Top Personal Finance Blogs by Young and Highly Successful Do-It-Yourselfers

A Review for the Mil­len­nial Gen­er­a­tion who Seek Finan­cial Free­dom: Mr. Money Mus­tache and White Coat Investor

Have you ever thought of man­ag­ing your own money with­out an expen­sive finan­cial adviser? Or just needed some­body you can trust not to rip you off with com­mis­sions, and high advi­sory fees? If you have fol­lowed our blog here, that’s pre­cisely what Dan and I write about. Dan and I are two old guys who also have a suc­cess­ful life­long story, but we are just a cou­ple of old rich gay queens.

20–30 some­thing age young peo­ple want to relate to peers, from their gen­er­a­tion. You have come to the right place. This post is a review of not just two indi­vid­u­als who also have a blog, but two suc­cess­ful 30-something young men, their spouses and fam­ily, and have ten of thou­sands of blog fol­low­ers and man­age their own investments.

Intro­duc­ing Mr. Money Mus­tache and the White Coat Investor. While they pur­sue wildly dif­fer­ent lifestyles, they are extra­or­di­nar­ily alike in their goal of achiev­ing a rich and reward­ing life for them­selves.  Con­tinue read­ing

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Four-Part Series: Investing Basics

A reader asked me to write an arti­cle show­ing how a begin­ner can IMG_1217under­stand, ben­e­fit from and suc­ceed in learn­ing how to invest for retire­ment. Thus, Dan and I devel­oped this four-part series for begin­ner investors.

We were happy to cre­ate this detailed 4-part series on invest­ing basics for the absolute begin­ner. The entire 4 parts are avail­able imme­di­ately by click­ing on the links below (or scrolling down). You can pick and choose which one of the parts inter­ests you. For those who need a refresher on basic invest­ing allo­ca­tion tables can jump to Part 3 and 4. If you need a refresher on how to make sense of the finan­cial indus­try, start with Part 1.

Dan and I have spent many years learn­ing how Wall Street works for our ben­e­fit. That’s an impor­tant dis­tinc­tion. We’ll tell ya a lit­tle secret: Wall Street is not that dif­fi­cult to under­stand. Part 1 shows how to see through all of its dis­trac­tions and focus on two of its most impor­tant assets: stocks and bonds. That’s it.

We have dis­cov­ered the inner work­ings of the finan­cial indus­try through the prism of a cou­ple of reg­u­lar con­sumers and eager to share with you. At the end of Part 4 lists these read­ings, finan­cial blog sites and invest­ment forums. Through­out the four parts are links to advanced read­ing on top­ics that are too com­plex and lengthy to dis­cuss in this arti­cle. I hope you enjoy it as much as Dan and I cre­at­ing this exten­sive blog post.

Best of fortunes,

Steve and Dan

Table of Contents

Part 1 Con­tents. Words for the Finan­cially Wise: Power of “Overlooking.”

  • Defin­ing:
    1. Sav­ings
    2. Spec­u­la­tion
    3. Invest­ments
  • The Rest of the Arti­cle focuses on Invest­ments: Stocks and Bonds.

Part 2 Con­tents. Explain­ing Wall Street. The road to Stocks and Bonds is paved with simplicity.

  • The Stock Market
  • Stocks
  • How the Stock Mar­ket Invest­ments are Organized
  • 27 Mil­lion Busi­nesses in the United States, but only a few thou­sand cor­po­ra­tions are avail­able for investing
  • Going Pub­lic
  • Share Prices
  • Six Core Asset Classes that every port­fo­lio should contain:

1. Large Cap

2. Mid Cap

3. Small Cap

4. Inter­na­tional, the World Stock Market

5. The Bond Market

6. Cash/Liquid Assets

Sum­mary

Part 3 Con­tents: The Ratio­nale behind the Cru­cial Stock/Bond Allo­ca­tion Split and Rebalancing.

  • Your Tol­er­ance for Risk and Your Age
  • Bonds-by-Age Rule in Allo­ca­tion Models
  • Excep­tions to the Bonds-by-Age Rule
  • Van­guard Port­fo­lio Allo­ca­tion Models
  • We adhere to the Bonds by age rule for one good Reason
  • Rebal­anc­ing the Portfolio
  • Tar­get Date Funds are very pop­u­lar with 403(b), 401(k) and 457(b) plans
  • Pri­mary Goal of Rebal­anc­ing: Reduce Risk and Hold On to Invest­ment Gains

Part 4 Con­tents: Putting it all together

  • Find­ing the money to build wealth: Pay­ing your­self first through your tax-deferred retire­ment plan.
  • Ignore Emo­tions (or be mind­ful of your resis­tance to save and ignore it)
  • Many Don’t Get Long Term Think­ing and spend every penny they earn NOW!
  • This Evo­lu­tion­ary Think­ing about human adapt­abil­ity is worth a sec­ond look
  • Do you need a budget?
  • Invest­ment Goals
  • Con­struct­ing A Port­fo­lio that Grows
  • The Mutual Fund Industry:

1. Load vs. No-load

2. Actively Man­aged vs. Pas­sively Managed

3. Sec­tors

  • The Prospec­tus
  • Intro­duc­ing the Pas­sive Strat­egy with Index Funds
  • Locat­ing the spe­cific invest­ments and invest­ment companies
  • Why we invest in the Van­guard Group:

1. The Van­guard Group has Three Tril­lion Dol­lars in Assets!

2. Index Funds

3. Very Low Fees!

4. 20 Mil­lion Investors! Not all of these peo­ple can be wrong.

 

  • Port­fo­lio Exam­ple for a 75 year-old Investor
  • Port­fo­lio Exam­ple for a 25 year-old Investor
  • Words to the Wise: Be Patient
  • Fee-only Finan­cial Advis­ers Pro­fes­sional Organizations:

1. Gar­rett Plan­ning Network

2. National Asso­ci­a­tion of Per­sonal Finan­cial Advis­ers (NAPFA)

  • Lazy Port­fo­lio Authors’ Web­sites for Addi­tional Port­fo­lio Samples
  • Bogle­heads Invest­ment Forum
  • Be Wary of K-12 School Dis­trict 403(b) and 401(k) plans.
  • Addi­tional Reading

Waiver: Dan Robert­son and Steve Schullo are not licensed finan­cial or invest­ment advi­sors, and the infor­ma­tion and expe­ri­ences shared as do-it-yourself investors con­tained herein is for infor­ma­tional pur­poses only and does not con­sti­tute finan­cial advice. Through­out our blog, we share our expe­ri­ences with finances as a cou­ple of ordi­nary con­sumers, not as pro­fes­sion­als. Do not start, change or mod­ify your port­fo­lio based on the infor­ma­tion in this blog post alone. Any ideas, invest­ment strate­gies, links to fee-only pro­fes­sional advis­ers and par­tic­u­lar invest­ment com­pa­nies dis­cussed in this arti­cle or in our blog are a reflec­tion of our expe­ri­ences and should not be con­strued as a rec­om­men­da­tion. Con­sult with a tax or finan­cial professional.

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Stock and Bond Investing Basics, Part 1

IMG_1217Four-part Series on Invest­ing Basics

Easy to Read for the Absolute Begin­ner and a Refresher for All

Part I: Words to be Finan­cially Wise: Power of “Overlooking.”

Since my intro­duc­tion into the strange world of per­sonal finance came from mis­lead­ing promises of two insur­ance com­pany annu­ities. The early growth of the annu­ities returned 12% a year but dropped to 3% with­out any expla­na­tion. Then I was con­fronted with sur­ren­der fees of $6,000. I felt ripped-off; and then had to lis­ten to insult­ing remarks from an insur­ance agent who rebuked me and my edu­ca­tion col­leagues by lec­tur­ing, “I’ll never rec­om­mend mutual funds to teach­ers because they are too risky.” I ended our “dis­cus­sion” imme­di­ately and began look­ing for alter­na­tives. (Mutual funds will be dis­cussed in details in Part IV.) But I needed to learn the basics myself and for my edu­ca­tional col­leagues. After research­ing the most well-known invest­ment options, I cre­ated the fol­low­ing table to help all of us make sense of the invest­ment choices available.

For­tu­nately, most of the finan­cial industry’s offer­ings can be safely ignored. Let’s break this down to three basic groups.

3investmentscatigories

Sav­ings. Many Amer­i­cans have one of the sav­ings accounts listed. Unfor­tu­nately, mil­lions of Amer­i­cans have all of their money lan­guish­ing in these sav­ings accounts, Cer­tifi­cates of Deposit (CD) or Money Mar­ket accounts. Stay away from Annu­ities: they are inher­ently bad invest­ments due to their com­plex­ity and high costs (see “Annu­ities: Use­ful But Lit­tle Under­stood”).

Finan­cial news out­lets report 2–3 tril­lion dol­lars in money mar­ket accounts. A knowl­edge­able investor doesn’t invest 100% in any one invest­ment. The stan­dard inter­est rate for money mar­ket accounts offers dis­mal returns, which does not keep up with the stan­dard of liv­ing. Over time, infla­tion erodes buy­ing power (See my pre­vi­ous arti­cles on using annu­ities in retire­ment plans).

Peo­ple keep money in sav­ings for good and bad rea­sons. The good rea­son is a sen­si­ble amount avail­able for emer­gen­cies. Bad rea­sons are a knee-jerk response to the 2008 stock mar­ket losses, mis­un­der­stand­ing risk and miss­ing out on the growth ben­e­fit of long-term investing.

        “Speculation/Gambling” is straight­for­ward. I see spec­u­la­tion and gam­bling, as the tak­ing of exces­sive risk in an almost des­per­ate attempt to get rich overnight. Gam­bling is under­stood by most as a 99% self-destructive habit and a neg­a­tive (and expen­sive) form of enter­tain­ment. Few indus­try experts can ade­quately explain to me, beyond a rea­son­able doubt, a solid rea­son for tak­ing on exces­sive, spec­u­la­tive risk in invest­ing. Hedge funds, deriv­a­tives, pri­vate equity (See Depart­ment of Labor) and the cur­rent fad among bro­kers: sell­ing pri­vate real estate invest­ment trusts (REITS) are all dread­fully costly. Your money is locked up for years. They are also com­plex, too risky and their returns have lagged the mar­ket averages.

The wis­dom of own­ing indi­vid­ual com­pany stocks and gold is debat­able. Most pru­dent finan­cial advis­ers rec­om­mend own­ing all avail­able com­pa­nies, not just one or two stocks. If your com­pany offers a 401(k) match of pur­chas­ing the com­pany stock, take the offer. But as soon as you are eli­gi­ble to sell the stock, rein­vest it in your diver­si­fied port­fo­lio plan (Arti­cle about the cons of own­ing your company’s stock).

For my com­fort level own­ing stocks in all avail­able com­pa­nies reduces the risk by increas­ing diver­si­fi­ca­tion. Invest­ing 100% in any one com­pany (or that sav­ings account) is equiv­a­lent to the adage of “putting all of your eggs in one bas­ket.” The goal is to diver­sify across thou­sands of com­pa­nies located in hun­dreds of coun­tries worldwide.

I like to wear a gold watch, a gold wed­ding ring and even gold in my eye ware. It’s pretty and shiny; but those eye-catching images are not legit­i­mate rea­sons to own gold as a sep­a­rate invest­ment. Thus, the entire gambling/speculation group should be ignored–excessive and inex­plic­a­ble risks does not make finan­cial sense.

To sum­ma­rize, don’t invest in:

  • One com­pany, no mat­ter how big or famous: Apple, IBM, Microsoft, Tesla, etc.
  • Your friend’s bou­tique or his invest­ment recommendation
  • Some­thing you don’t understand
  • Gold, sil­ver, visual art and dia­monds (Only for pleasure)

The art of being wise is know­ing what to over­look. Psy­chol­o­gist and Philoso­pher, William James

Thus, the mid­dle col­umn above shows you what to ignore, which is the pri­mary idea for Part I of this series. Know­ing what to ignore is a sig­nif­i­cant devel­op­ment in your work­ing knowl­edge of the finan­cial indus­try as we move for­ward in this series. It reduces the indus­tries’ com­plex­ity and all of the incom­pre­hen­si­ble jar­gon. Over­look­ing will guide your think­ing to where you should invest.

          Focus on the Third Cat­e­gory, Invest­ments. Know­ing where to put your money with just enough risk and stick­ing with the plan is the chal­lenge and the goal of invest­ments. Finan­cial insti­tu­tions pro­vide excel­lent mod­els that we can copy when we set up our plan: uni­ver­sity endow­ments, pen­sion plans (My pen­sion: Cal­i­for­nia State Teach­ers Retire­ment Sys­tem) and the Bill and Melinda Gates Foun­da­tion invest in the third col­umn in the above table. It is appro­pri­ately titled “Invest­ments.” Real estate invest­ments are a cru­cial choice for finan­cial insti­tu­tions and for home­own­ers. Peo­ple are not afraid of own­ing a home–it is a long-standing Amer­i­can tra­di­tion. Yet  the inclu­sion of stocks and bonds in our retire­ment plan has been prob­lem­atic for most peo­ple. Finan­cial insti­tu­tions have a long tra­di­tion of invest­ing in real estate and stock and bonds. Why not us too? Dis­cov­er­ing and man­ag­ing our diver­si­fied port­fo­lio of stocks and bonds will be the focus of the rest of the series.

