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I have been a fan of Jonathan Clements’ writings for years. He is a celebrated writer who writes about Personal Finance and Financial Planning – Best known for writing (hold your breath) more than 1008 articles for The Wall Street Journal!
So when I did reach out to him for an interview, I was not sure whether I would get a Yes (or even a reply) from him. But Jonathan was gracious enough to grant me an interview. Lucky me. 🙂
The best part about his writings is that it cuts through the financial clutter like a knife. He tells you in clear terms how to think about money. His advice is typically ‘direct and seeks to unravel the confusion that often surrounds financial choices.’
Note – This interview has several links to articles on Wall Street Journal (WSJ). If you click on the link, you will be shown only a part of the article with an option to subscribe. But luckily, there is a work around. Just copy the article title and paste it on Google. From search results, click the WSJ link to that article. You will get access to the full article. 😉
So without any further delay, let us move to the interview:
Image Source (link)
Dev: You are a celebrated writer. Tell me something about your journey. How did you get to where you are? Did you always want to write about money?
Jonathan: My father was a financial journalist for the first decade of his career – working in London for the Financial Times, the Daily Telegraph and for several other publications. That meant journalism, as a career, always seemed to me like a real possibility.
I was also interested in economics from a fairly early age. But I think what spurred my interest in personal finance was grappling with my own finances during my 20s.
By age 25, I not was only married to a PhD student with no paycheck, but also we had our first child. All the financial responsibility was on my shoulders – not an easy thing when you’re living in one of the world’s most expensive cities and earning a young reporter’s salary.
Dev: What is the most important thing you have learned about money (+personal finance) since you started writing about personal finance?
Jonathan: The secret to financial success is no secret at all – You need great savings habits. I’ve met thousands of everyday Americans who have accumulated $1 million-plus portfolios. Most were mediocre investors. Many had relatively modest incomes.
But almost all of them shared one key attribute: They were extremely frugal.
Dev: What is your personal investment philosophy?
Jonathan: I start with the assumption that I have no clue what will happen in the future. That’s a tough position to maintain, because the markets’ constant turmoil almost begs us to think about the future and what might happen next.
Still, I try to avoid the forecasting game and instead keep my focus on the things I can control – risk, investment costs, my portfolio’s tax bill, how much I save and spend.
Dev: Alright. Lets now move on to some questions related to investing in general.
Why are investors generally so bad at investing? Is it because Investors seem to be forever drawn to investments that they don’t understand because they think they’re sophisticated?
Jonathan: In my new book, How to Think About Money, I finger two major culprits: our hunter-gatherer ancestors and Wall Street.
Thanks to the instincts we inherited from our nomadic ancestors, we tend to spend too much today, we have too great a fear of short-term investment losses and we have too much confidence in our ability to outperform the market.
Meanwhile, Wall Street feeds the fantasy that we can outperform the market, because the fantasy is highly lucrative – for Wall Street.
Dev: In one of your interviews, you mentioned that you had put almost 95% of your portfolio into stocks in 2008-2009. Where does that kind of confidence in the markets and economy come from?
Jonathan: It was the one time I engaged in market-timing.
But in early 2009, it didn’t feel like market-timing. Rather, it felt like a one-way bet:
Either the financial system was going to collapse, in which case it didn’t matter what I owned, or stocks were going back up—so I bought stocks.
Dev: Why do people find it tough to invest for long term? Why is that it’s always about the short term for most people?
Jonathan: Part of it is our hardwired instincts, which I mentioned earlier (hunter-gatherer ancestors). Part of it is Wall Street, which makes money when folks trade.
And Part of it is the media, which sells more newspapers and attracts more television viewers when it focuses on short-term performance.
For money managers, there’s also a basic agency issue: They may know intellectually that the right strategy is to invest for the long haul, but their livelihood depends on performance over the next year or two, so that’s what they focus on.
Dev: And how to address this problem? Both as an investor myself and as an advisor?
I’ve come to believe that it’s crucial to have some sense of fundamental value, so you have an emotional anchor when stock prices go wild.
