How Do Americans Feel about their Financial Situation?

There is Good News and Not So Good News 

Finan­cial inse­cu­rity is a real­ity for many Amer­i­cans. 56% of peo­ple say they look favor­ably on their finances, yet 57% feel they are unpre­pared for a finan­cial emer­gency. 50% would claim to be finan­cially secure.

6 out of 10 Amer­i­cans who “break even” actu­ally are spend­ing more than they make each month. 1 in 3 has no sav­ings, which inci­den­tally is the biggest worry for Amer­i­cans com­ing in at 83% being con­cerned about it. 71% are wor­ried about cov­er­ing the bills they cur­rently have, and 69% are wor­ried about not hav­ing money to retire. 87% of those wor­ry­ing so much about finances are look­ing for work. 68% make less than 25,000. 76% of con­cerned peo­ple have less than 10,000 in non-housing wealth. 66% are 18–34 year old, which makes sense as they are going to col­lege, enter­ing, and estab­lish­ing them­selves in the work­force dur­ing most of those years.

1 in 5 Amer­i­cans feel like they will never be able to retire. Almost 1 in 3 houses has some­one 55 or older with no retire­ment sav­ings. 37% of Gen X feel that they are not at all finan­cially secure and that is the largest num­ber across all gen­er­a­tions stud­ied. Mean­while 71% of Mil­len­ni­als are con­fi­dent they will meet their finan­cial goals.

personal finance

Source of the above report: 

Dan and Steve Suggest

Thank You “Masters-in-Accounting” for Shar­ing this Survey!

Edu­ca­tion in per­sonal finance (and in gen­eral) makes a dif­fer­ence. But you don’t have to have a Mas­ters Degree in Busi­ness Admin­is­tra­tion (MBA) to dis­cover how to man­age your money and suc­ceed. It’s not that com­pli­cated, but it does take some effort. Dan and I are edu­ca­tors, not finan­cial pro­fes­sion­als! If you can read and do basic 6th grade math, you can be a suc­cess­ful investor and gain finan­cial free­dom. Edu­cate your­self because nobody else is going to do this for you.

Accord­ing to the sur­vey, the Mil­len­nial gen­er­a­tion appears to know this. Young adults tell every­body they know and the media that SS and Pen­sion sys­tems will not be avail­able when they retire in 30 years, yet 71% of them feel con­fi­dent about their finan­cial sit­u­a­tion. What are they doing to earn such confidence?

Pick up a copy of one of John Bogle’s Invest­ing books could help you even­tu­ally feel more con­fi­dent about your finan­cial sit­u­a­tion (here is one: Lit­tle Book on Com­mon Sense Invest­ing, 2007 by John Bogle).

You can also pick up a copy of our book, Late Bloomer Mil­lion­aires, which is for the absolute begin­ner and who might be a late starter and/or this book just released writ­ten by John Bogle’s fol­low­ers, Bogle­heads Guide to Invest­ing (2014).


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Welcome to Our Blog, Los Angeles Teachers!


Scroll down for a CALL TO ACTION!

WELCOME TO OUR BLOG, Late Bloomer Wealth! Our names are Steve Schullo (Taller one) and Dan Robert­son with our dog Sammy in front of our home in Ran­cho Mirage, CA. We are retired edu­ca­tors. Our blog and our per­sonal finance books are about how two edu­ca­tors with­out any for­mal finan­cial train­ing, started sav­ing late, made mis­takes, learned from these expe­ri­ences and still man­aged to save enough for our retire­ment so we could say adios to the class­room ear­lier than most edu­ca­tors who have not saved.

I (Steve) worked as an ele­men­tary teacher at Hoover, Politi and Alta Loma, and was a tech­nol­ogy coach for Cochran MS for 24 years before retir­ing in 2008. Dan is a retired teacher from LAUSD, where he started teach­ing sp. ed. in the 1960s, went on to Cal-State Los Ange­les and sub­se­quently devel­oped a com­puter train­ing pro­gram at the LGBT Van Ness Recov­ery House. He also wrote Spe­cial Ed grants.

We both saved for retire­ment in our 403(b) plans. But before you start your plan, read my free down­load­able book: Just scroll down on the right, reg­is­ter for our blog and get the free book: Fight­ing Pow­er­ful Inter­ests. You can always opt out later. We have tons of infor­ma­tion and links to finan­cial experts that Dan and I trust relat­ing to per­sonal finance. All of our infor­ma­tion is based on our expe­ri­ence. We are not pro­fes­sional finan­cial advisers.

