Remember when we were younger and we had an idea of what the future held? Whether our personal lives or as a society as a whole, those ideas rarely came to fruition exactly as expected. The possibilities of the future are limitless. And for good reason, because the possibilities of the mind are limitless as well.
The past only has one course to the present though -- and that is through reality. All possibilities eventually give way to actual events. Out of every possibility of tomorrow, there is only ever one path that becomes our reality. Most of tomorrow's concerns will never come to pass, and a few of yesterday's concerns are tomorrow's laughs (the vast majority are forgotten forever after reality invalidates them).
There are two words that can turn any financial decision into a mistake: "What if."
In terms of returns, those two words have generated the most stellar performance and most disastrous afflictions imaginable. Because we can always imagine a better return than what we have experienced. If we can imagine things getting worse, then we can imagine things being worse than what has happened so far.
Looking back at the unexpectedly positive returns of 2016, it is easy to spot investments that could have netted far greater returns than those we gained. Lucky for me, I was invested in the highest returning stock of the year, aptly named Nvidia, but that does not mean that I reaped the highest rewards imaginable. FOMO is the fear of missing out, and in my case, I missed out on higher gains by not buying more shares when I purchased Nvidia.
With a new administration starting next month (for many, "President Trump" is still an unimaginable reality), there are a slew of unknowns, and at least half are navigated by fear. While the markets responded favorably to the election of Donald Trump last month, the continuation of this bull market is by no means a guarantee. Amid all the uncertainty, the most probable reality is that the more things change, the more they stay the same.
Personally, I still feel as though the 2008-09 crash is still too fresh for the major populous to have forgotten the lessons learned from it. As equities have climbed to new heights repeatedly in the past eight years, there is still a "once bitten, twice shy" mentality masking or negating rational exuberance. In part, the pains of that near-disaster are still memorable, but also, the pains of FOMO are still haunting many others.
At the time it happened, people did not have the free cash available (or the confidence) to benefit from the DJIA tumbling from 11,000 down to 6,500-level, but now many people have learned the benefit of keeping a large amount of cash on hand to benefit from depressed markets. Anytime the markets retreat, that cash on the sideline comes into play now. At this point, I cannot imagine that trend stopping in the coming year either.
While I find it hard to expect the continuation of market growth, I am left with my prediction for the new year as either a gain or less of less than 10%. For this coming year, I feel optimistic enough to predict a small gain. That said, I do not plan to make any changes to how I have been managing my portfolio.
After paying off my mortgage this week, I have afforded myself the possibility to max out both my Roth IRA and my Health Savings Account, which I resolve to do in 2017. Since the markets have been hitting new highs, I have been directing a larger portion of my incoming assets to cash. I expect the bond market will offer strong buying opportunities after a sharp decline as interest rates rise (not that the buying opportunities will be rewarded in 2017), but I do not expect many other great buying opportunities.
Thankfully, I am diversified enough that I should be able to benefit from any unexpected rise. And more importantly, I am disciplined enough that I am not unnerved by leaving money on the table or by missing out on better gains that others will enjoy. I have been on both sides of trades enough times that it does not matter. Plus the majority of my assets are indexed, and it is hard to complain about replicating the general market performance when gains have been this strong.
Saturday, December 31, 2016
Friday, November 11, 2016
The Full Motley -- 4Q, 2016
Whataweek!!
Historic can describe the past week, but it would be a modest start because I am not sure if there is any hyperbole to articulate the surprise win of Donald Trump in the presidential elections. Thinking back to the original notion last year that he was running being met with dismissal and smirks, and a large portion of the population were probably still dismissing and smirking the idea up through Tuesday evening. Un-/Fortunately, his supporters and Clinton's dissenters knew that the election would not be decided by words or by actions, but strictly by voting. They showed up across the nation more consistently, and that is how elections are won.
Up early on Wednesday, November 9th, I happened to tweet "The American stock markets open in a few (minutes, so) let's see whether the financial media predictions that the market will crash if Trump wins are true!" As we know now, those predictions matched the political media predictions forecasting a Clinton win in terms of accuracy (or lack thereof). The DJIA went as high as 18,650 on Wednesday, before closing at 18,589, up 1.4%. Then, it closed at 18,808, up another 1.17% on Thursday, before setting a new all-time high closing earlier today at 18,847.
As for Thursday, November 10, which was the day that I processed my regular quarterly reallocation as usual, most of the money came out of Total International Stock Index (not surprisingly, as the international markets were rising over the past three months, although tempering lately) and almost all of it went into Total Bond Market Index (also not surprisingly since the index has been volatile since peaking in July).
Meanwhile, my individual brokerage account got an unexpected surprise of its own this week in the name of Nvidia, which had been sitting with a 300% return from where I bought it two years ago. After surpassing expectations by no small amount, the stock spiked 30% today! That increase pushed my return over 400% and the promise of the stock has an even higher upside. We will have to see where it goes from here. As the cliché goes, time will tell!
Historic can describe the past week, but it would be a modest start because I am not sure if there is any hyperbole to articulate the surprise win of Donald Trump in the presidential elections. Thinking back to the original notion last year that he was running being met with dismissal and smirks, and a large portion of the population were probably still dismissing and smirking the idea up through Tuesday evening. Un-/Fortunately, his supporters and Clinton's dissenters knew that the election would not be decided by words or by actions, but strictly by voting. They showed up across the nation more consistently, and that is how elections are won.
Up early on Wednesday, November 9th, I happened to tweet "The American stock markets open in a few (minutes, so) let's see whether the financial media predictions that the market will crash if Trump wins are true!" As we know now, those predictions matched the political media predictions forecasting a Clinton win in terms of accuracy (or lack thereof). The DJIA went as high as 18,650 on Wednesday, before closing at 18,589, up 1.4%. Then, it closed at 18,808, up another 1.17% on Thursday, before setting a new all-time high closing earlier today at 18,847.
As for Thursday, November 10, which was the day that I processed my regular quarterly reallocation as usual, most of the money came out of Total International Stock Index (not surprisingly, as the international markets were rising over the past three months, although tempering lately) and almost all of it went into Total Bond Market Index (also not surprisingly since the index has been volatile since peaking in July).
Meanwhile, my individual brokerage account got an unexpected surprise of its own this week in the name of Nvidia, which had been sitting with a 300% return from where I bought it two years ago. After surpassing expectations by no small amount, the stock spiked 30% today! That increase pushed my return over 400% and the promise of the stock has an even higher upside. We will have to see where it goes from here. As the cliché goes, time will tell!
Sunday, August 14, 2016
The Full Motley -- 3Q, 2016
It has been an active quarter since my last reallocation with the domestic stock markets setting all-time highs amid global jitters, which in the past couple weeks have subsided and seemingly reversed. In my last quarterly update, I compared a portfolio to a collective unit of investments working toward the same goal as opposed to the way people often view them, which is as a group of investments trying to outperform the rest of the group.
To my surprise, this reallocation shifted about 1.5% of my balance (most of the time, it is under 1% and typically way less), pulling from Vanguard Total Bond Market Index, Vanguard Explorer Fund and Vanguard PRIMECAP Fund, as listed from the most highest amount remove to the least (although, all three were almost the same amount). Those assets mostly were directed into Vanguard International Stock Index Fund, and the remainder split between Vanguard High-Yield Corporate Fund and Vanguard Total Stock Market Index Fund.
