Stocks have REALLY nose-dived. We’re all stressed with the coronavirus and the stock market. This is the first bear market – defined as a 20% decline from the recent peak – in over a decade. At the close on Thursday we were -27% off the peak just on February 19. How far will we spiral down? We all want a sense that we’re in control. We can’t control the stock market. We retirees can control when and how much stocks we have to sell for our spending. We can push that time pretty far into the future. Surprisingly, we also have better opportunities to improve our portfolio for the more distant future. This posts list what you might do.

 

 

One thing that’s not on the list: don’t sell stocks now! That makes NO SENSE. Everything in our financial retirement plan – and all nestegger’s plans – is focused on avoiding having to sell stocks when they’ve cratered. Selling now would mean throwing out my total plan. As I mentioned in the last two posts (here and here), Patti and I have plenty of cash and bonds that stretch the time before we will be forced to sell stocks. Four years. Maybe more. We’ve just got to wait this out. Here’s what I’m doing and what you might do now.

 

== I sold more bonds this week ==

 

Restatement: bonds are our insurance against steep, steep declines in stocks. We sell bonds, not stocks when they’ve cratered. Our spending for the balance of 2020 is already in cash. Our next scheduled sale of securities for spending for 2021 is the first week of December. Last week I stated that I wanted to get all that we’d sell this coming December 20 in cash.

 

I sold more bonds on Tuesday – IUSB and BNDX. I failed to sell enough last Friday. I double-checked my math. I forgot to sell enough include the taxes that we will withhold in December 2020, primarily from our RMDs.

 

The Tuesday price for IUSB was a less than a percentage point off its all-time high. I now have all of 2020 and 2021 gross spending (our Safe Spending Amount, Chapter 2, Nest Egg Care) in cash. I still may sell stocks and bonds in early December, but it’s good to know that I don’t have to sell any.

 

== I cut expenses ==

 

I cut expenses but not by design. We cancelled the trip we had planned for France in April. We also have our annual trip to England in May, and I doubt that we’ll make that. Trips like these are by far our largest discretionary expenses. One trip equals much more than one month of spending on the basics; that lower spending translates to more months before I have to sell stocks.

 

== I’ll harvest tax losses ==

 

I have losses in two securities in my taxable account. One taxable loss is the specific shares from 2019 dividends from VTSAX that we’ve owned for years. The other is from FSKAX that I purchased in December. Last fall I refinanced our mortgage. I took out a larger loan than I paid off and netted $85,000. I invested some in bonds that I’ve now sold and some in FSKAX. It’s down 24% now. I have a short-term loss.

 

I can sell the specific shares of VTSAX and all of FSKAX and capture a tax loss for our 2020 tax return. The loss is big enough such that we’ll pay no taxes on dividends we’ll receive later in 2020. We’ll likely have $3,000 that we can deduct from other income. I think I some loss will carry over for our 2021 tax return. The day I sell I’ll reinvest the proceeds in a security that is different enough so I don’t run afoul of the IRS wash sale rule.

 

 

I haven’t really dodged much taxes with this move. I’ve just pushed out the time I’ll pay taxes. I’ll have to pay higher capital gains taxes when I sell in the in the future; that’s from the lower cost basis that I’ll have.

 

== Sell actively managed stock funds ==

 

Patti and I don’t own any individual stocks or actively managed funds in our taxable account. My friend Jay owns quite a few. He’s been reluctant to unload even the ones that obviously under-perform because he does not like paying the tax on capital gains that have accrued over the years. (A future post will describe that this is not really a valid consideration.) The steep decline in value means his tax bite on some of these will be very low. The opportunity to clean up his holdings – sell those dogs and move to index funds – is here.

 

== Convert Traditional to Roth ==

 

It’s best to convert Traditional to Roth when stocks have declined. You get more bang – lower RMD in the future as an example – for your buck – the amount you convert – when stocks have declined. The dollar amount you convert is a greater percentage of your smaller total.

 

I haven’t done this yet, but I will convert some Traditional to Roth soon. Converting Traditional to Roth never costs me money – after tax dollars to spend – and makes me money if I use the Roth judiciously to avoid higher taxes that I would otherwise pay. You want breathing room that 100% Traditional IRAs and RMDs don’t give you: too high Adjusted Gross Income triggers ugly taxes that you might be able to avoid.

 

• One dollar of too much Adjusted Gross Income can result in $2,000 in higher Medicare Premiums; those are deducted from your Social Security paychecks each month.

 

• A rare few retires have a tax concern from TOO LARGE of Traditional IRA. Those folks may face too high of tax bracket on RMD withdrawals later. That’s because at expected returns for stocks and bonds, RMD will double in real spending power relative to the initial RMD (now at age 72). That real doubling means you could get pushed into a tax bracket that you would really like to avoid. The big jump is from the current 24% to 32%. This is most problematic for couples and after one has died. The tripwire for the 32% tax bracket for a single tax payer is at about $177,000 modified adjusted gross income (MAGI). Folks who can envision this level of AGI in the future should be fairly aggressive in converting Traditional to Roth, and the time is here.

 

== Add financial capacity at low cost ==

 

This sounds crazy to include in this list with the market cratering, but here goes: your non-financial assets – primarily your home – are a deep, deep reserve for your financial retirement plan. As I mentioned above, last fall I decided to get more money out of our biggest non-financial asset. I refinanced our home mortgage and got an added $85,000 out of our accumulated home equity. My mortgage rate is 3.625%. That’s low, but the 30-year mortgage rate now is 3.36%, just a tick up from last week, the lowest in 50 years!!!

 

This was a very easy process. I used one of the mortgage lenders listed with Costco, NBKC. I used NBKC when I last refinanced in 2012. My closing costs were really low. The process this time was easier than before. I think the whole process, starting with my initial inquiry, took six weeks. Maybe eight.

 

 

Conclusion. The stock market has cratered. We’re all stressed. We all want to act to give us a sense that we’re controlling our financial future. Our nestegg financial retirement plan lets us avoid selling stocks when they’ve cratered. We pull out our insurance policy and sell bonds for our spending. I sold bonds last week and more bonds this week to have zero uncertainty on price for my next big sale in December. I am looking to harvest tax losses that will give me a bit more after-tax dollars to spend in 2021. I’m looking to convert Traditional to Roth; I get a bigger bang for my buck now that stocks have declined.

 

If you own stocks and actively managed funds in your taxable account, it’s time to look hard at selling them now. Buy index funds. It seems crazy, but you should consider adding to your financial resources by tapping your non-financial assets; you do that with a mortgage. Rates are the lowest in 50 years.

