors exhibit but getting them to change their behaviors is really sort of the next wave where we need to do some work. Do you agree with that? And what are your thoughts on how advisors and individual investors themselves can enact positive behavioral changes?

Clements: I think Michael is absolutely right about that. The behavior change is the next big frontier; it's an issue that we need to know more about. But I think advisors are actually well-suited to help with that. I mean, one of the things we know is that we don't like the disapproval of others. As I say to people all the time, if I tell myself, I should get up and go to the gym in the morning, it's so easy for me to roll over and go back to sleep. But if I tell my wife, I'm going to go to the gym in the morning, I am on the hook, because I don't want to live with her disapproval. So, I get up and I go to the gym.

Well, similarly, if you have an advisor who says, you know, you need to sign up for your 401(k) plan, and you need to be contributing 12% of income, and you need to be getting a will, and you need to be doing this, you need to be doing that. And we're going to talk about it in three months, when you come back. Suddenly, I'm going to be afraid of disappointing you, and I will probably go out and do those things. So, I think advisors definitely have a role in helping people to follow through on the financial commitments they make.

There are other things that we've seen work well. Obviously, automation in 401(k) plans has helped enormously in getting people not only to contribute, but also the auto escalation. We've seen the power of visualization and one of the things that I love are these various apps that can allow you to age your face and that if you age your face, then you create sympathy for your future self. And studies have founded that people who go through that exercise are more likely to take care not only of their health, but also to save for retirement.

So, there clearly are things that can get people to change behavior. But I don't think we know enough yet in order to have a rigorous program that's going to help people across the board behave better.

Benz: In terms of advisors and choosing advisors, I think that's something a lot of investors struggle with how to do it. And I'd also like to get your take on whether there is a business model for advisors that you prefer, that you think is a better one? Or does it really depend on the individual and the sort of financial help that they are seeking?

Clements: So, the problem with the financial advice business is, the people who most need advice are least likely to get it. If you have somebody who has a relatively modest income and a relatively modest portfolio, it's very hard for them to get financial advice, at least get holistic financial advice. I mean, certainly, you can now get advice with your portfolio through a robo-advisor. But as we've already discussed, that's only one relatively small part of people's financial lives. And in many ways, the easiest part to address in terms of having an advisor who is going to help you figure out the insurance you need, and the debt that you should be paying down first, and what sort of house you can buy, and so on--somebody who is going to give you that level of attention is going to be relatively expensive and most Americans are not going to be able to afford the price.

That said, I would tell people to either hire an advisor who is charging a percent of the assets or hire an advisor who is charging an hourly fee. I mean, those are the two models that minimize conflicts of interest, in my mind. Meanwhile, I think that any advisor who is taking commissions, I mean, the conflicts of interest are huge, and sooner that model disappears, the better off the financial world will be.

Benz: How about backing up to an even more basic question, and it's one that you touched on, on HumbleDollar with your Great Debates section, whether to hire an advisor or not? I know that we both know a lot of Bogleheads who are very much in that sort of DIY mindset. How should someone try to approach that question of whether they even need financial help?

Clements: I think, Christine, there is a spectrum on this. So, the Bogleheads, who I love dearly, are in my mind that 20% of the population who can indeed get it done on their own. They are a group of individuals who are not only intensely interested in financial issues but seem to be superb at delaying gratification. These are the people who do not need the personal trainer, they do not need the coach, they do not need the budget, they are going to do just fine managing their own impulses. But among the other 80%, there is clearly a spectrum. I mean, certain people have no interest in financial matters and don't have the necessary financial discipline, and having a full-time advisor would be great for these folks. And then, there is going to be some group in the middle maybe 30% of the population, 40%, who need periodic handholding and coaching, they might be able to get by with an hour or two with a financial advisor every year, pay for those hours, and away they go. So, I don't think there is one solution for everybody.

Ptak: It can be a bit paradoxical. So, as you mentioned before, some of the investors that need the most financial help and advice, the advice that they're going to receive, they're not going to receive it very positively, right? Because it's going to be forcing them to curb their lifestyle in various ways or make other sorts of compromises. So, if you were one of those investors sitting down taking the measure of an advisor who is dispensing that sort of advice, and you're trying not to be turned off as an investor at the advice you're receiving, how do you reconcile those two things to make sure that you make a sound choice of an advisor that well serves you and helps to advance your plans?

