This week’s picks for the best in personal finance from around the web.

Time, not timing, is key to investing success (Washington Post – Barry Ritholtz). Whether writing for his own blog, Bloomberg, or the Washington Post, Ritholtz usually has sound advice. This article is no exception.

Boomer wealth dented by mortgages poses U.S. risk (Bloomberg). Why an “old-fashioned belief” (pay off your mortgage by the time you retire) still makes a ton of sense.

Are your assets ready for college? (Wall Street Journal). How much financial aid your child may qualify for doesn’t just depend on how much money you have; it depends on where you have it.

The cost of caring for aging parents (US News). Three ways caregivers can keep from going crazy, broke, or both.

Save on prescription-drug costs (Chicago Tribune). You already know about generics, but have you considered “therapeutic alternatives”?

And from the blogosphere…

Warren Buffett has some brilliant advice for investors freaked out about geopolitics (Business Insider). Avoiding the “expensive distraction” that global crises can be.

What to expect when you’re expecting…a rate hike (Think Advisor). Why the fear of rising interest rates may be overblown.

Is it worth it to buy a ‘longevity annuity’? Probably not (Encore – a MarketWatch blog). There may be better ways to manage the risk of living a long life.

Resist changing direction because of a single event (Sketch Guy – a NY Times blog). As researchers would say, beware the sample of one.

8 practical ways to love God more than money (Christian PF). Good advice for keeping money in its place.

We’d love to hear your responses to any of the above. To weigh in, just meet us in the comments section.

Matt Bell

By Matt Bell

Matt Bell is Sound Mind Investing’s Associate Editor. He is the author of three personal finance books published by NavPress, leads workshops at churches and universities throughout the country, and has been quoted in USA TODAY, U.S. News & World Report, and many other media outlets.

What if you knew that certain types of purchases would make you happier than others? More specifically, what if you had seen some of the studies indicating that spending money on experiences tends to make people happier than spending money on stuff? Would you arrange your use of money accordingly? Maybe you would, but apparently most people don’t.

Summarizing some new research on the topic, an article in Scientific American noted:

Researchers surveyed people before and after they made purchases. Beforehand, they rated life experiences as making them happier and as a better use of money than buying objects.

But subjects still tended to choose to buy objects over experiences. Then, despite picking items, most said they still believed the experiences would have been a better choice.

The researchers ascribe this conflict to the tangible and quantifiable nature of a thing. You can point to a car and say how much its worth. But taking that car on a cross-country trip is an experience, and experiences can’t easily be assigned a value.

Ah, but what if you bought things that led to great experiences? Another recent study on money and happiness raised this very question, pointing out that things and experiences are not always mutually exclusive. Some things, the researchers explained, can be thought of as “experiential goods,” which are capable of bringing about just as much happiness as pure experiences.

An important key here is knowing what types of experiences make people happy. After all, going to the dentist to have a cavity filled and going on a vacation are both experiences, but visiting your dentist isn’t likely to rate as high on the happiness scale as visiting your favorite resort.

The research points to three types of experiences that are especially good at promoting happiness—those that “satisfy the psychological needs of competence, autonomy, and relatedness.”

Some experiential goods might even satisfy all three.

A musical instrument, for example, makes possible a sort of human happiness hat trick: Finely tune your skills, get the happiness of mastery (competence); play your heart out, get the happiness of self-expression (autonomy); jam with friends, get the happiness of connecting with others (relatedness).

I suspect there’s more work to be done in solving the mystery of the money/happiness connection. After all, overspending on that musical instrument could just as easily land you in the marital penalty box.

Still, it’s helpful to know that spending money on certain types of experiences—and certain types of experiential goods—can help us live happier lives.

What are some experiential goods you’ve purchased that have made you happy?

Matt Bell

By Matt Bell

Matt Bell is Sound Mind Investing’s Associate Editor. He is the author of three personal finance books published by NavPress, leads workshops at churches and universities throughout the country, and has been quoted in USA TODAY, U.S. News & World Report, and many other media outlets.

For decades, the accepted wisdom for diversifying a portfolio has been to own stocks for growth potential and bonds for stability. The mix between these two was altered depending on an investor’s time frame and risk tolerance.

When our Dynamic Asset Allocation (DAA) investment strategy was introduced in January 2013, we explained that the primary motivation behind the research was a desire to reduce our reliance on bonds for portfolio stability. We believe interest rates are likely to rise from their recent historic lows in the coming years. Rising interest rates mean falling bond prices. That means bonds aren’t likely to stabilize portfolios any longer—they could very well sink them! This is the problem DAA was designed to solve.