This first step in learn­ing about invest­ing is unlearn­ing. Ignore the nearly uni­ver­sal opin­ion that it’s too com­plex. As you dis­cover what to ignore, your tar­get for invest­ing is easy to grasp. When you look for invest­ments that grow with the econ­omy, you’ll see the ben­e­fits of invest­ing in the total growth of the world’s economies. Dis­cov­er­ing invest­ing safely in those some­times “dreaded” stocks and bonds is not as com­plex as you think. After read­ing this four-part series, you will enjoy finan­cial security.

Part Two in this Series on Invest­ing Basics will include:

  • Intro­duc­tion to the stock and bond markets.
  • Under­stand­ing stocks and bond asset classes for diversification.

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Explaining Wall Street, Part 2

 

Part 2: How Wall Street Orga­nizes Stocks and Bonds

Since 2008, we have heard neg­a­tive news about Wall Street. While much of it is true, we can be thank­ful for one Wall Street his­tor­i­cal con­tri­bu­tion. In Part 2, we con­tinue our jour­ney of dis­cov­er­ing what Wall Street has already done to make invest­ing sim­ple. Under­stand­ing the orga­ni­za­tion of the stock and bond mar­kets pro­vides an advan­tage: once it’s under­stood how stocks and bonds are cat­e­go­rized, cre­at­ing an invest­ing port­fo­lio becomes straight­for­ward. The finan­cial indus­try can be over­whelm­ing and com­pli­cated, but the stock and bond mar­kets are not.

The Stock Market

Stocks. Com­pa­nies issue stocks to raise money by sell­ing shares to the pub­lic. When we pur­chase a “share” or a stock, we lit­er­ally own a tiny por­tion of the com­pany. We become share­hold­ers. If the com­pany grows and pros­pers, so will we, the share­hold­ers. Own­ing shares brings an oppor­tu­nity to par­tic­i­pate in the company’s growth. Don’t you think that’s cool? It’s us, reg­u­lar share­hold­ers, and, along with the “big guys and gals,” Cal­i­for­nia State Teach­ers Retire­ment Sys­tem, the 2nd largest teach­ers’ pen­sion plan, Yale endow­ment and hun­dreds of other large finan­cial insti­tu­tions also par­tic­i­pate in the same share­holder growth.

The stock mar­ket. After the ini­tial sell­ing of stocks the trad­ing among the share­hold­ers begins. An exchange is a phys­i­cal (or a vir­tual loca­tion using online trad­ing tech­nol­ogy) where stocks are bought and sold by indi­vid­u­als or insti­tu­tions. The most famous and largest phys­i­cal exchange in the world, the New York Stock Exchange (NYSE), is located at 11 Wall Street in lower Man­hat­tan, New York City.

Investors buy and sell shares listed with these major exchanges:

  • New York Stock Exchange
  • National Asso­ci­a­tion of Secu­ri­ties Deal­ers Auto­matic Quote (NASDAQ) a net­work of com­put­ers that exe­cute trades electronically.
  • Amer­i­can Stock Exchange

How the Stock Mar­ket is Organized

His­tory. In 1884, jour­nal­ist Charles Dow cre­ated a chart to reduce the con­fu­sion and mon­i­tor the progress of the stock mar­ket over­time. In order to com­pre­hend mar­ket trends and the broad econ­omy with a con­sis­tent mea­sur­ing tool, he tracked twelve rep­re­sen­ta­tive stocks (10 rail­roads and two indus­tri­als). He named his chart the Dow Jones Indus­trial Aver­age, or the “DOW.”

Over the last cen­tury the DOW expanded to what it rep­re­sents today: thirty  of the largest Amer­i­can cor­po­ra­tions. These busi­nesses rep­re­sent a cross sec­tion of indus­tries. My mother worked for Min­nesota Min­ing and Man­u­fac­tur­ing Com­pany (3M) and invested in its employee stock pur­chas­ing pro­gram. 3M is one of the old­est mem­bers of the DOW.

The DOW num­ber rep­re­sents the aver­age of the thirty cor­po­ra­tions’ stock prices, clos­ing on May 29, 2015 at 18,010. This aver­age is derived from the daily over­all gain or loss in value. It’s not impor­tant to know the cal­cu­la­tion for our pur­poses, but as Charles Dow envi­sioned, it’s a snap­shot of how the stock mar­ket and the econ­omy are performing.

Mil­lions of busi­nesses. Accord­ing to the Cen­sus Bureau, the United States’ busi­ness com­mu­nity ranges in size from tiny “mom and pop” shops with no employ­ees to enor­mous multi­na­tional cor­po­ra­tions employ­ing tens of thou­sands of peo­ple. The Small Busi­ness Admin­is­tra­tion reports more than 27 mil­lion busi­nesses. Only a tiny frac­tion offer stocks, about 5,000 com­pa­nies. The rest are either too small or have not “gone public”.

Going Pub­lic. Pri­vate com­pa­nies “go pub­lic” to raise money by issu­ing stock, and invit­ing investors to own part of the busi­ness. After a com­pany secures the approval of the Secu­ri­ties and Exchange Commission’s reg­u­la­tions to sell shares, an Ini­tial Pub­lic Offer­ing is issued to the pub­lic. From then on it’s listed in one of the exchanges above and is called a publicly-traded company.

Share Prices. As with any piece of prop­erty, the seller and buyer deter­mine the share price. It’s noth­ing complicated—both agree on a price and a trade is com­pleted. The “sup­ply and demand” prin­ci­ple applies. In the broad­est terms, if there are more buy­ers of a stock than sell­ers, the price increases until a buyer agrees to pay the higher price. If the price con­tin­ues to increase until there are no more buy­ers, then the price has to decline back to a level where buy­ers will come back. His­tory pro­vides sev­eral excep­tions: dur­ing the boom times such as the 1920s, 1990s and early 2000s, maniac buy­ers would pay exces­sively high prices in the face of experts warn­ing them that prices can­not be sup­ported by the company’s finan­cial fun­da­men­tals. The tech­nol­ogy bub­ble in the late 1990s and the recent 2008 real estate bub­ble are clear exam­ples. On the other hand, if there are more sell­ers than buy­ers, the price declines until some­one agrees to pur­chase the cheaper shares. If the prices con­tinue to decline, poten­tial buy­ers will get ner­vous about their port­fo­lio decreas­ing in value. Many will panic and sell to keep from los­ing, which leads to even lower prices. This can lead to crashes such as when the DOW went way down to 6,547 in March, 2009 (almost 3 times below the DOW today!).

Stock prices are estab­lished by a com­pli­cated set of cir­cum­stances that baf­fle the experts, and are beyond my ama­teur expla­na­tion here. All we need to know as long-term investors, is that prices rise and so does our port­fo­lio and when prices decline our port­fo­lio will decline as well. By the end of this series dis­cov­er­ing how to set up an invest­ment port­fo­lio to take advan­tage of the ups and downs of the stock mar­ket over­time will be shown. War­ren Buf­fett is famously known for buy­ing cheap shares at a value dur­ing severe bear mar­kets when stocks are falling pre­cip­i­tously, when most other investors are try­ing to avoid more losses. Mr. Buffett’s views “rock-bottom” prices as an oppor­tu­nity as he believes the invest­ment will even­tu­ally increase over the long-term. He is right when think­ing over long peri­ods of time. He has become the most famous investor of all-time by pur­chas­ing cheap shares, the exact oppo­site of the pan­icky crowd (YouTube Can­did Camera).

Asset Classes

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Domes­tic. The stock mar­ket con­tains mil­lions of shares offered by thou­sands of pub­licly traded com­pa­nies. With so much infor­ma­tion to digest, how can we decide which com­pany to invest in? Isn’t choos­ing among all these shares and thou­sands of dif­fer­ent com­pa­nies more com­pli­cated than buy­ing a car? Yes. But Wall Street addresses this com­pli­ca­tion by clas­si­fy­ing groups of com­pa­nies called asset classes, which reduces thou­sands of stocks choices down to a group of six core asset classes.

The most famous and his­tor­i­cal asset class of the largest Amer­i­can cor­po­ra­tions is rep­re­sented by the Stan­dard and Poor’s (S&P 500) Index. Its ori­gins are traced back to 1860 when William Poor pub­lished his com­pre­hen­sive book about the finan­cial and oper­a­tional sys­tems in the United States stock mar­ket. The cap­i­tal (value of total stock shares) size of each of those 500 com­pa­nies gives them weight in their place­ment of an asset class–large-cap, mid-cap or small-cap.

Large-cap is an abbre­vi­a­tion for large-capitalization. Cap­i­tal­iza­tion is cal­cu­lated by mul­ti­ply­ing the num­ber of a company’s shares out­stand­ing by its stock price per share. Cur­rently, Apple is the largest Amer­i­can cor­po­ra­tion mea­sured by the biggest mar­ket cap­i­tal­iza­tion and qual­i­fies to be listed in the S&P 500. The fol­low­ing three major cat­e­gories (or indexes) pro­vide size guide­lines for the roughly five thou­sand com­pa­nies, that offer stocks:

  • Large-Cap (Cap­i­tal­iza­tion) Index: the S&P 500 Index, each com­pany is worth more than $10 billion.
  • Mid-Cap Index: $1 bil­lion to $10 billion
  • Small-Cap Index: $100 mil­lion to $1 billion

Another way to view the 5,000 com­pa­nies is to know there are about 500 large-cap, 500 mid-cap, and 2,000 small-cap com­pa­nies. The remain­ing com­pa­nies have a smaller cap­i­tal­iza­tion and are not counted in the major asset classes. A Wall Street com­mit­tee selects com­pa­nies for inclu­sion in an asset class based on their cap­i­tal­iza­tion and other fac­tors. As their cap­i­tal­iza­tion grows or shrinks, their inclu­sion (or exclu­sion) in either small, medium or large-cap asset class is based on this value.

The total worth of each com­pany deter­mines which of the three asset classes it belongs to. My mother’s employer, Min­nesota Min­ing and Man­u­fac­tur­ing Com­pany (3M), for exam­ple, has about 715 mil­lion shares owned by indi­vid­ual investors and insti­tu­tions all over the world. At today’s April 15, 2015 price, a share costs $166.00. Mul­ti­ply 715 mil­lion total shares by the price: 715,000,000 x $166.00 = about $118 bil­lion of cap­i­tal­iza­tion. It has enough value to qual­ify as a large-cap.

3M is one of the 500 large-cap com­pa­nies. When we invest in the S&P 500 large-cap index, we own 3M, Apple, Exxon and 497 other large-cap com­pa­nies. Recall in Part One when I said that diver­si­fi­ca­tion involves invest­ing in many com­pa­nies. Cat­e­go­riz­ing com­pa­nies by size allows us to buy a diver­si­fied col­lec­tion of com­pa­nies’ stock in a sin­gle index. Large-cap is one asset class. We want to invest in the three asset classes avail­able in the domes­tic stock mar­ket (The remain­ing asset classes will be discussed).

The S&P 500 Index is one fun­da­men­tal exam­ple of diver­si­fi­ca­tion and should be one core hold­ing in our port­fo­lios. Table 1 shows the three basic domes­tic asset classes.

Table1LargeCap

The DOW Jones Indus­trial Aver­age (DJIA) and the S&P 500 are uni­ver­sally fol­lowed by ana­lysts work­ing in bro­ker­age firms and banks to track the broad econ­omy and all of its com­plex machi­na­tions. It gives a pic­ture of the broad econ­omy since it mea­sures 500 busi­nesses, includ­ing the 30 in the DJIA.

Each asset class changes as some com­pa­nies’ cap­i­tal­iza­tion changes or–as in the infa­mous Enron bank­ruptcy case–they’re removed from the asset class and from the stock mar­ket. For­tu­nately, bank­rupt­cies and cap­i­tal­iza­tion adjust­ments have min­i­mal effects on the entire index because of the built-in diver­si­fi­ca­tion of many com­pa­nies over dif­fer­ent industries.

Diver­si­fi­ca­tion is a pow­er­ful anti­dote against exces­sive risk and we investors should want as much as pos­si­ble. The next asset classes under dis­cus­sion rep­re­sent the eco­nomic force of inter­na­tional mar­kets and the global econ­omy. They offer dif­fer­ent demo­graph­ics and indus­tries, which pro­vide increased oppor­tu­ni­ties to grow our portfolio.