Take a look around. But first, to help you get started here are some impor­tant prior arti­cles and links about the LAUSD’s 403b and 457b plans specif­i­cally for LAUSD employees.

Click here for numer­ous reviews from peo­ple who know about what we have done to help teach­ers save for retire­ment. Here is one exam­ple: Pure, unadul­ter­ated and hon­est finan­cial advice from a cou­ple guys who have per­se­vered through every­thing life has thrown at them. It’s rare to get such a per­sonal account of someone’s finan­cial life, Late Bloomer Mil­lion­aires is really a finan­cial mem­oir.  Steve and Dan walk you through their finan­cial lives and give you an all access pass to their strug­gles, tri­umphs, defeats and their vic­to­ries. I can tell you this, you will NOT read another per­sonal finance book like this one. It is more than just a finan­cial book, it’s a heart­warm­ing jour­ney of love, rela­tion­ship and growth that uses per­sonal finance as the cen­tral theme. This is non­fic­tion at its best and an adven­ture worth expe­ri­enc­ing. By the end you will feel smarter and empow­ered finan­cially and full of hope that you can do this thing called lifeI mean, retire­ment!
—Scott Dauen­hauer CFP, MSFP, AIF 

A. CALL TO ACTION: The 457(b) Roth is Com­ing to LAUSD. BUT Teacher Larry Shoham from Hamil­ton HS needs your sup­port: . Check out his guest arti­cle about the Roth’s phe­nom­e­nal strat­egy and incen­tive to save for retire­ment.


B. All Avail­able 403(b) and 457(b) Options to LAUSD employ­ees

C. Web­sites: Finan­cial Lit­er­acy For Teachers

1. National Endow­ment for Finan­cial Edu­ca­tion (NEFE) • 1331 17th Street, Suite 1200 • Den­ver, CO 80202 • 303–741‑6333. NEFE High School Finan­cial Plan­ning Pro­gram — http://www.hsfpp.orgLOGIN FOR TEACHER OR STUDENT MATERIALS.
Cal­i­for­nia Con­tact —
3. Uni­ver­sity of Cal­i­for­nia Coop­er­a­tive Extension–Riverside
Con­nie Costello:   (951) 827‑5241

D. Here are Mate­ri­als for Teach­ing Per­sonal Finance to your stu­dents for all grade lev­els. Inspired by LAUSD award-winning teacher Rafe Esquith and devel­oped by Van­guard. All grade lev­els. Check it out:


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Enough” by John Bogle: A Review by Two “Late-Bloomer Millionaire” Educators

Steve and Dan's (and Sammy's "woof-woof") Book Review

 Enough: The Mea­sures of Money, busi­ness, and Life

By John C. Bogle

Review by Steve and Dan

The author explains and addresses, head-on, the many prob­lems with the finan­cial industry’s rela­tion­ship to reg­u­lar investors. We have read sev­eral of John Bogle’s other invest­ment books and adapted his index­ing strat­egy. “Enough” pro­vides an under­stand­ing of Bogle’s life and his busi­ness phi­los­o­phy behind his cre­ation of the leg­endary Van­guard Mutual Fund Group. After read­ing this book, read­ers who may not be famil­iar with Mr. Bogle or his invest­ment com­pany he built, will bet­ter under­stand why mil­lions of investors now use Vanguard.


John C. Bogle

Con­tinue read­ing

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Steve and Dan’s Bond Decisions

This Pie Chart is our Diver­si­fied Port­fo­lio as of June 30, 2015

Q2 2015 Asset Allocation

(Click directly on the Pie Chart to Enlarge it)

An Expe­ri­en­tial Insight Into Bonds: Matu­rity (long-term vs short-term) hori­zon, gov­ern­ment vs. cor­po­rate, highly rated vs lower rated (risk of get­ting your money back) and their place in the portfolio.

  1. What are the riski­est bonds?
  2. What are the safest bonds?
  3. Why include them in a portfolio? 

A real life exam­ple of a risky bond: Dan just bought and sold a “risky” bond fund ear­lier this year.