Clements: So, is your concern here, Jeff, that I'll go to the advisor who is offering me a large piece of carrot cake rather than who is offering me dog food. Is that your concern here?

Ptak: That's right. Some of the best advice is the toughest advice, and so we as investors, we have to take that advisor's measure, and that can be one facet of how we respond to them. So, do you have any sort of advice for somebody who would be considering an advisor in the face of that? What are the sorts of tells or things that they should be looking at to make sure that they're being well served?

Clements: Well, I guess, it comes back to the old Wall Street saying, which is, there is no free lunch. If somebody is selling you something that sounds like it's going to be completely painless and not going to cost you anything either in terms of current spending or in terms of fees or selling, you should be leery. And if somebody is being forthright with you and telling you the tough story about what you're going to need to do in order to achieve your goals, you should be willing to listen to that. But whether people will or not, I don't know. I imagine those folks are not listening to your podcast, I'm just saying.

Benz: Among the Great Debates on HumbleDollar, another one of them, is whether investors are dumb. And I'd like to get your take on whether you think that's a myth or is there a kernel of truth in it when you look at some of the asset-weighted return data, what's your view?

Clements: Clearly, it's in Wall Street's interest to make everyday investors think that they are stupid, because if investors believe that they are stupid, and the folks who work on Wall Street are smart, these individuals are more likely to go off and hire a financial advisor. And yet, from the evidence I've seen, it seems that everyday investors' results, on average, are not at all bad, while most professionals' are notably mediocre. And hence, this notion that small investors are stupid is really, I think, insulting. I mean, you don't find the Ford Motor Company running around and saying, "Hey, customer, you should buy this car because it's got all these safety features, and frankly, we think you're going to be too stupid on the road without them." They don't say that. Why does Wall Street propagate this notion that investors are stupid?

And that brings me to this widely discredited study from DALBAR, which has been refuted by countless people, including me. And yet, Wall Street continues to use that data. And I'm just shocked. I mean, clearly, it shows that they have no concern for the truth. Nobody who's looked at the evidence believes that every investor is as stupid as the DALBAR study suggests, and yet Wall Street goes on publicizing that study year after year. It really is reprehensible, and I can't imagine why Finra and the SEC allow Wall Street firms to continue to lie about investor results using a flawed study like that. It's just flabbergasting.

Ptak: On the flip side, one of, I would say, the more, I don't know if heartwarming is the word, but one of the better success stories we've seen is investors in target-date funds. I think our research has found that the gaps there tend to be smaller than you would typically see on a stand-alone equity or even fixed-income investment. It seems to speak to the power of routinization, mechanization, having these features like auto rebalancing and a glide path. Would you agree?

Clements: Absolutely. I'm a huge fan of target-date funds, and particularly, target-date funds that are built around index funds, those you can get from Vanguard, Schwab, and Fidelity. I think those are a great product. If somebody said to me, I have $10 million and I'm going to put it all in a target-date fund, I might respond that could be one of the smartest things you can do. Now, you can get greater tax efficiency and somewhat lower costs by buying the component parts. But acknowledging that you will likely make mistakes if you build your own portfolio and that simply buying something off the shelf like that, that seems to me to show a great deal of self-awareness and a great deal of sophistication, even as you buy what is probably one of the simplest investment products out there.

Benz: We sometimes hear trash talking among advisors about target-date funds, where they'll say, oh, one size fits none. They seem to think that extra customization is in order for everyone. Would you agree with that? It sounds like you wouldn't, but are there situations where you think some extra customization would make sense?

Clements: Sure. I mean, there are certain situations where you've got an executive in Silicon Valley who has a huge weighting in his or her own company where you'd want to build a portfolio that complemented that large single-stock position up until that position could be sold. So, yes, certainly, there is the case for customization, and certainly you can get greater tax efficiency with customization. As I mentioned before, certainly you can lower costs with customization. But I really do not think that this is a good argument for advisors to be engaging in. You go back 15-20 years ago, an advisor was saying, "Yeah, those index funds, they're OK, but I can do better by picking actively managed funds." Well, that didn't work out so well.