The fact that bonds performed so well in the past quarter caught me by surprise. I had known that small-caps were on a rise because I own a triple-leveraged small cap ETF in an unrelated brokerage account, which has had phenomenal performance in the past couple months. I was further surprised to see my actively managed large-cap fund outperform my total market index fund. While the index fund had gained assets, it lost pace to the higher performers.
The best part of this reallocation was that I moved a large portion into my international index fund on August 10, 2016, which is the date I have set for my reallocations, and in the following days, that sector has performed relatively strong against domestic stocks. It was not market timing in the sense that the shift was anticipated, but I unwittingly found the best moment to reallocate based on the disciple of rebalancing quarterly.
Saturday, August 6, 2016
Are The Poor Greedy?
Last week, I proposed an unexpectedly intriguing question. "Are the poor greedy?" It reminded me of an episode of The Simpsons where Kent Brockman introduced his segment with Marge Simpson by posing a similarly contrarian question and adding, "Most people would say 'No, of course not! What kind of stupid question is that?' But one woman says 'yes'."
As I researched the thought online, I found what was most intriguing was not the conclusion itself, but rather the schools of thought attributing greed to the poor to reach that conclusion. Equally interesting were schools of thought engaging but ultimately rejecting the notion without outright dismissing it.
Defining greed as "wanting more than enough," then the poor may often qualify. For the poor who are in debt, they bought items before earning money to spend likely in a distorted sense of entitlement or simply for instant gratification. While volunteering at a shelter that provided food to the homeless, I saw a few occasions where people tried to take more than they were allotted either by rigging the system or by sneaking more items (for the record, the overwhelming majority of recipients detested those few; in large part because they threatened the entire distribution system).
In his podcast characterizing the poor as greedy, Robert Kiyosaki started the conversation by clarifying that what we often call "greedy" should actually be called "corrupt" (an abuse of power to benefit excessive) and what greed truly is boils down to expecting to benefit before acting or earning.
Other examples can include keeping up with the Joneses, living in excess, taking shortcuts, avoiding generosity, and gambling.
All in all, the answer is a matter of some conjecture and attained through a confirmation bias. If you want to believe that the poor are greedy, then there are plenty of reasons behind it. Conversely, if you believe that the poor cannot be greedy by definition or on principle, there are reasons to support it.
There was a slow paradigm shift that occurred in the American workforce, as well as the American Dream itself. It used to be that an American man could get hired by a company, work a full shift each day, support a family, and own a home and two vehicles. Through a variety of reasons (for those who want to look beyond the simplistic portrayal of it being solely corporate corruption), the American Dream was no longer enough for a large portion of the younger population. It was as if Americans started rejecting the simple American Dream as complacent and average, and the result of wanting more predictably ended in getting less.
In a March 2008 blog, John Mayer wrote, "What I want to do is to shed a little light on why we're all in the same boat, no matter the shape of the life we lead: because every one of us were told since birth that we were special ... We were promised we could be anything that we wanted to be, if only we believed it and then, faster than we saw coming, we were set loose into the world to shake hands with the millions of other people who were told the exact same thing."
Granted, that shift was not perpetrated through that mindset, and the other side of its disappearance involved corporations demanding the same work for less money (or more work for the same pay) through a variety of methods. I would be remiss to overlook it. However, many others are overlooking their own participation in where they are now and inflating the impact of influence corporate decisions by the corrupted greedy have on their lives. While those negative forces could be a setback, the individual decisions of inaction through a chosen belief in futility is what empowers them.
As I researched the thought online, I found what was most intriguing was not the conclusion itself, but rather the schools of thought attributing greed to the poor to reach that conclusion. Equally interesting were schools of thought engaging but ultimately rejecting the notion without outright dismissing it.
Defining greed as "wanting more than enough," then the poor may often qualify. For the poor who are in debt, they bought items before earning money to spend likely in a distorted sense of entitlement or simply for instant gratification. While volunteering at a shelter that provided food to the homeless, I saw a few occasions where people tried to take more than they were allotted either by rigging the system or by sneaking more items (for the record, the overwhelming majority of recipients detested those few; in large part because they threatened the entire distribution system).
In his podcast characterizing the poor as greedy, Robert Kiyosaki started the conversation by clarifying that what we often call "greedy" should actually be called "corrupt" (an abuse of power to benefit excessive) and what greed truly is boils down to expecting to benefit before acting or earning.
Other examples can include keeping up with the Joneses, living in excess, taking shortcuts, avoiding generosity, and gambling.
All in all, the answer is a matter of some conjecture and attained through a confirmation bias. If you want to believe that the poor are greedy, then there are plenty of reasons behind it. Conversely, if you believe that the poor cannot be greedy by definition or on principle, there are reasons to support it.
There was a slow paradigm shift that occurred in the American workforce, as well as the American Dream itself. It used to be that an American man could get hired by a company, work a full shift each day, support a family, and own a home and two vehicles. Through a variety of reasons (for those who want to look beyond the simplistic portrayal of it being solely corporate corruption), the American Dream was no longer enough for a large portion of the younger population. It was as if Americans started rejecting the simple American Dream as complacent and average, and the result of wanting more predictably ended in getting less.
In a March 2008 blog, John Mayer wrote, "What I want to do is to shed a little light on why we're all in the same boat, no matter the shape of the life we lead: because every one of us were told since birth that we were special ... We were promised we could be anything that we wanted to be, if only we believed it and then, faster than we saw coming, we were set loose into the world to shake hands with the millions of other people who were told the exact same thing."
Sunday, July 31, 2016
The Shocking Investing Fact They Don’t Want You To Know (Reprint)
https://wallethacks.com/shocking-investing-fact/
Written by Jim Wang
Investing is simple. (no that’s not the shocking fact)
Make regular contributions into an index fund, ensure that you are diversified, wait, and shift into more conservative investments as you near the age you want to withdraw the funds. (no, that’s not it either)
Everyone knows this! They've known this for eons!
Here’s the problem... it’s also BORING. Boring with a capital B. O. R. I. N. G.
You can’t sell magazines, blog posts, or television shows with that idea. You can’t make money as a broker with that idea. You can’t make money as a financial expert with that idea. It’s too simple, it lacks excitement, and anyone can do it themselves. Good luck getting investment into your hedge fund!
In 2006 at Berkshire Hathaway’s annual meeting, Warren Buffet offered up a bet.
The bet? He could pick an investment that will beat any hedge fund manager over a period of 10 years. Head to head. Your best versus my best.
Protege Partners, a hedge fund founded in 2002 and now with approximately $2 billion in assets under management, took him up on the bet.
The stakes? Just a million bucks. No big deal to billionaires.
Here’s the best part...
Warren Buffet’s pick? An S&P 500 index fund at Vanguard! Ha!
One of the best investors in the world — Warren Buffett! The Oracle of Omaha! — chose an index fund!
When the money is truly on the line... you go with an index fund. (yep, that’s the fact!)