Yeah, bonds are risky and can have excel­lent, double-digit returns. They also can be a tricky invest­ment, if you think that bonds are uni­ver­sally safe by not decreas­ing in value. Well, I have news, they also have risks and can decrease up to 20% in value! Bonds are not as volatile as stocks. Bonds increase diver­si­fi­ca­tion which in turn reduces port­fo­lio risk, and as a pos­i­tive con­se­quence, pre­serves your cap­i­tal. That’s the pri­mary rea­son why peo­ple near retire­ment and those in retire­ment should have a bond allo­ca­tion approx­i­mately equal to their age. For exam­ple, a “Bogle rule” (age in bonds) offered by John Bogle (founder of Van­guard) is that 60 years-olds should allo­cate approx­i­mately 60% of their port­fo­lio to a diver­si­fied selec­tion of bonds. Bogle’s sug­ges­tion is debat­able. It might be worth your while to check out this dis­cus­sion on the Bogle Rule.

Bogle rule or not, accord­ing Your Money your entire port­fo­lio should be diver­si­fied no mat­ter what your age: Our port­fo­lio above shows full diver­si­fi­ca­tion: inter­na­tional and domes­tic stocks, inter­na­tional and domes­tic bonds, infla­tion pro­tected bonds, var­i­ous types of gov­ern­ment bonds, and bal­anced funds which include stocks and bonds. The ready-made bal­anced funds offer­ing both stocks and bonds such as Van­guard Welling­ton for younger investors and Van­guard Welles­ley for older investors are good starter plans (I wanted Van­guard Welling­ton way back when I was a young teacher). Dan and I prac­tice and live diver­si­fi­ca­tion, as shown in the pie chart above.

Bond returns have not kept pace with the infla­tion rate, the pri­mary rea­son why hold­ing 100% bond port­fo­lio is a bad idea for most investors. Like­wise, a 100% equity expo­sure is not proper diver­si­fi­ca­tion. Over time 100% equi­ties have higher returns over bonds, how­ever, there are peri­ods of severe equity declines dur­ing crashes that most peo­ple can­not tol­er­ate. Only investors in their early to mid 20s could get away with a 100% stock allo­ca­tion, but not after 30 years old.

Most investors should have a bond allo­ca­tion, since most of us will need them even­tu­ally as we age, we might as well learn about them when we are young. It’s that bal­ance between stocks and bonds that ame­lio­rates wide swings in our port­fo­lio. Pub­lic and pri­vate pen­sion plans, endow­ments and trusts have a com­bi­na­tion of stocks, bonds and cash. Wealthy investors and retired peo­ple who can com­fort­ably live on their pen­sion plans and social secu­rity may decide to leave their invest­ments to heirs, and thus don’t need their invest­ments to fund their retirement.

“Splitting-Up” Your Port­fo­lio into Stocks and Bonds is Not “Hard To Do,” it’s Essen­tial For Cap­i­tal Preser­va­tion, Diver­si­fi­ca­tion and Keep­ing Pace or Beat­ing Inflation

This table Vanguard’s Model Port­fo­lios was our sal­va­tion on a major deci­sion. It helped Dan and I choose the proper stock-bond allo­ca­tion split of 35% equity and 65% bond allo­ca­tion shown in the pie chart. At our age, port­fo­lio preser­va­tion is our num­ber one pri­or­ity. This allo­ca­tion pre­served our cap­i­tal dur­ing the hor­rific 2008 stock mar­ket crash (Our port­fo­lio declined only 11.8%). Dan and I need our invest­ments for retire­ment income, so we use “Bogle’s rule” of age-in-bonds. 35% equity risk pro­vide the appro­pri­ate amount of expo­sure to ensure our port­fo­lio grew just enough to beat the infla­tion rate. Infla­tion is retirees’ pri­mary obsta­cle to sus­tain­ing our retire­ment lifestyle. Retirees live on fixed income and don’t have “raises.”

Dis­cover the Less Risky Bonds

Bond risks are asso­ci­ated with the increase in their matu­rity date and whether they are issued by the gov­ern­ment or by cor­po­ra­tions. The longer the matu­rity the higher the risk and higher their returns. While cor­po­rate and gov­ern­ment bonds are the most sen­si­tive to moves in the inter­est rate, long term cor­po­rate bonds are the riski­est (and can have higher returns) as cor­po­ra­tions can­not print money, can­not raise taxes and have gone bankrupt.

