 Welcome, everyone, to the third episode of Bogleheads on Investing. In this episode, we'll be speaking with Jonathan Clements, founder and editor of Humble Dollar. He's also the author of several investing books and a former Wall Street Journal personal financial columnist. Hi, everyone. My name is Rick Ferri, and I'm the host of Bogleheads on Investing. This program is brought to you by the John C. Bogle Center for Financial Literacy, a 501C3 corporation. Today, my special guest is Jonathan Clements, the founder and editor of Humble Dollar. He's also the author of eight personal finance books, including How to Think About Money and his newest book From Here to Financial Happiness. Jonathan also sits on the advisory board and investment committee of Creative Planning, one of the country's largest independent financial advisors. Jonathan was born in London, England and graduated from Cambridge University before coming to New York in 1986. His first job was covering mutual funds for Forbes magazine, and then he went to work for the Wall Street Journal. He worked at the Journal for almost 20 years, wrote over 1,000 columns for the Journal and the Wall Street Journal Sunday edition. He also worked for six years at Citigroup, where he was the director of financial education for city personal wealth management before returning to the Journal for an additional 15-month stint as a columnist. Today, I'll be talking with Jonathan about his career and his new book From Here to Financial Happiness, plus a lot of other interesting topics that we'll get into right now. Let me introduce Jonathan Clements. Welcome, Jonathan. Rick, thanks so much for having me on your show. I really appreciate it. Jonathan, you've got an interesting background. You've worked at some of the big financial media companies, including Forbes and the Wall Street Journal for 20 years. It didn't take you long, it doesn't seem, that you immediately started looking at what makes performance of mutual funds tick and what makes the performance of accounts tick. And it seemed like you caught on right away in your writing to this idea that the Bogleheads believe in low fees and indexing. Can you talk about when you first started as a financial writer, what that process was that got you to that point so quickly? So as you can probably tell from the funny accent, Rick, I wasn't born in the U.S. I was born in England and I had most of my education there. When I got out of university, I started working in the U.K. and I very quickly discovered that the standard of living for financial journalists, particularly young financial journalists in London, totally sucked. And so I decided that I wanted an upgrade. So I moved to New York and I got a job as a fact checker at Forbes magazine, which was the lowest form of life. And the goal as a fact checker was to get yourself promoted. And the way I got myself promoted was to start writing about mutual funds. And after almost two years at Forbes, I was promoted to a staff writer and given the job of writing for every issue about mutual funds. And the standard way at Forbes to write about funds was to do these fund manager profiles. You fly to Boston, fly out to Los Angeles, sit down with a money manager, have him or her describe their investment philosophy and usually they'd give you three or four or five stock picks that you would describe in that particular article. And what quickly became apparent to me was that most of these guys who I considered to be top fund managers, because that's why I was interviewing them, more often than not, their moment of glory faded. The past performance was definitely no guide to future results. I got hired away by the Wall Street Journal in early 1990 to write about mutual funds for them. And I continued to see the same phenomenon. So you went there and you actually met with these top money managers, these top mutual fund managers. And you were looking at the performance and having this discussion and you're realizing then very soon after that that it was then the performance started to go down. You said their glory faded. In the years afterwards, these fund managers who had been at the top of their game when I spoke to them, often the reason I was interviewing them was because they had been identified as being top managers and what is called the Forbes Honor Roll. They had good performance in up markets and down markets. They seemed like consistent winners. More often than not, that performance didn't last. And we know that, right? We know past performance is no guide to future results. And so the question arises, what is a guide to future results? And the research has clearly shown the best predictor of future performance isn't past performance, the best predictor of future performance is low cost. If you want a manager who's really brilliant, you want to find the manager who is smart enough to get hired by a fund company with low annual expenses because that's what's going to give them a performance edge. Back though to that one point about the glory faded. So you're seeing this time and time again where the glory faded of the top managers that you went out to interview. At some point in your mind, did you come up with reasons why the glory faded? What was it that you found that caused the outperforming managers to underperform going forward? Was there something about just the dynamics of the mutual fund industry as a whole? Well I think obviously we have this issue with successful managers tend to attract assets and the more assets a manager is overseeing the harder it is for him or her to continue the good performance. But also the reason that managers tend to stand out is because they are in a sense cheating within their style box. If you have a good period for growth stocks, the value managers that look