The Worst Kept Secret on Wall Street
Hedge fund and investment portfolio managers rarely beat index investing, especially after they take their management fee and taxes. Actively managed mutual funds cannot beat index investing, especially after fees and taxes. It’s hard to beat the market when you have to pay over 1% each year in fees!
Unlike many hedge funds, Buffett’s pick is a fund you can buy if you have $3,000 (the minimum). It costs you nothing to buy or sell (no sales load) and has an expense ratio of 0.17% (0.05% if you get the Admiral shares). If you invested $100,000, it’s just $170 a year. Your cell phone probably costs more. Way more.
Planet Money did a story about this bet and how it’s doing, with a little under two years left. They give the story a little more color with a look at both sides of the bet (it’s 21 minutes and entertaining, definitely listen to it when you can), but I bet you can guess how it’s going…
How’s the bet doing? At the end of 2015, the index fund is up 66% and the hedge fund is up only 22% (remember the market fell sharply, ~45%, in 2008). There is almost no way the hedge fund can make up the gap in two years.
Who Doesn’t Want You To Know?
The investment establishment. Other brokers. Actively managed mutual funds. Hedge fund managers and salespeople. People who make money off those higher fees or when you trade stocks, options, and other assets.
Those trillions of dollars in index funds aren’t in other funds. Actively managed funds charge north of 1% in fees. Vanguard charges a fraction of that. That’s billions of dollars a year the establishment isn’t earning (like $40+ billion) and you know they aren’t happy about that!
Do you know when those folks make money? When you buy and trade stuff. Even buy and hold is too boring for them. Pay $5 to buy a stock and hold it for ten years — they won’t make another FIVE DOLLARS until you sell. $10 in 10 years? Ha — good luck paying for those executive shirts where the collars don’t match the shirt.
This is not new news… it’s just not IN the news
The gauntlet was thrown in 2006 by Warren Buffet, but the knowledge that actively managed funds can’t beat index funds has been around for a very long time.
I remember reading about it as a teenager, in the mid-1990s, on The Motley Fool (I found this article from 1999 — “The average actively managed stock mutual fund returns approximately 2% less per year to its shareholders than the stock market returns in general.”).
It’s not new news, it’s not in the news because it’s hard to write that story more than once.
And it’s hard to get advertising from the financial establishment if you’re telling folks they don’t need the financial establishment. 🙂
Why Doesn’t Everyone Invest in Index Funds?
A lot of people do... trillions of dollars are in index funds. But a lot of people don’t...
... because index investing is boring. Buy and hold is boring.
It’s boring to write about too. How many times can this article be written? Once. If another column is due next week... what then? 🙂 I’m fortunate in that I don’t have that pressure!
That’s why you get articles about how a billionaire warns about index funds or whether “passive investment is hurting the economy.”
Do you know what else is boring but made “more exciting” by marketing and the news? Losing weight. Weight loss is at its core a math problem — consume fewer calories than your body burns. No one said it was easy because ice cream is awesome, but that’s not a weight loss problem. That’s not a math problem. That’s a human behavior problem.
Investing is the same way.
What do the most successful investors recommend?
Warren Buffet recommends index funds. In the 2013 letter to Berkshire shareholders, he shared his instructions in his will (page 20, emphasis mine):
My money, I should add, is where my mouth is: What I advise here is essentially identical to certain instructions I’ve laid out in my will. One bequest provides that cash will be delivered to a trustee for my wife’s benefit. (I have to use cash for individual bequests, because all of my Berkshire shares will be fully distributed to certain philanthropic organizations over the ten years following the closing of my estate.) My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.) I believe the trust’s long-term results from this policy will be superior to those attained by most investors – whether pension funds, institutions or individuals – who employ high-fee managers.
David Swensen, Yale’s chief investment officer responsible for managing their endowment, also recommends index funds. Swensen beat the market for 20 straight years (1988 to 2008). If you wanted to make a bet with a manager, he’s the guy to make it with… and he recommends index funds!
How I have my investing ice cream…
I'm not an expert when it comes to investing but I understand a lot about human behavior. I know I like a little excitement in my life.
Most of my investments are in index funds. A small piece is invested in dividend growth stocks to scratch that itch. It lets me stretch my financial analysis muscles (a tiny bit), pick a few stocks, and enjoy the little shots of dopamine whenever I see a dividend come through. That’s good enough for me.
If you have this itch, put 90% of your investments in index funds and carve off a little bit to do the “fun stuff.” Bet it on some tech companies or biotech companies. Who cares... it’s fun money. It’s like cheat days or that piece of chocolate, a little bit won’t hurt you and you can make sure you don’t do anything truly bad or dangerous.
Once you realize you’re bad at it, you can always put it back into the index fund — there are no transaction costs! 🙂
Written by Jim Wang
Investing is simple. (no that’s not the shocking fact)
Make regular contributions into an index fund, ensure that you are diversified, wait, and shift into more conservative investments as you near the age you want to withdraw the funds. (no, that’s not it either)
Everyone knows this! They've known this for eons!
Here’s the problem... it’s also BORING. Boring with a capital B. O. R. I. N. G.
You can’t sell magazines, blog posts, or television shows with that idea. You can’t make money as a broker with that idea. You can’t make money as a financial expert with that idea. It’s too simple, it lacks excitement, and anyone can do it themselves. Good luck getting investment into your hedge fund!
In 2006 at Berkshire Hathaway’s annual meeting, Warren Buffet offered up a bet.
The bet? He could pick an investment that will beat any hedge fund manager over a period of 10 years. Head to head. Your best versus my best.
Protege Partners, a hedge fund founded in 2002 and now with approximately $2 billion in assets under management, took him up on the bet.
The stakes? Just a million bucks. No big deal to billionaires.
Here’s the best part...
Warren Buffet’s pick? An S&P 500 index fund at Vanguard! Ha!
One of the best investors in the world — Warren Buffett! The Oracle of Omaha! — chose an index fund!
When the money is truly on the line... you go with an index fund. (yep, that’s the fact!)
The Worst Kept Secret on Wall Street
Hedge fund and investment portfolio managers rarely beat index investing, especially after they take their management fee and taxes. Actively managed mutual funds cannot beat index investing, especially after fees and taxes. It’s hard to beat the market when you have to pay over 1% each year in fees!
Unlike many hedge funds, Buffett’s pick is a fund you can buy if you have $3,000 (the minimum). It costs you nothing to buy or sell (no sales load) and has an expense ratio of 0.17% (0.05% if you get the Admiral shares). If you invested $100,000, it’s just $170 a year. Your cell phone probably costs more. Way more.
Planet Money did a story about this bet and how it’s doing, with a little under two years left. They give the story a little more color with a look at both sides of the bet (it’s 21 minutes and entertaining, definitely listen to it when you can), but I bet you can guess how it’s going…
How’s the bet doing? At the end of 2015, the index fund is up 66% and the hedge fund is up only 22% (remember the market fell sharply, ~45%, in 2008). There is almost no way the hedge fund can make up the gap in two years.
Who Doesn’t Want You To Know?
The investment establishment. Other brokers. Actively managed mutual funds. Hedge fund managers and salespeople. People who make money off those higher fees or when you trade stocks, options, and other assets.