Wow, this is a crazy time. Last week I described how I could wait nearly four years before I would have to sell stocks for our spending. I could sell our insurance against painful declines in stocks – selling bonds only for our spending – up to the end of 2023 and maybe into 2024. This post is a brief explanation of how I improved the quality of our insurance today: I removed a part of the variability in the value of our insurance. I effectively pre-sold bonds equal to our spending in 2021. I now have the next 22 months of spending in cash.

 

== Bonds are insurance ==

 

We own bonds to sell them, not stocks when they have cratered. When it’s too painful to sell stock, we’ll disproportionately sell bonds or solely sell bonds for our spending. Bonds are insurance. That’s it. We don’t own bonds to smooth out the annual variations is our portfolio – that’s what most people think.

 

== We have enough insurance ==

 

The recap of last week’s post is that Patti and I can wait nearly four years before we HAVE to sell stocks. That’s plenty of insurance in my mind. We don’t need more. We don’t need to sell stocks now to get more bonds:

 

• We have the balance of our pay for 2020 – our annual Safe Spending Amount (SSA) – in cash and CDs that mature later this year. I got that cash from the sale of primarily stocks last December.

 

• We have about two years of spending in Reserve. Our Reserve is the off-the-top amount I don’t even consider as part of our Investment Portfolio. I keep that in an intermediate bond fund, IUSB. If I decided to use those two years – totally avoiding selling anything from our Investment Portfolio – I could cover spending in 2021 and 2022. I’d first have to wrestle with the possibility of having to sell stocks in December 2022 for spending in 2023.

 

• We can lower our monthly spending over the next two+ years and slide that date out another six months to July 2023. And if I pulled out the stops I could slide further to December 2023 or even early 2024.

 

== Insurance quantity is near an all time high ==

 

The quantity of our insurance is much more than it’s been. We all have more insurance if you follow anything close to IUSB and BNDX. Both IUSB and BNDX have been on a tear over the last 14 months. I have 14% more than I did at the end of 2018.

 

 

Why this tear? Bond prices move in the opposite direction to the change of interest rates. Interest rates have fallen to record lows. The return on a 10-year US Treasury note is below 1%. It’s really getting hard for me to think that rates can get lower and bond prices higher. This morning, however, IUSB is up another .74%.

 

== The quality of our insurance ==

 

All our bond insurance is in intermediate bond funds – 85% is IUSB (Total US bonds) and 15% is BNDX (Total International bonds). I’m not driven to make more money from bonds, I just want them there to sell for spending when if (when!) stocks tank. In normal times, I’ve very happy with these two.

 

== A good farmer pre-sells part of his crop ==

 

My gut tells me I should be like a good farmer. A good farmer wants to avoid the variations in price that he may receive for his crop that he harvests, stores, and finally sells each December. Spot prices can swing widely depending on crop yields and demand. In the past 15 years, the spot price for corn has ranged from $1.90 per bushel to $8.00 per bushel. The smart farmer takes the some of the risk out of the price he will receive by contracting to deliver part of his crop in December at a set price. He enters into a futures contract.

 

The spot price today for corn is $3.82 per bushel. That’s about the average over the last five years. A farmer can contract today to sell a part of his corn crop at $3.85 per bushel. He looks at that and decides he’d be happy with that price. He knows the spot price then may be higher or lower, but that’s not the issue: he’s taken some risk out of the total revenues he will receive for his 2020 crop – revenues he’ll need for his family and for the business in 2021.

 

== I forward sold money I’ll need for 2021 ==

 

In essence, I did what the farmer does. I forward sold the crop that I would likely harvest for our spending needs in 2021. Well, I really didn’t enter into a forward contract: I just sold enough IUSB to equal our 2021 spending needs. I’ve taken out any variability that may hit IUSB between now and then. I’ve improved the quality of our bond insurance: I’ve locked in a good price of part of that total crop. I now have the 12 months of 2021 in cash. That’s in addition to the 10 months remaining in 2020 that was already in cash. The next 22 months in cash.

 

That doesn’t mean I won’t sell stocks and bonds in December for our spending in 2021. Nine months is a long time from now. But if stock returns tank relative to where they were on November 30 – the last day of our calculation year – I have locked in the value of a big part of my insurance at a price I’m happy with now. I have improved the quality of our insurance.

 

 

Conclusion: Bonds are our insurance against very poor stock performance. We retirees must annually sell securities for our spending needs. We sell more bonds or even solely bonds when stocks tank. I’ve kept all our bonds in our Reserve and Investment Portfolio in intermediate bond funds. Over the last five years, the amount of our insurance has increased – especially over the last 14 months. With this bad turn in the variability of stocks, the time may come later this year when I’ll have to use our bond insurance. I’m happy with the price of our bonds now. I effectively locked in the price will get this next December. I simply sold part of our intermediate bonds.

This is a scary week. Does the rapid decline in the stock market worry you? I’m more worried about the coronavirus. Patti and I are in the age bracket most susceptible to viruses: our immune system to kill a virus just isn’t as strong as it was when we were younger. I’m much less worried about our financial future, largely because our financial retirement plan has anticipated scary times like this. I have reminders planted in my head to calm any worries. The purpose of this post is to list the things I’m telling myself this week. If you’ve followed the plan in Nest Egg Care, you should have an almost identical list.

 

== Spend and Invest is harder than Save and Invest ==

 

Patti and I are in the Spend and Invest phase of life. We annually need to sell securities for our spending. That means we’re more affected by bad variability in stock and bond returns. We’re hurt most when we sell when stocks and bond have declined.

 

Those of you who are not retired are in the Save and Invest phase of life. That’s easier in times like this: just keep adding your routine monthly contributions to your retirement account. You’re gaining the advantage of dollar-cost averaging. This nosedive in stocks is helping you. It’s not hurting you.

 

== My checklist ==

 

Here’s the checklist I go down in periods like this.

 

We’ve planned for the worst. The basic concept of Nest Egg Care (NEC) is to plan for the worst and adjust when you find you are not on the track of the worst. The worst is the most horrible sequence of stock and bond returns in history. That’s what drives our Safe Spending Rate (SSR%) and our Safe Spending Amount (SSA) to a low, low level. (See Chapter 2, NEC.)

