How to Create Your Own Path to Financial Success

Jonathan Clements, founder and editor of HumbleDollar and editor of a new book called My Money Journey, shares his thoughts on rising interest rates, crypto, retirement, and his own financial story.

Here are a few excerpts from Clements’ conversation with Morningstar’s Christine Benz and Jeff Ptak:

How to Recover From Financial Setbacks

Ptak: You’ve written about your own financial journey in the book in an essay called “Now and Then.” From an investment standpoint, one of your biggest successes was embracing index funds and maintaining a fairly heavy equity portfolio. What was the aha moment for you with respect to owning index funds and not messing around with individual stocks and active management?

Clements: In the early days, when I barely had two nickels to rub together, I did own some individual stocks, and I did own actively managed funds. I started as an investor in 1986 and 1987. Having just come back from England, I didn’t have much money. But at that time, the array of index funds on offer was really very limited. If you were going to build a diversified portfolio, you almost had to own actively managed funds or dabble in individual stocks. But early on after I arrived back in the States in 1986, I read and eventually got the chance to talk to three people who I credit with my financial education, Jack Bogle, Burt Malkiel, and Charlie Ellis. And thanks to those three, the books they wrote, the conversations I had with them, I very quickly became a hard-core indexer. And anybody who followed my stuff over the years knows that became this perennial theme. I wrote about index funds so often at The Wall Street Journal that it almost became a joke. People thought that I was completely repetitive, just blathering on about the same stuff over and over again. But in terms of that advocacy of index funds, I would say that there aren’t many things that I got right in my life, but that advocacy, I’m quite proud of.

Are Stocks the Solution to Market Weakness?

Benz: Charlie Ellis contributed an essay to the book, too, I should say. Going back to your essay, you noted that you tended to step up and add to stocks in periods of market weakness. Can you talk about what were your cues to add stocks? Were you using rebalancing as your trigger? And I’m curious to know if you were adding to stocks just in this recent market disruption last year and perhaps back in March 2020 at the onset of the pandemic?

Clements: Christine, when it comes to investing, I claim no special insight. If I have any investing superpower, it’s the belief in my lack of investment ability, my willingness to just buy broad market index funds and shovel money into them month after month. But over the course of my investing career, whether it was the market decline of 2000-02, it was early 2009, it was early 2020, or it was last year, when we’ve had these sharp declines in the stock market, I have stepped up the plate and I have bought heavily and I have strayed from my asset allocation. So, for instance, last year, my target stock allocation, according to my little spreadsheet, is 80% stocks and I think I got up to 86% or 87% stocks. I’m probably still right around there right now, which obviously is way over where I’m meant to be according to the rules I laid down for myself.

So, what prompts me to do that? I hate to say it’s horribly unscientific. I have, over the years, paid attention to all of those market metrics that I learned about early in my investing career—price/earnings ratios, price to book, dividend yield, more recently Shiller P/E, and what I’ve learned is that they really aren’t very good signals when stocks are over- or underpriced. So, when it comes to investing heavily in stocks, I tend to make these shifts, one, when the market is down sharply, 20% plus; and two, when I read about people panicking and people expressing pessimism about the future of the world. It’s as simple and perhaps as stupid as that, but that is what I do. When I see people getting all bent out of shape about the stock market because it’s down 20-plus percent, that’s my signal to say, hey, it’s time to move a few more thousand dollars into the stock market.

How Do You Approach International Diversification?

Ptak: What’s the framework that you use for determining the split between, say, U.S. and non-U.S. stocks or really any sort of regional mix for that matter? And maybe I should have started by asking whether you think it’s important to internationally diversify when it comes to equities as we know there were some, like Bogle, who felt just plunk it down into a total stock market U.S. tracker and you’re good, whereas others say that you should spread it out across company stocks that are domiciled all around the world. What’s your take and how do you approach it?

Clements: I think there are two approaches to portfolio building. The approach I used to take was that U.S. stocks were your engine of growth and then you thought about ways to diversify that. So, if you thought that 20% of foreign stocks would provide sufficient diversification, you would go for that 20% in stocks and then, depending on where you are in your lifecycle and your upcoming financial needs and so on, you would have the appropriate allocation to bonds. But probably several years ago, I changed my approach, and I decided that the global market portfolio should be my starting point in designing a portfolio and then I should decide what I want to subtract. The only thing that I have already subtracted from that global market portfolio are foreign bonds. I don’t see the need to have foreign bonds in my portfolio. I don’t really want to introduce the currency risk into what’s the safe portion of my portfolio. But in terms of the mix of U.S. and foreign stocks, I have pretty much a 50-50 split between the two, and my intention is to stick with that. I do not have a crystal ball. I do not know which part of the global financial markets are going to do best in the years ahead. And so, in my ignorance, I think the best defense is to own a little bit of everything. So, that’s why I have pretty much equal holdings of U.S. and foreign stocks.

Retirement Portfolio Advice

Benz: You mentioned to me that as you have approached and thought more about your own retirement, you’ve gotten more interested in the topic and it’s also just, I think, a fundamentally interesting topic. As you think about your investment positioning when you actually do fully retire, can you talk about what you anticipate your portfolio will look like at that time and recognizing that this is very individual-specific, not necessarily guidance that people should extrapolate into their own situations?

Clements: I’m glad you threw in that caveat, Christine. I’m probably a little bit of an outlier on this. But I have, one, oversaved for retirement. We can talk about that later. But I have more than I really need for retirement, which allows me to continue to carry a stock-heavy portfolio. My written asset-allocation calls, as I mentioned, for 80% stocks and 20% in short-term bonds. And the way I settled on that is that with 20% of my portfolio in short-term bonds and you throw a 4% withdrawal rate on top of that, 20% in bonds will cover five years of portfolio withdrawals to cover my expenses.

I am not yet fully retired. I still earn enough to cover my living costs even if I’m not saving a whole lot of money each year at this point. I have reached the lofty age of 60 in case people are wondering. So, my target is 20% in bonds to cover those five years of portfolio withdrawals. I’m above that right now because the market is depressed. Will I head back to the 80%? Yeah, probably. But as I look ahead to fully retiring, one, I know I’m going to have Social Security—and I was a little shocked when I went on the Social Security website apparently. If I delay Social Security till age 70, I’m going to get $48,000 a year. I don’t know about you high-living types in Chicago. But here in Philadelphia, $48,000 pretty much covers what I spend each year. So, I’m not sure I’m going to need a whole lot of money from my portfolio. And on top of that, and I’m happy to talk about it, I am planning to put at least some of my portfolio into immediate fixed annuities that pay lifetime income.