Those trillions of dollars in index funds aren’t in other funds. Actively managed funds charge north of 1% in fees. Vanguard charges a fraction of that. That’s billions of dollars a year the establishment isn’t earning (like $40+ billion) and you know they aren’t happy about that!
Do you know when those folks make money? When you buy and trade stuff. Even buy and hold is too boring for them. Pay $5 to buy a stock and hold it for ten years — they won’t make another FIVE DOLLARS until you sell. $10 in 10 years? Ha — good luck paying for those executive shirts where the collars don’t match the shirt.
This is not new news… it’s just not IN the news
The gauntlet was thrown in 2006 by Warren Buffet, but the knowledge that actively managed funds can’t beat index funds has been around for a very long time.
I remember reading about it as a teenager, in the mid-1990s, on The Motley Fool (I found this article from 1999 — “The average actively managed stock mutual fund returns approximately 2% less per year to its shareholders than the stock market returns in general.”).
It’s not new news, it’s not in the news because it’s hard to write that story more than once.
And it’s hard to get advertising from the financial establishment if you’re telling folks they don’t need the financial establishment. 🙂
Why Doesn’t Everyone Invest in Index Funds?
A lot of people do... trillions of dollars are in index funds. But a lot of people don’t...
... because index investing is boring. Buy and hold is boring.
It’s boring to write about too. How many times can this article be written? Once. If another column is due next week... what then? 🙂 I’m fortunate in that I don’t have that pressure!
That’s why you get articles about how a billionaire warns about index funds or whether “passive investment is hurting the economy.”
Do you know what else is boring but made “more exciting” by marketing and the news? Losing weight. Weight loss is at its core a math problem — consume fewer calories than your body burns. No one said it was easy because ice cream is awesome, but that’s not a weight loss problem. That’s not a math problem. That’s a human behavior problem.
Investing is the same way.
What do the most successful investors recommend?
Warren Buffet recommends index funds. In the 2013 letter to Berkshire shareholders, he shared his instructions in his will (page 20, emphasis mine):
My money, I should add, is where my mouth is: What I advise here is essentially identical to certain instructions I’ve laid out in my will. One bequest provides that cash will be delivered to a trustee for my wife’s benefit. (I have to use cash for individual bequests, because all of my Berkshire shares will be fully distributed to certain philanthropic organizations over the ten years following the closing of my estate.) My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.) I believe the trust’s long-term results from this policy will be superior to those attained by most investors – whether pension funds, institutions or individuals – who employ high-fee managers.
David Swensen, Yale’s chief investment officer responsible for managing their endowment, also recommends index funds. Swensen beat the market for 20 straight years (1988 to 2008). If you wanted to make a bet with a manager, he’s the guy to make it with… and he recommends index funds!
How I have my investing ice cream…
I'm not an expert when it comes to investing but I understand a lot about human behavior. I know I like a little excitement in my life.
Most of my investments are in index funds. A small piece is invested in dividend growth stocks to scratch that itch. It lets me stretch my financial analysis muscles (a tiny bit), pick a few stocks, and enjoy the little shots of dopamine whenever I see a dividend come through. That’s good enough for me.
If you have this itch, put 90% of your investments in index funds and carve off a little bit to do the “fun stuff.” Bet it on some tech companies or biotech companies. Who cares... it’s fun money. It’s like cheat days or that piece of chocolate, a little bit won’t hurt you and you can make sure you don’t do anything truly bad or dangerous.
Once you realize you’re bad at it, you can always put it back into the index fund — there are no transaction costs! 🙂
Saturday, June 25, 2016
In Case of Emergency
Fear-mongering was at its finest in the early morning hours of Friday, June 24, 2016, as the British pound plummeted to a 30-year low and many media analysts implying that its FTSE 100 would follow suit. When it only closed down 3.15% (and our domestic markets closed down 3-4%), I quipped on Twitter, "some #Brexit collapse, I haven't been this disappointed in a sale since Prime Day!"
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| Why cap at 7%, I doubt I hear back |
In short, the markets fluctuate. The markets crash. The markets rebound. The markets will do what markets do, and no one can predict their movements 100% of the time with an degree of accuracy. In reality, a market increasing drastically in short bursts should be every bit as alarming as those that their decreases (albeit, less painful, so any warnings are often dismissed as buzzkillers).
Both the Motley Fool (no relation) and Vanguard warned their investors about the dangers of over-reacting in times of panic, and their points are perfectly valid. All professional long-term planning has already accounted for drastic declines and for sharp increases because, for the most part, they even out in the long run. Market timing is a difficult process and a foolish endeavor. One often touted benefit of reallocation is that it shifts money according to the markets, but its moves are small so there is no drastic change after drastic shifts in either direction.
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| Money.CNN.com after Brexit vote |
For the most part, I adhere to that philosophy. However, the little bit of market timing I will employ is when the markets have set new all-time high and retreated off that mark. Then, I start directing a higher portion of my contributions to a cash position. Keep in mind, the operative word there is "portion" because I continue contributing to both stocks and bonds during these times (because either could continue to increase overall), but the logic behind gaining a higher cash position after setting a new high in the stock market is to have liquid assets on hand to benefit when (if) stocks or just market sectors present a rare buying opportunity.
For example, people who have been putting all their money into the stock market since 2009 have been doing awfully well for themselves. By March 4, 2013, the Dow Jones Industrial Average set a new all-time high closing mark. But the gains continued for another couple years until May 19, 2015, at which point it had closed on its current all-time high of 18,300. Since that time, for a plethora of reasons that have created a single reality, the markets have not closed above that mark. However, it has not closed 17% below that mark either. Some say we are still in a bull market. Others say we are in a bear market. The correct label will depend on whether the Dow closes above that 18,300 mark before retreating 20% or not.
Either way, I am buying into the market as it increases while upping my cash position to hedge either direction the market will take. The logic being that if the markets will eventually have to pull back, but they may continue increasing significantly until then. Yet, to benefit from a market retreat, cash on hand is necessary to buy into the depleted assets. If my portfolio were 100% in stocks and the stock markets declined drastically, then obviously, I would want to buy more at the lower price. Unfortunately, my portfolio value would be decreasing at the same rate as the falling prices, so it becomes a moot point. My idealistic hope would be that I could pull money out at the peak and then reinvest it at a lower amount (ideally at the lowest point of the valley). That's an ideal "buy low, sell high" scenario. Unfortunately, any given weekday, the market could move higher than it was the day before (in which case, I may have sold my shares for a lower price, and now I would have to buy them back at a higher amount).
This is the face of uncertainty. Once there is 100% certainty in the markets, then invest 100% into the asset classes that favor that direction.
Tuesday, May 10, 2016
The Full Motley -- 2Q, 2016
Like it or not, it is time for another quarterly update!
I have said a lot about periodic rebalancing over the years (February 2016 marked the seventh year of this blog, albeit I missed that update due to work volumes from two jobs), but the most consistent things that I have said about its merits is that it is the most practical method to employ "buy low/sell high" methodology and that it is the most effective method to remove emotions from investing (hence my minimalist pun in the first paragraph).