The World Stock Market 

World

Inter­na­tional Asset Classes. Some Amer­i­cans remain leery of the risk asso­ci­ated with invest­ing in for­eign coun­tries. This arti­cle addresses this risk while encour­ag­ing peo­ple to have a strat­egy no mat­ter where they invest. Ignor­ing inter­na­tional oppor­tu­ni­ties focuses your port­fo­lio to only on the United States econ­omy. This is short-sighted. Diver­si­fi­ca­tion is a cru­cial strat­egy, and inter­na­tional expo­sure will strengthen your port­fo­lio by increas­ing diver­si­fi­ca­tion and thus, reduc­ing risk. Once again, Wall Street and the exchanges around the world have cre­ated asset classes to assist with diver­si­fi­ca­tion. Table 2 illus­trates the two pri­mary inter­na­tional stock mar­ket asset classes: devel­oped mar­kets and emerg­ing markets.

Table2Internationalassetclasses
For your infor­ma­tion, small-cap, mid-cap and large-cap inter­na­tional asset classes are avail­able for investors from mutual fund com­pa­nies and invest­ment banks. It is beyond the scope of this arti­cle to dis­cuss the com­plex­ity and the merit of includ­ing these addi­tional asset classes in your port­fo­lio. Here is an excel­lent video about inter­na­tional invest­ing, “be truly diver­si­fied.” 

The Bond Market

A bond is the one invest­ment most peo­ple con­sider safe. Since WWII, we have heard “Invest in Amer­ica, Buy U.S. Sav­ings Bonds.” “Buy War Bonds,” was a ral­ly­ing call cel­e­brated by Pres­i­dent Roo­sevelt to fund that war. Table 3 illus­trates these three basic bonds.

Table3bondmarketassetclasses

Just as we invest in dif­fer­ent stock asset classes, we invest in gov­ern­ment spon­sored, cor­po­rate and inter­na­tional bonds. A cor­po­ra­tion raises money by issu­ing bonds as well as issu­ing stocks. Instead of the bond­holder own­ing part of the com­pany the investor lends money to the cor­po­ra­tion. In return, an investor earns a yield or inter­est pay­ment plus the face value of the bond at the end (or matu­rity date) of the bond agreement.

The deci­sion to pur­chase indi­vid­ual bonds ver­sus a bond fund is debat­able. Indus­try giant The Van­guard Group pub­lished an arti­cle about this impor­tant deci­sion (Van­guard will be dis­cussed in Part IV). Own­ing a bond fund requires less time to man­age than indi­vid­ual bonds. I don’t want the has­sle and time of dri­ving to a bank, buy­ing indi­vid­ual bonds, and then return­ing to the bank to cash them at matu­rity and then repeat­ing the process.

Thank­fully, bond pur­chases can be exe­cuted from your home com­puter. The best loca­tion to pur­chase bonds directly from the gov­ern­ment can be found at Trea­sury Direct. Trea­sury Direct.gov has every­thing you want to know about fed­eral gov­ern­ment bonds. In Part IV, I will dis­cuss how to include cor­po­rate bond funds in your portfolio.

Sum­mary: Core Invest­ments for Every Portfolio

Each asset class increases and decreases in value, not always at the same time. Bond val­ues fluc­tu­ate, but less than stocks. Larry Swe­droe and Rus­sell Wild each wrote an excel­lent book on bond invest­ing. We have to expect some eco­nomic boom and bust cycles which affect our invest­ments. But we should aim for a com­fort­able bal­ance. The advan­tage of this bal­ance between stockss and bonds is that over time there is steady growth.

Allow me to assure you…there is noth­ing new or rev­o­lu­tion­ary with invest­ing in global stock and bond asset classes dis­cussed here. I am merely report­ing what I have read in many per­sonal finance books (links to Lazy Port­fo­lio Authors in Part 4) and through our expe­ri­ence of liv­ing through two of the great­est stock mar­ket crashes in his­tory. As pre­vi­ously men­tioned, most large insti­tu­tional firms have invested in these asset classes, suc­cess­fully for decades. Pen­sion plan trustees must fol­low fed­eral pen­sion laws which pro­tect and set min­i­mum stan­dards to grow the fund so that an ade­quate ben­e­fit is avail­able for the pen­sion­ers (Click here for addi­tional infor­ma­tion about insti­tu­tional invest­ing). If the trustees invest in just one asset class or a sav­ings account that pays lit­tle inter­est, they will not meet those fed­eral pen­sion guide­lines and those ben­e­fits might be jeop­ar­dized. If you are employed by a cor­po­ra­tion, gov­ern­ment or pub­lic school dis­trict and have a pen­sion plan, con­sider your­self lucky. Part of your salary is already being invested in these same asset classes and that is the pri­mary rea­son why the ben­e­fit is higher than Social Security.

Next we will dis­cuss the cru­cial stock and bond bal­ance, known as the stock/bond allo­ca­tion split.

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Part 3: Investing Basics

splitwood1Part III: The Stock/Bond Allo­ca­tion Split and Rebalancing

Since 2008, a retired friend has put 100% of his money in cash. He recently asked if it’s time to get back into the stock mar­ket. You already rec­og­nize our friend’s major mistake–100% into any­thing is not diver­si­fi­ca­tion. Still, we can tell a lot about our friend’s invest­ing strat­egy by his ques­tion, so let’s exam­ine this in detail. Get­ting out of the mar­ket in 2008 seemed like a good idea for many peo­ple for obvi­ous rea­sons. His first mis­take before the 2008 crash was not hav­ing a plan. A plan, illus­trated by this 4-part series, would have pre­vented him from mak­ing mis­take num­ber two, pan­ick­ing and mov­ing 100% in cash. Seven years later, after the stock mar­ket has returned to glory by hit­ting all-time record highs, he now con­sid­ers going back into the mar­ket. Still with­out a plan, get­ting back into the mar­ket would be mis­take num­ber three. What is going to stop him from repeat­ing the same buy­ing when stock prices are high and bail­ing out when stock prices are low? The “buy high and sell low” strat­egy is uni­ver­sally agreed to be a killer of portfolios.

Investors of all ages can­not afford a reck­less and unplanned strat­egy. Of course, our friend is not inten­tion­ally reck­less. He is a smart man, but his ques­tion speaks vol­umes about reck­less inten­tions. He needs a plan! We are not alone in preach­ing this. Van­guard wrote: With­out a plan, investors can be tempted to build a port­fo­lio based on tran­si­tory fac­tors such as fund ratings—something that can amount to a “buy high, sell low” strat­egy (Click here for arti­cle). The point of this entire series is to pro­vide a solid plan that will take us through the ups and downs of the stock and bond mar­kets with a suc­cess­ful long-term strategy.

Part 3 may be the most impor­tant part of this four-part series. If our friend was diver­si­fied in all of the six asset classes, it still might have not been enough to pro­tect him from a 20–50% loss in his port­fo­lio. How­ever, if he were diver­si­fied in 100% in stocks (no bonds) and stayed put he would have recov­ered his losses. But that cre­ates too much mar­ket volatil­ity and fear for most of us to endure. Dan and I expe­ri­enced the volatil­ity in 2000–2002 and we do not wish that expe­ri­ence on anybody.

Stock diver­si­fi­ca­tion itself was in ques­tion after the 2008 dis­as­ter (Click here for more infor­ma­tion). That mas­sive loss was cat­a­strophic for many investors who thought they were diver­si­fied. In Part II we dis­cussed allo­cat­ing your money into the six core asset classes. But we did not dis­cuss how much to allo­cate in each asset class in pro­por­tion to your entire port­fo­lio. Thus, in this part we dis­cuss how to pro­por­tion­al­ize your port­fo­lio accord­ing to your age.  This is called the stock/bond split. This highly respected invest­ment forum has a wiki that dis­cusses this in detail: http://www.bogleheads.org/wiki/Asset_allocation. We also dis­cuss how to keep your per­sonal allo­ca­tion in check between stocks and bonds by an annual main­te­nance chore called “rebalancing.”

Your Tol­er­ance for Risk and Your Age

How com­fort­able would you be with a 5%, 10%, or more tem­po­rary loss in your port­fo­lio? With­out expe­ri­enc­ing how you would react to a decline in your invest­ments, it is dif­fi­cult to exam your reac­tion ahead of time and it’s nearly impos­si­ble to know with­out an actual loss. Mar­kets go down, some losses have been over 50%.

For­tu­nately, Van­guard founder and indus­try giant, John Bogle, has always sug­gested imple­ment­ing his rule-of-thumb to man­age this risk—and that is your age. Your tol­er­ance for risk and your age are closely related when putting the final touches on your port­fo­lio. As a gen­eral rule, as you get closer to retire­ment age or if you’re already retired, your tol­er­ance for risk goes down. By def­i­n­i­tion, we retirees have fewer liv­able years for our port­fo­lios to recover after a mas­sive stock mar­ket sell off. Thus, in our 70s and 80s, we should restrict our stock allo­ca­tion to 20–25%. The remain­der (75%-80%) should be in bonds (or fixed accounts). The stock/bond allo­ca­tion split is a cru­cial deci­sion, often over­looked by many investors in 2008. Many elderly were exposed to 80%, 90% and some­times 100% in stocks when the 2008 stock mar­ket crashed. This mis­for­tune could have been pre­vented by sim­ply includ­ing bonds approx­i­mately equal to one’s age.

Dan and I fol­lowed this rule of match­ing our fixed accounts with our age. We painfully learned the stock/bond split les­son (and diver­si­fi­ca­tion) as a result of the 2000–2002 tech­nol­ogy bub­ble crash. At that time we had a fool­ish and a dan­ger­ously naivé 100% stock allo­ca­tion, obvi­ously stock expo­sure gone awry. Not sur­pris­ingly, we paid the price with a 70% decline in our portfolio.

Our Cru­cial Deci­sion: An Appro­pri­ate Stock/Bond Split?

IMG_1212

The Van­guard port­fo­lio allo­ca­tion mod­els helped us decide on the 30%/70% stock/bond split. After look­ing at all of the choices from 100% bond allo­ca­tion to 100% stock allo­ca­tion, we were torn between two choices illus­trated in Table 4. Our first choice was to select the bond allo­ca­tion that matches our ages, which is a no brainer. The 40% stock/60% bond split was the clos­est fit as both of us were in our 60s. How­ever, we choose the slightly more con­ser­v­a­tive 30%/70% stock/bond split when we com­pared the risk and aver­age return to the slightly more aggres­sive 40%/60% stock/bond split.

Vanguard 30-70 and 40-60 stock bond

The “aver­age annual return” for the slightly more aggres­sive allo­ca­tion (40%/60%) was 7.9% over 89 years of stock mar­ket his­tory. How­ever, the (30%/70%) returned 7.3%. The addi­tional risk for only a .6% higher return was not worth it. Thus, we opted for the lower stock and higher bond expo­sure for an aver­age return of 7.3%. It’s a rea­son­able return on invest­ment goals for retirees, which is to meet or beat the infla­tion rate.

Thus, we now hold to a 30% stock/70% bond split. The strat­egy worked to pro­tect us from the 2008 crash — dubbed the year of the great­est stock mar­ket crash since the Great Depres­sion. Our port­fo­lio only decreased 11.8%. In our expe­ri­ence, the stock/bond split was the major strat­egy which pro­tected our port­fo­lio from another major loss. Yet, we are per­plexed by some finan­cial pro­fes­sion­als who insist that the “bonds by age” rule is out­dated and should be ignored. In our opin­ion, the pro­fes­sion­als want to make this sim­ple, yet pow­er­ful strat­egy, com­pli­cated so we investors have to depend on their “advice.” In our expe­ri­ence dur­ing the 2008, the bonds-by-age rule worked as planned to pro­tect us from one of the biggest stock mar­ket crashes in history.

Excep­tions to the Bonds-By-Age Rule

There are two exceptions:

  1. Some peo­ple have spe­cial con­sid­er­a­tions such as leav­ing their invest­ments to heirs or char­ity. Or the have a robust pen­sion ben­e­fit and they col­lect social secu­rity. In these excep­tional sit­u­a­tions, investors can live com­fort­ably from their pen­sion and social secu­rity. So they are able to take more risk with their investments.
  2. Investors in their early to mid 20s could have 100% in a diver­si­fied port­fo­lio of both domes­tic and inter­na­tional stocks and no bonds. This group would rebal­ance among the stock asset classes. Hav­ing said this, all investors should have a small per­cent of cash handy for emer­gen­cies or plan­ning for big ticket pur­chases. Young investors need to learn how bonds work and a small allo­ca­tion would do the trick.

We Adhere to the Bonds-By-Age Rule for One Good Reason

We are retired and need dis­tri­b­u­tions from our invest­ments to fund our retire­ment. Dan has only social secu­rity and I have a mod­est teacher’s pen­sion, a tiny social secu­rity pay­ment and a small Vet­eran Admin­is­tra­tion com­pen­sa­tion ben­e­fit for wounds suf­fered in Viet­nam. Our port­fo­lio sup­ports our retire­ment lifestyle and beats infla­tion. Seniors gen­er­ally can­not afford a major loss by hav­ing the stock/bond split that is more appro­pri­ate for a younger per­son or allo­cat­ing 100% stocks. Thus, we fol­low the “bonds by age” rule.