 

We’re far away from the worst. Our plan assumes we will ride the most horrible sequence of return in history. The most horrible sequence of return I find had cumulative real returns for stock and bonds of below 0% for 14 years. That included a two-year period when stocks declined in real spending power by -49% and a five-year period when bonds declined by -44%. Statistically that steep of stock decline is a 1-in-185-year event and that bond decline is a 1-in-2400-year event. I don’t know how to calculate the chance of both of those events occurring in the same 14-year period, but I think the chance is far lower than 1-in-2400.

 

 

 

 

 

Our first real worry-point is when Patti is 87 and I am 90. That’s 15 years in the future for us. We have zero chance of depleting our portfolio through the end of 2034 when Patti would be 87 and I would be 91. I keep the image of our hockey stick in mind. The shaft length is the number of years of no chance of depleting our portfolio. We’re locked in on that inflection point 15 years from now. We do have increasing chances of depleting our portfolio after that inflection point, but, unfortunately, it’s low probability that we both won’t be alive then.

 

 

Bonds are insurance, and our insurance is not declining. We all hold bonds as insurance when stocks crater. We’ll sell bonds – disproportionately more than stocks or even 100% – when stocks dive. All of us have more insurance now that we had at the start of the year because bonds are in positive territory. I can see on my phone that stocks are down about another 1% so far today, and bonds are up about .5%.

 

 

• It helps to re-imagine our portfolio mix for what we’ll spend in the next few years. Every December I re-imagine our portfolio into three holding periods: Short (three years), Mid (four to ten years) and Long (more than ten years). If I re-imagined as of last night, I’d see that our near term portfolio is in positive territory year to date.

 

 

I don’t need to sell ANY stocks for our spending until July 2023 – more than three years from now. And I can push that to 2024, almost four years from now.

 

1.  All our spending for 2020 is in money market and CDs that mature this year. I sold securities for our total 2020 spending in the first week of December 2019.

 

2. My scheduled sale of securities for cash we’ll need for spending in 2021 is nine months away – the first week of December 2020, but I don’t need to sell stocks or bond in my Investment Portfolio then. If I push, I can get to early 2024 before I have to sell stocks.

 

• I have roughly two years of spending in Reserve. (See Chapter 7 NEC and The Patti and Tom File at the end of Part 2.) Your Reserve is an off-the-top amount. It’s not part of your Investment Portfolio that you use to get your SSA. Our  Reserve is invested in IUSB. I can use that Reserve – and not sell from our  Investment Portfolio – if returns are really bad over the 12 months ending this coming November 30. I can totally skip selling from our Investment Portfolio in early December 2020 and again in December 2021. Our Reserve can carry us to the next sell point in December 2022.

 

• I can lower spending over the next two+ years. That would be easy for us. Our SSA is 22% higher in real spending power than it was when we started five years ago. It would be easy for us to cut back to our 2015 spending level. Lower spending would buy me about another six months delay in the time I have to sell in our Investment Portfolio. I can slide December 2022 to about July 2023.

 

• Finally, I can still sell a disproportionately high percentage of bonds in our Investment Portfolio. If I did that, I would further slide the first required sale of stocks for our spending into 2024. Almost four years from now.

 

• I also have over $100,000 unused Home Equity Line of Credit: now I’d really be pushing it!

 

 

Conclusion: Times like this are nerve-racking. But if you’ve followed Nest Egg Care, you should be confident that you’ll never get close to the worst event –  depleting your portfolio such that you are not able to take a full withdrawal for your spending in the upcoming year. Short-term bad variability is not the concern. We retirees are hurt most when we’re forced to sell stocks in several years when they’ve decline by a least 30%.

This article, “A Terrific Large Growth Fund” at Morningstar (M*) concludes: [JENSX] “Jensen Quality Growth’s managers have demonstrated stock-picking acumen over a long period of time.” We nesteggers know that it is very rare that a fund will outperform its peer index fund over a decade – no more than 1 in 16 do. But is JENSX one of the very few with a track record that tells us that it will beat the market in the future? The purpose of this post is to explain why I would NOT want to own this fund, and you shouldn’t want to own it either: I’d conclude future performance will be no better than its peer index fund.

 

== Why this article? ==

 

The article is an example of the kind of report you could receive on more than 1,000 mutual funds if you were a Premium Member to Morningstar: cost of about $200 per year. I sometimes come across similar articles that recommend an actively managed fund. I’m curious. Is the fund recommended really a world beater? I look first at the fund’s Expense Ratio and then at performance on the M* site: M* compares the historical performance of any fund to its peer index fund. Does JENSX have low costs that aren’t too great of headwind to overcome and a solid track record that says it’s very likely to outperform in the future?

 

== Expense Ratio ==

 

I first look at a fund’s Expense Ratio to judge the headwind it has to overcome to deliver a return better than the market. I find Expense Ratio on the M* Quote page; that’s the page you get after you enter the fund’s ticker symbol in the Search bar on M*’s home page. Morningstar states JENSX’s Expense Ratio is .87%. That .87% is 12% of the expected real return of stocks of 7.1% per year (.87%/7.1%). I like to think of that as a breezy, 12-mph headwind that JENSX has to overcome every year or over the years if it is to deliver better than market returns.

 

 

I want to compare that 12-mph head wind to that of its peer index fund. M* says JENSX falls into Large Cap Growth category; that make sense from the “Growth” in name of the fund. But the M* display on the Portfolio page tells me JENSX is closer to Large Cap Blend. This could be an aberration in the snapshot of holdings as of the end of January. But I’m going to use Large Cap Blend as the benchmark for comparison. I’ll show the comparison to Large Cap Growth in a bit; it’s not as good.

 

 

The Expense Ratio for the index fund I use for Large Cap Blend, VLCAX, is .05%. That’s .7% of the 7.1% expected return (.05%/7.1%). That is calm conditions of less than 1 mph . 1/17^th that of JENSX. It’s much easier to VLCAX to deliver a net return that’s close to the total the market return. I’d reliably keep +99% of what the market returns, but I’d never get more than the market return.

 

== Stock Picking ==

 

JENSX’s can only deliver a return to an investor that’s better than a peer index fund or better than the market if it’s its stock picking skill is better than others. It’s a zero-sum game: the managers of JENSX only win that game by beating other actively fund managers. JENSX can overcome its 12% headwind to match its peer index fund if some other managers perform 12% worse. Winning that game with any consistency is tough. Is JENSX up to it? The data in this Table says, “No, not really.”

 

 

JENSX does beat VLCAX over some holding-periods but not others. Recent performance has really dragged down the results of longer holding periods. Over a 10-year holding-period JENSX lags VLCAX by about .7 percentage points per year. That seemingly insignificant difference in return rate cumulates: you’d have  6% more from VLCAX than from JENSX at the end of ten years. Overcoming that deficit in the future won’t be easy.