good are those who sneak a few growth stocks into their portfolio. So you have this value manager that's done well in a period for growth stocks. You say okay, this is the guy who really knows his stuff. He's been able to pick superior stocks and shine in a period when his investment style is out of favor. But of course what happens when styles rotate and when value stocks come into favor, the guy who's been cheating, who's been sneaking some growth stocks into his portfolio, suddenly finds it hard to keep up with the other value managers because he's not a true value investor. I saw that repeatedly in the managers I looked at. I'd be trying to benchmark funds and compare them to their peers and a particular fund would look good even if his or her style was out of favor. When the style returned to favor, they were out of step because they owned the wrong sort of portfolios. I think a lot of that cheating goes on and that's a lot of a reason why we think managers are good and it just turns out they weren't true to their mandate. So at some point you came to the epiphany or the aha moment that maybe forget about active management and we're just going to use index funds. When did that occur? It would have been in the early 1990s. At that point there were a whole lot of index funds out there but those that were out there were regularly performing better than the typical actively managed funds that they were competing against and it wasn't just that I started writing about this stuff but I started investing my money in these funds. I became a big believer in indexing particularly and index funds that were offered by Vanguard and the good performance of those funds coupled with me personally benefiting was what helped to cement my view that chasing actively managed funds and trying to actively manage a portfolio is really a fool's errand. In the early 90s you went to the Wall Street Journal and you picked up the getting going column. In 1994 the Wall Street Journal which at the time had no columnist outside of the editorial page and the venture editor announced that he was willing to experiment with columns within the news pages and being sort of up at a 31 year old raised my hand and said I'd like to have one of those and shockingly really the journal gave me a column at H31 so in 1994 towards the end of the year I started writing this column that was dubbed getting going and I did it for another 13 and a half years writing that column both for the regular Wall Street Journal and also once it was launched for Wall Street Journal Sunday. The first time you actually wrote about index funds in the getting going column do you remember approximately what year that was? It was part of the getting going philosophy from the start I would have been writing about index funds even before the getting going column was launched in 1994 but precisely when I can tell you Rick. Did you get any blowback from the journal because there all is a lot of advertisers in the journal I mean these mutual fund companies advertise in the Wall Street Journal and when you start talking about indexing and low fees and you know how that is the reason why index funds outperform most active managers and you started talking about active managers did you get a talking to by anyone and you allowed to pretty much say what you wanted? I got to tell you Rick back in the 1990s indeed throughout my period of the journal from a point of view of advertisers being allowed to influence the copy that appeared in the news pages it was verboten in fact advertising reps for the Wall Street Journal could be fired for calling up a reporter on a few occasions I was called by advertising guys and asked to speak at some particular event and whenever they called they only called after they cleared it with their boss and they called very tentatively it was really it was a magnificent organization from that point of view I can't swear that it's like that today but back then you know there was a church and state separation between the news department and the advertising department but I know that I've spoken with a lot of other journalists over my time and it's not that way at a lot of publications I mean that Chinese wall if you will it's got a lot of holes in it at a lot of companies I can't believe that and you know there were occasions when executives would come in and complain about my coverage I remember one particular meeting there were some guy who came in from Merrill Lynch to complain about my commentary on actually managed funds and there was a big meeting in the main news conference from on the ninth floor of the Journal building and I was down there and there's some other people were down there and the manager was down there the guy from Merrill Lynch spoke his piece and then I responded and as we walked out after the meeting the managing editor sidled up to me and he whispered in my ear he didn't lay a punch on you that was pretty much the attitude of the Journal unless you were making factual errors they were going to defend you to the hilt but again I can't swear that it's that way today I understand thank you it wasn't only mutual funds I mean the way I met you where you were taking investment advisors to task as well and that's how you and I first talked I think it was in 2001 because I had started the company and I was charging low advisory fees and I think you were really onto this idea of what is that 1% AUM fee buying you and she caught on to that very quickly as well well generally I would say the world of investing has become much friendlier to the average investor over the course of my career I mean you think about all the things that have happened we've seen the collapse of brokerage commissions we've seen tighter bid-off spreads we've seen this proliferation of low-cost