Rebal­anc­ing

IMG_1214

Rebal­anc­ing is easy to under­stand, but for many investors it’s some­times dif­fi­cult to employ. Van­guard has an exten­sive arti­cle on all aspects of this impor­tant action. From what­ever action the investor takes, the pri­mary goal of rebal­anc­ing is to get back to your orig­i­nal stock bond split. It’s not an exact sci­ence, of course. For exam­ple, after seven years of explod­ing stock mar­ket returns, our port­fo­lio was recently out-of-balance with a 47% stock / 53% bond split. Our stock allo­ca­tion grew and our bond allo­ca­tion declined. To rebal­ance, we sold some of our equity hold­ings and pur­chase bonds to get closer to our orig­i­nal plan: 30% stock/ 70% bond allo­ca­tion. With each of the fol­low­ing three actions, we increased our bond and reduced our stock holdings:

  1. I sold my mother’s Min­nesota Min­ing and Man­u­fac­tur­ing stock that I had inherited.
  2. We trimmed our Total Stock Mar­ket Index by 1/3.
  3. I sold some real estate and invested this new money in bonds.

Con­se­quently, we are back to about a 35% stock/65% bond allo­ca­tion. As pre­vi­ously men­tioned, it is not an exact sci­ence as we are look­ing into sell­ing a more equi­ties and pur­chas­ing more bonds to move to our 30%/70% stock/bond split.

Tar­get Date Funds

As pre­vi­ously men­tioned rebal­anc­ing can be chal­leng­ing. It requires advanced skill and knowl­edge as you are required to assess your port­fo­lio at least once a year. You can either get help from a fee-only finan­cial adviser, or you can invest in a fund that auto­mat­i­cally rebal­ances your stock/bond split for you through­out your work­ing career. A pop­u­lar choice for work­ing investors are Target-Date Funds (Click here for pros and cons of TDF). They man­age the job of rebal­anc­ing for the investor. Just pick the tar­get year clos­est to the name of the fund and you are all set. Most TDF are named in the year that the investor will retire, such as 2020, 2025, 2030…2050, etc. The good news is that most tax-deferred retire­ment plans have TDFs available.

Pri­mary Goal of Rebal­anc­ing: Reduce Risk!

The pri­mary rea­son why some investors have a dif­fi­cult time rebal­anc­ing is the con­stant dilemma of sell­ing the best part of their port­fo­lio that is per­form­ing well. But that is exactly what investors need to do. Why? The answer is straight­for­ward. The pri­mary goal of rebal­anc­ing is to reduce risk, not to chase returns. To earn high returns one must increase the risk. It doesn’t work any other way. We must be care­ful of the bal­ance between risk and return with a reg­u­lar main­te­nance of the stock/bond split. In this high fly­ing stock mar­ket, our port­fo­lio per­formed well as it was drift­ing towards more risk by a grad­ual expo­sure to stocks and lesser expo­sure to bonds. We are bring­ing it back to our orig­i­nal stock/bond split by rebalancing.

In sum, the pri­mary pur­pose of diver­si­fi­ca­tion, the stock/bond split and the main­te­nance of this allo­ca­tion through rebal­anc­ing is to keep risk in check. This is not about elim­i­nat­ing risk; we need some risk to earn a return that meets or beats the infla­tion rate. And that is a big deal as so many investors fall below that thresh­old of earn­ing aver­age returns. (Click here for Dalbar’s his­toric and pathetic returns from investors who do not have a solid plan). It’s a mis­take to think that this strat­egy alone will increase per­for­mance. If the stock and the bond mar­ket increase, our port­fo­lio will fol­low suit (and visa versa). But not all asset classes grow and lose in per­fect sync (click here for the famous Callan Table of asset class per­for­mance). Rebal­anc­ing reverses the knee-jerk reac­tion of buy­ing high and sell­ing low into your plan of sell­ing high and buy­ing low through rebalancing.

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Investing Basics, Final Part 4

Part 4: Putting It All Together

In Part I we dis­cussed what to ignore in the enor­mous and com­plex finan­cial indus­try and what to focus on–stocks and bonds. The prover­bial “nee­dle” in the “nee­dle in the haystack” is found eas­ily. Knowl­edge of ignor­ing the finan­cial world ‘s “haystack” is the trick to find­ing the needle.

In Part II we dis­cussed the six basic com­po­nents of con­struct­ing a straight­for­ward and broadly diver­si­fied port­fo­lio. We didn’t have to search far to dis­cover the six major asset classes that all diver­si­fied port­fo­lios include:

  1. Large-Cap
  2. Mid-Cap
  3. Small-Cap
  4. Inter­na­tional
  5. Bonds
  6. Cash/liquid Funds

(Note: liq­uid­ity is money that can be taken out and spent in a man­ner that doesn’t affect your portfolio’s diver­si­fi­ca­tion plan. These accounts may have check cash­ing priv­i­leges. Click here for more infor­ma­tion about liq­uid assets. Van­guard pub­lished this arti­cle on man­ag­ing cash).

Pen­sion plans, endow­ments and foun­da­tions with bil­lions of assets must include, as man­dated by fed­eral pen­sion laws, a por­tion of all six. For decades, this require­ment has been a pos­i­tive strat­egy for pen­sion­ers and their fam­i­lies. The pro­posal is to use this strat­egy for our indi­vid­ual portfolios

In Part III Dan and I shared how we deter­mined the cru­cial stock/bond split that was appro­pri­ate for our age and risk tol­er­ance and how we rebal­ance these assets to keep our plan on track.

In this final Part IV, you will see how we con­structed an indi­vid­u­al­ized and sim­ple port­fo­lio to con­trol costs and enjoy the aver­age returns of the world’s economies. You too will con­struct a stock and bond mar­ket port­fo­lio which grows from the labor of peo­ple work­ing in the pro­duc­tion, con­sump­tion, exchange, and dis­tri­b­u­tion of goods and ser­vices in every devel­oped and emerg­ing mar­ket coun­try on the planet. How cool is that? Let’s fin­ish the job so you will not miss another minute of all this pos­i­tive energy.

Our tasks in Part IV is:

1: Before con­struct­ing your port­fo­lio you need to find the money by cre­at­ing a pow­er­ful strat­egy; pay­ing your­self first by tak­ing advan­tage of your employer’s spon­sored tax-deferred retire­ment plan; and set­ting up your finan­cial goals.

And 2: Find­ing the spe­cific invest­ment com­pa­nies which track each of the six major asset classes, and employ­ing the pas­sive invest­ing strat­egy.

Pay­ing Your­self First

To find the money in this crazy and over-the-top con­sump­tion cul­ture, we paid our­selves first. This phrase refers to the prac­tice of auto­mat­i­cally mak­ing a sav­ings con­tri­bu­tion or invest­ment from your wages before it reaches your wal­let. Every month we invested a part of our wages in our tax-deferred sav­ings accounts at work and spent the rest. This strat­egy worked to find the money to invest for the future. We were com­mit­ted to sav­ing reg­u­larly no mat­ter what.

Your employer’s tax-deferred retire­ment plan is a per­fect way to do this. Your 401(k), 403(b) or 457(b) plans make the task of sav­ing for retire­ment con­ve­nient. The amount you choose is auto­mat­i­cally deducted from your salary every month for as long as you desire.These pro­grams are pop­u­lar for two good reasons:

  1. they reduce income taxes, and
  2. help pay for retirement.

Fifty mil­lion work­ing peo­ple take advan­tage of retire­ment plans offered at work (see Invest­ment Com­pany Insti­tute report). Depend­ing on your tax bracket, for every $100 con­tributed to a tax-deferred plan, your take-home pay can be reduced by only $75-$80 (The ben­e­fits of tax defer­ment explained in detail).

 Ignore Emo­tions (or be mind­ful of your resis­tance to save and ignore it)

This wasn’t easy at first. Early on Dan and I felt lit­tle enthu­si­asm for the auto­matic deduc­tions from our pay­checks. We knew we were doing the right thing with this pow­er­ful psy­cho­log­i­cal tool of pay­ing our­selves first. We felt it pos­i­tively a few years later, when our nest egg reached sev­eral thou­sand dol­lars. Our enthu­si­asm emerged like a new­born chick break­ing out of its shell. We com­mit­ted, with enthu­si­asm, to increase our deduc­tion both annu­ally, and also every time we got a pay raise. This evo­lu­tion in our think­ing about liv­ing on less income, was a pleas­ant surprise.

Many Don’t Get It

Many Amer­i­cans think that liv­ing pay­check to pay­check is the only option. Still oth­ers don’t bother to take advan­tage of free money offered right under their noses:  the employer-matching con­tri­bu­tion in their retire­ment plans. They are up to their chins in exces­sive spend­ing and debt. To put money away to qual­ify for their employer’s free match was out of the ques­tion. Exces­sive spenders need every penny. It’s dif­fi­cult to believe how peo­ple get them­selves into this end­less spend­ing cul­ture. Trag­i­cally, these hard-working peo­ple don’t reach that peace­ful place where they can expe­ri­ence less stress with lit­tle to no money wor­ries while build­ing a future finan­cially free.

This Evo­lu­tion­ary Think­ing is Worth a Sec­ond Look

There is help for the exces­sive spenders. Thus, I think it is worth dis­cussing this phe­nom­e­non on how lucky peo­ple are who can save money that they will not touch until many years in the future. Peo­ple can live below their means with­out suf­fer­ing to reach finan­cial free­dom. The famous book Mil­lion­aire Next Door shows how reg­u­lar work­ing stiffs, with­out “inher­i­tance or advanced col­lege degrees,” got wealthy.

While many Amer­i­cans fail to seek a pos­i­tive behav­ior about money man­age­ment, humans are capa­ble of tak­ing advan­tage of the above ben­e­fits by pay­ing your­self first. Our turn­around from non sav­ing to sav­ing is evi­dence that human beings pos­sess unique abil­i­ties. We can and do adjust to many things. This pow­er­ful adapt­abil­ity prob­a­bly orig­i­nates in our DNA. Here are exam­ples. Cal­i­for­nia suf­fers from a severe drought. The ongo­ing pub­lic dis­cus­sions about the drought every­where we go forces us to look at our per­sonal water use.

We have com­pleted the usual water-saving efforts by trans­form­ing our back­yard into desert flora, but we also did some­thing more. We were both­ered by the cold shower water going down the drain while wait­ing for hot water. What a waste, we thought. We started col­lect­ing that water in a one-gallon bucket and watered our small veg­etable gar­den. Iden­ti­cal to our “pay our­selves first” com­mit­ment, our water sav­ing rou­tine is now a steady, and pos­i­tive habit — one gal­lon at a time. Our one huge tomato plant has pro­duced over a 150 organic tomatoes.

Bucket drought

Tomatos

Two Arti­cles that Speak to Shift­ing Your Atti­tude towards Spend­ing Habits

The first is a bril­liant piece by finan­cial blog­ger super­star Mr. Money Mus­tache. It is an insight­ful arti­cle titled What is hedo­nic adap­ta­tion?) The sec­ond is a promi­nent UCLA study on auto­matic retire­ment sav­ings enroll­ment titled Save More Tomor­row. Both Mr. Money Mus­tache and the UCLA study show that peo­ple are fully capa­ble of liv­ing on less money by a minute shift in atti­tude. The Mr. Money Mus­tache arti­cle illus­trates that our expe­ri­ences are more sat­is­fied because a height­ened sense of val­ues emerges by doing with­out the new cars, expen­sive “toys,” nightly din­ners out, buy­ing man­sions, and all of the other mate­ri­al­is­tic bag­gage that causes unnec­es­sary stress and does not make us hap­pier long-term. The UCLA study, Save More Tomor­row, reported when employ­ees are auto­mat­i­cally enrolled in their tax-deferred retire­ment plans at work, few opt out. Later, when they got a raise, their con­tri­bu­tions were auto­mat­i­cally increased. Once again, few opted out. These find­ings speak vol­umes to our poten­tial adap­ta­tion. These pos­i­tive adjust­ments are avail­able to all, with­out undo suf­fer­ing.

It’s not how much money you make, but how much money you keep, how hard it works for you, and how many gen­er­a­tions you keep it for. –Robert Kiyosaki

In our cul­ture, spend­ing is a big prob­lem. It’s well-documented and dif­fi­cult to resist the 24/7 mar­ket­ing blasts. If you need a home bud­get as an anti­dote, use it (Click here for online tools to help you start bud­get­ing. Web­sites such as Mint.com, BudgetPulse.com, and YouNeedABudget.com can help keep track of spend­ing and stay within a bud­get). Use any strat­egy that will help you live below your means by spend­ing less than you earn (sav­ing is a virtue). It’s never about suf­fer­ing, deny­ing sim­ple plea­sures, or increas­ing stress. If you feel mis­er­able because you saved or spent too much, reassess your monthly income and expenses. Make a com­mit­ment to your­self and your fam­ily to invest a part of your earn­ings in both long-term retire­ment and short-term liq­uid sav­ings, and go about your busi­ness stress free. It’s ironic how we can live just as eas­ily on 90% of our income as 100%. Mr. Money Mus­tache and the Save More Tomor­row study have this down to an art and a sci­ence respectively.

