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10 Things Not to Do with Your Money

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You’re probably doing at least three.

If you want to get better at something—such as your job or playing an instrument or a sport—you need to work hard and put in the time. But in my three decades of covering the financial world as a reporter and author, I’ve learned that if you want to make your money grow faster, sometimes the best financial strategy is to do less, not more. This certainly doesn’t work for everyone all the time, and I readily concede that it makes me sound like a curmudgeon, but it’s worth considering before you do something that you might later regret.

Here are 10 money-related things that I’m glad I don’t do…

1. I don’t carry life insurance. When my children were younger, I had some term-life insurance, which is the cheapest way to get short-term coverage. Once I had amassed enough savings so that my family would be OK ­financially if I went under the next bus, I ditched the policy, saving lots of money in annual premiums.

2. I don’t use a financial adviser. I am comfortable managing my own money, partly because I’m knowledgeable and partly because I know that I won’t panic when the market next declines.

If you don’t fall into that camp, consider a fee-only ­financial planner rather than one who gets a commission every time you invest in something. You might search for an adviser through GarrettPlanningNetwork.com and/or the National ­Association of Personal Financial ­Advisors.

3. I don’t buy individual stocks. It’s risky to bet heavily on any one stock, and I don’t fool myself into thinking that I can create a collection of stocks that will outperform the overall market or the best mutual fund managers. That’s why all my stock market money is in mutual funds. I haven’t owned any individual stocks in 15 years except for a small amount of shares in various companies that I worked for—and I sold those stocks as soon as I was able to.

4. I don’t own municipal bonds. Based on my tax bracket, buying tax-free municipal bonds in my taxable account potentially makes sense. But I follow a different strategy that should deliver greater after-tax wealth. I keep taxable bonds—which yield more than munis—in my tax-sheltered retirement account. That way, I don’t have to pay income taxes on the interest I earn each year. Meanwhile, I use my taxable account to buy and hold stock index funds. (See below for the tax advantages of that strategy.)

5. I don’t invest in actively managed mutual funds. There’s a mountain of evidence that most professional money managers fail to beat the market, once you factor in their investment costs. For instance, in 2014, just 13% of large-company stock funds outpaced the Standard & Poor’s 500 stock index, according to the investment research firm Morningstar, Inc. That won’t be true e­very year, but it’s true often enough that I stick with passively managed index funds, which allow me to capture the market’s performance while incurring low annual expenses.

Also, index funds generate modest annual tax bills because they don’t have a big turnover in their holdings each year, as many actively managed funds do, so they’re slow to realize taxable capital gains. And when they do, the gains will be taxed mostly at the lower rate that applies to long-term capital gains. Unless you’re in the top federal income tax bracket, your long-term capital gains and qualified dividends are likely be taxed at 0% for the lowest bracket or 15% for other brackets.

6. I don’t pay attention to market pundits. Most of these folks simply do not know where stocks are headed or what will happen to interest rates—and yet they tell wonderfully convincing stories that can prompt investors to make big, unnecessary changes in their portfolios.

7. I don’t act on investment opinions offered by friends and family. Don’t get me wrong—I listen to what friends and family say, but mostly to find out what investments other folks are excited about. Those are the investments that I’m often tempted to avoid or cut back on in my own portfolio because the enthusiasm of others often is a sign that the investments are overvalued.

8. I don’t budget. I have never created a detailed written budget or tracked my daily spending. I know I’m being sensible with my spending, so why bother?

How to determine whether you’re spending sensibly enough to avoid creating a budget: If you’re in the workforce, do you save 12% or more of your pretax income toward retirement? If you’re retired, do you limit your annual portfolio withdrawals to 4% of your nest egg’s beginning-of-year value? If you answered “yes,” you’re probably being prudent with your spending, so you, too, don’t need to budget.

9. I don’t carry debt. I avoid borrowing money—even mortgage debt. I took out a 30-year mortgage in 1992, when I bought my first home, and paid it off within a decade. I know that many people cannot afford to do this. And I readily concede that the mortgage-­interest tax deduction is a great tax break. But even with the tax savings, I found that my mortgage was costing me more than I could earn on high-quality bonds, so my “bond buying” strategy was to make extra principal payments on my mortgage in order to escape the mortgage and its interest costs more quickly.

10. I don’t own a vacation home. You can think of a house as similar to a stock—there’s the price appreciation and the dividend.

In the case of a home, the price appreciation typically is modest and is more than offset by all the costs you incur, including property taxes, homeowner’s insurance and maintenance expenses.

In contrast, the dividend on a house or an apartment can be huge. I’m referring to the rent you receive if you’re a landlord.

What if you buy a vacation property for your own use? Instead of rent checks, you collect so-called imputed rent—the pleasure you get from using the place. That can be a great thing—but it won’t put cash in your pocket.

The implication: Buying a second home for your own use may be a good way to spend your money if you like to vacation in the same place year ­after year. But don’t expect that vacation home to make you wealthier. I’d rather have the freedom to go wherever I want on vacation, so I have avoided the hefty cost of owning a second home.

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Jonathan ­Clements writes a weekly column for The Wall Street Journal and is author of Jonathan Clements Money Guide 2015. Previously, he was director of financial education for Citigroup at the bank’s US wealth-management business. JonathanClements.com

Date: April 15, 2015 Publication: Bottom Line Personal
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