index funds and we've seen a total change in the advisory model so that while there are still financial advisors out there who are charging 1% and simply giving you a bunch of expensive mutual funds that is less and less the case people are paying 1% they're often getting a very low-cost portfolio and they're getting help with their broader financial life they're getting help not just with the choice of stocks and bonds and which particular funds they're going to buy and so on but they're also getting help with a financial plan they're getting help with their estate plan help with tax management help with insurance today for that 1% if you're with the right fee only financial advisor you're getting much more than you would have got 20 years ago and of course as we know if all you want is portfolio management you can go out and you can get portfolio management for 25 basis points these days and you'll get a portfolio for that 25 basis points that is as good as the portfolio you would have got 20 years ago probably better in fact and be paying 1% back then and there are a lot of other models that have come out to like flat fee portfolio models subscription-based organizations like XY planning and then hourly fee advisors as well so it seems like it's much more diverse way in which you can pay for this advice rather than just AUM and I think one of the benefits of this is that you go back 20 years and people really believe that if you went to Merrill Lynch, if you went to Morgan Stanley you were somehow investing with the best and the brightest and the messages got through going to the big wire house these big brokerage firms is actually bad for your financial health and you're far better off looking elsewhere to some of these smaller financial planning outfits looking to the robo advisors trying out an hourly planner the stranglehold that the big brokerage firms had on the way advised clients manage their money is over that is definitely a plus so let's talk about the brokerage firms and such because both of us worked for Citigroup for a while you changed jobs and you actually went over to what I call the dark side I was on the dark side so I'm just saying that facetiously you went to work for Citigroup and it almost at the time when you did that there was some of us who had been following you were kind of questioning scratching our heads saying you wrote about these companies for years and now you're going to work for one I mean was that an experiment or could you tell us about that sure back in 2008 I was pretty burned out on writing the column I've been doing it for 13 and a half years and I was casting around for something new to do and I didn't want to become an editor at the journal I didn't really want to start writing about something else so I wanted a total change and I was approached by Citigroup to be involved in a financial startup that they were working on and the financial startup was this their plan was to create an advisory service that everyday Americans would deliver financial advice in return for a flat monthly fee and so I joined Citigroup in April of 2008 and that's indeed what we worked on was this flat fee advisory program they actually launched a pilot version of it in January 2009 remember what things were like in January 2009 if there was a worse time to launch a new financial advisory service I'm not sure when it would have been I mean January 2009 it probably wasn't quite as bad as 1932 but we were at the height of the financial crisis and this thing went nowhere in the months that followed Citigroup was in turmoil Smith Barney was sold off this startup that I was working on fell apart and Citigroup had to make a call they needed some sort of advisory offering for regular retail investors with Smith Barney gone what they decided was they were going to take this startup that I was involved in was called MyFi and then what was left which was the bank-based brokers they threw us together and said figure out what you want to do they brought in a woman called Debbie McQuinney who had been at Schwab and had overseen their RIA business and Debbie announced that what you wanted was all these bank-based brokers to become the only financial advisors and people who were part of this startup were sort of put in charge of this group of bank-based brokers and as you might imagine it was complete turmoil I can imagine but that is indeed what happened and that's how I ended up going from being part of the startup to being as I put it in the mainstream of Citibank I stayed on because they were having this experiment trying to turn these bank-based brokers into the only financial advisors and it worked to a degree but just from a purely from an economics point of view and you'll probably appreciate this Rick. I mean to go from charging commissions every time you buy and sell you might be getting a four or five percent commission on a product sale to charging one percent a year what you effectively do is you give up right away three quarters of your annual revenue and so this business went from being profitable to being extremely unprofitable so after a year or so of this there was yet another U-turn and they moved towards a fee and commission model but they still continue to try to favor the fee-based business so I sort of I hung on there I actually ended up spending six years at Citigroup towards the end I had got to the point where I had enough money I didn't sort of salary I was earning there and I decided I was sick of dealing with lawyers and sick of dealing with compliance people so I quit. And you went back to the Wall Street Journal for a little while. I went back to the Wall Street Journal and I had to say even though I can't claim that I didn't much good when I was on the dark side I'm sort of glad I did it I learned