I would say to advisors who are touting their ability to build customized portfolios that will somehow be better than what an investor can get with a target-date fund, I would say, you are probably trying to sell the wrong thing. You want to sell yourself to clients on something where you really can deliver value, then talk about the three areas that we've already discussed over the past few minutes. Talk about these other areas where you can add value, the right sized home, getting to social security at the right time, managing debts, insurance, and so on.

Second, talk about how you could help clients to have a happier financial life by making sure that they pursue the goals that are most important to them. Third, talk about how you can help them to improve their financial behavior, so that not only are they more likely to achieve their goals, but also, they're going to be happier along the way. That is a conversation where advisors are talking about something where they truly can deliver added value. But simply saying your customized portfolio is going to do better than a target-date portfolio, it may not be the case.

Benz: So, it sounds like definitely you like target-date funds for accumulators, how about the decumulation period? Do you think there's more work to be done in terms of productizing solutions that will make it easier for people who are in drawdown mode and maybe trying to wrestle with traditional IRAs and Roth accounts as well as company retirement plan assets?

Clements: I say to people all the time, saving for retirement is life's toughest financial task, but drawing down a portfolio in retirement is life's trickiest. There's no doubt about it. Trying to draw down an investment portfolio once you quit the workforce involves a host of different issues: inflation, longevity risk, sequence-of-return risk, major tax issues. It is a hugely complicated exercise, and I do think that there is the potential there for some sort of automated solution. But it's going to have to be enormously complicated to design it, taking into account all of these various factors.

Now, I would mention and put in a plug for a product that's already there. It's hugely unpopular, but kind of solves a lot of these issues. And that is the plain-vanilla immediate fixed annuity. I mean, plain-vanilla immediate fixed annuities, if you buy one with an inflation rider, has the potential to give you lifetime income that rises every year with inflation and could provide a great complement to the Social Security benefits that you're getting. It removes the need for investment management. It's a solution that deserves to be far more popular. And yet insurance agents don't sell it because the commissions on immediate fixed annuities are tiny, and consumers are reticent to buy them because for some reason, Americans who are this enormously optimistic group of people somehow believe that they're going to buy an immediate annuity and die the next day. I don't know how to make immediate fixed annuities seem more attractive to the average American, but they certainly should be bought in far greater numbers than they are today.

Benz: There was some work done in the realm of what asset allocation should look like in retirement, where you've got kind of a reverse glide path where that equity component of the portfolio is relatively low at the outset of retirement and then ramps up. I'd like your take on that whole idea. Does it seem appropriate, particularly right now, given that we've had such a long-running rally in the equity market?

Clements: Oh, my goodness, Christine, are you trying to get me to make a market forecast? I'm not biting on that one. I have no clue what will happen to stock prices. In terms of that notion of, because the first five years of retirement are so crucial, and if you get hit with a big bear market, it is potentially so devastating that you should start with relatively low level of equity and then increase it as you get through those initially years. I think it's an interesting idea. But I also feel at some level that it's an unnecessary idea.

The reason I feel that is the same reason I always get a little bit queasy when people talk about the 4% withdrawal rate. This notion that anybody is going to withdraw 4% of their portfolio in the first year of retirement and thereafter step up the annual sum involved every year with inflation regardless of what's going on in financial the markets. I mean, nobody in the history of the world has ever done that. It's beyond baffling to imagine that somebody would do that in the face of a market like we saw from 2007 to 2009. I mean, what I would say is, if you're worried about sequence-of-return risk and a big bear market early in retirement, make sure you have a decent amount of cash and bonds in your portfolios so that you can draw down that portion of your portfolio, if we do indeed get bad markets. I think that's the solution. What equity level you have is less important than making sure that you have enough cash and bonds to get through five or six or seven years without having to sell any of those stocks.

Ptak: Maybe going back to annuities, since you mentioned that previously, can you talk about some of the situations where you feel like those really are the most eligible and suitable options to consider, like, where maybe is that investor sort of in their life, have they just entered retirement, are they firmly in the midst of it? Or what other sort of circumstances you think would make that an option that's particularly worth considering?