Goals

Your port­fo­lio should reflect both your short-term and long-term goals (Other goals to con­sider, but will not be dis­cussed here). As men­tioned in Part I, short-term goals are usu­ally liq­uid cash for an emer­gency, down pay­ment on a house or a car, the two biggest con­sumer items. Most investors stash this money in bank sav­ings or money mar­ket accounts (help­ful hints on emer­gency plan­ning).

The long-term goal of sav­ing for retire­ment is our pri­mary chal­lenge in this entire 4 Part Series. How much do we need to save for retire­ment? Can a 30 year-old know in advance? In order to achieve this goal, how do we know how much to save? Dan and I didn’t know the exact amount for our retire­ment needs because we were busy work­ing, learn­ing and mak­ing invest­ing mis­takes and relearn­ing as we went along. Besides, how in the heck can we pre­dict the stan­dard of liv­ing and tax rates years in advance?

Edu­ca­tion is not a high pay­ing pro­fes­sion. We kept sav­ing and invest­ing what we could, one year at a time for three decades. The annual goal was to build a nest egg by our action plan; to watch spend­ing, and keep sav­ing. Every year we would assess how much we saved and if pos­si­ble increase our tax-deferred con­tri­bu­tions (tax-deferred plans will be dis­cussed next). One thing was certain–our long-term invest­ments would not be spent until retire­ment. Because how much to save is a uni­ver­sal headache, here are four arti­cles that pro­vide hints to help you decide: click here, here , here and here. One sec­ondary goal, pay off your home mort­gage before retir­ing. Our pri­mary point is to save some­thing now.

Let’s Fin­ish Our Task and Con­struct A Port­fo­lio that Grows!

In this final sec­tion we will be con­struct­ing our diver­si­fied, low-cost stock and bond port­fo­lio. We will be look­ing for invest­ments that fol­low the six pri­mary asset classes. Because these asset classes are so impor­tant, let’s review those asset class tables from Part II before we begin the final phase of select­ing our funds.

Tables 1 2 3 asset classes

Asset Class # 6. Cash

What do we need to know before select­ing an invest­ment that tracks each of our six asset classes? Mil­lions of investors use mutual funds. There are large-cap mutual funds that track large-cap com­pa­nies, and sim­i­lar­ily titled mutual funds for the other five asset classes. This is not as straight for­ward as it appears, unfor­tu­nately. Knowl­edge of their costs and how they are con­structed, mar­keted and pre­sented to investors will be dis­cussed next.

The Mutual Fund Industry

Mutual funds have been avail­able to investors for a long time. Since the 1920s they have grown into a multi-billion dol­lar indus­try. A mutual fund com­pany col­lects a pool of investors’ money and invest their money in hun­dreds of com­pany stocks. When an investor owns a share of a mutual fund com­pany he or she auto­mat­i­cally owns a share of each of the hun­dreds of com­pa­nies in that mutual fund.

Build-in diver­si­fi­ca­tion is appeal­ing and easy. But we have a recur­ring prob­lem. Recall the ini­tial prob­lem we already addressed in Part II about the impos­si­bil­ity of decid­ing which of the thou­sands of com­pa­nies to invest in. Once again, there are lit­er­ally thou­sands of mutual fund com­pa­nies and they out­num­ber the indi­vid­ual com­pa­nies listed on the New York Stock and the NASDAQ Exchanges com­bined. Pick­ing our mutual funds can be just as over­whelm­ing and con­fus­ing as pick­ing indi­vid­ual com­pany stocks. Many non­fidu­ciary bro­kers or finan­cial advis­ers are lit­tle help as they make the selec­tion process com­pli­cated. Under what cri­te­ria do we choose?

Com­mit to mem­ory these four terms:

  1. Load
  2. No-load
  3. Actively man­aged
  4. Pas­sively man­aged (Index­ing Strategy)

Knowl­edge of these terms pro­vides giant advan­tages to invest­ment costs as we zero-in on spe­cific low-cost invest­ment com­pa­nies. Let’s dis­cuss each next.

Load vs. No-load

The next valu­able les­son Dan and I learned was to avoid invest­ments which charge com­mis­sions. In the mutual fund indus­try, they obfus­cate the word com­mis­sion and use “load” instead. Com­mis­sions and loads are the same thing. Do not pay for either. My abso­lutist, hard-line response against com­mis­sions may sound insult­ing, but many knowl­edge­able indi­vid­ual investors defend pay­ing com­mis­sions. There is a long and sor­did his­tory of how loads drag down your port­fo­lio returns. Take a look at Table 4 that illus­trates how costs eat into a nest egg.

Front-end loads are paid when pur­chas­ing an invest­ment. It’s down­right crim­i­nal, but 5.75% is not an uncom­mon com­mis­sion. Ugh. For exam­ple, for every $10,000 invested, the com­mis­sion is $575.00. For every $100,000 invested, $5,750 is the com­mis­sion. $5,750 is just for the oppor­tu­nity to invest in a fund that any­body can invest in and save over $5000. Ouch.

If you had not paid a com­mis­sion going into the fund, watch out,– there may be a “back-end” commission–fees charged when money is taken out (also known as a back-end load). Com­mis­sions and ongo­ing annual costs in excess of 1.5% per year are ter­ri­ble prices over the long-term. If you think you did not pay com­mis­sions, take a hard look at what your finan­cial adviser or bro­ker is doing with your account. Every time your bro­ker trades stocks, mutual funds or bonds within your account, com­mis­sions may be charged.

Actively Man­aged vs. Pas­sively Managed

We also learned that most mutual funds are actively man­aged. There are sev­eral prob­lems with actively man­aged mutual funds:

  1. Expen­sive: Actively Man­aged funds are costly. Investors are charged for hav­ing a man­ager or a team of man­agers buy­ing and sell­ing stocks. Man­agers and the mutual fund com­pany get paid whether the value of the mutual fund that you or I own goes up or down. We take the risk and they make money, always.
  2. Taxes: When stocks are sold at a profit, the mutual fund share­hold­ers have to pay cap­i­tal gains taxes. Cap­i­tal gains taxes are not charged in tax-deferred retire­ment plans, how­ever trad­ings costs might be charged with either after-tax or tax-deferred investments.
  3. Style Drift: If the name of a mutual fund had “Small-Cap” in its title, it is sup­posed to track small-cap com­pa­nies right? Not nec­es­sar­ily. Too many actively man­aged mutual funds track one asset class, but end up track­ing addi­tional asset classes. For exam­ple, a small-cap mutual fund many suc­cumb to “style drift,” mean­ing that the man­ager doesn’t want to sell the grow­ing small-cap com­pa­nies that are now mid-cap. Sell­ing those high per­form­ing stocks which have grown from small-cap to mid-cap stocks might jeop­ar­dize the manager’s year-end bonus, when he or she is eval­u­ated. Con­se­quently, the investors “think” they have a small-cap invest­ment when a por­tion of the small-cap stocks “drifted” into a mid-cap asset class. This is an unseen and unknown risk. It is prob­a­bly okay in the short-term, but over time that small-cap mutual fund owns fewer small-cap com­pa­nies. Thus, the investors port­fo­lio which is sup­posed to have a ded­i­cated mid-cap fund already, becomes over diver­si­fied with mid-cap com­pa­nies. This changes the risk/return pro­file of the investor’s portfolio.
  4. Unknown Diver­si­fi­ca­tion Prob­lems: Our diver­si­fi­ca­tion plan can drift out of whack and we may not know it. Of course few com­plain dur­ing a bull mar­ket when every­thing grows. When the mar­ket crashes, how­ever, the share­hold­ers diver­si­fi­ca­tion plan that grew out of whack, can put them in more risk than was orig­i­nally planned. This is not good. Just as a ship or plane fol­lows a pre­de­ter­mined course, your port­fo­lio must also fol­low your plan’s “course.” But it’s cer­tainly great for the man­ager and his or her bonus. As pre­vi­ously men­tioned, the man­agers still get paid no mat­ter what the stock mar­ket does to investors.

 Sectors

The vast major­ity of actively man­aged mutual funds invests in many parts of the stock mar­ket such as “indus­tri­als,” “retail” or “health­care.” These are called sec­tor fund invest­ing. Let’s digress and talk about the fol­low­ing eight sec­tors of the S&P 500 Index.

  1. Con­sumer Durables/Staples: Rep­re­sent big-ticket items that are not pur­chased fre­quently, cars, homes, refrig­er­a­tors, washer-dryers.
  2. Con­sumer Cycli­cals: Leisure or dis­cre­tionary goods and ser­vices, hotels, enter­tain­ment, travel. Con­sumers spend more on non-necessary items when times are good than when times are bad.
  3. Energy: Crude oil and nat­ural gas explo­ration and pro­duc­tion firms, oil and gas firms, refin­ers and even drillers.
  4. Finan­cials: banks, finan­cial services.
  5. Health­care: hos­pi­tals, clinics.
  6. Industrial/Basic Mate­ri­als: com­pa­nies involved in the dis­cov­ery, devel­op­ment and the process of raw mate­ri­als. Min­ing, chem­i­cal pro­duc­ers and forestry products.
  7. Tech­nol­ogy: com­puter hard­ware and software.
  8. Util­i­ties: nat­ual gas, water, and elec­tric­ity pro­duced and deliv­ered to homes and businesses.

The finan­cial news pun­dits fre­quently talk about which ones of these sec­tors are per­form­ing well and which are lag­ging. It is use­less infor­ma­tion. Dan and I have exten­sive expe­ri­ence with one power house, but short-term, sec­tor invest­ing–tech­nol­ogy. When Dan and I learned about mutual fund com­pa­nies built-in diver­si­fi­ca­tion fea­ture, we quickly trans­ferred our five com­bined 403(b) annu­ities to num­ber 7 above–technology sec­tor mutual funds. These mutual funds weren’t the usual mutual funds from the six core asset classes. Twenty years ago that level of diver­si­fi­ca­tion was still a few years away in our learn­ing curve. We had to expe­ri­ence the tech­nol­ogy bub­ble and burst first. We erro­neously thought that the tech­nol­ogy mutual fund was enough diver­si­fi­ca­tion with hun­dreds of tech­nol­ogy com­pa­nies. The prob­lem was that half or more of the com­pa­nies in each tech­nol­ogy sec­tor mutual fund were the iden­ti­cal com­pa­nies. So, when those com­pa­nies’ stock crashed, the mutual funds tech­nol­ogy sec­tor and our entire port­fo­lio crashed.

Our port­fo­lio had three mas­sive prob­lems. Thus, we learned three valu­able lessons:

  1. It was not diver­si­fied among the six asset classes.
  2. Our port­fo­lio had 100% stocks and no bonds. Imag­ine our igno­rance, as we were in our mid­dle 50s and early 60s. We had not yet dis­cov­ered the stock/bond split.
  3. We erro­neously thought that 1.1% cost of our sec­tor funds were inex­pen­sive (today our port­fo­lio costs .13%).

This is pre­cisely why we believe that sec­tor invest­ing is spec­u­la­tive. Sec­tors are not the core asset classes that we are look­ing for and, in addi­tion, can be exces­sively risky.

Cau­tion: avoid­ing com­mis­sions and active man­age­ment costs are effort­less; but you will encounter investors who will argue with a straight face that pay­ing these extra costs “pro­vide value”–higher per­for­mance and a help­ful “adviser.” Don’t believe a word of it. These unfor­tu­nate investors need an ego to feed and will argue their erro­neous point with past per­for­mance. I don’t under­stand these overzeal­ous and over­con­fi­dent investor’s who defend pay­ing com­mis­sions. Past data is 100% accu­rate, but it reflects stock mar­ket booms and busts of the past and is dan­ger­ously beside the point. Do not choose invest­ments based on past per­for­mance. Do not take the advice of a com­mis­sioned bro­ker, adviser, or an over­con­fi­dent friend who brags at par­ties about his (or her) invest­ment acu­men, espe­cially if alco­hol has been consumed.

Read the Prospectus

By law every secu­rity, indi­vid­ual stock, bond and mutual fund must send a prospec­tus to poten­tial investors detail­ing infor­ma­tion about the company’s or mutual fund’s goals, risk, past per­for­mance, etc. This lengthy and com­pli­cated doc­u­ment has legal waivers and spec­i­fies that “past per­for­mance does not guar­an­tee future per­for­mance.” Always be mind­ful that the future is all we have and is 100% unknown. Never lose your way with catchy 30-second sound bites from the high priests of finance and their 24/7 mouth piece, the finan­cial news media machine.

