Sometimes it's difficult to comprehend the enormous impact earning a few extra percentage points has on your portfolio each year. Paul Merriman in his article A Vanguard fund strategy to double your nest egg does a pretty good job putting it in perspective. Not only does he give you a great idea for a balanced, well-diversified (and cheap) portfolio, but he highlights how you can double your money once you retire.
Merriman explains how a simple portfolio made of Vanguard index funds has outpaced the S&P 500 by 2.2% over the past 10 years. Does that 2.2% difference make a big impact over the life of your portfolio? Merriman explains that "on a $100,000 portfolio over 10 years, that extra performance is worth $45,901 ($250,095 at 9.6% vs. $204,194 at 7.4%)....A typical investor will have money in the market for at least 40 years, including pre-retirement and postretirement periods. Over that long span, a $100,000 portfolio would grow to $3.91 million at 9.6% vs. only $1.74 million at 7.4%...This seemingly small difference in return is equally significant to younger investors accumulating assets. If you started with $5,000 and added that same amount every year for 40 working years, a return of 7.4% would give you a portfolio worth $1.19 million. If instead you earned 9.6%, you would wind up with $2.18 million — nearly twice as much.."
However, there is a catch according to Merriman, and this extra return isn't entirely free. When starting out, it may take a few hours to set up your portfolio and then maybe an hour to rebalance investments each year. If you invest for 40 years, maybe you spend 50 total hours working on your portfolio. If your reward for your efforts is $990,000 (the difference between a 7.4% return and 9.6% return - see above), that gives you $19,800 per hour of work. Hey, I think I'll take that.
Sunday, November 24, 2013
Wednesday, October 2, 2013
How Long-Term Investors Are Failing
I came across a great article today by Paul Merriman titled "7 Reasons Why Retirement Savers Fail." He explains how investors continue to work against themselves when investing and why they regularly achieve returns much lower than popular indices. The entire article is well worth a read but here are a few clips:
"In the 20 years ending Dec. 31, 2012, the Standard & Poor’s 500 Index compounded at 8.2% while the average investor in U.S. equity funds made only 4.3%. In other words, nearly half the return of the market was lost....How did investors lose half the return of the market? Where did it go? Three powerful forces took it away. First, investor behavior, mostly emotion-based buying and selling based on emotions, costs two percentage points. That brings the return down to 6.2%.Second, there's the cost of running funds that are trying to beat the market. The average annual cost of operating a fund, 1.3%, reduces the return further, to 4.9%. Third, portfolio turnover is almost always higher in actively managed mutual funds — sometimes much higher. This can take away another 0.6 percentage points, bringing the return down to the 4.3% reported by Dalbar."
"The latest report repeats a conclusion Dalbar has reached year after year: 'No matter what the state of the mutual fund industry, boom or bust: Investment results are more dependent on investor behavior than on fund performance. Mutual fund investors who hold on to their investments are more successful than those who time the market.' The answer, it seems obvious, is for investors to stay in the game. They will do that only if they have confidence in the choices they have made. I think the most dependable way to achieve the full returns of the market is to invest in a diversified mix of index funds with low expenses. If you couple this with patience and with enough bond funds to keep you within your comfort level, then I think you are likely to be more successful than 99% of all other investors."
Paul Merriman writes a lot of good stuff and I recommend anything he writes. If anyone is interested in reading more, check out his website. He has some free investing books that you can download!
"In the 20 years ending Dec. 31, 2012, the Standard & Poor’s 500 Index compounded at 8.2% while the average investor in U.S. equity funds made only 4.3%. In other words, nearly half the return of the market was lost....How did investors lose half the return of the market? Where did it go? Three powerful forces took it away. First, investor behavior, mostly emotion-based buying and selling based on emotions, costs two percentage points. That brings the return down to 6.2%.Second, there's the cost of running funds that are trying to beat the market. The average annual cost of operating a fund, 1.3%, reduces the return further, to 4.9%. Third, portfolio turnover is almost always higher in actively managed mutual funds — sometimes much higher. This can take away another 0.6 percentage points, bringing the return down to the 4.3% reported by Dalbar."
"The latest report repeats a conclusion Dalbar has reached year after year: 'No matter what the state of the mutual fund industry, boom or bust: Investment results are more dependent on investor behavior than on fund performance. Mutual fund investors who hold on to their investments are more successful than those who time the market.' The answer, it seems obvious, is for investors to stay in the game. They will do that only if they have confidence in the choices they have made. I think the most dependable way to achieve the full returns of the market is to invest in a diversified mix of index funds with low expenses. If you couple this with patience and with enough bond funds to keep you within your comfort level, then I think you are likely to be more successful than 99% of all other investors."
Paul Merriman writes a lot of good stuff and I recommend anything he writes. If anyone is interested in reading more, check out his website. He has some free investing books that you can download!