Dan Bought A High Risk, Long-Term Cor­po­rate Bond

Here is a close to home exam­ple of what some investors are doing, chas­ing high-yield bond returns. Early this year Dan bought Van­guard Long Term Cor­po­rate Index Bond because it returned 25% in 2014 at low cost. I kid you not! This was Dan’s deci­sion as he sold his posi­tion in a cor­po­rate bond fund offered by Loomis Sayles. He decided on Van­guard to lower his cost and to get out of Loomis Sayles as the lead man­ager, Dan Fuss, is in his 80s, so he may retire.

This was a break from our usual bond pur­chase as we decided years ago to only pur­chase short-term (1–5 year matu­rity), inter­me­di­ate term (5–10 years) and mostly high-rated, AAA, AA or A. He got out of the Van­guard Cor­po­rate bond as it sys­tem­at­i­cally lost value soon after he bought it (June 30, 2015 YTD return, .25%). He also knew that long term bonds are the most sen­si­tive to ris­ing inter­est rates and accord­ing to all of the reports for years now, those rates have got to rise sooner or later.

The matu­rity date is the time when the bond holder gets his or her money back with the promised inter­est rate. Longer matu­rity dates yield the higher return, but at higher risk. If bonds are used to keep volatil­ity in check and reduce over­all port­fo­lio risk, it doesn’t make sense to increase bond risk. Port­fo­lio risk should be taken on the stock side of the allo­ca­tion, not the bond side. In today’s low inter­est rate envi­ron­ment, that’s pre­cisely why even short-term bonds and cash have his­tor­i­cally puny returns.

The riski­est bonds are:

1. Cor­po­rate more than government

2. Long-term more than Inter­me­di­ate and short-term maturities

3. B-rated or lower more than AAA, AA, or A rated (rat­ing guide).

The safest bonds are AAA rated, short-term gov­ern­ment bonds.

Bond Books

It is always good to read a cou­ple of books on bonds before invest­ing. Here are two that I read and recommend:

1. Larry Swedroe’s “The Only Guide to a Win­ning Bond Strategy.”

2. Rus­sell Wild“s “Bond Invest­ing for Dum­mies, 2nd Edi­tion.”

Video Series on Bonds

My favorite invest­ment web­site is Bogle­heads and their bond video pre­sen­ta­tions in their Wiki. Bogle­heads are fol­low­ers of John Bogle, founder of the Van­guard Group and the father of the index­ing strategy.

Bot­tom line: Don’t chase high returns on any secu­rity. Con­struct a low-cost diver­si­fied stock and bond port­fo­lio as shown in the pie chart above. Our stock/bond split (35%/65%) is appro­pri­ate for our ages, late 60s and early 70s. No mat­ter what your age, you’ll rest eas­ier with diver­si­fied hold­ings which fit when you need the money and your tol­er­ance for risk.


Best of fortunes,

Steve and Dan


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Portfolio Performance Report

Happy Belated 4th of July!
How did your retire­ment invest­ment port­fo­lio per­form at the half-way mark of 2015?

After years of 24/7 chat­ter about inter­est rates, the Fed­eral Reserve Board announced that it will raise inter­est rates by the end of the year. They haven’t yet, but the mere prospect of higher inter­est rates hit our bond allo­ca­tion. Our bonds lost value because the inter­est rates did go up due to mar­ket forces (not from a change in pol­icy) and thus our port­fo­lio is down about $40,000 off its intrayear high in April (Bond value dis­cussed in more detail here). It’s not a big deal as we were expect­ing this for some time. As you will see our YTD port­fo­lio return is up slightly at .3%, a third of a per­cent gain for the year.

Our port­fo­lio is in the black for one pri­mary rea­son: The major bench­marks, the DOW Jones Indus­trial Aver­age (DOW), S&P 500 Index, and the NASDAQ have all hit all time record highs. Dan and I remem­ber vividly when the last time the tech­nol­ogy heavy NASDAQ hit the record books, way back in March, 2000–it finally just broke that record dur­ing this 2nd Quar­ter. Still the domes­tic stock mar­ket only had a slight increase, but the inter­na­tional equi­ties soared over 10%.
From the bar chart below, our Van­guard Inter­na­tional Explorer (VINEX) returned 10.69%. Below is our fund by fund break­down on how our port­fo­lio pre­formed at the stock and bond mar­ket close on June 30, 2015.
(Click directly on the charts to enlarge them) 