The first step toward creating the DAA strategy was to identify complementary asset classes that could act as diversifiers to a portfolio. The simplest way to diversify a portfolio using the six asset classes we identified would be to simply own some of each class all the time. The results of doing this aren’t bad, when you consider that the primary purpose of doing so would be to reduce risk rather than boost returns. Over the past 30 years (1984-2013), the S&P 500 had an annualized return of 11.1%. A portfolio evenly divided between these six asset classes would have earned 8.7%. That’s obviously a lower return, but an investor would also have experienced much lower volatility along the way.

DAA takes this diversification idea and adds a timing element to it. Instead of owning all six classes all the time, DAA owns only the three classes showing the best current momentum. By avoiding the worst three asset classes, DAA wins by not losing.

Unlike the “own all six all the time” approach, which had lower volatility but also produced lower returns than the stock market (8.7% vs. 11.1%), DAA would also have greatly reduced risk but done so while boosting returns to 13.4% annualized. Better returns with less risk is a tough combination to beat!

A $10,000 investment in the “own all six all the time” portfolio would have grown to roughly $123,000 over 30 years. But that same amount invested using the timing mechanism built into DAA (“own only three at a time”) would have grown to a whopping $433,000. That’s dramatically more than the S&P 500′s growth as well (which rose to $234,000), yet with substantially less volatility than the stock market experienced.

Circling back around to the original challenge of how to effectively diversify a stock portfolio without relying heavily on bonds to do so, consider the following. Since December of 1973 (as far back as the back-tested data is available), there have been 488 rolling 12-month periods (the first period was Jan73-Dec73, the next period “rolled forward” to Feb73-Jan74, etc.). Of those 488 12-month periods, the S&P 500 index of large U.S. companies lost money in only 106 of them. During those down periods, DAA outperformed the S&P 500 in 102 of them. The few times it didn’t, it trailed the S&P 500 by an average of only 1.7%.

As a diversifier against stock-market declines, DAA would have done an outstanding job over the past four decades! (For information on how to best use DAA within your portfolio, we suggest reading Higher Returns With Less Risk: The Best Combinations of SMI’s Most Popular Strategies.)

A more detailed version of this article appears in the September 2014 issue of the Sound Mind Investing newsletter. To read all of that issue, which includes our latest specific investment guidance, sign up for a web membership. At just $9.95 per month, and with the freedom to cancel any time, it’s a low-cost, low-risk, high-return investment in your financial future.

Mark Biller

By Mark Biller

Mark Biller is Sound Mind Investing’s Executive Editor. His writings on a broad range of financial topics have been featured in a variety of national print and electronic media, and he has appeared as a financial commentator for various national and local radio programs. Mark is also the Senior Portfolio Manager of the SMI Funds.

This week’s picks for the best in personal finance from around the web.

Why your fund’s return may be better than yours (Vanguard). Yes, trying to time the market is a big factor. But there’s more to the story.

Robert Shiller tries to understand why stocks are ‘very expensive’ (MarketWatch). The famed economist is sticking to his position that stocks are overvalued, but acknowledges they could remain at these levels for years.

Power of attorney can have its own complications (NY Times). Even when it seems you’ve done everything right, the paperwork still may be wrong.

The challenges of extending your career after retirement (US News). Many are hoping to keep working for pay in their later years. Here are some ways to turn that hope into a plan.

The ‘deceitful’ infomercial king and his pyramid scheme (CNBC). The only thing more stunning than the frauds perpetuated by scam artists is the number of people who fall for them.

And from the blogosphere…

The stock market’s missing ingredient (Bloomberg View – Barry Ritholtz). The market soared in 2013—and hardly anyone even noticed.

What makes Warren Buffett a great investor? Is it the intelligence or the discipline? (Farnam Street). The famed investor on avoiding delusional behavior and why temperament trumps IQ.

Go ahead, spice up your investing life (Sketch Guy – a NY Times blog). “Where did you get the idea that investing should be exciting?” Good question.

Monopoly experiment reveals how money changes people (Business Insider). An eye-opening study on how money can impact how we treat others, and what we think of ourselves.

Retirees live on less (Squared Away). It’s still probably best to assume you’ll need more and then be surprised that you don’t need so much after all, rather than the other way around.

We’d love to hear your responses to any of the above. To weigh in, just meet us in the comments section.