We need invest­ments which mechan­i­cally track each one of the six asset classes in our pre­scribed plan. The beauty of the next strat­egy is sim­plic­ity: broad diver­si­fi­ca­tion, low costs and the stock/bond split.

Intro­duc­ing the Pas­sive Strat­egy with Index funds

The answer to actively man­aged mutual funds and their loads/commissions, trad­ing costs, cap­i­tal gains taxes and style drift has been around since 1976. That’s when John Bogle intro­duced the now world famous Index­ing strat­egy with his S&P 500 Index along with his new invest­ment com­pany The Van­guard Group. Mr. Bogle is still sharp at 85 years-old preach­ing his same mes­sage: invest in all avail­able com­pa­nies at low-cost and “hold them for­ever.” War­ren Buf­fett, the world’s most suc­cess­ful investor agrees. Read on.

After years of trial and error, Dan and I have most of our money under pas­sive man­age­ment. We abhor trad­ing. Our trades are lim­ited to either sell­ing some stocks to buy bonds, sell bonds to buy stocks, or sell­ing to sup­port our retire­ment. We only trade to bring our port­fo­lio back to our orig­i­nal stock/bond split. We also avoid tim­ing and com­pe­ti­tion and the fruit­less effort to beat the mar­ket aver­ages, as these have been proven by many aca­d­e­mic reports to be los­ing strate­gies over the long-term. We man­age our money with a sim­ple and easy to under­stand plan that doesn’t take our pre­cious retire­ment time away from the things we value: travel, writ­ing blog posts/books, rais­ing veg­gies, vol­un­teer­ing, enjoy­ing the out­doors by hik­ing, take our dog, Sammy, for walks. For the last twenty years the active/passive debate has raged on. The active man­age­ment afi­ciona­dos refuse to con­cede that the pas­sive strat­egy has the upper hand when it comes to the data to sup­port it:

  1. Index funds make the con­struc­tion of a sim­ple port­fo­lio even simpler
  2. Fees eat into returns
  3. Pick­ing stocks ahead of time to beat the aver­ages is fruitless
  4. Study after study shows higher returns with the pas­sive strat­egy (See Rick Ferri’s arti­cle) and Vanguard’s out­stand­ing arti­cle, The Case for Index­ing Fund Invest­ing).

Locat­ing the spe­cific invest­ments and invest­ment companies

After years of invest­ing with bro­ker­age firms Schwab and Scot­trade, and no-load, mutual fund com­pa­nies such as INVESCO, Fidelity, and oth­ers, and after sev­eral trial and errors, Dan and I migrated our nest egg to The Van­guard Group. We con­structed our port­fo­lio with this out­stand­ing com­pany for its low-cost and index­ing phi­los­o­phy (aka , the pas­sive invest­ing strat­egy). Way back, Van­guard was not avail­able in our 403(b)s . (My free pdf book, Fight­ing Pow­er­ful Inter­ests, dis­cusses the dif­fi­culty in includ­ing low-cost invest­ments in your employer’s plan).

Why We Invest In Van­guard Group

All of the port­fo­lio asset classes dis­cussed in detail in the four-part series are avail­able in this one company–Vanguard Group. Van­guard changed not only how Dan and I invested, but how over 20 mil­lion indi­vid­ual investors did too (Click here for more infor­ma­tion). Van­guard fol­lows the same invest­ment philosophy/principles of pas­sive man­age­ment, low costs, think long-term, build wealth slowly in broadly diver­si­fied invest­ments that Dan and I value. Like us, Van­guard abhors trad­ing to beat the mar­ket. Fur­ther­more, our money is less volatile to bear mar­kets because Van­guard investors, our investor col­leagues, are less likely to panic sell. Investors stay­ing put dur­ing mar­ket tur­moil is, by itself, a huge advantage–less pan­icky investors, less volatil­ity and the declines should be less.

The Van­guard Group has Three TRILLION Dol­lars in Assets!

Accord­ing to the inde­pen­dent source, Lip­per INC., the aver­age mutual fund expense is 1.02%, but Van­guard is only .18%. Not sur­pris­ingly, the com­pany has over $3 tril­lion invested for over 20 mil­lion investors. All of these peo­ple can­not be wrong. Because of these struc­tural advan­tages, Van­guard is now the largest and most pres­ti­gious invest­ment com­pany in the world devoted to the ordi­nary investor. (Black­rock has more assets but is devoted to institutions).

TIAA CREF has an iden­ti­cal invest­ment phi­los­o­phy as Van­guard with nearly one tril­lion dol­lars in assets with no com­mis­sions charged and rea­son­able fees. Fidelity Invest­ments is a large mutual fund com­pany, but charges com­mis­sions on some of its funds.

As we have said through­out this series, the choices are over­whelm­ing every­where you go in the finan­cial indus­try. Van­guard is no dif­fer­ent. If you are new to Van­guard, please bare with me as I walk you through the six asset classes to con­struct your portfolio.

Start at this intro­duc­tory page to begin your search. Van­guard has over 100 invest­ment options and with sev­eral dif­fer­ent accounts avail­able. No mat­ter what your choices are in your employer spon­sored plan, your asset allo­ca­tion and the stock/bond split with the low­est cost funds will remain the goal. Unfor­tu­nately, I can­not elab­o­rate for those folks who have Fidelity Invest­ments, TIAA CREF or Black­rock in their employer plans. How­ever, the search for the six asset classes remains the same no mat­ter which invest­ment com­pany your employer has made avail­able to you.

Asset Class # 1

Let’s start with the Large-Cap asset class. At the Van­guard search page, as you type “Large-Cap,” the fol­low­ing choices should drop-down in the search window:

·         Van­guard Large-Cap Index Fund Investor Shares (Ticker: VLACX) Min: $3,000, .23% Cost.

·         Van­guard Large-Cap Index Fund Admi­ral Shares (Ticker: VLCAX) Min: $10,000, .09% Cost

·         Van­guard Large-Cap ETF (Ticker: VV) .09% Cost. (ETFs or Exchanged Traded Funds are fine choices. FAQs about ETFs). The pri­mary dif­fer­ences between the three choices are price.

Do not fret about the addi­tional “Large Cap Value” or “Large Cap Growth” Funds. We are keep­ing with the theme of sim­plic­ity. “Growth” and “value” invest­ing is beyond the pur­poses of this begin­ning arti­cle. Here is a link for fur­ther read­ing for growth vs. value invest­ing.

Asset Class # 2

Next, let’s search for the mid-cap investor share class, admi­ral shares and an ETF:

·         Van­guard Mid-Cap Index Fund Investor Shares (Ticker: VIMSX) Min: $3,000, .23% Cost.

·         Van­guard Mid-Cap Index Fund Admi­ral Shares (Ticker: VIMAX) Min: $10,000, 09% Cost.

·         Van­guard Mid-Cap ETF (Ticker: VO), .09% Cost.

Asset Class # 3

Here are the small cap asset class choices. I found them for you:

·         Van­guard Small-Cap Index Fund Investor Shares (Ticker: NAESX)  Min: $3,000, .23% Cost.

·         Van­guard Small-Cap Index Fund Admi­ral Shares (Ticker: VSMAX) Min: $10,000, .09% Cost.

·         Van­guard Small-Cap ETF (Ticker: VB) .09% Cost.

Lets broaden our search for the Inter­na­tional Stock Mar­kets of the world’s economies:

Asset Class # 4

Here are the Inter­na­tional asset class choices:

  • Van­guard Total Inter­na­tional Stock Index Fund Investor Shares (VGTSX) Min: $3,000, .22% Cost.
  • Van­guard Total Inter­na­tional Stock Index Fund Admi­ral Shares (VTIAX) Min: $10,000, .14% Cost.
  • Van­guard Total Inter­na­tional Stock ETF (VXUS), .14% Cost.

Asset Class # 5

Bonds can be com­plex. Thus, to get you started, there is one bond fund that con­tains two or the three bond cat­e­gories shown in Table 3 above. The total bond mar­ket index invests in United States domes­tic gov­ern­ment trea­suries and cor­po­rate bonds. I would not be con­cerned about inter­na­tional bond expo­sure at this time. Here is the Van­guard Total Bond Mar­ket Index:

  • Van­guard Total Bond Mar­ket Index Fund Investor Shares (VBMFX) $3,000, .20% Cost.
  • Van­guard Total Bond Mar­ket Index Fund Admi­ral Shares (VBTLX) $10,000, .07% Cost.
  • Van­guard Total Bond Mar­ket ETF (BND), .07% Cost

The Van­guard Total Bond Mar­ket Index allo­cates 30% in cor­po­rate bonds and 70% in U.S. gov­ern­ment bonds of all matu­ri­ties (short-, intermediate-, and long-term issues). Click on these links for an expla­na­tion of bond matu­ri­ties and dura­tion.

Asset Class # 6

Finally, our last asset class is CASH. Dan and I have used the Van­guard Prime Money Mar­ket Account for years.

  • Van­guard Prime Money Mar­ket Fund (VMMXX), .16% Cost.

This account offers check cash­ing priv­i­leges, so it can work like your bank or credit union check­ing account. We use it for large pur­chases: house remodel, trips aboard or auto pur­chase. Our credit card and check­ing accounts are located at our near­est Credit Union. Credit unions usu­ally charge the lower ser­vice fees than the big banks.

Port­fo­lio Exam­ples of Vanguard’s Six Asset Classes

Below are two port­fo­lio exam­ples for an older and a young investor. The port­fo­lios between these two extremes should be adjusted to your bonds-by-age rule, as illus­trated in Part III (Stock/bond split).

Portfolio example 75 year old

Portfolio example for 25 year old

I hope you found this four part begin­ning invest­ing series help­ful. All of the ideas in this series have been repli­cated, used and rec­om­mended by many finan­cial pro­fes­sion­als. In the ref­er­ence sec­tion is a list of finan­cial authors and their web­sites that I read to learn about investing.

Be Patient

Our final com­ment on this series can­not be taught. Humans have a dif­fi­cult time with patience. We want things now, no excep­tions. Exer­cis­ing and prac­tic­ing patience and per­sis­tence are pow­er­ful skills of the mind and atti­tudes that result in reach­ing your goals, whether those goals are edu­ca­tional, pro­fes­sional, finan­cial or as the Bud­dhists say, to become enlight­ened.

We know peo­ple who have attempted short-cuts in life. They almost always were dis­ap­pointed. When it comes to money and invest­ing, slow growth over a work­ing career is almost always supe­rior over the get-rich-quick schemes. There are now and never have been over night get rich quick schemes that worked con­sis­tently. Sure, there are a few lucky peo­ple who win big in the lotto but there are arti­cles and books on how 70% of lotto win­ners end-up los­ing all of their win­nings. How can that be? One of their major prob­lems is not know­ing how to man­age a wind­fall and deal­ing with fam­ily demands of a share of the winnings.

The biggest advan­tages of build­ing wealth slowly is that the mis­takes and mis­steps taken along the way can be addressed. As we slowly build wealth, we learn many ancil­lary skills, such as know­ing with con­fi­dence, that you money will grow over time and dis­cern­ing which peo­ple in your fam­ily knows how to han­dle money.

Fru­gal liv­ing reduces stress. Going on vaca­tion instead of wor­ry­ing about two new car pay­ments or a house too big for your means makes a huge dif­fer­ence in your qual­ity of life. The last thing you want to have is a house and car that owns you, rather than you own­ing them. Stress over money can takes a huge toll on your phys­i­cal health and well-being, but it can be addressed with some effort. For Dan and I, it was a no brainer. We val­ued our trips aboard for relax­ation and edu­ca­tion. We val­ued our 403(b)s way more than own­ing trendy expen­sive cars parked in the garage that required pricey main­te­nance, pre­mium gaso­line, hefty insur­ance pre­mi­ums and annual reg­is­tra­tions.  Our used cars got us from one des­ti­na­tion to the other for years and the money saved was astonishing.

Addi­tional Assistance

If you need a finan­cial pro­fes­sional to help you get started after read­ing this series, there are two sources for choos­ing a pro­fes­sional to assist you with set­ting up  your plan or mod­i­fy­ing your cur­rent portfolio.

  1. Call Van­guard and let one of their advis­ers help you. They can help you trans­fer your money to Van­guard from any other company.
  2. Or hire a fee-only finan­cial plan­ner in your neigh­bor­hood from either of these two pro­fes­sional organizations:
    1. Gar­rett Plan­ning Net­workNational
    2. Asso­ci­a­tion of Per­sonal Finan­cial Advis­ers (NAPFA).

More Resources and Infor­ma­tion to Help You Learn More.

“Lazy” or “Couch Potato” Port­fo­lio Concept

Couch

(Car­toon reprinted with paid permission)

“Invest­ing should be dull, invest­ing should be more like watch­ing paint dry or grass grow. If you want excite­ment, take $800 and go to Las Vegas.” –Nobel Econ­o­mist Paul Samuelson.