The amounts being shifted each quarter are insignificantly low, typically between 1-2% of the overall portfolio. But the more telling aspect is often which fund(s) had the most movement in any given quarter. I have not missed (m)any quarterly reallocations (even if I do not write out an actual update) so each quarter, the funds begin at their intended percentage; therefore, any deviation is the result of its relative performance. This quarter, the two biggest movers were Vanguard Explorer Fund (up) and Vanguard Total International Stock Index Fund (down). Not many other sectors moved over the past three months (which are inconveniently in the middle of each quarter), which is only noteworthy insomuch that I was surprised to see the bond market index hold its own.
To the uninitiated, it would appear as though rebalancing (even the "buy low/sell high" mantra itself) would "punish winners" and "reward losers," and it would if the stock market had absolute winners and absolute losers. American culture is very competitive, so the instinct to identify winners and losers is ingrained in our minds so heavily that it feels innate. However, the opposite of competition is cooperation, and that is in fact what the allocation is in the first place. These funds are working together within the same portfolio on the basis that each year is going to be different than the past. Some years, certain assets will perform better than the high performers of yesteryear.
Understand that there are two key elements involved herein though. The first is that the investments within the portfolio are broadly diversified within an asset class and, secondly, that the asset classes are viable sectors for future years. Using the past for example, it would not make sense to invest in telephone companies after the explosion in cellphones (that is, unless the company were positioned correctly to hold its own as the paradigm shifted). Cable companies would be a dangerous asset class today if they're a pure-play cable without exposure to delivering the Internet or other streaming services to its consumers. Conversely, bonds are poised for a sharp decline -- and they have been for a number of years, which we have yet to see -- but even if the market collapsed, bonds are still viable investments thereafter so a sharp recovery could be expected. As the market declined, investors who rebalance periodically would be directing money in the asset class, so when a recovery occurred, they would have purchased a considerable amount when the assets were deflated, which reaps immediate benefits from having a lower cost average per share.
I have said a lot about periodic rebalancing over the years (February 2016 marked the seventh year of this blog, albeit I missed that update due to work volumes from two jobs), but the most consistent things that I have said about its merits is that it is the most practical method to employ "buy low/sell high" methodology and that it is the most effective method to remove emotions from investing (hence my minimalist pun in the first paragraph).
The amounts being shifted each quarter are insignificantly low, typically between 1-2% of the overall portfolio. But the more telling aspect is often which fund(s) had the most movement in any given quarter. I have not missed (m)any quarterly reallocations (even if I do not write out an actual update) so each quarter, the funds begin at their intended percentage; therefore, any deviation is the result of its relative performance. This quarter, the two biggest movers were Vanguard Explorer Fund (up) and Vanguard Total International Stock Index Fund (down). Not many other sectors moved over the past three months (which are inconveniently in the middle of each quarter), which is only noteworthy insomuch that I was surprised to see the bond market index hold its own.
To the uninitiated, it would appear as though rebalancing (even the "buy low/sell high" mantra itself) would "punish winners" and "reward losers," and it would if the stock market had absolute winners and absolute losers. American culture is very competitive, so the instinct to identify winners and losers is ingrained in our minds so heavily that it feels innate. However, the opposite of competition is cooperation, and that is in fact what the allocation is in the first place. These funds are working together within the same portfolio on the basis that each year is going to be different than the past. Some years, certain assets will perform better than the high performers of yesteryear.
Understand that there are two key elements involved herein though. The first is that the investments within the portfolio are broadly diversified within an asset class and, secondly, that the asset classes are viable sectors for future years. Using the past for example, it would not make sense to invest in telephone companies after the explosion in cellphones (that is, unless the company were positioned correctly to hold its own as the paradigm shifted). Cable companies would be a dangerous asset class today if they're a pure-play cable without exposure to delivering the Internet or other streaming services to its consumers. Conversely, bonds are poised for a sharp decline -- and they have been for a number of years, which we have yet to see -- but even if the market collapsed, bonds are still viable investments thereafter so a sharp recovery could be expected. As the market declined, investors who rebalance periodically would be directing money in the asset class, so when a recovery occurred, they would have purchased a considerable amount when the assets were deflated, which reaps immediate benefits from having a lower cost average per share.
Friday, May 6, 2016
There Is No King
With all due respect to Maria, how do you solve a problem like TINA? Because "she" is becoming a problem.
If pictures are worth a thousand words, then the chart of the 10-year return on a hypothetical $10,000 in Vanguard Prime Money Market Fund should say it all. In 2006 and 2007, the fund was returning a generous 5% APR. In the eight following years, the fund earned less than 0.3% APR. In other words, stashing money under the mattress or burying in the front lawn legitimately may have had a better risk-adjusted return!
The Federal Reserve Bank (the "Fed") has kept its federal funds rate significantly less than 1% since December 2008. At that time, investors were so frightened by the markets that financial stability was its own incentive, so the funds did not need to offer a corresponding interest rate (because 0% APR is higher than any loss).
Consequently, the Fed left investors with no choice but to invest in stocks. As the markets plummeted, the good money acknowledged that it was far more probable that they would rise than continue falling and, without an interest rate yield, the opportunity costs were effectively eliminated. In other words, "there is no alternative" in which to invest than stocks (which was how TINA got her name).
Initially, the returns from stocks were fantastic with the market recovering in record time with the Dow returning to its pre-October 2008 levels in about a year and setting a new all-time high in March 2013. However, maintaining an artificially low interest rates has had its negative affects otherwise.
When I first started in finance, the known expectations for retirement planning was that stocks would get 9-11%, bonds would get 6-7%, and a cash position would get 2-3% (at times, falling below the pace of inflation). Nowadays, the revised expectations place stocks getting 6-8%, bonds getting 4-5% and cash returning nothing.
Therefore, anyone approaching retirement would need to review and likely revise their retirement plans because it would be too risky (in fact, foolhardy) to expect the old school returns in investments to be restored. The difference in current returns in all investment classes is, across the board, effectively equal to the zeroed federal funds rate.
Whether the federal funds rate (or the recent regulation changes in Money Market Funds, which are required by October 2016) boosts the return of the Money Market Funds is almost irrelevant if the retirement plan is set to the worst case scenario, which is basically where the economy is right now. Because if you have planned for the worst, then anything else is an improvement -- and having more money in retirement than needed is hard to qualify as a problem.
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| From a 5% return to nothing seemingly overnight. |
The Federal Reserve Bank (the "Fed") has kept its federal funds rate significantly less than 1% since December 2008. At that time, investors were so frightened by the markets that financial stability was its own incentive, so the funds did not need to offer a corresponding interest rate (because 0% APR is higher than any loss).
Consequently, the Fed left investors with no choice but to invest in stocks. As the markets plummeted, the good money acknowledged that it was far more probable that they would rise than continue falling and, without an interest rate yield, the opportunity costs were effectively eliminated. In other words, "there is no alternative" in which to invest than stocks (which was how TINA got her name).
Initially, the returns from stocks were fantastic with the market recovering in record time with the Dow returning to its pre-October 2008 levels in about a year and setting a new all-time high in March 2013. However, maintaining an artificially low interest rates has had its negative affects otherwise.