Matt Bell

By Matt Bell

Matt Bell is Sound Mind Investing’s Associate Editor. He is the author of three personal finance books published by NavPress, leads workshops at churches and universities throughout the country, and has been quoted in USA TODAY, U.S. News & World Report, and many other media outlets.

MarketWatch recently ran an article highlighting what it called the Worst money mistakes you can make at any age. Sitting near the top of the list was a financial trap that would hinder even Houdini, a misstep so severe that anyone taking it would surely never be able to recover (okay, I’m embellishing just a bit). What is this major money miscue? It is for married couples to combine their finances.

The article was aimed at women, and cautioned that many…

…make the mistake of combining all of their income, investments and financial accounts with those of their spouse or partner. If those relationships eventually come to an end, they often end up less financially secure than they would have been if they had kept some of their finances separate.

MarketWatch quoted Certified Financial Planner Wendy Weaver, who advised:

“Keep your own checking account and deposit your income in it. Then you can share expenses out of a joint account into which you both contribute proportionally.” She also recommends keeping any investment you bring into a relationship in your own name.

The MarketWatch article reminded me of a Today Show segment I saw a few years ago about “financial infidelity.” The host mentioned the results of a Money Magazine survey in which:

  • 71 percent of married Americans acknowledged keeping secrets about their spending from their spouse
  • 44 percent said keeping secrets about money is acceptable under certain circumstances
  • 40 percent admitted that they tell their spouse they spent less on purchases than they actually did (women lied mostly about clothing, shoes, and things for kids; men lied mostly about things for the car, entertainment, and sports tickets)

When the Cure is Worse Than the Disease

For help interpreting the survey’s results, Today turned to two financial experts.

Expert number one, host of a cable TV show about money, said, “I don’t think financial infidelity is all that bad. I mean, women need to have independence in their relationship and they need to be able to have private numbers that they can do whatever it is they want with.”

Expert number two, Today’s resident financial authority and a personal finance author, tempered things a bit by saying, “I agree, except that let’s acknowledge that we’re each going to have this pool of money that we can do with what we want and we don’t have to talk about it.”

She believes couples should keep three bank accounts: “One for me, one for you, one for the house. And the house gets taken care of first.”

To which expert number one responded, “Oh my gosh, without a question you should have separate bank accounts. I mean you should be able to do with your money whatever you want to do with your money.”

The host concluded the segment by saying, “Good advice.”

I concluded watching the segment by saying, “huh?”

Separate Accounts, Separate Lives

Divorce attorneys have told me that when money is the issue that brings a couple in to see them, as is it often is, the specific issue is usually that the husband and wife were living separate financial lives. Over time, one spouse trashed their finances, usually by racking up a lot of debt. By the time the other found out, it was too late. Not only were their finances a mess, but now all respect and trust had been lost as well.

Let’s face it, there are plenty of factors that tend to make money a tough topic for married couples. There are deep-seated family of origin habits and points of view about money that impact each spouse in ways they may not even realize. There are temperament differences that are very often really the cause of many financial disagreements that seem to be about something else. And there are often a whole host of unspoken money-related hopes, dreams, and fears.

With all of that working against us, we don’t need to introduce systems that foster separateness. We need systems and structures that create teamwork, openness, and honesty.

In part, that means combining financial accounts. Of course, some can’t be combined. An Individual Retirement Account is, after all, individual. But those accounts that can be combined should be, including checking and savings accounts.

It also means both spouses should have easy access to the household’s complete financial picture. How much income is coming in? How much is going out and where is it going? How much is being invested and where? How much is being given away?

In our household, Mint provides much of this information, automatically tracking and updating our financial picture. All either of us needs is Internet access and we can see the current state of our finances.

Freedom Doesn’t Require Separate Accounts

One point made by expert number two that I agree with to a degree, was this: “Let’s acknowledge that we’re each going to have this pool of money that we can do with what we want and we don’t have to talk about it.”

Jude and I each have individual clothing budgets.  Each amount is a line item on our household budget.  We each have the freedom to spend that money as we want, but we’re accountable to manage to the number. And we usually do talk about what we buy. Other couples use such budgeted amounts for lunches with friends, hobbies, etc.

You don’t need to live separate financial lives to have some semblance of freedom in marriage. You each just need a budgeted amount you can manage.

What’s your point of view on this? When a couple gets married, should they combine their finances or keep them separate?

 

Matt Bell

By Matt Bell

Matt Bell is Sound Mind Investing’s Associate Editor. He is the author of three personal finance books published by NavPress, leads workshops at churches and universities throughout the country, and has been quoted in USA TODAY, U.S. News & World Report, and many other media outlets.