I tell investors to imagine a line rising steadily at 6% every year, which is my expectation for long-run returns on a globally diversified stock portfolio, based on current dividend yields and likely long-run earnings growth.
When annual stock returns are above that 6%-a-year growth path, we should be happy with our good fortune, but also realize we’ll likely pay a price at some point in the future, in the form of lower returns.
Conversely, when stock returns fall below the 6% growth path, we might be less happy – but we should take comfort in the knowledge that the market will likely play catchup at some point in the future.
Dev: You have said in the past that because we can’t control returns, focusing on the principles we can control is critical for investors. What are those principles?
Jonathan: As mentioned earlier, the things we can control are risk, investment costs, taxes, and our own saving and spending. The latter is easily the most important.
If you can’t control your impulse to consume, you’ll likely lead a life dogged by financial misery.
Dev: As an investor, the hardest thing about investing is to find a balance between 1) riding out periods temporarily unfavorable to your views and 2) realizing your views are wrong and moving on. How should an investor maintain that balance?
Jonathan: If you own a globally diversified portfolio, none of this is hard. It’s only hard if you make large investment bets on a small group of securities. If you own an undiversified portfolio, you’ll be constantly trying to figure out when to hold and when to fold, and probability suggests you’ll get it wrong half the time – which is why it’s an approach I avoid.
Dev: Now moving on to some questions on Personal Finance & Balance of Life & Money.
People try to address different aspects of their personal finances separately – like retirement, goal planning for children, taking loans, investing, etc. What this does is that people fail to see a big ‘total’ picture. They fail to understand how these pieces fit together and think about the tradeoffs we all need to make. How to solve this problem?
Jonathan: I think we should organize our finances around our paycheck – our so-called human capital – or the lack thereof.
Our human capital has 4 key implications for our finances.
- First, it provides us with a stream of income out of which we can save for future goals. We need to figure out which goals we can reasonably afford, based on the size of that paycheck.
- Second, a regular paycheck is similar to collecting interest from bonds, so it frees up those in the workforce to invest heavily in stocks.
- Third, those paychecks allow us to take on debt early in our working career, so we can purchase items we couldn’t otherwise afford. But we should also endeavor to get all those debts paid off by the time we retire and our paycheck disappears.
- Fourth, our human capital drives our insurance needs. We need to protect our family against the potential loss of our income by purchasing both life and disability insurance.
Dev: I am a conservative investor who focuses a lot more on Return of Capital than on just return on capital. Though every individual’s risk and investing profile is different, do you think that focusing on mistake-reduction is what investors should focus on?
Jonathan: In theory, you could add “avoiding mistakes” to my list of things that investors can control.
Problem is, avoiding mistakes is much harder than, say, controlling investment costs – and lots of investors fail.
They panic when the market goes down and grow overconfident when share prices rise.
I’m a firm believer that stocks will be the best-performing asset class over the long haul. But many investors should probably favor somewhat more conservative portfolios, where there’s less chance that they’ll be scared into making foolish mistakes.
Dev: I want to be rich – many people just invest with that in mind. Do you think having financial goals is important?
Jonathan: It’s crucial to have goals like buying a home, paying for your children’s college and funding your own retirement. But all these specific goals fall within a broader, overriding objective: We want to have enough money to lead the life we want.
If that’s the objective, it becomes much clearer how we should handle our money. Instead of investing to get rich – which brings with it the chance of ending up poor – we should pursue strategies that have a much surer chance of success, including diversifying broadly, holding down investment costs and opting to index.
Dev: Retirement is a key financial goal for most people. What are some suggestions you have to help investors be more prepared for actual retirement?
Jonathan: There’s plenty of advice available for folks who want to retire in comfort – and the most crucial suggestion is to start saving a healthy sum every month from an early age.
But even as we prepare financially for retirement, we should also think hard about what we’ll do with all that free time.
For many folks, retirement turns out to be a big disappointment, because they believe a life of relaxation will make them happy. Instead, I think retirement should be viewed as a chance to take on new challenges, without worrying so much about whether those challenges come with a paycheck.
Dev: Many people believe that they have to sacrifice their lives to have more money or vice versa. What are your thoughts on bridging the gap between money and leading a fulfilling life?