Clements: I think I have two things I would say off the bat. One is the best annuity you can buy is the late Social Security benefits. So, before you even consider buying an immediate fixed annuity, you should plan on delaying Social Security until age 70, assuming you're at reasonably good health, or if your health is poor, assuming your spouse is in reasonably good health, and you expect him or her to get your survivor benefit. I mean, that's the first choice you should be making in terms of an immediate fixed annuity.

But the second thing you need to think about is how tight are your retirement finances going to be. Because if you have barely enough for retirement, that immediate fixed annuity is going to be the way for you to squeeze the maximum income out of your nest egg. So, to the extent that you haven't done a great job of saving for retirement, you should be more inclined to buy that immediate fixed annuity.

Benz: Let's talk a little bit about your own retirement. You call yourself semi-retired. I'd like to get your take on whether you think you'll ever retire altogether. Do you think working and writing will continue to be part of your game plan for as long as you can foresee?

Clements Well, I hope, Christine, that it will indeed continue to be something that I do right up until they carry me feet first out of my apartment. That is actually one of the reasons I launched HumbleDollar. In the back of my mind was my father's retirement. My father essentially retired at age 53. And what he did, after a few years of living in Washington, D.C., which was where he had been working, was he moved down to Key West. And he spent the last 15 years of his life living full time in Key West. And Key West is a wonderful place to go for three or four days. It's beautiful, it's fun, and it is really just a terrible place to spend 15 years of your life.

It's just, hanging out, relaxing--it's not a great place. My father was intellectually unstimulated. He was somewhat socially isolated. And he was old before his time. And I saw that, and I had been bound and determined ever since to make sure that I will always have a reason to get out of bed in the morning, even after I stopped working for money. And so, as a consequence, I want to make sure I had something to do, and HumbleDollar is what I hope to be doing.

Benz: And certainly, there are financial benefits of working longer. But I get a little nervous, I'd be curious to hear if you do too, about working longer as a fallback plan. So, for people who haven't saved enough for retirement, you know, I sometimes hear, well, my plan is just to continue working forever. Why isn't that a good plan?

Clements: Because your body may not cooperate. We see these stats all the time. A majority of workers plan to work at least part time in retirement, but only about a quarter of retirees report working for money after they quit the workforce. So, clearly, there's a gap there between people's expectations and what the reality is. You should make sure on the day you quit full-time work that you do indeed have enough to get you through your retirement years. If you continue to work and make a little bit of money, all the better. I think there's great value in that not only from a financial point of view, but also from a psychological point of view. I do think that it's crucial to have a sense of purpose in retirement. But that should not be your financial plan, that should be the plan that makes you feel more fulfilled.

Ptak: Maybe to widen out for a minute, just on the topic of retirement readiness and retirement security, I'm surprised sometimes at the amount of debate about how retirement-ready the general population is. I guess my impression is it's not very retirement ready at all. In fact, verging on a crisis, but others take a different point of view. So, I'd be interested in your perspective, when you scan across, how retirement-ready, retirement-secure does it look like folks are? And do you think that there are breakthroughs that are needed to improve the general state of retirement readiness?

Clements: Jeff, my fear is that this will indeed be something of a slow-moving crisis that could have alarming implications. My best guess from looking at the data is that 20% of Americans are really in great shape for retirement and they're going to have a wonderful time, they're going to travel, they're not going to worry about money, and so on. The next 20% are going to be in pretty good shape. They may not be able to do all the traveling they want, they may have a certain amount of financial stress, but they're going to be in pretty good shape. The other 60%, as best I can tell, are not in great shape. And that's worrisome. I mean, it's worrisome for us as a society. We don't want to be a society where there is widespread poverty among older Americans. We don't really want to be going out to eat because we did a good job saving for retirement and have a waiter or waitress who seems barely able to remember what our order is, or to carry the food to our table. This is not the sort of world that we want to be living in.

And so, yeah, I find it deeply worrying. But what is the solution? It's problematic, right? Because, in the end, this is not a financial issue. It's not a question, necessarily, of, oh, we need to have retirees to have more money. What we really need is to have people stay in the workforce for longer, because that is what's going to make it possible to treat older Americans with greater financial kindness.