When I first started in finance, the known expectations for retirement planning was that stocks would get 9-11%, bonds would get 6-7%, and a cash position would get 2-3% (at times, falling below the pace of inflation). Nowadays, the revised expectations place stocks getting 6-8%, bonds getting 4-5% and cash returning nothing.
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| Prime Money would return $250 on $11,000 over 8 years. |
Whether the federal funds rate (or the recent regulation changes in Money Market Funds, which are required by October 2016) boosts the return of the Money Market Funds is almost irrelevant if the retirement plan is set to the worst case scenario, which is basically where the economy is right now. Because if you have planned for the worst, then anything else is an improvement -- and having more money in retirement than needed is hard to qualify as a problem.
Friday, April 8, 2016
How The Most Basic Financial Advice Is Flawed
In terms of financial advice, "buy low; sell high" is a myth. It would be similar to telling someone asking for directions, "go to your destination; then stop."
"Buy low" is bad advice on its own, because the market could always go lower. Whether you are waiting for the markets to decline to its lowest possible point or even just a little bit lower beyond its lowest point, you have nowhere to start.
"Sell high" could be even worse advice because (in addition to the same logic that the markets can always go higher), once you lock in a profit, "opportunity costs" begin accumulating, starting with the alternative return that the money would have earned if it were kept in the initial investment. For example, if you opened an index mutual fund in your 20s with the intention of selling half when your initial investment has doubled, then where does that new money go? Selling a stock to keep the money in a stable value option is only a smart move if the index declined, so earning nothing would higher than a loss. But if the index fund money doubled after 15 years and you were another 25 years away from retirement, then the expected return of the index fund would be considerably higher than the return on a stable value option over that period of time. Again, the investor has not been given useful instructions when told to sell high.
While "buy low; sell high" is a catchy mantra, it provides no ready-to-use advice. The discipline of rebalancing is the how-to for the "buy low; sell high" advice to work. "When are stocks low?" "How do I know if bonds are high?" "What if everything is down at the same time?" Creating an asset allocation to use as a guideline or a road map would provide answers to each of those questions (or even bypass them altogether) with more clear instructions than "go to your destination; then stop." Rebalancing at set periods ensures both buying low and selling high.
Foremost, it removes the biggest pitfall for novice investors: emotion! Regardless what happens in the market in between, do nothing until the set rebalance date. Only one of two scenarios is possible as a result. If the market declined and recovered within a year (using annual reallocations as an example), then there would be no need to get out in the first place. If the market declined and stayed lower for more than a year, then prices will still be lower on the planned reallocation date(s) and, as an added benefit, it will have given inversely related investments time to increase in value as well.
Personally, I have rebalanced my old 401(k) quarterly since February 2009, as seen in my Full Motley entries. Honestly, I have found that quarterly rebalancing is a bit too often (because the amounts moved are often *very* low), but it is the discipline that I developed and the intervals are close enough together that I rarely forget. If I were advising a close friend who did not care about investing, then I would suggest semi-annually, or at very least annually. Anyone born in August, September or October could use their birthdays and the day they start or file their taxes as the dates to rebalance. Otherwise, either day works for annual rebalancing (and then, to rebalance semi-annually, again six months from the chosen date).
Like many other professions, personal finance has its own lexicon, and "buy low; sell high" was an attempt to simplify the best advice into layman's terms. Unfortunately, it falls a bit short in terms of practical application. In reality, the intended advice was "allocate and rebalance."
"Buy low" is bad advice on its own, because the market could always go lower. Whether you are waiting for the markets to decline to its lowest possible point or even just a little bit lower beyond its lowest point, you have nowhere to start.
"Sell high" could be even worse advice because (in addition to the same logic that the markets can always go higher), once you lock in a profit, "opportunity costs" begin accumulating, starting with the alternative return that the money would have earned if it were kept in the initial investment. For example, if you opened an index mutual fund in your 20s with the intention of selling half when your initial investment has doubled, then where does that new money go? Selling a stock to keep the money in a stable value option is only a smart move if the index declined, so earning nothing would higher than a loss. But if the index fund money doubled after 15 years and you were another 25 years away from retirement, then the expected return of the index fund would be considerably higher than the return on a stable value option over that period of time. Again, the investor has not been given useful instructions when told to sell high.
While "buy low; sell high" is a catchy mantra, it provides no ready-to-use advice. The discipline of rebalancing is the how-to for the "buy low; sell high" advice to work. "When are stocks low?" "How do I know if bonds are high?" "What if everything is down at the same time?" Creating an asset allocation to use as a guideline or a road map would provide answers to each of those questions (or even bypass them altogether) with more clear instructions than "go to your destination; then stop." Rebalancing at set periods ensures both buying low and selling high.
Foremost, it removes the biggest pitfall for novice investors: emotion! Regardless what happens in the market in between, do nothing until the set rebalance date. Only one of two scenarios is possible as a result. If the market declined and recovered within a year (using annual reallocations as an example), then there would be no need to get out in the first place. If the market declined and stayed lower for more than a year, then prices will still be lower on the planned reallocation date(s) and, as an added benefit, it will have given inversely related investments time to increase in value as well.
Personally, I have rebalanced my old 401(k) quarterly since February 2009, as seen in my Full Motley entries. Honestly, I have found that quarterly rebalancing is a bit too often (because the amounts moved are often *very* low), but it is the discipline that I developed and the intervals are close enough together that I rarely forget. If I were advising a close friend who did not care about investing, then I would suggest semi-annually, or at very least annually. Anyone born in August, September or October could use their birthdays and the day they start or file their taxes as the dates to rebalance. Otherwise, either day works for annual rebalancing (and then, to rebalance semi-annually, again six months from the chosen date).
Like many other professions, personal finance has its own lexicon, and "buy low; sell high" was an attempt to simplify the best advice into layman's terms. Unfortunately, it falls a bit short in terms of practical application. In reality, the intended advice was "allocate and rebalance."
Thursday, March 24, 2016
TIME.com: 10 Reasons You're Not Rich Yet
10 Reasons You're Not Rich Yet
By Jocelyn Black Hodes / Daily WorthAs a financial adviser, I have spent many years helping other people overcome financial stumbling blocks so they can become rich. Ironically, the one person I have had the most trouble helping is myself.
Being "rich" can mean different things to different people, but I believe it means having the financial freedom to achieve your goals and live the life you want. I am great at giving advice; I am not always so great at taking my own advice (know anyone like that?). So, when it came to helping my clients understand why they weren’t rich yet, the easy part was explaining the culprits, because I was all too familiar with most of them.
Regardless of our upbringing, education, profession or lifestyle, most of us are not where we want to be financially and our reasons are probably more similar than different. The good news is that it is never too late to become rich if you, like me, are ready to own up to the reasons you’re not and do something about it.
Want to know why you aren't rich yet? Keep reading.
#1: You spend money like you're already rich.
Sure, it feels good to buy expensive things, whether it's a luxury car, designer clothes, a big house in the burbs, or a tropical vacation. Even if you don't necessarily buy pricey items, if you consistently buy stuff you really don't need, it still adds up fast ($300 trip to Target for toothpaste? AHEM). But the shopping high only lasts until the guilt and regret set in or the credit card bill arrives. Most of us are guilty of living beyond our means and using credit cards more than we should. The problem is that as long as we continue to spend more than we have, we can't start building wealth. Chronic overspending and high-interest, revolving credit card debt are your worst enemies when it comes to financial success. Spend like you're poor and you are much more likely to become rich.
