The Investing Strategies That Can Lead to 'Financial Freedom'

A market timer predicts the direction stocks will take, then makes trades accordingly. In contrast, an "over-rebalancer" makes trades as a response to market movement.

In a stock market decline, personal finance expert Jonathan Clements, founder and editor of HumbleDollar.com, embraces the latter approach, as he tells ThinkAdvisor in an interview.

"For most people who have a high risk tolerance, which I do, there's an opportunity in over-rebalancing," argues Clements, who for nearly two decades was The Wall Street Journal's personal finance columnist.

For his ninth book, "My Money Journey: How 30 People Found Financial Freedom — And You Can Too" (Harriman House, April 2023), he presents a collection of revealing essays written by 29 other people — many in financial services — about their personal money stories.

Plus, Clements has written a chapter on his own financial path through the years.

The 29 contributors — all of whom have written for HumbleDollar — include Charles Ellis, author of "Winning the Loser's Game," and William Bernstein, the former neurologist who wrote "The Four Pillars of Investing."

"My Money Journey" is a peek at the financial choices these individuals have made — both early missteps and ultimate triumphs.

In the interview, Clements discusses the revelations of five contributors, as well as details of his own investing approach.

Among the areas he explores are the fruits of frugality, the big benefit of being a super-saver and various asset-bucketing strategies.

Born in London, Clements, 60, founded the website HumbleDollar.com, which last year scored 4.7 million page views, in 2016. It's packed with articles on a full range of financial topics and news.

He started the site, which focuses largely on retirement issues, after his long stint writing for The Wall Street Journal and six years (2008-2014) as director of financial education for Citi Personal Wealth Management at Citigroup.

Clements himself is a perfect example of someone who has achieved financial freedom while continuing to work just as hard as he did before he "semi-retired," he says.

ThinkAdvisor recently interviewed the writer and editor by phone.

Speaking from his Philadelphia, Pennsylvania, base, he reveals his own retirement investing plan:

"Five years of spending money in higher-quality short-term bonds and the vast majority of … remaining money in the stock market."

Here are excerpts from our conversation:

THINKADVISOR: What's your definition of financial freedom?

JONATHAN CLEMENTS: The ability to control and spend your day doing what you want without worrying about money is at the core of financial freedom.

If you're constantly going to crave more [money], you're never going to be financially free.

Do you need to be retired to reach financial freedom?

No. If you're spending your day at a job that you love, you may have a degree of financial freedom. And money isn't an issue because you're earning a paycheck.

Do you consider yourself retired?

I [call myself] semi-retired. I'm 60, and I could retire completely if I wanted to. My financial situation now is very good. I just happen to be working as hard as I ever have because I love what I do.

We have this conception of retirement: [Flip] a switch and go from working long hours every day to not working at all. In what world does that make sense?

In the chapter about your own financial journey, you write that you weren't a market timer but "just responding to market movement." Please elaborate on the difference.

If you're a market timer, you may forecast the direction of the stock market and then act on it.

For example, you predict that stocks are going to tank, and you therefore move into cash to avoid the market crash you expect.

By contrast, what I engage in is over-rebalancing. When the stock market goes down, my financial advice is to rebalance back to your target percentages.

But what I do when the market declines is, if my goal is to have 80% of my money in stocks, I might take that up to 85%.

I'm not basing that on my forecast of what the market will do. I'm basing it on what the market has done; in this instance, fallen sharply.

What's the big advantage to over-rebalancing?

For most people who have a high risk tolerance, which I do, there's an opportunity in over-rebalancing.

Financial markets have never gone down and then failed to recover. I trust in that history.

Suppose we had a situation where the global financial markets didn't [recover] — an economic apocalypse. At that point, it wouldn't matter what you own.

Being in bonds isn't going to do you any good. The only thing that will do you any good is a basement that's well stocked with canned goods and bottles of wine, I would imagine.

Jiab Wasserman spent most of her career in financial services and rose to vice president of credit risk management at Bank of America. She took advantage of investing opportunity during the 2008-09 financial crisis — and she and her husband retired at ages 53 and 57, respectively, she writes.

How was she able to retire so young?

Jiab was extremely frugal. That meant not only could she save a large portion of her income, but she needed a smaller nest egg in order to pay for her retirement years.