In the end, we need to have a society where there are enough people in the workforce producing the goods and services that society needs. And without that, it doesn't matter what we do with Social Security, or what we do with Medicare. I mean, those are just financial transactions. In the end, what we need is the underlying economy that creates the goods and services, that means we can support all those other things.

Benz: So, it doesn't sound like you think mandatory contributions, either on the part of employers or employees, would be part of the fix in terms of improving overall retirement preparedness?

Clements: Remember, whether it's stocks or dollar bills or Social Security checks, these are just instruments of financial exchange. The question is, what are they going to be able to buy when we go to exchange them? So, we could give every retiree in America a million dollars, right? The government could just send everybody 65 and older, a million dollars. But what's going to happen when they turn around and spend that money? But, of course, if the goods and services aren't there, what we're going to end up with is hyperinflation. So, what we need to do is to make sure that we have people continuing to work long enough, producing the goods and services that we need. And then if we have that, we will have more taxes, we'll be able to pay for these social programs, and so on.

So, if you ask me, what's the solution? Yeah, sure, have people save so that they have the financial chits that they can turn in for goods and services later, but worry less about the financial chits and more about making sure that those goods and services are available. And I think the way to do that is to start think about how we can encourage employers to retain older workers and design jobs that are appealing to older workers. Because if we can keep people in the workforce into their late 60s, because we give tax incentives to employers to retain older workers, we give tax incentives to employers to design jobs that are less physically stressful, whatever it is, that is what's going to solve the retirement crisis ultimately.

Ptak: If we could shift to asset allocation for a second, this has been a great decade for investors in U.S. stocks and bonds, the U.S. 60/40 has almost literally been a world beater. Markets are cyclical, though, as we know, and the U.S. market, now it looks like it's fairly pricey, which could portend poor future returns. So, to those who didn't view this might be tempted to shift their allocation away from the U.S. in a big way. What would you say?

Clements: Well, I guess, I'd have two responses to that, Jeff. One is, I've become more and more leery of making any sort of forecast, even sort of a forecast inside my own head that I never tell to the world. I've become more and more leery of making those as a forecast based on valuations. Because the fact is, by almost any measure, the U.S. stock market has been expensive for the last 30 years. And yet it keeps going up. Valuations at least as currently conceived do not seem to be capturing what's going on. That said, I would also say to people, if you believe that markets are reasonably efficient, what you should do in designing a portfolio is start with the global market portfolio, which is a portfolio that consists of roughly four equal parts; U.S. stocks, U.S. bonds, foreign stocks, and foreign bonds. And then you should proceed by a process of subtraction. What are you going to remove from that global market portfolio? And in doing so, you should have a very good reason for going for that subtraction.

So, when I look at the global market portfolio, I say to myself, I really don't want to own foreign bonds because I live in the U.S., I'm going to retire in the U.S., my liabilities are here in the U.S. So, I don't really want my bonds to be denominated in foreign currency. So, I find it relatively easy to knock out foreign bonds. When it comes to foreign stocks, which many people seem to be very happy to toss out the window, I cannot find a really good reason to say, "Oh yeah, I should just be 100% U.S. stocks." I can find a reason to be 100% U.S. bonds, but I cannot find a good reason to be 100% U.S. stocks and yet a lot of people seem to be heading in that direction, and I believe it's just purely performance-chasing.

Benz: I guess Jack Bogle's assertion, which I wouldn't necessarily agree with, but his point seems to have some validity, which is that a lot of U.S. companies are pretty global companies, right? They are deriving a lot of their revenues from overseas. That seems potentially a reasonable defense for some home market bias, right?

Clements: I'll go a couple of feet down that road with you, Christine. But I'm not entirely convinced. If it was indeed the case, that we have a truly global stock market where big companies around the world are also involved in foreign countries, then we would expect to see U.S. and foreign stock markets moving in sync, not just in terms of directionally, but also in terms of gains. And we don't see that. We see the U.S. market has done substantially better over the past 10 years than foreign markets. And that says to me that the U.S. companies are not fully suffering what's gone on in foreign economies and that there is a chance that that will turn at some point. And what's happening here in the U.S. will not be reflected in what's happening to foreign companies and those foreign companies could do substantially better.