#2: You don't have a plan.
Without clearly defined short, mid and long-term goals, becoming rich will just seem like an unattainable fantasy. And that turns into your go-to excuse for why you shouldn't bother saving or stop overspending. As we say in the financial industry: those who fail to plan, plan to fail. Creating a financial plan may seem overwhelming or intimidating, but it doesn't have to be. Whether you do-it-yourself or decide to work with a financial professional, the process simply starts with prioritizing your goals and writing them down. Put that list where you can see it on a regular basis. Visual reminders go a long way in helping us stay on track.
#3: You don't have an emergency fund.
I know, you've heard it a hundred times: you need to have at least six months of income saved in an emergency fund. And yes, it's much easier said than done. However, I've seen too many people (including myself) get hit with a major unplanned expense, whether it's a car or home repair or a medical bill, or an unexpected job loss, accident or illness that's led to a drastic reduction in income. When these things happen–and they do, more often than you might think–not having a financial safety cushion can make the situation much, much worse. If you're forced to rely on credit cards, you'll end up sinking deeper into debt instead of, yes, saving to become rich.
#4: You started late.
With every year or month that goes by without saving, your chances of becoming rich decrease. Time and compounding interest are your two best friends when it comes to growing money, so wasting them really hurts. Just like exercising, the hardest part of saving is starting. Even if you're in debt, making little money or have a lot of expenses, you can still always save something — even if it is a small amount. The sooner you get yourself into the habit of saving — regardless of how much — the easier it will be for you to continue and eventually increase those savings. I like to think of saving as a muscle you have to work out and build with practice. Even if you start saving late, you can still become rich if you're committed enough. But you need to start. Now.
#5: You'd rather complain than commit.
"Life is too expensive." "I'll never get out of debt." "I don't make enough money." "Investing is too risky." I've probably heard every excuse for why someone isn't saving, investing or planning in general, and I'll admit I've used a few of them myself from time to time. It's easier to be lazy and let bad habits fester than to commit to –and follow through on — changing them. It's no wonder obesity and debt are epidemics in our country, and that millions of Americans have had to push off retirement. As long as the complaining, excuses and finger-pointing persist, so too will not becoming rich. Instead, take responsibility for your bad habits and focus on what you can do to change them. Then do it.
#6: You live for today in spite of tomorrow.
I get it. It is really hard to think about retirement and other distant fantasies when we have needs and plenty of wants now. The bills have to get paid, the family must be fed, momma needs a vacation — and a new wardrobe to go along with it. The problem is that impulsive and overly-indulgent behavior commonly lead to credit card debt, spending money you might have otherwise saved and, yes, not becoming rich. Do yourself a favor: Ditch the "buy now, worry later" mindset and instead, adopt a "save now, get rich later" mindset.
#7: You're a one-trick investor.
You might be lucky enough to become rich by betting all your money on one type of investment. Just like you might be lucky enough to win the lottery. But that's not a strategy for getting rich (at least, not one I'd ever recommend).
One of the worst financial mistakes you can make is putting all your money eggs in one basket. Doing so puts you at too much risk, whether it is being too conservative or too aggressive. Sure, the stock market is on a run and real estate is on an upswing again, but are you prepared for when the tides turn? Because they will. And if you are invested in all fixed-income securities like CDs, bonds and annuities and think you're safe, inflation should make you think again. Your investment portfolio needs to include a good mix of investments with varied levels of risk and return potential and liquidity (so you can get your money when you need it).
#8: You don't automate.
Here's the secret to saving: Automation. Saving is seamless when it's automatic. Unfortunately, we are not born to be savers. We are impulsive and greedy by nature. Being responsible requires much more discipline. However, automation forces us to be responsible without too much effort. And all it requires is setting up regular transfers from a paycheck or bank account to a savings or investment account. Without it, we are much more likely to spend money we could be saving. Even if it is a seemingly small amount that you automate, those steady investments can make a big difference over time. Automate whatever you can whenever you can; just be careful to avoid over-drafting your account and try to increase your savings amount periodically.
#9: You have no sense of urgency.
You might think you don't need to worry about getting out of debt or saving because someone, or something else will save you. Maybe it's a pay raise, a new job, an inheritance, a rich spouse, or the lottery you're counting on. Whatever "it" is, you use it as an excuse to put off taking steps on your own to become rich. The problem is that very little in life is certain. Who knows what will actually happen, or not happen, so why not focus on what you can control now? Save now and save yourself — just in case something, or someone, else won't.
#10: You're easily influenced.
Maybe you live with a chronic over-spender or a typical day out with your girlfriends involves shopping. Or maybe it's your inner "Real Housewife" that you sometimes can't control. We all have negative influences in our lives that threaten our chances of becoming rich. The superficial, materialistic, sensational culture in which we live is probably the biggest one. The suffocating swirl of media that goes along with it makes it ten times worse. The trick is not giving in to temptation. How? Some of it is making conscious choices to avoid putting yourself in vulnerable positions. But most of it is having the willpower to keep the goal of becoming rich in the front of your mind, especially when you are tempted to sabotage yourself.
Saturday, January 16, 2016
Indexing Simplified
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| NONE OF THIS IS ACCURATE! |
Additionally, I have been planning to get a better view of the real American economy and understand people's relationship with money this year. Too many people believe the stock market is rigged in a way that proverbial wolves end up concluding that inaccessible grapes are sour. To that extreme, the media has reported that more than half of Americans have less than $1,000 to their name (determined by the responses of 518 people over 18, in reality).
Amid lotto fever, the above meme spread on social media -- and people immediately protested the calculations, but honestly, I felt the logic was equally invalid! As Dr. Robert Anthony hypothesized in his book The Advanced Formula for Total Success, "if we divided all the money in the world equally, in a short time the rich would be rich again, and the poor would be poor."
In anticipation of providing a needed service, I wanted to prepare a quick tutorial about investing for those who either tell me that they do not trust the stock markets or that they want to start investing but they literally do not know how. My hope is that, while the market declines, I can convince a few how investing can benefit them. I know it works because when an old friend got her first full-time job with benefits, she invited me to lunch to explain to her how her 401(k) worked. I told her (more or less) the following, and a couple years ago, she was praising me at a house party by saying that I was the reason for her financial stability, adding that she even bought her first car with a loan from her 401(k). That said, one of the most important things to understand about investing is the product in which you invest. The markets are always in motion, so understanding how the product works is important to avoid pitfalls like performance chasing or the quintessential "buy high/sell low" folly.
WHAT IS STOCK?
Stock is a certificate of ownership in a large corporation. You can buy shares of stock in many of your favorite brands: Amazon, Netflix, Starbucks, Chipotle, Disney, etc. As an owner, you would share in that company's prosperity. You are a fractional owner though, so you will get a fraction (minuscule amount) of their profits.
WHAT IS THE PROBLEM?
If you invested all of your available money into a single company, then you would have no impact on that company itself, but all of your financial welfare would be solely reliant upon that company. That company may not do very well in a given year, and even the strongest brands can lose acceptance by the public (such as K-Mart, Blackberry, McDonalds by large, and potentially Subway now).