“Index­ing may not be fun or excit­ing, but it works.” Charles D. Ellis, author: Win­ning the Loser’s Game.

Lazy Port­fo­lios are exactly what Dr. Samuelson’s and Mr. Ellis’s quotes advise—each is an unex­cit­ing port­fo­lio sans micro­man­age­ment. As we said through­out this four-part series, excite­ment is not part of the slow-as-you-go invest­ing expe­ri­ence. Dan and I were excited when our port­fo­lio grew a half mil­lion dol­lars in four months at the height of the dot com bub­ble.  Excite­ment dur­ing a bull mar­ket is not always a good thing. In fact, if your port­fo­lio is mak­ing over-the-top returns (much higher than the aver­ages) it should be a warn­ing to take a look at your stock/bond split. You may be tak­ing too much risk that you will later regret when the mar­ket crashes.

Lazy Port­fo­lio Authors’ Web­sites for addi­tional Port­fo­lio Samples

http://fundadvice.com

http://www.coffeehouseinvestor.com

http://www.scottburns.com

http://www.investmentadvisornow.com/

http://www.daretobedull.com/index.asp

http://www.efficientfrontier.com/

http://www.portfoliosolutions.com/who-we-are-2/staff-bios/

http://crawlingroad.com/blog/

http://david-swensen.com/

http://www.investorsolutions.com/

Check out John Bogle’s Fol­low­ers: Affec­tion­ately titled “Bogleheads”

Bogleheads.org: The epit­omy of do-it-yourself investors. This web­site lists all of us who fol­low John Bogle’s invest­ing phi­los­o­phy of low costs, diver­si­fi­ca­tion and slow-growth over a life­time. The dis­cus­sion forum has over 42,000 reg­is­tered indi­vid­u­als and 1.5 mil­lion views a month. There are plenty of savvy peo­ple who will answer your ques­tions. It is one of the most pop­u­lar invest­ment focused web­sites in exis­tence. You don’t have to reg­is­ter to lurk and read as much as you want. If you want to post, how­ever, you will have to reg­is­ter. It’s all free. Please join this won­der­ful group of ded­i­cated peo­ple from all walks of life to con­tinue Mr. Bogle’s prin­ci­ples and learn to con­struct a low-cost port­fo­lio for yourself.

This link will take you to bogle­heads’ favorite lazy port­fo­lios: http://www.bogleheads.org/wiki/Lazy_portfolios

Be Wary of K-12 School Dis­trict 403(b)s

K-12 school dis­tricts’ 403bs are rife with con­flicts of inter­ests and exces­sive costs. Read my 3-part inter­view with fidu­ciary attor­ney, W. Scott Simon, pub­lished on Morn­ingstar Adviser and the free pdf down-loadable book, Fight­ing Pow­er­ful Inter­ests before start­ing a 403(b) plan.

Be Wary of 401ks too

401ks may also charge exces­sive fees if you aren’t pay­ing atten­tion. See PBS Front­line doc­u­men­tary: The Retire­ment Gam­ble for an in-depth study of these plans.

Addi­tional Reading

Click here for a series of arti­cles by Forbes dis­cussing finan­cial lit­er­acy in the United States.

Suc­cess­ful Invest­ing: http://dunbarfinancialservices.com/dunbarfinancialservices.aspx?MyMenu=Submenus/ArticlesInv&MyPage=articles/Universalarticle.asp?myCategory=6&myArticle=12&SessionID=434139406

After your plan is up and run­ning: http://www.marketwatch.com/story/why-bogle-and-buffett-tell-investors-to-ignore-market-noise-2015–06-04

Kristof on div­i­dend pay­ing stocks: http://www.chicagotribune.com/business/sns-201505141100–tms–kplngmpctnkm-a20150601-20150601-story.html

Waiver: Dan Robert­son and Steve Schullo are not licensed finan­cial or invest­ment advi­sors, and the infor­ma­tion and expe­ri­ences shared as do-it-yourself investors con­tained herein is for infor­ma­tional pur­poses only and does not con­sti­tute finan­cial advice. Through­out our blog, we share our expe­ri­ences with finances as a cou­ple of ordi­nary con­sumers, not as pro­fes­sion­als. Do not start, change or mod­ify your port­fo­lio based on the infor­ma­tion in this blog post alone. Any ideas, invest­ment strate­gies, links to fee-only pro­fes­sional advis­ers and par­tic­u­lar invest­ment com­pa­nies dis­cussed in this arti­cle or in our blog are a reflec­tion of our expe­ri­ences and should not be con­strued as a rec­om­men­da­tion. Con­sult with a tax or finan­cial professional.

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Part 2 403(b) Interview: by Fiduciary Attorney W. Scott Simon

Part 2 of a 3-Part Series: A Way Around Costly 403(b) Plans

(Click here if you missed Part 1)

In so-called ‘open ven­dor’ states, high-cost 403(b) plans may be side-stepped by turn­ing to 457(b)s, explains plan-participant advo­cate Steve Schullo.

W. Scott Simon, 06/10/2015

W. Scott Simon is a prin­ci­pal at Pru­dent Investor Advi­sors, a reg­is­tered invest­ment advi­sory firm. He also pro­vides ser­vices as a con­sul­tant and expert wit­ness on fidu­ciary issues in lit­i­ga­tion and arbi­tra­tions. Simon is the recip­i­ent of the 2012 Tamar Frankel Fidu­ciary of the Year Award.

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This month’s col­umn con­tin­ues my inter­view with Steve Schullo that began inlast month’s col­umn. Schullo, now a retired ele­men­tary school­teacher who taught in the Los Ange­les Uni­fied School Dis­trict (LAUSD) for nearly 25 years, has been active in attempt­ing to reform K-12 403(b) plans and the invest­ment options that are offered to plan par­tic­i­pants such as teach­ers, psy­chol­o­gists, coun­selors, sub­sti­tutes, cus­to­di­ans, nurses, et al.

In retire­ment, Schullo has just pub­lished another book titled “Fight­ing Pow­er­ful Inter­ests: Edu­ca­tors Chal­lenge Tax-Sheltered Annu­ities and WIN!” which can be down­loaded (as a PDF) for free. He is also a blog­ger atLate Bloomer Wealth.

The fol­low­ing inter­view was con­ducted via email and has been edited.

Scott Simon: You’ve noted that, at least in states like Cal­i­for­nia as well as five or six other such “open ven­dor” states, pur­port­edly a school dis­trict must allow a vendor–an insur­ance com­pany or mutual fund com­pany–to sell its prod­ucts to par­tic­i­pants in a 403(b) plan, as long as the ven­dor agrees to com­ply with the 2007 IRS regulations.

Steve Schullo: Yes, that’s right. In the LAUSD, that has resulted in some­thing like 125 insur­ance com­pany ven­dors sell­ing high-priced annu­ities and around 25 mutual fund com­pany ven­dors pri­mar­ily sell­ing funds with com­mis­sions and exces­sive advi­sory fees sold by broker/dealers. That’s all cour­tesy of how Cal­i­for­nia Insur­ance Code sec­tion 770.3has been inter­preted by insur­ance com­pa­nies in their own favor. For the record, only 27 ven­dors remain today as the rest quit the LAUSD 403(b) plan once the new IRS reg­u­la­tions were issued in 2007. But that’s still too many.

But isn’t it good to pro­vide school employ­ees with a lot of invest­ment choices?
Well, it’s good if the costs of the ven­dors’ prod­ucts are fully dis­closed so that teach­ers can make an apples-to-apples com­par­i­son. But they never are, so teach­ers rarely get the full hor­ri­ble story about high and hid­den fees and costs.

There’s also the deer in the head­lights syn­drome. Stud­ies have shown that if you give peo­ple too many invest­ment choices, they tend to freeze because they are over­whelmed by so much choice. The default choice they make is often based on the advice of the near­est fast-talking invest­ment sales­per­son who, by the way, is not a fidu­ciary. That’s why I favor a set-up–whether in a 403(b) plan, a 457(b) plan, a 401(k) plan, any retire­ment plan–where true dis­cre­tionary fidu­cia­ries are in con­trol of the plan to look out for the inter­ests of school employ­ees. Dis­cre­tionary fidu­cia­ries are legally and finan­cially moti­vated to be on the side of those they serve: plan participants.

It doesn’t sound as if you hold out much hope for par­tic­i­pants in K-12 403(b) plans in open ven­dor states such as Cal­i­for­nia.
Not as long as California’s ancient Insur­ance Code sec­tion 770.3 isn’t rein­ter­preted or out­right repealed.

Imag­ine how much 403(b) plans–all retire­ment plans for that matter–have changed since 1969 when this code was enacted. In 2015, we still have a code sec­tion requir­ing that any­time a ven­dor signs a district’s agree­ments, the dis­trict must put them on the ven­dor list and make their prod­ucts avail­able to school employ­ees. The ulti­mate result of this has been a huge array of high-cost invest­ment prod­ucts offered by ven­dors that are all too glad to sign an agree­ment com­ply­ing with the 2007 IRS reg­u­la­tions. Those reg­u­la­tions, which required information-sharing, made it more dif­fi­cult for ven­dors offer­ing low-cost invest­ment options and pushed almost all of the already tiny num­ber of low-fee ven­dors off the LAUSD’s approved list of invest­ment options. Van­guard, for exam­ple, never signed with LAUSD because LAUSD and the new IRS reg­u­la­tions required all ven­dors to share infor­ma­tion, cost­ing Van­guard money that it would not expend to pay those costs.  So Van­guard and other low-cost providers refused to sign the agreements.

K-12 edu­ca­tors should be enti­tled to ratio­nal, low-cost invest­ment options in 403(b) plans, just like those avail­able in any other kinds of plans. After all, look at the national trends includ­ing recent lit­i­ga­tion that has favored plan par­tic­i­pants and the U.S. Labor Department’s fidu­ciary pro­pos­als. And yet, pub­lic school employ­ees in Cal­i­for­nia as well as other open ven­dor states are stuck with anti­quated laws–passed when the Bea­t­les were still together–that have wholly failed to look out for their interests.

So are pub­lic school employ­ees in open ven­dor states con­demned to invest only in 403(b) plans?
Based on my expe­ri­ence, no. Such plans, and the death grip that insur­ance com­pany ven­dors have on them, can sim­ply be side­stepped by turn­ing to a 457(b) plan. For years, I explained the annu­ity trap and high-cost mutual funds to the unions and LAUSD ben­e­fits per­son­nel, but to no avail.

In 2006, how­ever, this bleak sit­u­a­tion changed when a few coura­geous LAUSD per­son­nel who were dis­turbed by the dom­i­na­tion of the high-cost annu­ity providers in the 403(b) plan stepped for­ward and pro­posed offer­ing a new 457(b) plan. Toward that end, they cre­ated the LAUSD Retire­ment Invest­ment Advi­sory Com­mit­tee, which is com­posed of rep­re­sen­ta­tives of the LAUSD’s eight unions–employees who would par­tic­i­pate in the 457(b) plan. I was asked to be a member-at-large of that committee.

Cal­i­for­nia insur­ance code sec­tion 770.3 con­cerns 403(b) plans but not 457(b) plans. The LAUSD was free to issue a request for pro­posal to com­pet­i­tively bid for a sin­gle vendor–like in 401(k) plans–that would keep records and admin­is­ter mutual funds to be selected by the com­mit­tee. I was so glad but that feel­ing ended when the LAUSD hired an insur­ance company–Variable Annu­ity Life Insur­ance Com­pany (VALIC)–to be the third-party admin­is­tra­tor for this new low-cost plan. I was really upset. How could the LAUSD offer a low-cost plan if they were going to con­tract with VALIC, a com­pany that, in my assess­ment, had played a big part for decades in cre­at­ing the high-cost prob­lems with the LAUSD 403(b) plan?

Was the LAUSD 457(b) advi­sory com­mit­tee sab­o­taged from the start?
Not so fast. While VALIC was a big prob­lem, per­haps an even big­ger prob­lem our com­mit­tee ran into was Mer­cer, the large inter­na­tional con­sult­ing firm, which insisted, over our committee’s vocif­er­ous objec­tion, that its own mutual fund rec­om­men­da­tions with their hid­den revenue-sharing arrange­ments be adopted. See, VALIC told the LAUSD board of edu­ca­tion that its fee was only 15 basis points, but what they didn’t say was that they relied on revenue-sharing with 27 basis points, too. Within min­utes, Mer­cer told the board that there would also be 27 basis points of costs, but nei­ther VALIC nor Mer­cer totaled them up together. I remem­ber at the time think­ing that 42 basis points was quite a bar­gain. And yet, why the bifur­cated pre­sen­ta­tion with VALIC announc­ing 15 basis points and Mer­cer 27 basis points?