a lot about the business I've learned purely being on the outside I mean once as you know yourself Rick once you've been in the inside you see how it works you understand much better the culture of these institutions and why they do the screwed up things that they do for the benefit of the shareholders whatever it is for the benefit of the everyday investor who walks into the bank branch No not for that I haven't heard that one yet but that's what they might say but it's not what I saw anyway So you went to the Wall Street Journal and you were there for about a year and a half and then you decided to go out on your own and start your own business the humble dollar in 2017 which is a great blog and a lot of good advice there and then you continued to author books in fact you wrote how to think about money and you also your latest book from here to financial happiness can you talk about the transition to starting your own business and going from a paycheck if you will to starting from scratch and seeing how it goes So I wouldn't claim that I'm the most courageous person in the world at least not courageous financially in the position I am now I depended on the income I earn today in order to cover the bills essentially this is my retirement job it just happens that I'm working harder than ever I know how that goes If the books don't sell and the website doesn't make any money it's okay nobody's going to stop tonight So I do this more than anything at this point out of the sort of sense of public service I know this stuff backwards and forwards I love writing about it and I love being part of the conversation and that's what the books and the website allow me to do Well I read from here to financial happiness recently thank you for sending me the copy I appreciate that in typical Boglehead fashion if I can get a free book of course I'll get one for free and I did here so thank you I started reading the book and a few weeks ago and the subtitle is Enrich Your Life in just 77 days and it occurred to me as I was reading the book I need a much longer than 77 days to enrich my life the book is only let me see how many pages it is it's got 77 chapters it's 240 pages roughly but as I began to work through the book and it's not just a book it's a workbook and a book and looking day one, day two, day three, day four there are some of these days where I was reading about where my god I mean I have to book down I mean I literally had to say I really have to think about that that's going to take a long time for me to process what you just wrote now some of the days went by pretty easy but some of them were much more difficult in fact it was I found it aggravating in some ways to have to think about some of the things you wrote about in the book but as I kept on going through it I realized it was a method to the madness why you did it this way why you wrote the book this way could you talk about that you're thinking of how you put this book together as opposed to all your other books so the book it grew out of a couple of different things I've been thinking about and one of the ways I've described the book to people is that I like to think that it's the conversation that you should be having with a really good financial advisor a really good financial advisor isn't going to be purely concerned with making sure that you end up with the right seven mutual funds a really good financial advisor should be trying to figure out what it is that you really want from your financial life what's going to improve it today what's going to make you happy in the future what are the goals that you truly care about what sort of retirement do you want what is it that you're going to do with this last 20 or 30 years of your life so a good financial advisor is going to figure out that stuff and then he or she is going to help you figure out how to get there and it's not just about building the right portfolio there's so much more to managing money than having those six or seven mutual funds you need to figure out your estate planning figure out whether you should be paying down your debt then it's required you need to be figuring out insurance you need to be figuring out what sort of house you can afford to buy what you should be doing with your cars all of this stuff is part of building a robust financial life and that's what the 77 days are about it's about figuring out where you stand what you want and how you're going to get there and the premise is that you can do it with these 77 steps and the 77 steps are a mix some days it is about information gathering some days it's about teasing out what you want some days it's giving you a brief financial lesson about some topic that I think is crucial to understanding money and some days it's settling on specific steps that you ought to take the book gets deep into call it behavioral finance without calling it behavioral finance what I find is that you're able to describe things in layman terms without having to put a hundred footnotes in there and references to behavioral finance studies and such but you're able to take a lot of the biases and behavioral finance things that we know in academia and you're able to very efficiently and very cleanly use it to describe what people should do or shouldn't do or at least get people to think about their behavior and how their behavior affects their finances and that's what I found very interesting about the book is most of the time when you read a book like this you're constantly seeing footnote, footnote, footnote, footnote this study, that study, this study, that study you've avoided all of that in the book and I commend you for that but this is a very well researched and very well written book that encompasses just so much and I think you really hit what you were trying to do here