WHAT CAN WE DO?
One solution is, if you and I mutually pool our money, we would have twice as much money together as either of us alone. Now we can buy into two separate companies to diversify our reliance on a single company for our financial well-being. The likelihood that both companies would fail is substantially lower (at least half). Add additional people to the plan, and that likelihood decreases even further.
WHAT IS A MUTUAL FUND?
A mutual fund is essentially that pooled concept: thousands or even millions of investors pool their money together to benefit from a shared, diversified portfolio. That pooled bank is large enough to put some of the money toward hiring a professional money manager to make the investment decisions who brings in the know-how and is paid to research the companies soundly.
Although there are countless mutual funds for a variety of markets in reality, the focus of this entry will stay within the equity (stock) market.
WHAT IS THE PROBLEM?
Historically, the economy has been going up, not just in recent years but for the past several decades. When trading individual stocks, it is said there’s a loser for every winner. All things equal, you stand to lose as much as you gain by trading in stocks, but if the economy itself continues to prosper, the investments would typically increase universally.
WHAT CAN WE DO?
If the economy is steadily increasing over time (such as 15-20 years), then that increase should suffice for most novice investors. Besides, if it is said that there's a loser for every winner trading in the stock market, then even selecting professional money managers is as risky as selecting the stocks themselves. Therefore, John C. Bogle pioneered the concept of pooling money into a mutual fund without hiring a money manager.
WHAT IS AN INDEX FUND?
An index fund is a mutual fund that merely mirrors a major market index without a hired manager. Consider the S&P 500 Index for example, which tracks 500 of the largest companies in the country today. When one of those companies falters in its performance, whether by losing money or just not making as much as other companies, it gets replaced by a company that, for sake of simplicity, was ranked at #501. As that happens, the index funds will sell the stock of the failing company and buy stock of the new company, so that the index fund itself will continue to mirror the index, owning the same 500 companies in the S&P 500.
WHAT IS THE PROBLEM?
The economy does not always go up, so when the index falls, its index fund should decline as well. Also, the grass will be greener in some (but not all) other pastures because actively traded stocks may increase more (or decline less) using complex financial strategies with successful traders (money managers). The theory that there is a loser for every winner in a trade remains though, so the over-performance of any trader will cause another trader to under-perform.
WHAT CAN WE DO?
If the performance of the economy itself is enough for you, then investing in an index fund may be the right choice. There will always be noise about how much more money you could be making in another fund, but that additional return is almost always accompanied by an even higher risk than the reward.
Typically, the only people who refute the merits of index fund investing are those who are selling a more expensive investment (or those who have recently bought into such an investment).
Typically, the only people who refute the merits of index fund investing are those who are selling a more expensive investment (or those who have recently bought into such an investment).
Friday, January 8, 2016
Credit Card Debt Rising
Rising Credit Card Debt
Upon its conclusion, they posed four questions to field experts, which are available on the above link. I am not an expert myself, but I found the questions especially intriguing, so since this is my blog, I took it upon myself to entertain each of the questions before reading any of the expert's responses.
What daily behaviors lead people to amass credit-card debt? It may be redundant, but the daily habits themselves contribute to amassing credit card debt more than most people may realize. For individuals serious about tackling credit card debt, they need to stop accruing balances and pay off what is there. Just like starting a diet where you need to monitor everything single you eat in a day, including the smallest snacks, people need to monitor every single thing they buy in a day, including the smallest items. Being mindful of daily spending habits is an important step. Simply changing some financial habits is as counter-productive as snacking between meals while on a diet. It is an improvement, but the person may question if it is worthwhile to pursue because they’re not getting the full benefits.
What is the biggest mistake people make when managing credit-card debt? Thankfully I cannot speak for myself here, but I suspect people trying to eliminate their credit card debt underestimate how many factors are working against them. For example, the minimum balance due is not there for the consumer’s benefit. Paying just the minimum balance is not an efficient means of managing credit card debt. Although it will eventually pay off the loan, the time frame involved is incredibly discouraging.
How does the growth of credit-card debt affect the economy? For years, I misunderstood the direct correlation until I heard it in the most simplistic terms. Once the debts are due, there is a ripple effect. Loans are harder to come by, and payments are needed now because others need to make their own payments with the amount due. So people sell their assets (e.g. stocks) in order to make their payments, and when there are substantially more sellers than buyers in the market, stock prices can decrease in dramatic fashion. Unfortunately, when that happens, even more people sell their stocks to prevent them from falling further.
What role, if any, should government play in incentivizing and encouraging people to maintain low debt-to-income ratios (e.g., through tax incentives)? I am not sure, but having healthy credit is truly its own reward. If lower interest rates, peace of mind and/or financial security are not enough motivation, then I cannot see where other incentives would change the behavior for the majority of circumstances.
Friday, January 1, 2016
2016 Preview: Back To Basics
It's a new year and a new slew of short-sighted advice that never benefits many in the long run (and rarely in the short run). This year the focus of the markets will indirectly be on the U.S. Presidential Elections, which draws comparisons to past election years -- especially the years when an incumbent president is not up for re-election, which has not happened in 8 years (of course, 2008's market had extraordinary influences on it, making it a poor comparison for any other situation).
While I could make predictions about the Dow and other random sectors as I have in past years, this past year was bad all-around (although, not by the previously mentioned 2008 standards). While I generally like to invest in deflated sectors like gas or gold, the minor decline across the boards (notwithstanding heavy declines in other markets). I have picked up a new strategy to use on my brokerage account involving ETFs, but it rates as "too soon to assess" (i.e. extol its virtues).
Negative returns may sound like bad news for the market, and a decline would come as bad news to most investors, but I think it will be a reasonably decent year with a fourth quarter that pushes the markets into positive territory. More importantly, a sound strategy of rebalancing quarterly (as I have been doing) or a comfortable allocation among various sectors is the best way to plan for the coming year of uncertainty. Not surprisingly, this strategy is also the best plan for any year. It is the most basic strategy, but I do not anticipate many people profiting from any individual sector, so focusing on one would be unlikely to bear fruit (maybe even more unlikely than in other years, although high rewards never accompany safe bets).
While I could make predictions about the Dow and other random sectors as I have in past years, this past year was bad all-around (although, not by the previously mentioned 2008 standards). While I generally like to invest in deflated sectors like gas or gold, the minor decline across the boards (notwithstanding heavy declines in other markets). I have picked up a new strategy to use on my brokerage account involving ETFs, but it rates as "too soon to assess" (i.e. extol its virtues).
Negative returns may sound like bad news for the market, and a decline would come as bad news to most investors, but I think it will be a reasonably decent year with a fourth quarter that pushes the markets into positive territory. More importantly, a sound strategy of rebalancing quarterly (as I have been doing) or a comfortable allocation among various sectors is the best way to plan for the coming year of uncertainty. Not surprisingly, this strategy is also the best plan for any year. It is the most basic strategy, but I do not anticipate many people profiting from any individual sector, so focusing on one would be unlikely to bear fruit (maybe even more unlikely than in other years, although high rewards never accompany safe bets).
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