There's a rule of thumb that you need 80% of your pre-retirement income to retire in comfort. But if you're a super-saver and regularly sock away 20% or 25% of your income, it should be entirely possible to retire early with a relatively small nest egg.

William Bernstein, co-founder of Efficient Frontier Advisors, and author of "The Four Pillars of Investing," writes that once you've "won the financial game, the goal is not to get richer but to avoid ending up poor. So stop playing with money you really need." Do you agree?

If you have enough money to carry you through the rest of your financial life, you shouldn't continue to take unnecessary risks.

That said, I can see a case for dividing a retirement portfolio into two: a portion that's going to pay for your retirement, managed in such a way that there's no risk that you're going to run out of money.

Take the portion that you think you'll never need to spend and invest it much more aggressively because you plan to [perhaps] bequeath that money to your family or a favorite charity.

William Bernstein also recommends: "Mentally compartmentalize your portfolio into safe assets versus risky assets." Only two buckets? Do folks need more than that?

There are different approaches. Some people have three or even four buckets to cover their retirement income needs.

For example, a short-term bucket, an intermediate-term bucket and another bucket to cover 10 years and beyond.

But I think the basic notion, the one that makes sense to me, is that you need two buckets, one for your long-term investment money.

As I head toward retirement, my goal is to have five years of spending money in high-quality short-term bonds and the vast majority of my remaining money in the stock market.

So, I'll know that whatever happens in the market, I'll be fine for the next five years.

Adam Grossman, founder of Mayport Wealth Management, views the stock market as "a hall of mirrors — and that's on a good day!" he writes. Please explain.

He's referring to [the idea that] what the stock market does on any particular day cannot be explained by a single factor.

At the end of the day, some poor financial journalist has to write a narrative explaining why the market went up or down.

But the truth is you can't summarize what's going on in the financial markets with a single story. It's far too complicated for that.

Adam is saying that markets are beyond anybody's ability to forecast or fully understand.

Mr. Grossman reveals that when he worked with a stockbroker in the 1990s, his "whole portfolio went, more or less, to zero." It was "a disaster." But the experience gave him motivation to become a financial planner. Interesting, isn't it?

Many of the stories in the book are about people making mistakes early on. One of the lessons is that even if you make early mistakes, there's still ample opportunity to recover.

If you adopt simple investment principles and are a diligent saver, you can recover from those early missteps.

That's sound advice, but people's emotions often mess up that logical way of handling their money. Right?

That's one of the key points in "My Money Journey." Every one of the writers' journeys is intensely personal and reflects their upbringing, relation to financial uncertainty, desire for big wins [and so on].

Emotions certainly play a huge role, but we investors need to figure out how to make our peace with these emotions so we do indeed get to retirement successfully.

Some people get it done on their own; others need a financial advisor.

William Ehart, a journalist and longtime investor, writes that during the financial crisis, he lost "almost everything through a stomach-churning series of horrible decisions."

Further, he was laid off at the end of 2009, and the next year, went bankrupt. He was a drinker, he says. He invested unwisely in gold and energy ETFs.

But now he's in index funds and makes "side bets." He has decided to hire a financial advisor. Do you know whether he's done that?

He has. A lot of people struggle with money. People spend too much. They make foolish investments. Bill was an impulsive investor, and it took him a number of years to get his impulsivity under control.

But it's not an uncommon story. I've met countless investors who get a thrill from investing and aren't able to rein it in.

Bill was able to and decided he would do even better if he had a financial advisor to help him.

Greg Spears, certified financial planner, is deputy editor of HumbleDollar and an adjunct professor at St. Joseph's University. Earlier, he was a senior editor at Vanguard Group. In describing his vigilance about money, he notes a critical conversation with his wife about checking accounts and taxes.

When is it a good time for couples to schedule a discussion about finances?

It's probably better to have frequent small conversations than a big, in-depth, sit-down discussion about your financial future or what you should be doing with your money.

Husbands and wives should be talking about finances all along the way to make sure they're on the same page.

A couples' counselor told me that the No. 1 reason couples came to her was because of financial issues.

Money fights are probably much more frequent than you might suspect.

(Pictured: Jonathan Clements)