with this book well in many ways Rick, thank you for your kind words but in many ways the book is a product of the decades I've spent thinking about money one of the challenges of writing regularly about money is that the basics are indeed pretty basic the basics of putting together a portfolio, figuring out how much insurance you need what you need to do in terms of estate planning paying down debt this stuff is really not that complicated and if you're going to survive as a financial writer you need to have some intellectual curiosity and start to delve into other areas of finance and I've been the beneficiary in terms of my longevity as a financial writer of some of the great research that has come out of academia the research on behavioral finance, on neuro-economics, on evolutionary psychology, on money and happiness all of these four areas have produced incredible insights that are so useful to us as managers of our own money and I've had really the pleasure of swimming in this research for the past 20 plus years and so while the book reflects that research it's not like I sat down and read it all over in the year running up to the book's publication I have been absorbing this for years and years and it's sort of become part of the way I think about money I'm not an original thinker but I am pretty good at synthesizing what's out there that the book represents there's a few things you wrote in here which caught my attention very quickly you have these great little quotes at the end of every chapter but it's not this is what you've learned in this chapter it's a saying or it's something that you put together and I want to read you one of them because I found it very interesting it's actually from day 44 you said if our net worth was displayed on our foreheads for all to see libraries would be mobbed and used cars would be status symbols and it took me a second to think about that saying libraries would be mobbed and used cars would be status symbols well of course I started thinking about it saying sure you wouldn't buy a book you'd go to the library get one for free and you wouldn't buy a new car you'd go out and buy a used car and that would be a status symbol because what would be on your forehead is a big number you know probably one of the most influential books I think that any of us have read over the past 20 years is the millionaire next door and this notion that it's not the money that you see it's the money that you don't see it's the millionaire next door living in the modest home wearing clothes from JC Penney and driving the second hand car that's the millionaire the millionaire isn't the big house with the his or her European sedan and the beautiful landscape that's not money that's money that is gone that is money that is spent and yet the money that is still there often isn't visible you see this on the Bogleheads forum the Bogleheads forum isn't just about low cost investing it's about having sensible habits when it comes to spending money I think this is one of the reasons why you see so much overlap between the Bogleheads and what's become a very hot topic in recent months which is the fire movement financial independence retire early that frugality cuts not just across investing but across our entire financial life and being frugal about how we handle our money is the key to wealth and that's why I came up with that we all knew how much everybody was worth and you saw somebody driving a BMW with a negative net worth of chance to laugh out loud I get it, that's true but because we don't see the net worth on their forehead we don't get the chance to laugh at them that's perfect, that's great in fact you followed up with that and another day, day 52 you talked about want to hurt your happiness by a big house involving lots of upkeep and a long commute I think a lot of us are guilty of that a big house you're now you've got big bills to keep it up and it might be nice to show off for a while but after a while people stop coming and you just have bigger bills you had one more thing in here I want to talk about and that is something you wrote on day 70 which talked about limiting yourself to one financial advisor one bank and one brokerage firm or mutual fund family I want to talk about that because it always comes up on the Bogleheads where people say oh I have three or four banks because I want to diversify I have two or three different advisors because I want to diversify I don't want to keep all my money at one particular firm call it Vanguard or Schwab or TD or wherever I want to diversify because what happens if one of those companies go under you're actually saying no don't worry about that here so in terms of what I call communication, multiple financial advisors multiple banks, multiple mutual fund companies multiple brokerage firms I don't see there is much benefit to this with one narrow exception I do appreciate that there is this FDIC limit of $250,000 and if you have a ton of money in the bank in order to make sure that you're covered by that $250,000 you may need to use multiple banks but other than that two financial advisors what you're going to end up probably is two portfolios that have massive amounts of overlap for which you're paying excessive cost you're not getting any added value if you can't find one financial advisor who's doing the job for you you've got a big problem similarly you go to a brokerage firm you're getting diversification not from the brokerage firm but from the investments that you buy if you have 10 different ETFs that's your diversification the fact that they're all held at one brokerage firm is of no import it's not like the brokerage firm is going to go under and suddenly all your assets are gone those assets are held by a separate custodian you have no reason to worry