Jonathan: In How to Think About Money, I argue that our orientation shifts as we grow older.
In our 20s, what matters is external rewards—promotions, pay raises, that sort of thing.
In our 40s and later, we’re more focused on things we find intrinsically satisfying.
An obvious implication: Those in the 20s should ignore conventional wisdom, which says they should pursue their passions. Instead, they might focus on less fulfilling but higher paying jobs.
Meanwhile, those in their 40s and older might use the financial freedom they’ve earned – thanks to their earlier, higher paying jobs – to switch to a career that’s less lucrative but perhaps more fulfilling.
Dev: That is an interesting thought indeed. And since we are talking about financial freedom, do you think that a simplistic concept of financial freedom is enough? Or is there something much bigger that people need to target?
Jonathan: It depends on what you mean by financial freedom. If financial freedom is viewed as the freedom to buy anything you want and to sit around relaxing, you’ve set yourself up for an unsatisfying life.
If financial freedom is defined as the freedom to spend your days doing what you’re passionate about, you’re likely to be far happier.
Dev: One of the themes in your financial writing seems to be that investing is a means to enhance your life, not an end in itself. What can – and can’t – money do for us?
Jonathan: Money can do 3 key things for us.
First, having money can help us to avoid worrying about money.
Second, money can allow us to have special times with friends and family, which research suggests can be a huge source of happiness.
Third, money can allow us to spend our days doing what we’re passionate about, what we find interesting and what we think is important.
Dev: You write about “leading a thoughtful financial life.” What does that mean to you and why do you feel it can help investors get the most out of their money?
Jonathan: The research tells us we aren’t very good at figuring out what will make us happy.
We imagine that the new car or the bigger house will deliver a permanent boost to our happiness, yet the thrill proves all too fleeting.
If we’re to get maximum happiness out of our money, we need to think hard about how we spend it. One simple trick: Wait a few weeks or a month before making a major purchase. That’ll give you time to ponder whether it’s something you really want – or whether it’s just a passing fancy.
Dev: You have said in past that in pursuit of wealth, we shouldn’t neglect today. What do you mean by that?
Jonathan: If you aren’t happy with your financial life today, it’s unlikely that you’ll stick with your long-term plan. So what does happiness today mean?
You want to feel like you can pay your bills and handle rough financial times. You need a portfolio you’re reasonably comfortable with. You need to spend your days mostly doing what you enjoy. And you need to devote your spending to items that bring you a fair amount of happiness.
Dev: But you are also an advocate of delaying gratification. Now I agree that the idea of delaying gratification is very critical. Yet, in some way delaying gratification is about neglecting today. How does one decide what to do exactly?
Jonathan: It might seem like “delaying gratification” and “enjoying today” are in conflict. But they aren’t: If you don’t feel like you’re on track to meet future goals, you’ll have a constant, nagging sense of financial worry – and you won’t enjoy today.
Dev: You have been a staunch advocate of index-investing. But in a market like India, there are still fund managers who regularly beat the index. It might be due to maturity level Indian markets or due to some other alpha-sources. Do you think indexing can work in markets like India? Or does it make sense to give more weight to actively managed portfolios here?
Jonathan: I don’t know anything about the stock market in India.
But the logic of investing doesn’t change: Before costs, investors collectively earn the performance of the market averages. After costs, they must inevitably earn less.
Trading costs in emerging stock markets are notoriously high – so, arguably, indexing makes even more sense in emerging markets than it does in, say, the U.S. or Europe.
Dev: In one of your old articles written in 2006 (link), you talk about Combining Index Funds With Alternative Strategies. So it’s kind of a ‘Core and Explore’ strategy, where the idea is to have 80% of the portfolio in low cost index funds and exploring higher returns with 20% of the portfolio. Do you think this approach is still valid? Even for a market like India, where information asymmetry is higher?
Jonathan: I think core and explore works for emotional reasons.
If you invest 80% in index funds and make active bets with the other 20%, the 20% might provide an emotional outlet for your crazier impulses – while ensuring that at least 80% of your money earns decent long-run returns.
But the case against active management keeps getting strong and stronger, so I’d prefer that someone was 100% indexed.