 

 

== What if the benchmark is Large Cap Growth? ==

 

JENSX’s performance is worse if I compare it to VIGRX, the Vanguard Index fund for Large Cap Growth. The table shows JENSX trails badly over every holding-period. Over ten years it trails by more than two percentage points per year. The difference in compound growth is 20%. That’s REALLY difficult to overcome in the future.

 

 

== Would I buy JENSX? ==

 

Nope. I don’t see anything about JENSX that excites me. I can’t see why anyone would buy it.

 

== Would I sell JENSX if I owned it? ==

 

I sent the link to the M* article to my friend Jay with the comment, “What is M* thinking? Why would they recommend this fund? Look at that Ho-Hum performance. Who would buy this?” Jay responded, “I already own it in my taxable account!” Hmmm.

 

If Jay would not buy JENSX now, should he sell it now? That decision takes a bit of thought and math. In the next week or so I’ll explore that question, “When should you sell an actively managed fund and buy its peer index fund?”

 

 

Conclusion: We all see articles that recommend actively managed funds. When I dig into the funds recommended, I’m usually unimpressed. The costs that these funds have to overcome are high. They can only overcome the costs by winning the stock picking game, and that’s a zero-sum game: an active fund wins only when other active funds lose. Very few actively managed funds are able to overcome their costs to deliver the net return of a peer index fund. Performance may have looked good in the past, but that good performance just does not persist.

The IRS published proposed changes to RMD percentages in November. The rule making process will be completed this year and new, lower RMD percentages will likely take effect for 2021. This post describes those changes and what I think that means for us retirees. My conclusion is that the changes don’t really mean much to you. Here’s a short summary article on the changes.

 

== RMD Factor and percentages ==

 

RMD percentages for our IRAs or 401k for all almost all of us – married or single – are determined by the Uniform Lifetime Table published by the IRS.* The Table displays RMD Factors – IRS calculated life expectancies – for each year of age. The Table basically assumes you are married and your beneficiary (Patti in my case) is ten years younger than you and uses the life expectancy of that younger person for your “RMD Factor”. This table shows current RMD Factors for the first dozen years of RMD. The inverse of each factor is RMD%.

 

 

My current RMD% for this year – age 75 – is 4.37% and next year it would be 4.55%

 

== RMD% isn’t connected to SSR% ==

 

The IRS makes no judgement on how the RMD% will affect the value of your IRAs over time. RMD%s are meant to be low enough so your retirement account easily lasts the lifetime of your beneficiary but are to be high enough to provide reasonable income. The IRS does not use a Retirement Withdrawal Calculator (RWC) to find your highest Safe Spending Rate (SSR%). That’s a whole different logic. [See Chapter 2, Nest Egg Care (NEC).]

 

Your Safe Spending Rate (SSR%) is always more than your RMD%. That’s primarily because the added ten years of your life expectancy is not appropriate for most all of us for the calculation of your SSR%. Patti is three years younger than me, not ten. Her life expectancy when we started our plan was 19 years, not 27. Our initial SSR% was 4.40% (See Chapter 2, NEC) in the year my RMD% was 3.65%. SSR% was about 20% greater RMD%.

 

== Don’t use RMD as a guide to spending ==

 

Some folks I know use their RMD is their target for spending. They don’t want to spend more than their RMD. They feel badly if they do spend more. Using your RMD as a guide means you are spending far too low of an amount to ENJOY. If I had done that for 2015, my first year for RMD, I would have ignored Patti’s IRA (She was not subject to RMD.) and our taxable assets as part of our nest egg. My RMD was a fraction of our Safe Spending Amount for 2015. I would have hated that.

 

Patti and I don’t want to make the mistake of spending too little at this stage in life. The driving issue for us is the shockingly low probability that both of us will be alive in, say, ten years. It was 50% probable that both of us would be alive in JUST 11 years at the start of or plan in 2015. (See Chapter 3 and Appendix E, NEC.) We’ve both lived five years, and I can calculate that that same probability is eight years now. We both want to live those years to the max – always paying ourselves our SSA and spending or gifting it all in the year. Those are also going to be our healthiest years.

 

== Higher RMD factors = Lower RMD% ==

 

Americans at all ages are living longer if one looks over long enough time period. Recently some age cohorts have seen declines in life expectancy (Blame the opioid crisis.), but we retirees are consistently living longer. Each cohort (age) lives a bit longer than the cohort from the year before: I’m 75; if I live to age 76, the probability that I will live to be 77 is just a bit – a very tiny bit – better than that probability for those age 76 now.

 

The IRS has not updated their life expectancy tables for 18 years, so that’s a lot of years to accumulate small annual increases in life expectancy for each year of age. The IRS new calculation of life expectancies conclude that appropriate RMD Factors for each age should be about 1.5 years more than those set in 2002. I show the changes for up to age 82; last week’s post explains why 70 and 71 no longer apply.

 

 

 

My RMD Factor for next year increases. My RMD% will be lower next year than this year: my RMD% for my current age 75 is 4.37%. It would have been 4.55% next year, but it will be 4.22% for 2021. If I had $1 million on 12-31-20, my RMD would have been $45,500 and the new RMD would be $42,200. I have to take $3,300 less from my IRA.

 

== What do these changes mean to us? ==

 

The economic effects of the changes are small as I discussed in last week’s post.

 

• You gain from lower total tax in the short term. In an example of $3,300 lower from RMD at age 76 would translate to about 15% less tax that year on $3,300 or about $500: that’s the differential between 22% income tax and 7.5% effective capital gains tax that I showed last week. You get a bit more to spend after taxes now. I like that, but that’s not a monumental amount.

 

That’s really a deferral in taxes. You’re using your taxable assets for spending a bit faster than you otherwise would. Your sources for spending will shift a bit faster from taxable accounts to your IRAs. Eventually you will be withdrawing more from your IRAs and your total tax, because of the higher tax rate on income, will more than you otherwise would have paid. You’ll net less.

 

• You gain a bit of wealth over time because you’re leaving a bit more – $3,300 more in the example – in your IRA account to compound tax-free. Growth of your investment in your IRA is effectively untaxed. That tax-free run will end when you withdraw for your spending in a future year. The amount of taxes you avoid on the growth of that $3,300 works out to a small difference per year ­– maybe a hundred bucks or so.