about that ditto for using multiple mutual fund companies I don't see any point in that you can have all your mutual funds at one company each fund is a separate company each of those investments is held by the outside custodian there should be no extra risk involved it's true, it is that way but some people still have this belief that they need to be diversified amongst where they keep their money I'm glad you wrote that in the book because it's just not true I personally have all my money at Vanguard and I don't have any reason to put it anywhere else even if I wanted to buy an exchange traded fund it was traded by iShares I could buy it through Vanguard so I don't need to have multiple custodians now if somebody has a 401k of course they have to have the money in that 401k but once they retire they can roll that into an IRA account at the one custodian that they choose and I'm not saying Vanguard's the place it could be Schwab, it could be wherever but why complicate it if you have a 401k account at a number of custodians not only does it make it complicated for you, the investor but if you should happen to pass away it becomes 10 times more complicated for the person who has to pick all this up absolutely I do as you do Rick I have all of my investment dollars at Vanguard and in fact I don't own any ETFs I own purely mutual funds and there's no publicity here when I pass away my kids should be able to settle my estate in a couple of hours I think that's the whole idea of simplicity is the next phase of what's going on with financial writers personally me I just launched a website Core 4 investing and it's all about being simple simplicity phase, at least baby boomers like me need to make things much more simple need to make their portfolio simpler need to make their estate simpler need not to have five different IRA rollover accounts if you're not going to go back to work put them all together into one there's no reason to have five anymore and if you have 401ks all over the place from different jobs you don't need that bring them all together into one IRA make it simple so I think simplicity is important and not just for us but for the future generations and I would just add the corollary to that which is that Wall Street battles this notion fiercely they want investors to believe that there is some correlation between sophistication, complexity and investment returns that simply isn't the case I know so many high net worth individuals who end up in complicated investment products because they think they're getting something special and they aren't what they're getting is a complicated investment product there's an excuse for charging high fees if you want to be truly sophisticated you should have a simple portfolio very well put let's get back to one more item before I come to questions by the Bogleheads forum you talked about FIRE financial independent retire early this is getting to be quite a phenomenon especially among millennials and how could you elaborate a little bit more on what FIRE is and then talk more about your viewpoint of these different facets of FIRE so the financial independence retire early movement is really about being extremely frugal early in your career quickly buying yourself some financial freedom so that you can potentially retire at a relatively early age now let's unpack that a little bit when we talk about retirement it's really not about retiring in the sense of you're going to go and live in Florida and spend all your days doing nothing it's really about buying yourself the freedom to spend your days doing what you love of course for many people this idea of being frugal buying yourself financial freedom quickly and then using that freedom to spend your days doing what you love that notion has been around for many decades I mean that certainly drove a lot of my financial behavior I was a prodigious saver when I was in my 20s and 30s and that's what plows me today not to worry about earning a paycheck what the financial independence retire early movement the FIRE movement has done is it's conceptualized in this single word FIRE and it's become a rallying cry for a certain group of devotees but you know it's not that different from anything that we've known before it's simply that it has coalesced around this one phrase and it has become something of a movement and I think it's to be applauded in a country where far too many people save way too little the idea that we're celebrating people who are being smart about their money and saving diligently what's wrong with that not a thing and parlaying that out there are being formed and have been around now for a while companies like Betterment where they're teaching young people right from the beginning use low cost index funds don't try to beat the market just put a simple portfolio together of low cost index funds granted they're using ETFs because they're custing the assets at a brokerage firm but I always applauded companies like Wealthfront and Betterment for teaching young people right from the beginning and don't bother trying to beat the market just have a consistent investment strategy a consistent saving strategy just put the money away it's all part of the same movement and I think it's all very good yeah I think anything that focuses on holding down costs whether it's the costs in your day to day living the costs in your investment portfolio the costs of your insurance as long as you're being smart and the choices you make what's wrong with that? the less money that goes to these financial service providers the more money that ends up in your pocket in the last part of the interview today I'm going to go to the Bogleheads forum I asked the Bogleheads at Bogleheads.org to come up with some questions for you and a lot of people had a lot of