Q2 2015 Returns

To cal­cu­late our port­fo­lio per­for­mance, we included our dis­tri­b­u­tions and excluded our con­tri­bu­tions. Dis­tri­b­u­tions to fund our retire­ment are not mar­ket loses, like­wise our con­tri­bu­tions are not mar­ket gains either. For a cal­cu­la­tion that takes into account the full impact of con­tri­bu­tions and dis­tri­b­u­tions through­out the year, log on to Bogle­heads wiki and down­load a free Excel SS:

An addi­tional way to eval­u­ate our port­fo­lio (and yours too) is by com­par­ing our return with some other investors who reported their returns on Bogle­heads forum and the If your port­fo­lio is 100% equi­ties, then your return should be in the neigh­bor­hood of 6–8%, assum­ing 50% in domes­tic and 50% in inter­na­tional stocks. If you port­fo­lio is 100% bonds, your return should be a slight loss. If you don’t know how your plan is set up and don’t know your return, this is the time to talk with your adviser and find out. We are show­ing you how we eval­u­ate our port­fo­lio returns using the online port­fo­lio ser­vices (After a free reg­is­tra­tion, all you have to do is name your port­fo­lio, insert the ticket sym­bols and the num­ber of shares you own. Each day the port­fo­lio updates auto­mat­i­cally accord­ing to the mar­ket moves for the day. Unfor­tu­nately, annu­ity con­tracts do not use ticker symbols).

Q2 2015 Asset Allocation

Hope this helps.

Have a great summer!

If you have any ques­tions, please ask.

Best of for­tunes, Steve and Dan


Our Book Has 85 REVIEWS!

Late Bloomer Millionaires book cover

Steve Schullo and Dan Robert­son: Co-authors of Late Bloomer Mil­lion­aires. Read the 85 reviews and pick up a copy by click­ing on the cover above. If you read our book, please write a review on Ama­zon. Much appreciated.

If you have writ­ten a review, THANK YOU!  Dan and I want to help peo­ple under­stand their invest­ments, be informed and empow­ered. Don’t get sold an annu­ity, always buy an invest­ment. Know the dif­fer­ence. It’s never too late!

If you want my FREE new book, Fight­ing Pow­er­ful Inter­ests, go to the home page, scroll down on the right, reg­is­ter for our blog and get your free PDF book.


It’s a story about how a group of edu­ca­tors know­ing noth­ing about retire­ment plans and invest­ments and end­ing up with an award­ing win­ning 457(b) plan with the 2nd largest school dis­trict in the coun­try! After read­ing either book, you will have the skills and knowl­edge to rec­og­nize if your employer’s retire­ment plan is low-cost and best-in-class invest­ment options or all high cost, low per­form­ing annu­ities from insur­ance com­pa­nies. Read my prior blog post when I answer the ques­tion, “Is an Insur­ance Prod­uct an Invest­ment?

If needed, you will rec­og­nize and hire a fee-only finan­cial adviser with fidu­ciary respon­si­bil­ity (Gar­rett Plan­ning Net­works or National Asso­ci­a­tion of Per­sonal Finan­cial Advis­ers). Annu­ity agents are not fidu­cia­ries, never have been and there any no plans com­ing from the insur­ance indus­try requir­ing them to be fidu­cia­ries. Avoid them.

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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. But, Dan and I are two old white guys who also have a suc­cess­ful life­long story. But many young peo­ple want it now, not later (us older folks for­got how we thought when we were young!). And 20–30 some­thing age young peo­ple want to relate to their gen­er­a­tional peers.

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. You can pick the part which 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, once you know which gazil­lion parts to ignore. 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. Book rec­om­men­da­tions, addi­tional finan­cial blog sites and invest­ment forums are listed at the very end of Part 4. 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


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.”

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.


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 arti­cle on the monop­oly of annu­ities in K-12 school dis­tricts).

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


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.


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 


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.

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.


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 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 their port­fo­lio was safe because they were diver­si­fied with the 100% in equi­ties (stock mutual funds). Diver­si­fi­ca­tion with­out a bond allo­ca­tion is NOT diversification.

In Part II we dis­cussed allo­cat­ing your money into the six core asset classes, not five, or four or three, but six includ­ing a bond allo­ca­tion. And 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: 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?


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 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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