Even hedge funds, which supposedly attract the best and brightest money managers, are rapidly losing favor as their mediocrity becomes ever more apparent.
Dev: Who have been your financial heroes? And what are the most important things you have learnt from them?
Jonathan: I’m not big on heroes. Everybody has their strengths and their flaws. But I do greatly admire Vanguard Group founder Jack Bogle. And not just because he founded and built a great financial company.
Jack is in his 80s and yet he’s still a fierce advocate of low investment costs generally and indexing in particular.
Dev: I know that you are an avid cyclist and runner. Do you think there are any parallels between successful investing and endurance sports?
Jonathan: Both require discipline and a focus on the long term. Those are the obvious parallels.
But there’s also another common ingredient: To succeed, you need to suffer at least some discomfort.
If your brain is screaming “don’t do it,” often that’s the sign that you’re running faster than ever – and that you’re buying stocks at just the right time.
Dev: With the increased availability of information, how do you filter out what is good and what is not to get to your daily reading list? How to become a good consumer of financial content?
Over the past 18 months, I have – belatedly – become a devotee of Twitter (@ClementsMoney).
If you follow a bunch of financial experts, you can quickly get a sense for what ideas are garnering people’s attention.
Dev: What is your daily reading list?
Jonathan: I read The Wall Street Journal and The New York Times every day. Every few weeks, I’ll go to the library and leaf through the various financial magazines.
I keep an eye out for new academic papers. Because I’ve been doing this for more than three decades, I find I’m at risk of quickly dismissing something with a curt “I’ve read that before.”
But I try to resist that impulse. Every so often, there is something that’s truly new – and, even if it isn’t new, it tells you what investors are concerned about.
Dev: 5 books that everyone looking to become better managers of their own money must read.
A decade ago, The Wall Street Journal asked me to write on this topic, and I came up with this list. And here are the names:
- Money Masters of Our Time by John Train
- Capital Ideas by Peter Bernstein
- Winning the Loser’s Game by Charles Ellis
- The Four Pillars of Investing by William Bernstein
- Fooled by Randomness by Nassim Nicholas Taleb
Please keep in mind that there are plenty of fine authors who aren’t on that list, including John Bogle, Burton Malkiel and Jason Zweig.
Dev: You are yourself an author of 6 personal finance books, including the award-winning Jonathan Clements Money Guide (which gets updated every year). Now you are coming out with a new book called How to Think About Money, which is already getting a lot of positive reviews from industry biggies. Tell us something about the book.
Jonathan: How to Think About Money is my attempt to explain why we make so many investment mistakes, what’s the right way to think about this sprawling messy thing we call a financial life – and how we can squeeze more happiness out of the dollars that we have.
The book pulls together certain ideas that have captivated me – the centrality of our human capital in thinking about our finances, the impact of rising life expectancies, the importance of managing risk and investment costs, the insights from behavioral finance and the shaky connection between money and happiness.
Dev: Your 5 favorite articles written by you.
Jonathan: Instead of five, I’ll give you six. These aren’t necessarily the best written or most insightful articles I’ve written. But they were all especially meaningful to me. Please note: The WSJ articles may not be available unless you have a subscription:
(added by Dev: There is a work around. Just copy the article title and paste it on Google. From the search results, click the WSJ link to that article. You will get access to the full article.)
- Marathon Man: The Agony of Victory (1996) (link)
- What’s the Weirdest Race You’ve Run? Welcome to the Antarctic Marathon (2001) (link)
- 12 Ways to Make Your Kids Financially Savvy (2007) (link)
- Parting Shot: What I Learned from Writing 1008 Columns (2008) (link)
- I’m Not Apologizing (2009) (link)
- 5 Ways to a Happier (Financial) Life (2015) (link)
Dev: That’s all from my side Jonathan. Thanks a lot for taking time out of your busy schedule to answer my questions. It was wonderful to have you share your insights.
Jonathan: Thanks Dev.
Note – I hope you liked this interview. If you are interested in reading more personal finance and financial planning related articles by Jonathan Clements, you can checkout his website or his columns in WSJ.