great comments saying how they followed you for years and gave you a lot of kudos but there were a few questions so I'm going to go through a few of those questions now and sort of wrap them off so here was the first question and this was by Rosemary Eleven she asked you actually she asked you three questions so I'll do one, two, three and then you can put them all together if you'd like I am in retirement what is an acceptable asset allocation in retirement so that was her first question what is an acceptable asset allocation in retirement her second one was what international allocation I think she's talking about stocks as a percentage of the asset allocation and thirdly what is the safe withdrawal rate in retirement so some three broad general questions one, two, three if you can hit them so the right asset allocation such of your expenses are going to be covered by social security it's going to depend on whether you have a traditional employer pension it also might depend on whether you have anything else that's generating income for instance rental real estate but as a rule of thumb 50-60% in stocks is probably a reasonable target what I would say as sort of upper limit on that you should know exactly where you're going to get your next five years of portfolio withdrawals from and that money at a minimum should be invested in something so CDs, short term bonds high yield savings accounts something like that so to get to your third question Rick if you're using the 4% withdrawal rate which I think is a fine number at a minimum you should have at least 20% of your portfolio in cash or near cash investments so that you can cover those next five years of portfolio withdrawals now that suggests that potentially you could have 80% in stocks I think that's way too much I would probably go for 50% or 60% in stocks at a minimum you want that 20% or 5 years of 4% withdrawal rates stacked in cash or cash like investments so that you're covered in case it goes down steeply in terms of the second question about international allocation on a stock portfolio my view on this has shifted over the years and personally I now have a market weighted portfolio when it comes to stocks which means effectively that I have half my money in US stocks and half of my money in foreign stocks and I've done that for one simple reason which is who am I to think that I know better than all other investors collectively if all other investors worldwide collectively believe that half of global stock market value is in the US and half is outside the US shouldn't I as a hardcore indexer replicate those percentages the caveat and that is of course you are introducing a fair amount of currency risk into a portfolio if you're uncomfortable with that degree of currency risk I would say either hold less in international stocks or potentially seek out a fund that hedges its currency exposure but as things stand I'm not sure of a fund that would give you low cost foreign stock exposure with a currency hedge well thank you John that was a good answer but let me ask another question which is something to do with what you just talked about so we can hit this one too this is from CW Radio who asks as a safety first investor that is in retirement what investment should I put my safe money in and I think you already touched on this with the 20% but I think he looking for SPIA which is a single premium insurance annuity, a bond ladder and so forth he's asking if these are also acceptable places to put safe money I think all of those are acceptable places to put safe money if you're going to buy an immediate fixed annuity I would buy from more than one insurance company and I would buy from insurance companies with a high rating for financial strength an immediate fixed annuity is a great way to have a longevity risk and ensure that you have stable stream of monthly income you just don't want to get it you're railed because you buy from a single shaky insurance company and the insurance company goes under in terms of the bond portfolio I've always favored taking risk on the stock side of the portfolio and playing it safe with bonds in my own portfolio I own pretty much a sort of 50-50 split for the bond portfolio index, treasury bond and high quality short term corporates but if you want to go for added safety you might add in a mix of high quality short term treasuries as well rather than taking the credit risk that comes even with high quality corporates this is from a poster by the name of Beanie says Jonathan Clements used to recommend putting 15-20% of one's stock allocation in diversifiers such as merger arbitrage funds commodity funds gold funds and REITs I haven't seen him talking about this in a long time maybe 10 years or more have his views changed if so why? So I never recommend as much as 20% I do remember writing a column for the Wall Street Journal when people were all bothered about alternative investments and this was a question I was getting a lot and I did indeed say that if you really want alternative exposure in your portfolio I could see allocating 10% of a portfolio and no more to alternative investments and in terms of alternative investments it was the list that you recommended real estate investment trusts gold stocks commodity funds and precious metals funds and I still think that that's a reasonable allocation I have to say I don't particularly like merger arbitrage funds because they involve active management and I have soured on commodities funds those have become more actually traded it's gone from being a market where companies and farmers hedge to being a market dominated by investors returns from the commodity indexes hasn't been replicated and it will not be replicated so I'm not that crazy about commodity funds I still have a soft spot for gold