 

• When you take less from your IRA accounts, you are moving somewhat faster toward the day when your real RMD will double – assuming returns for stocks and bonds are at their expected rates of return. You IRA portfolio is growing a bit faster since you are taking out a bit less. As I mention in this post, the doubling can be a problem for a rare few retirees.

 

 

Conclusion: The IRS has proposed changes to RMD percentages. RMD percentages will be lower starting in 2021. The percentage changes are a fraction of a percent. You have a small gain in lower taxes now. That’s nice, but it’s not monumental. The other changes are small: you have a bit more in your IRA to grow tax-free; you are progressing a little faster to the time you will see your RMD double if returns for stocks and bonds are at expected rates. That doubling could possibly be a headache for some folks.

 

 

* The IRS has a different Table – with higher RMD Factors – if your spouse is at least 11 years younger.

The SECURE Act, passed in December, brought changes to retirement plans –– and more will come in 2021. This post discusses the SECURE Act and what I think it may mean for you. Next week I’ll describe lower RMD percentages that start in 2021.

 

== SECURE Act passed December 2019 ==

 

You can find summaries of this Act. Two are here and here. I highlight two key changes that affect retirees or those nearly retired.*

 

1. You don’t have to start taking withdrawals until the year you turn 72 (up from 70½).

 

2. Heirs after your death – with some exceptions – have to withdraw from their inherited IRA within ten years; that could have easily been over 30 or more years before. A key exception is a surviving spouse: SECURE did not change the RMD period or percentages.

 

How significant are these two?

 

== Two years of no RMD ==

 

What’s the benefit of not taking RMD at age 70½? This does not apply to Patti and me. We both take RMD now, but those younger may see a benefit from not taking RMD for two years.

 

• The first benefit is lower immediate taxes on the amount you withdraw from your nest egg for spending. If you don’t withdraw from your IRAs or 401ks for two years you’ll withdraw from your taxable assets. You always have the incentive to withdraw more from your taxable assets than from your IRAs. That’s due to the difference in effective capital gains tax rates and income tax rates. In this example your effective capital gains tax is about 1/3 that of income tax. You net 19% more to spend when you get your cash from the sale of securities in your taxable account.

 

 

This advantage of lower taxes on withdrawals from your nest egg dissipates as you get older. You will shift to a greater portion of your withdrawals coming from your IRAs.

 

– Your Safe Spending Rate (SSR%; see Chapter 2, Nest Egg Care) is always more than your RMD percentage. When you start out on your retirement plan, you withdraw your total SSR% and Safe Spending Amount (SSA) but you (generally) don’t withdraw more than RMD from your retirement plans. You therefore are always disproportionately withdrawing from your taxable account.

 

– You’re lowering your taxable assets, your lowest tax-cost source for cash for spending faster than you are lowering your IRAs. Year by year you inch toward the point where your retirement assets are a much greater part of your total. (Patti and I are that point now.) Then you’ll withdraw disproportionately from your retirement assets. The total tax bite out of your total withdrawal with be greater; your net to spend for a given withdrawal will be less than before.

 

That’s not a problem in my mind. Patti and I have seen a 22% real increase in our SSA over the past five years and even with modest returns this year we’ll see another real increase for spending in 2021. (All nest eggers have seen a significant real increase in their SSA.) Even after paying a greater percentage in taxes when we’re in our late 70s or 80s, we’ll have a greater net to spend than when we started our plan in 2015. And Patti and I both think we will spend less when we are in our 80s.

 

• You have a second benefit. As I mentioned in this post, when you keep money in your IRA you get a tax-free ride on the growth of your investment: you’re avoiding capital gains tax on the growth of your investment. You’ll have greater portfolio value later. That’s a good thing.

 

How much is this benefit? It’s good but not spectacular: $10,000 that has a 6% expected real return rate (a combination of 7.1% for stocks and 2.3% for bonds) would grow by about $8,000 in a decade. You keep all of that tax-free growth when you then withdraw from your IRA for your spending.

 

If that $10,000 was in a taxable account you’d be paying 15% federal capital gains tax. A simple way to look at this is to assume that capital gains tax is 15% of $600 of annual grown. That’s $90. While this simple example doesn’t count the effect of compound growth, I think that $90 close enough to get the picture. You come out ahead by $90 per year for each $10,000 you choose to leave in your IRA. That’s nice, but certainly does not change your financial future in any significant way.

 

== It’s possible to wipe out the benefit of tax-free growth ==

 

That math that calculates the benefit of tax-free growth assumes the marginal rate you would pay if you withdrew now is the same one that you’ll pay when you withdraw in the future. That may not be the case. I describe the possibility of being taxed at a higher marginal tax rate in this post: at expected return rates for stocks and bonds, your RMD will increase over time and will double in real spending power in about a dozen years relative to a withdrawal at age 70½. You are always being pushed toward a higher marginal tax bracket.

 

That doubling could put a portion of your total income in a much higher marginal tax rate than the one you experience at age 70½. You get to keep far less when you cross two big jumps in marginal tax in our current tax code: 12% to 22% and 24% to 32%. The higher bracket takes about a 10% bite out of the net you get to keep than the lower bracket. Cross one of those jump points and you start to lose all or more than all the benefit of tax-free growth.

 

 

It’s a bit of work to figure out if you might cross a jump point. (The post describes steps to figure this out.) This is particularly worth figuring out if you are a married couple with sizeable Traditional IRA (over $2.5 million) when you first start to take RMD. The example in the post showed a married couple would never get close to the 32% tax bracket, but when one dies 20% of the income of the surviving spouse would be taxed at 32%.

 

== The impact of ten-year rule on heirs ==

 

The ten-year rule on withdrawals for heirs will have an impact on the after-tax benefit they receive: withdrawals may put them in a much higher marginal tax bracket than they would otherwise experience for the prior “stretch IRAs” that could run for decades. Some writers have gone nuts about this, describing this as “a confiscatory death tax”. I discussed this issue last summer in this post. I don’t see this as a big issue:

 

• The “stretch IRA” rules were not rational in my mind. The thought that my Traditional IRA contribution in 1981 could have some part compound tax-free for decades – even eight decades – after I die is almost ridiculous. I don’t think folks thought that through when they wrote the legislation that set those rules for an inherited IRA.

 

• I argue that the “stretch IRA” similarly pushes your heirs to higher marginal tax rates for the same reasons that you are pushed toward a higher marginal tax bracket. RMDs will increase in real terms. That “confiscatory death tax” is a red herring. Heirs very well could pay in the same high marginal tax bracket under the “stretch IRA” as under the 10-year rule.