Ptak: Do you think that we're sleeping a bit on inflation and interest rates as they've been benign for what seems like forever now, but as we know, there's also a mechanism that can change that? And so, is that a possibility you foresee? And are there certain things that we should be doing as investors and savers to prepare ourselves for that eventuality?

Clements: Yeah, inflation has been dormant for so long, it is indeed easy to forget about the risks of inflation just as U.S. stocks have done so well so long that it's easy to assume that U.S. stocks will always dominate. So, yeah, I think people should be cognizant of inflation. And that means as an investor, you need to be looking for assets that are likely to provide some real rate of return. But those are awfully hard to come by these days. You're not getting paid very much if you put yourself in inflation-indexed Treasury bonds. You're not earning much more than inflation if you're in conventional bonds. I think it's one of the reasons that people should continue to have a healthy allocation to stocks, even though U.S. stocks are expensive by historical standards. If you're going to be an investor who makes money over time, you need to have some way of outpacing inflation and taxes, and stocks remain the best way to go.

Benz: Would you recommend that investors put anything in sort of the other tool kit in addition to those core equity and fixed-income exposures? Are there any asset classes that you like whether commodities or precious metals or real estate or anything like that?

Clements: In my own portfolio, I had an allocation to both U.S. and to foreign real estate for quite a few years. I must confess that I worry about those positions because I imagine they will not do well if we have a period of rising interest rates. But again, what will it take to have a period of rising interest rates? Presumably, we're looking at some sort of resurgence in inflation, and that does not seem to be a risk right now. But if we do have that, certainly those real estate stocks could be at risk.

I've also, in the past, had a position in gold, a very small position, and just rebalanced back to a 2% holding on a regular basis. At this point, I actually don't have that gold position anymore, simply because I can't really find a fund that I like enough to hold, and so now I'm happy to do without.

Benz: Gold in terms of gold bullion or precious-metals equity?

Clements: Gold stocks.

If you buy gold bullion, all you can reasonably expect over the long run is a rate of return that matches the inflation rate. With gold stocks, you should be able to do somewhat better than inflation. Plus, because gold stocks are so much more volatile than gold bullion, the potential rebalancing bonus is significantly greater. But as I said, while I've played that game in the past, I do not have a gold fund in my portfolio right now simply because I can't find a fund that I particularly like.

Ptak: You've been a strong proponent of indexing for many years. We've alluded to it, I think, various times during our conversation. It was probably a lonely cause to take up back when. Now it's very much in vogue. Do you feel heartened by that? Does it mean investors have gotten smart about cost diversification and tax efficiency? Or do you think it reflects structural changes and maybe the way the advice industry is getting paid versus how it used to get paid before when it was more commission-based? How do you feel when you take all that in?

Clements: I think the answer to all these questions is yes. But let me take it bit by bit. I have definitely been heartened that indexing has taken off. I mean, it's probably one of the few things in my life that I really have actually got right. I was early. When you look back, and you think about the math of indexing, the fact is that it is going to be a better-than-average strategy over the long haul compared to active management, it wasn't a tough decision to make.

What I think that investors should appreciate is not just the proliferation of index funds and their popularity but also just generally how much friendlier the financial world has gotten over the last 20, 25, 30 years. The fact is the cost of investing has come down enormously over that period. Investors today can invest at expense ratios that only the biggest institutional investors were getting 25 years ago. Similarly, today, if you're so inclined, you have access to investment classes that only institutional investors had access to 25 or 30 years ago. Again, another huge investor-friendly change.

On top of that, the array of tax-favored investment vehicles that are available to ordinary investors has increased. We have the Roth IRA. We have 529 college savings plans. We have solo 401(k)s. The proliferation of these investment vehicles has, again, made Wall Street a much friendlier place for everyday investors. And so, all of those things are great developments, and investors should be enormously happy about them. And I think to a degree, it also explains why we have the valuation that we have today. The fact is, if it costs so much less to invest, then people are willing to accept lower returns, and that means in the short term that we should see higher stock prices. I think those lower costs are one of the reasons that we've seen valuations rise so much over the past three decades.