stock funds and I still have a soft spot for real estate investment trusts but I probably wouldn't put more than a couple of cents of a portfolio in each What if somebody did any of that and just bought the three fund portfolio? I think the three fund portfolio is a great portfolio to own you and I have had this discussion Rick people tend to mess around way too much with their portfolios I think I've done too much of that myself over the years if you simply buy the three fund portfolio total US market total international and total bond I think that's a great mix you may even want to consider the two fund portfolio you can now go to Vanguard and buy the total world index fund and have the total bond market fund onto that and you could have an incredibly diversified portfolio with an asset allocation of your choice with just two mutual funds It wasn't that way years ago though things have gotten so much better in indexing space where you can really reduce the number of holdings that you need nowadays to be diversified globally it's really gotten a lot better and the fees have come down so much I mean that total world index fund I believe has something in the range of 8,000 stocks in that fund for a $3,000 investment or you can buy the ETF and invest even less you can buy a portfolio with 8,000 different stocks think about that I mean that is a astonishing today the everyday investor with 10 or 20,000 dollars to invest can build a portfolio that many institutional investors two decades ago would have died to have it would be lower cost and better diversified it's astonishing what ordinary investors can do with their money today really astonishing So the last question has to do with buying happiness this is from P10 and I'm gonna just paraphrase what he's saying you've always talked about and one of the things that make you unique is the spending side of happiness if spending actually makes people happy so he was wondering about your thoughts on spending now we've talked a lot about investing and saving but he wants to know specifically your thoughts about spending and how to spend correctly to make you happier as I've written in numerous places I believe the money can buy happiness in three ways first money can buy happiness simply by eliminating financial worries I mean so many people in America pursue happiness of the shopping mall rack up the credit cards and end up miserable because they leave themselves in a financially perilous state and whatever they manage to buy at the mall is no solace when they wake in the middle of the night worrying about what happens if they lose their job or how they're going to pay the credit card bill so simply being smart about money having little money in the bank saving for the future avoiding debt except for mortgage debt that alone is going to buy you substantial happiness so that's the first way that money can buy happiness second money can buy happiness if you can reach the point where you can spend your days doing what you love there is few things in life that bring greater happiness than looking hard at something you care passionately about so if you can get yourself to that point like the fire people talk about where you don't need a regular paycheck or you need a much smaller paycheck spend your days doing what you love that is the second way that money can buy happiness but the third way and this is probably what the question is getting at is I believe the third way that money can buy happiness is we can use it to create special times with friends and family and there are a couple of different elements to this I mean first we know that spending time with friends and family gives an enormous boost to happiness a research suggests that that is indeed the case the research suggests that having a robust network of friends and family not only makes you happier but it also gives a boost longevity equal in effect to not smoking so having a robust network of families is not only good for your happiness but it's also good for your health so in terms of using money what you want to do is spend it not on material goods which are often enjoyed on your own but on experiences you know taking family on vacation organizing family reunion going out to dinner with friends going to the theater with a colleague those experiences enjoyed with friends and family can give a big boost to happiness but there's another element to this which is you really want to get a lot of happiness out of your spending on experiences with friends and family you should arrange these things far ahead of time so that you have a long period of eager anticipation that way you'll get a lot more happiness out of the dollars you're about to spend and you should make sure that you keep mementos to remind you of the event in question when you go on vacation you should take photographs and then you should put them up around your house so that the months afterwards you can think wow that was such a great trip I had such a good time and here every day when I walk into the living room is that photograph that reminds me of what a special time in my life that was so that in terms of actually spending money would be my number one tip that's great Jonathan I want to thank you so much you've made us all very happy by being on our program today good luck with the book and again the name of your new book is from here to financial happiness enrich your life in just 77 days Jonathan thank you so much for being our guest on investing well thanks so much for it's been a pleasure talking to you this concludes the third episode of bogelheads on investing I'm your host Rick fairy join us each month to hear a new special guest in the meantime visit bogelheads.org and the bogelheads wiki participate in the forum and help others find the forum thanks for listening