 

• If Patti and I left money from our IRAs to our heirs (We don’t plan to leave all of our IRAs to them; we think it’s better is to leave our IRAs, never taxed, to charity.), we’d want them to enjoy it earlier in life and not leave most of it untouched for their retirement decades later. We’d like them to take it out within ten-years or less to improve their lives sooner rather than over perhaps 45-years.

 

 

Conclusion: The SECURE Act, passed this past December, changed the rules for retirement plans. The two most significant changes for retirees or those soon to retire are 1) Required minimum Distributions (RMDs) begin in the year you turn 72, not 70½; and 2) inherited IRA distributions generally must now be taken within 10 years. I personally don’t see that much advantage to waiting to take distributions from your IRA. I don’t get upset about this.

 

 

* I ignore one change that seems insignificant to me: you can now contribute to a traditional IRA beyond age 70½. This just aligns Traditional IRAs with Roth or 401ks; you could always contribute to those two beyond age 70½ if you were still working. Note: there is no special advantage to contributing to a Traditional IRA relative to a Roth IRA; if the tax brackets at time of contribution and at the time of withdrawal are the same, Traditional and Roth result in the same after-tax dollars to you.)

Last week I wrote about four principles for spending on ourselves that makes us happy. The book Happy Money described a fifth principle, Investing in Others, that is obviously different. This post summarizes the main point of this part of the book: you increase your happiness more by spending on others than by spending on yourself. You’ll be happiest with this spending if you can conclude a) your giving is a choice you have made, not a moral obligation; b) you can connect in a concrete way to the people being helped; and c) you are confident that your gift has impact. Happy Money states your Prosocial spending should be greater than 1/10^th of your personal spending.

 

This is a good, 11-minute TED talk by Michael Norton, one of the authors of the book. Here a 14-minute talk by Elizabeth Dunn, the second author: “Stop thinking about giving as a moral obligation. Start thinking of giving as a source of pleasure.”

 

== “Investing in others” ==

 

I like this term. I’ve written on this general topic before, “What’s Money For?” here and here. I used the term “help.” Help build success for your family and for others. But I like the term “Invest” better than the word “Help”.

 

== What’s Prosocial spending? ==

 

Prosocial spending is spending as gifts to others and donations to charities. You can use this table below to categorize your typical monthly or annual spending. Once you’ve categorized, divide your personal spending by your Prosocial spending.

 

 

In a representative sample of Americans, the average ratio of personal to Prosocial spending was 10 to 1. The study sorted out what made people happy. “The amount of money that individuals devoted to themselves was unrelated to their overall happiness. What did predict happiness? The amount of money they gave away. The more they invested in others, the happier they were.” This effect holds across a wide range of income around the world with people with very wide income ranges. Even experiments with toddlers show they expressed they were happiest when they gave their own treats to someone who had none and who expressed gratitude for their gift.

 

I’m sure Patti and I did not spend 1 in 10 on Prosocial gifts when we were in our Save and Invest phase of life, but now our Prosocial spending is more than 1 in 10. We don’t spend 90% of our annual Safe Spending Amount on ourselves (SSA; Chapter 2 Nest Egg Care). What we don’t spend on ourselves we give to family or charity.

 

== How to Give to get you the most Happiness ==

 

The book described three strategies organizations seeking donations can use to increase happiness of donors. We can apply these three to the way we give to give us more happiness. 1. Make It our Choice; 2. Make a Connection; 3) Make an Impact.

 

Make It our Choice. well, this is pretty obvious. We want to give because we make that decision and not because we think we have a moral obligation to do so or because someone tells us we should. Charities clearly need to ask for donations, but donors who read “It’s entirely your choice whether to give or not” felt happier and more connected to the charity than the message “I really think you should help out.”

 

Make a Connection. We are happier with our donations when we connect to those receiving our gifts.

 

All of us are connected to our family. Investing in our family to make them successful and happy is built into our DNA. Patti and I want to give in ways that are investments for the future: we emphasize gifts for education and to retirement plans. We want to give while are alive. I would not be nearly as happy with a plan to keep our money to ourselves to accumulate so that they can divide a bigger stack after we are dead.

 

We are happier – no matter how much we give – where connection to those we are helping is clear to us. Happy Money uses the example of Donorschoose.org. Donorschoose.org seeks donations to under-funded classrooms and does an excellent job of linking a donor to those the money will help. You can search for a classroom at your old school, one in your neighborhood, classrooms in the poorest school districts in the US, or make a donation based on your interest – science or history, for example. You get a thank you from the teacher and often from the students. That just reinforces the connection.

 

My friend Betty told me about two charities, somewhat similar to donorschoose.org where the connection between your giving and the end recipient is clear. Here’s one she likes: kiva. You get to pick the theme of your giving (women, education, refugees, others). You can even see a picture of the person you are helping.

 

Two of the large charities we give to do a good job in linking us to the people that ultimately will be helped. One we give to doesn’t do as good of a job in my mind in building an emotional connection, and after reading this, I need to “follow the money” to get a better connection to who is being helped and how. Or, more correctly I need to tell them how to better connect me to the people they help.

 

Make an Impact. Some charities are rigorous in assessing the impact of the donations they receive and organizations they then support. I buy into measurable, Big Impact for our donation dollars. Patti and I donate to GiveWell which rigorously evaluates how they direct donations to organizations that save and improve lives. I like to think that our donations will actually SAVE LIVES. I can connect with someone who WILL NOT DIE as a result of our gift.

 

100% of our giving at GiveWell goes to two top-ranked organizations that work to prevent malaria. About 400,000 die of malaria each year and two-thirds are under the age of five – every two minutes a child under the age of five dies from malaria. One organization distributes pills that prevent malaria in children under the age of five during the peak four months of the rainy season; the other organization distributes Insecticide Treated Nets. GiveWell estimates that roughly $2,500 saves one life.

 

Happy Money mentions several organizations that also rigorously evaluate impact that I had not heard about and now want to explore: Mulago Foundation (high impact organizations working to end poverty), Spread the Net (malaria prevention in Africa; 19 million nets protecting 41 million people), and Kickstart (water pumps for irrigation in Africa). I like the Kickstart video: “Poverty to Prosperity in Just One Season.” The other charity that my friend Betty likes is Charity: Water, investments in community owned water projects: 44,007 funded projects and +10 million with clean water. See a short video here.

 

Figuring out how best to give money is more difficult than deciding on our next nice vacation. I know Patti and I can improve and find the best organizations to support. I want to spend more time understanding the connection to the specific results of our giving.