The prob­lem was that in our igno­rance, the com­mit­tee didn’t real­ize that the 42 basis points was only for admin­is­tra­tion and didn’t include the costs of the invest­ment options, which were not included at the time because they were unknown. When the costs–administrative and investment-related–were all added up, we found that school employ­ees would be pay­ing over 100 basis points for half of the 18 funds that the com­mit­tee was being forced to accept. This appalled me because it showed very clearly that the com­mit­tee were never part of the deci­sion to select the invest­ment options for the LAUSD 457(b) plan.

When our com­mit­tee offered three lower-cost funds which met the require­ments of a diver­si­fied port­fo­lio as described in our Invest­ment Pol­icy State­ment, the com­mit­tee chair warned us not to go against Mercer’s orig­i­nal high-cost rec­om­men­da­tions. Our three rec­om­mended changes–out of 18 funds–were not exactly a threat to West­ern civ­i­liza­tion, but Mer­cer appar­ently seemed to think so.

Some com­men­ta­tors in the finan­cial media note that costs aren’t all that impor­tant. I strongly dis­agree. From one who has been through the wars with pow­er­ful finan­cial inter­ests, I can tell you that costs really do mat­ter and they mat­ter a whole lot to those that are threat­ened by any reduc­tion in them. In fact, in my expe­ri­ence, costs are the sin­gle most impor­tant fac­tor that the finan­cial indus­try cares deeply about, and it takes great pains to pro­tect those costs by cre­at­ing con­fu­sion and com­plex­ity for decision-makers and even attempt­ing to intim­i­date those who would oppose them.

For exam­ple, once our advi­sory com­mit­tee found out that it would have no role in select­ing the invest­ment options for the LAUSD 457(b) plan, we demanded at a con­tentious advi­sory com­mit­tee meet­ing that VALIC dis­close all costs, includ­ing the finan­cial industry’s sacred cow–revenue-sharing–to all school employ­ees dur­ing enroll­ment pre­sen­ta­tions. The VALIC reps were very angry about that, argu­ing that the employ­ees would be con­fused. [I touched on this in my July 2007 col­umn as part of a nine-part series on “Fleec­ing 403(b) Plan Par­tic­i­pants.”] I kid you not. As they walked out the door, they warned our com­mit­tee that they were going to speak to their legal team about this forced dis­clo­sure. This advi­sory com­mit­tee meet­ing was a big event, which is why a promi­nent reporter from the Los Ange­les Times was on hand to report it.

Simon: What is the LAUSD 457(b) plan like today?
Although our 457(b) plan advi­sory com­mit­tee lost that first bat­tle to replace three funds with lower-cost funds, we won the war on dis­clos­ing and even­tu­ally reduc­ing costs. Over the years we slowly got rid of the stench of high-cost revenue-sharing mutual funds. Today, our advi­sory com­mit­tee has a team in place that’s com­mit­ted to fidu­ciary respon­si­bil­ity. None of our funds charge revenue-sharing fees. Now our com­mit­tee chooses the funds.

Our com­mit­tee pushed back hard against the old anti-investor prac­tices of hid­ing and con­fus­ing costs, and ignor­ing com­mit­tee rec­om­men­da­tions to lower costs. This is why it is so impor­tant to have a com­mit­tee of employ­ees mak­ing the core rec­om­men­da­tions to a K-12 school district’s chief finan­cial offi­cer, whether it’s the invest­ments, TPA, or the finan­cial con­sul­tant. After all, it’s the school dis­trict employ­ees that are pay­ing the freight.

Just last year, after years of grad­ual replace­ment of those high-cost funds for lower-cost, best-in-class invest­ment options, the LAUSD 457(b) plan won an award from the National Asso­ci­a­tion of Gov­ern­ment Defined Con­tri­bu­tion Admin­is­tra­tors. Not bad for a bunch of rag-tag LAUSD employ­ees who came together, know­ing lit­tle about retire­ment plans but then earn­ing a pres­ti­gious award.

My inter­view with Steve Schullo will con­clude in next month’s col­umn (July, 2015).

Con­tinue read­ing

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Interviewed by Fiduciary Attorney: K-12 403(b) Plans

 Reform­ing K-12 Pub­lic School Dis­trict 403(b) Plans

Part 1 of a 3-Part Series

For Part 2: click here

May 7, 2015

Steve Schullo is work­ing to shed light on the awful short­com­ings of K-12 403(b) plans.

  1. Scott Simon, 05/07/2015
  2. Scott Simon is a prin­ci­pal at Pru­dent Investor Advi­sors, a reg­is­tered invest­ment advi­sory firm. He also pro­vides ser­vices as a con­sul­tant and expert wit­ness on fidu­ciary issues in lit­i­ga­tion and arbi­tra­tions. Simon is the recip­i­ent of the 2012 Tamar Frankel Fidu­ciary of the Year Award.

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As a com­ple­ment to my cur­rent mul­ti­part series ana­lyz­ing the con­tract between a K-12 pub­lic school dis­trict and a giant insur­ance com­pany pro­vid­ing invest­ment options for a non-ERISA 403(b) plan, I thought it would be inter­est­ing to hear from some­one who has long been in the trenches fight­ing the good fight against the many abuses that typ­i­cally char­ac­ter­ize 403(b) plans in the K-12 marketplace.

Steve Schullo was an ele­men­tary school teacher with the Los Ange­les Uni­fied School Dis­trict (LAUSD) for nearly 25 years. In his retire­ment, he has just writ­ten another book titled “Fight­ing Pow­er­ful Inter­ests: Edu­ca­tors Chal­lenge Tax-Sheltered Annu­ities and WIN!” which can be down­loaded (as a PDF) for free. Steve is also a blog­ger at Late Bloomer Wealth.

Steve has a unique per­spec­tive on the nature of the invest­ment options typ­i­cally offered by insur­ance com­pa­nies to par­tic­i­pants (teach­ers, psy­chol­o­gists, coun­selors, sub­sti­tutes, cus­to­di­ans, nurses, et al.) in the 403(b) plans estab­lished and main­tained by K-12 school districts.

I can­not think of any­one else today that has the same in-the-trenches expe­ri­ence and insight gained from fight­ing against a pow­er­ful and entrenched indus­try as well as decades of indif­fer­ence demonstrated–regrettably–by the vast bulk of the teach­ing pro­fes­sion. One result of this has been a gen­eral reluc­tance to even pub­licly dis­cuss ref­or­ma­tion of the poor invest­ment options typ­i­cally offered to employ­ees in K-12 403(b) plans. The per­plex­ing apa­thy of teach­ers unions and the gen­eral igno­rance dis­played by admin­is­tra­tors and teach­ers at many K-12 school dis­tricts con­tin­ues today when it comes to their 403(b) plans.

Steve’s efforts at bring­ing to light the awful short­com­ings of K-12 403(b) plans is offered to help oth­ers in their own attempts at reform. No one in the K-12 lead­er­ship hier­ar­chy is going to look out for the best inter­ests of edu­ca­tors with­out the edu­ca­tors them­selves step­ping up and demand­ing reform of their 403(b) plans.

The fol­low­ing inter­view was con­ducted via email and has been edited.

Scott Simon: Steve, thanks very much for con­sent­ing to this interview.

Steve Schullo: My pleasure.

I’ve got lots of ques­tions for you so let’s dive right in. When and where did you begin teaching?

In 1984 with the Los Ange­les Uni­fied School District.

When did you first invest in the retire­ment plan at LAUSD? Con­tinue read­ing

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A Do-It-Yourself Investor’s Powerful Insight

Dan and I joined this local pro­fes­sional orga­ni­za­tion. The Desert Busi­ness Asso­ci­a­tion (DBA) serves 300 mem­bers who are mostly LGBT locally-owned busi­nesses. Our book designer, Mark, and a fidu­ciary finan­cial adviser, Bob, told us about the DBA mix­ers hosted by dif­fer­ent mem­bers at their place of busi­ness. This gives mem­bers and chance to talk about what they do in a con­vivial atmos­phere. We meet twice a month with always a good turnout. I get to talk about our busi­ness, Late Bloomer Wealth Press, and the two books we pub­lished (Dan can­not attend as fre­quently as me because he has a con­flict with his 12-step meet­ing). Its been fun and ben­e­fi­cial meet­ing many busi­ness peo­ple across the valley.

Stock Bro­ker Finan­cial Adviser and an Insur­ance Agent

At the last mixer I had a con­ver­sa­tion with an insur­ance agent and a bro­ker from a local bro­ker­age firm. Our mutual inter­est in per­sonal finance sparked our con­ver­sa­tions. The dif­fer­ence between the insur­ance agent and the bro­ker is what I will elab­o­rate and share my insights about the invest­ing process as a Do It Your­self investor. My con­ver­sa­tion with the insur­ance agent didn’t last long as he went straight into his patent and well-rehearsed sales pitch about pro­tect­ing peo­ple from the stock mar­ket loses. I didn’t want to spoil my evening debat­ing with an insur­ance agent.

The bro­kers con­ver­sa­tion was inter­est­ing. Unlike the insur­ance agent, the bro­ker and I were at least on the same page about invest­ing in the stock and bond mar­ket. Insur­ance agents are typ­i­cally from a wholly dif­fer­ent world (as I have advo­cated for years, annu­ities should be ille­gal in the accu­mu­la­tion stage because of expenses and pathetic returns that don’t keep up for infla­tion. See a pre­vi­ous post about mix­ing insur­ance and invest­ing).

The bro­ker warned me that our bonds are going to take a hit when inter­est rates rise. I said that I already know that and took care in invest­ing in short-term and inter­me­di­ate term matu­rity dates in both gov­ern­ment and cor­po­rate issued. She wasn’t con­vinced. So, I took it a step fur­ther. I said as calmly as pos­si­ble, that Dan and I real­ize our port­fo­lio is prob­a­bly val­ued at $150,000 less than what it is right now because the bonds are priced at his­toric highs. She must have real­ized I was so wrong that she invited us to come to her office for a com­pli­men­tary ses­sion and she will show us some “alter­na­tives.” I was not inter­ested in car­ry­ing on this con­ver­sa­tion and I am not going to waste my time and hers for this com­pli­men­tary ses­sion. I have read so much about the bond prob­lem and the hit bonds will take when inter­est rates increase, I have come to the con­clu­sion that what­ever “alter­na­tives” she offers comes with expenses and risk that both Dan and I will not accept. Sure, those alter­na­tives will prob­a­bly shielded us from the bond col­lapse but what are the OTHER risks with the alternatives?

A DIY Investor’s Insight

What risk would you rather take? The risk you don’t under­stand because some­body else rec­om­mended an invest­ment, or the risk that you under­stand it was a DIYer’s choice of investment?

But there was a valu­able insight that I gained as I drove home and con­tin­ued think­ing about this rare con­ver­sa­tion with a bro­ker. Rare because we keep our money away from the big banks and bro­ker­age firms. We DIY investors have unique approaches to this com­plex topic of invest­ing and per­sonal finance. When I shared with her about the real value of our port­fo­lio, that is a great exam­ple of how this (me) DIY thinks. To be fair to the broker’s work, NO FINANCIAL ADVISER could say to their clients that their port­fo­lio is really less than what its worth now. Heck, they would lose their jobs faster than pilot Chuck Yea­ger break­ing the sound bar­rier. All advis­ers work with oth­ers and if I were an adviser I would not say what I said to any of my clients either. But, I am not an adviser and my expla­na­tion that our port­fo­lio is really worth less because of our bond’s inflated prices is how this DIY investor under­stands risk. This under­stand­ing is pow­er­ful as we can stay the course when our port­fo­lio does take a hit when the bond inter­est rates finally rise.

By pre­dict­ing ahead of time how our port­fo­lio will decline when inter­est rates rise, Dan and I can accept a short term fall in our bond prices and in our port­fo­lio. If we were go with the broker’s “alter­na­tives,” who knows what kind of increased risk and increased asso­ci­ated fees and com­mis­sions we will have to take on and pay. The irony of this talk about rais­ing bond prices is that the decrease is off­set by the increase in the bond’s rate of return, which we all want. This long-term effect of bond invest­ing is rarely dis­cussed on invest­ment forums or the finan­cial media. Don’t we all want higher bond rates of return? Of course, we do.

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LAUSD’s Investment Workshop Employees’ Comments/Follow up

SammyHi LAUSD Colleagues!

Dan and I cer­tainly hope you were as sat­is­fied after attend­ing last week’s invest­ment work­shops as our con­tented 13 year-old Korean Jindo mix, Sammy. The eval­u­a­tion results showed you were!

Thanks for com­ing! This was our fourth work­shop as pre­sen­ters. We were happy to see col­leagues that I have worked with years ago look­ing so good. We had 73 par­tic­i­pants out of 120 that offi­cially reg­is­tered. The weather might have had some­thing to do with the 47 reg­is­tered no shows. It driz­zled much of the day. Still, it was a fab­u­lous expe­ri­ence for us to encour­age our col­leagues to save and invest for the future. The par­tic­i­pants asked good ques­tions and most stayed the entire day!  Con­tinue read­ing

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