Yes, if indexing had remained a Vanguard-mutual-fund-only phenomenon, then indexing would not be as popular today as it is. The introduction of the ETF has meant that individuals on their own through a brokerage firm or working with a financial advisor can now access indexing no matter who they're investing with. And that is why indexing has been able to explode the way it had. Even though Jack Bogle didn't like them, ETFs have indeed been a game changer for the better.

Ptak:Well, this has been a wonderful conversation, Jonathan. Thank you so much for your time and insights and for joining us as our guest on The Long View today.

Clements: It's been my pleasure. Thanks for having me on, Jeff. Thank you, Christine.

Benz: Thanks, Jonathan.

Ptak: Thanks again.

Benz:We enjoyed it.

Clements: Take care. Bye.

Ptak: Have a great rest of the day. Take care.

Benz: Bye.

Ptak: Thanks for joining us on The Long View. If you liked what you heard, please subscribe to and rate The Long View from Morningstar on iTunes, Google Play, Spotify, or wherever you get your podcasts.

Benz: You can follow us on Twitter at Christine_Benz.

Ptak: And at Syouth1, which is, S-Y-O-U-T-H and the number 1. Finally, we'd love to get your feedback. If you have a comment or a guest idea, please email us at TheLongView@Morningstar.com. Until next time, thanks for joining us.

About the Podcast: The Long View is a podcast from Morningstar. Each week, hosts Christine Benz and Jeff Ptak conduct an in-depth discussion with a thought leader from the world of investing or personal finance. The podcast is produced by George Castady and Scott Halver.

About the Hosts: Christine Benz and Jeff Ptak have been analysts and commentators on investments and the investment industry for many years. Christine is Morningstar's director of personal finance and senior columnist for Morningstar.com. Jeff is head of global manager research for Morningstar Research Services, overseeing Morningstar's team of 120 manager research analysts in the U.S. and overseas.

To Share Feedback or a Guest Idea: Write us at TheLongView@morningstar.com

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About the Authors

Christine Benz

Director
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Christine Benz is director of personal finance and retirement planning for Morningstar, Inc. In that role, she focuses on retirement and portfolio planning for individual investors. She also co-hosts a podcast for Morningstar, The Long View, which features in-depth interviews with thought leaders in investing and personal finance.

Benz joined Morningstar in 1993. Before assuming her current role she served as a mutual fund analyst and headed up Morningstar’s team of fund researchers in the U.S. She also served as editor of Morningstar Mutual Funds and Morningstar FundInvestor.

She is a frequent public speaker and is widely quoted in the media, including The New York Times, The Wall Street Journal, Barron’s, CNBC, and PBS. In 2020, Barron’s named her to its inaugural list of the 100 most influential women in finance; she appeared on the 2021 list as well. In 2021, Barron’s named her as one of the 10 most influential women in wealth management.

She holds a bachelor’s degree in political science and Russian language from the University of Illinois at Urbana-Champaign.

Jeffrey Ptak

Chief Ratings Officer, Research
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Jeffrey Ptak, CFA, is chief ratings officer for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc.

Before assuming his current role, Ptak was head of global manager research. Previously, he was president and chief investment officer of Morningstar Investment Services, Inc., an investment unit that provides managed portfolio services through fee-based, independent financial advisors, for six years. Ptak joined Morningstar in 2002 as a senior mutual fund analyst and has also served as director of exchange-traded fund analysis, editor of Morningstar ETFInvestor, and an equity analyst. He briefly left Morningstar to become an investment products analyst for William Blair & Company, and earlier in his career, he was a manager for Arthur Andersen.

Ptak also co-hosts The Long View podcast with Morningstar's director of personal finance and retirement planning, Christine Benz. A full episode list is available here: https://www.morningstar.com/podcasts/the-long-view. You can find him on social media at syouth1 (X/fka 'Twitter') and he's also active on LinkedIn.

Ptak holds a bachelor’s degree in accounting from the University of Wisconsin and the Chartered Financial Analyst® designation.

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