 

How good of job have you done in picking the charities you give to? Are you getting the happiness that you should?

 

 

Conclusion: Giving our money away can make us happier than spending it on ourselves. But how we give makes a big difference in how happy that makes us feel. We make ourselves happier when we give in ways that emotionally connects us to the people we are helping and in ways that we know have a big impact on their lives.

I read this book and liked it: Happy Money: The Science of Happier Spending. The book says we – especially retirees — should think about money differently. The science of happiness tells us we should not view our money as a means to get more money – that’s what we typically do –  but we should view money as a means to get more happiness. The book lists five key principles as to how should use money to make us happier: 1) Buy Experiences; 2) Make it a Treat; 3) Buy Time; 4) Pay Now, Consume Later; and 5) Invest in others. This post discusses how Patti and I think about Buying Experiences and weaves in aspects of the next three principles. What experiences do you plan to buy and how will you buy them in 2020?

 

== Our BIG experiences: Travel ==

 

Travel by far is the largest discretionary expense for Patti and me. Our vacations are the most memorable experiences we buy. We are in good health now and want to continue to buy travel experiences. Happy Money says we get far more happiness when we spend on experiences than when we spend to buy stuff. I’d agree. My desire for stuff has crashed. I have close to zero urge to spend on a new car, for example. I bought two pair of travel pants about 18 months ago. They’re great. They wear like iron. I think that’s about it for pants purchases for a few more years.

 

Do you have travel plans for 2020? Most friends tell me they do, and I think that’s great. Some of my friends that I think have a nice nest egg and are clearly in good health tell me they don’t like to travel. I wonder how they’re going to enjoy the money they have.

 

== We think differently: our monthly pay ==

 

I think Patti and I have an advantage in how we view our money. We calculate our annual Safe Spending Amount (SSA) and pay it out monthly to ourselves. We get a steady paycheck just like when we worked – when we were in the Save and Invest phase of life – but now we know we have no real reason to save one dime of it. It’s a lot easier for us to think how to use money to increase our happiness.

 

I think most retirees fail to pay themselves from their nest egg and therefore they think differently about their money. If I didn’t send that monthly check to ourselves, I think every time we’d think about spending a big amount for travel, I’d be calculating how much that was going to cost in future growth in our portfolio. I’d probably ask, “Can’t we find something that costs less?” I’d be stuck in the Save and Invest phase of life. That’s not the right way to think about money as set forth in the book.

 

== Anticipation is happiness ==

 

One of the principles of happiness is that we get present pleasure by anticipating a future experience. New or novel experiences are best. Experiences you can envision more concretely in the future are better. More distant events are better. Experiences that are physically challenging are more rewarding and memorable.

 

Patti and I have a travel bucket list that helps think about and anticipate the future. Maybe you do, too. We change it often. The travel we now have planned for fall 2020 wasn’t even on the list last fall. We’re streaming Ken Burn’s West documentary, and I just added two possible travel experiences to the list. We discuss the trips we might want to take, re-rank them, and decide which ones we will buy in the upcoming year or years. We keep the list as a Note on our iPhones/computers that we each can amend. Here’s our current list.

 

 

We like travel to be active and connected to the outdoors. Patti and I like to walk/hike on our vacations and hope we can continue to be active for a number of years. But we’re past the age of looking for physical challenges to make our experiences more memorable. We know we will be pleasantly tired at the end of eight miles and that’s just fine. I do like that I have to prepare weeks ahead of a trip to make sure I can hike eight miles and just be pleasantly tired and not ache the next day. That routine reinforces anticipation.

 

We like to always have our vacations fully planned – and largely paid for – at least six months in the future. I’ve always liked knowing we have something to look forward to. Our 2020 experience that is furthest in the future is at the end of September and early October: two weeks in Tuscany. We’ve never been to that part of Italy. This will be a treat for us.

 

I generally like to plan the complete details of our walking vacations in advance. I don’t like to conform to a set agenda. I don’t dig in to get a good picture of where we will be and what we will be doing if I totally delegate that to the tour company.

 

Organizing the days has always been very easy to do for our travels to England. The information on the long-distance walking trails is terrific. Train, bus or taxi is very easy to organize ahead of time. I used to spend hours figuring out miles per day and where we would stay. It’s a lot easier for the recent past since we’ve been to the Lake District for or five times now.

 

I want a self-guided walking. When we’re going to a non-English speaking country I don’t try to organize the details myself. I want a local company to help: they’ve laid out the walks; they arrange all the logistics of getting where we are staying to the start of each day’s walk; they know the best places to stay; they usually have three levels of quality and cost of accommodation to pick from. Here are three companies that we have used in Portugal, Italy, and France.

 

== Pay Now, Consume later. ==

 

I like having to pay for the package before the trip. We spend most on travel in January or February. Patti will work her magic and buy most, if not all, airfares, and I’ll make the deposits for all our trips for the year. Once we’re past that first-of-year hump, it’s all downhill. We spend very little when we are on the trip. I like getting back and seeing that we’ve very charged very little to our credit card.

 

I like the fact that logistics expenses are bundled in the tour packages. I don’t want to think about that detail. The self-guided packages we buy are roughly half the price per day of higher-end guided walking tours. We wind up asking for changes to the suggested daily details. A standard package may be seven days and six nights. We typically want to stay two weeks. We wind up asking the tour companies to help us stretch our stay to more nights and maybe more walks. We’ve stretched the standard seven-day/seven-night package to 12 nights in Tuscany this fall, for example.

 

I’m not inclined to dig into the details of the costs we might be adding to the standard package. Luciano (Girasole) was great in telling us he wanted to arrange for a driver to take us from the Rome airport to Siena. Going first to Rome and then Siena would have been a logistical nightmare. Hiring a driver means we’re using money to buy time and avoid stress. That cost is buried in the total price. I don’t have to think about how much I’m paying for the driver, nice car, and two-hour drive.

 

 

Conclusion: We all typically spend hours and hours and willingly pay for advice to understand how best to save and invest. We trust our intuition as to the best ways to spend to make us happy, and science tells us our intuition is often wrong. Follow five principles for happier spending: 1) Buy Experiences; 2) Make it a Treat; 3) Buy Time; 4) Pay Now, Consume Later; and 5) Invest in Others.

How much did $2,000 that I invested in an IRA in 1984 accumulate to in 2020? $88,200! I’ve repeated a post like this for two years now (here and here), but I always like to look back to see the power of saving, investing in stocks, and compound growth. At times I look at my IRA and ask, “Where the hell did all of that come from?” Especially after a year like 2019. The purpose of this post is just to refresh that perspective. Keep the lessons in mind for your kids and grandkids: if they save now, they, too, should have many multiples of spending power in the future.

 

== Our gift we opened Jan 1, 2020 ==

 

Patti and I conceptually opened our 36-year old gift envelope on January 1: I put $2,000 in my IRA on Jan 2, 1984 when I was 39; I invested in a stock index fund* on that date and it sat there for 36 years. It went through the ups and horrible downs in the stock market since then. But we did not touch it. Patti and I ripped open the opened the envelope this January 1 and emptied its contents on the kitchen island counter: $88,200! “Spend it all this year! We’re going to ENJOY.”

 

== Four envelopes ==

 

Here’s the display of four envelopes. Tax deductibility for contributions to an IRA began in 1981, so these are the first four years of today’s Traditional IRA: I display results two ways. I show in the table below the change in nominal dollars. This means dollars include the effect of inflation; we had relatively high inflation in the 1980s­ –6% per year from 1981 through 1984 for example. This gives a dramatic picture of the multiple we earned, but it overstates what happened in real spending power. But it sure is catchy!

 

 

The table below lets us see what really happened. I adjust the $2,000 we invested then for inflation. The $2,000 I invested in January 1984 has the same spending power as $5,050 today; that’s what I really invested to compare to the $88,200 on January 1. It’s “just” a multiple of 17.5X.

 

 

You can also see by comparing the tables that I invested $2,000 each year 1981-1984, but the inflation-adjusted amount that I invested declined each year. That’s because it took quite a few years for Congress to adjust the contribution limits for inflation. It was well past 1984 before Congress first adjusted the contribution limits. Congress’s most recent adjustment raised the contribution limit to $6,000 for 2020, and this is almost the exact same spending power as $2,000 in 1981.

 

== Why more than 12X in spending power? ==

 

My use of the Rule of 72 – using 7.1% real annual return rate for stocks – says one would expect about 12X growth in spending power in 36 years. That’s roughly half way between 8X at the 30-year mark and 16X at the 40-year mark.

 

 

The actual returns have averaged 17X. Last year’s post has a good picture of why this is true and shows that bonds would have similarly resulted in many multiples of growth: they ended their 45-year run of 0% cumulative real return starting in the early 1980s and began a steep upward climb to their current long-term average return of 2.3% per year.

 

== What are the lessons from this story? ==

 

1. To build a nest egg we have to invest heavily in stocks and tolerate their annual variability in return. Where else will we find roughly 7% real annual rate of return? Some friends of mine love bonds; some love gold; some love real estate. I just don’t get it. They can’t expect to average anywhere close 7% per year real annual return over many years.

 

 

2. Try to help the next generation understand the power of saving and investing. We all want to help make our family successful. Patti and I like the idea of giving now to help them to have more money in the future. Patti and I also want to give in a way that encourages them to be savers and investors like we were.

 

 

 

Conclusion: We retirees have ridden a very favorable sequence of returns starting in the early 1980s through the 1990s. Those who saved and invested are in the group of the richest retirees in history. Our savings compounded savings by many multiples by investing in either stocks or bonds. Patti and I gave $2,000 in 1984 to our older selves. We opened that gift and found 17X in greater purchasing power. $2,000 of spending power saved and invested in the year 1984 translated to roughly $3,000 per month to spend in 2020.

 

 

* Source. Morningstar. VFINX’s “Growth of 10K” graph. I change the start date to 01/02/1984 and the end date to 01/01/2020. You will see $10,000 grew to $441,300 or 44.1X.

 

Inflation data is from here.

I like looking at the Vanguard Style Box (I call it a Nine Box.) at the end of the year to get a snapshot of what outperformed and what underperformed the US stock market as a whole. US stocks are likely the biggest portion of your portfolio; they are more than twice the next biggest component – International stocks – in our portfolio. This post shows 2019 results. I previously reported 2017 and 2018 results.

 

I display the Vanguard index funds that focus on each of the nine segments. (I have no idea why Vanguard’s list of funds on their Style Box excludes index funds this year.) I also display for reference the +30.8% return for VTSAX, the index funds that holds ~3,600 US stocks. (I hold FSKAX, a very similar fund to VTSAX = +30.9% in 2019. I would expect over time for the two to be virtually identical in return.)

 

 

Vanguard’s index funds track very closely to the underlying indices. Vanguard tracks performance of its index fund to indices constructed by a third party. It’s not the same company the Morningstar uses as benchmark indices, but for our purpose we should assume they are the same. Vanguard shows fund performance is very close to all its benchmark indices less the fund’s expense ratio, no greater than .07% for these funds.

 

I display the percentage point difference from VTSAX in each box below. Five of the nine boxes were better than VTSAX and four were worse. Growth was the winner. Value was the loser. Large-Cap growth beat VTSAX by 6.4 percentage points, and it was also the clear winner in 2017 and 2018. Small-Cap Value was the worst at -8.0 percentage points. Large-Cap Growth Small-Cap value by 14.4 percentage points; that pattern has repeated for the last couple of years.  

 

 

If you look at the Morningstar site, you will find that VTSAX is classified as “Large Blend” just like VLCAX. VLCAX (Large Blend) outperformed VTSAX because VLCAX is only large cap stocks – 592 stocks held. VTSAX hold holds the total market – 3,587 stocks – and was hurt this year by Small-Cap stocks.

 

== Five years ==

 

Common wisdom is that you can tilt your portfolio to outperform the average. The thinking is that Value will outperform Growth given enough years, and Small Cap will outperform Large or Mid Cap. (I put tilting toward small cap out of my head here.) Tilting these ways clearly did not pay off for the last five years. I know I can’t predict which box is going to outperform over the long, long time of our retirement plan. That’s why I hold Total Market funds.

 

 

For reference: Total World Stock Index, MSCI All Cap World Index = +28.11%. Total International Stocks (VTIAX) = +21.51%. (Patti and I own the ETF of this = VXUS = 21.75%.)

 

 

Conclusion: 2019 was a terrific year for US stocks. It was clearly the best since the start of our financial retirement plan five years ago. You can always expect some segments of the market to outperform and some to underperform. It’s been fairly consistent that Large-Cap Growth stocks have outperformed over the past five years. Value stocks, especially Small-Cap Value stocks have underperformed. I don’t think anyone knows what will outperform in the next five.