Sunday, September 8, 2013
Your Best Investment Move Ever
I think one of the huge problems investors face these days is knowing what information to trust and what information should be ignored. Do we trust prestigious newspapers like the Wall Street Journal or the New York Times? How about the Wall Street banks? They presumably have the most resources and, hence, the best information right? How about a friend or family member who insists he knows the next hot investment? Paul Merriman wrote a great article about just this topic called "Your Best Investment Move Ever." Unfortunately, the "right" investment source is probably one that is hardly ever in the news. That in itself is a mistake. Check out the article though. It's a quick read and has tons of good information in it. A few quick pieces from the article:
"Every investor can choose among three basic sources: Wall Street, the huge industry that's perpetually hungry for profits; friends, neighbors, relatives and others who are eager to show how smart they are; and the academic community, which rigorously studies what works — and what doesn't.
I call this choice Wall Street vs. Main Street vs. University Street. My pick is University Street and I've never regretted it."
And then a little bit later...
"You see, it was the academic community that taught me decades ago to add asset classes with long-term performance records higher than the S&P 500 Index, without additional risk.
All I did was apply the lessons. Perhaps the greatest of these was that proper asset allocation accounts for the overwhelming majority of the results of a portfolio."
I always made a point to largely ignore most of what i hear on TV or read in newspapers about investing. Most of the information I use comes from books written by trusted scholars. Below are a list of books I would recommend reading:
The Little Book of Common Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Return by John Bogle (side note: I recommend anything that John Bogle writes)
A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing by Burton Malkiel
The Elements of Investing: Easy Lessons for Every Investor by Burton Malkiel and Charles Ellis
The Power of Passive Investing: More Wealth with Less Work by Richard Ferri
And if you are feeling ambitious...
John Bogle on Investing: The First 50 Years by John Bogle
Enjoy!
(Paul Merriman's bio on Marketwatch reads: "Paul Merriman is committed to educating people of all ages to get the most from their retirement investments. Founder of Merriman Wealth Management, a Seattle-based investment advisory firm, he is the author of numerous books on investing: "Financial Fitness Forever," "Live It Up Without Outliving Your Money," and the new "How To Invest" series, free at his website: "How To Invest" series: "First Time Investor," "Get Smart or Get Screwed: How to Select the Best and Get the Most from Your Financial Advisor" and "101 Investment Decisions Guaranteed to Change Your Financial Future." In his retirement, Paul writes a weekly column at MarketWatch and continues his weekly podcast, Sound Investing, which was recognized by Money magazine as "the best Money Podcast in 2008". He is president of The Merriman Financial Education Foundation and all profits from the sale of his books are used to advance financial literacy. His recommendations for portfolios of Vanguard funds, Fidelity funds and ETFs, podcasts, articles and books are available at paulmerriman.com. Follow Paul on Twitter @SavvyInvestorPM")
"Every investor can choose among three basic sources: Wall Street, the huge industry that's perpetually hungry for profits; friends, neighbors, relatives and others who are eager to show how smart they are; and the academic community, which rigorously studies what works — and what doesn't.
I call this choice Wall Street vs. Main Street vs. University Street. My pick is University Street and I've never regretted it."
And then a little bit later...
"You see, it was the academic community that taught me decades ago to add asset classes with long-term performance records higher than the S&P 500 Index, without additional risk.
All I did was apply the lessons. Perhaps the greatest of these was that proper asset allocation accounts for the overwhelming majority of the results of a portfolio."
I always made a point to largely ignore most of what i hear on TV or read in newspapers about investing. Most of the information I use comes from books written by trusted scholars. Below are a list of books I would recommend reading:
The Little Book of Common Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Return by John Bogle (side note: I recommend anything that John Bogle writes)
A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing by Burton Malkiel
The Elements of Investing: Easy Lessons for Every Investor by Burton Malkiel and Charles Ellis
The Power of Passive Investing: More Wealth with Less Work by Richard Ferri
And if you are feeling ambitious...
John Bogle on Investing: The First 50 Years by John Bogle
Enjoy!
(Paul Merriman's bio on Marketwatch reads: "Paul Merriman is committed to educating people of all ages to get the most from their retirement investments. Founder of Merriman Wealth Management, a Seattle-based investment advisory firm, he is the author of numerous books on investing: "Financial Fitness Forever," "Live It Up Without Outliving Your Money," and the new "How To Invest" series, free at his website: "How To Invest" series: "First Time Investor," "Get Smart or Get Screwed: How to Select the Best and Get the Most from Your Financial Advisor" and "101 Investment Decisions Guaranteed to Change Your Financial Future." In his retirement, Paul writes a weekly column at MarketWatch and continues his weekly podcast, Sound Investing, which was recognized by Money magazine as "the best Money Podcast in 2008". He is president of The Merriman Financial Education Foundation and all profits from the sale of his books are used to advance financial literacy. His recommendations for portfolios of Vanguard funds, Fidelity funds and ETFs, podcasts, articles and books are available at paulmerriman.com. Follow Paul on Twitter @SavvyInvestorPM")
Sunday, June 2, 2013
The Stock Market Game: The Worst Kind of Game
My first exposure to “The Stock Market Game” was my junior year of high school and I loved it. I loved tracking the market. I loved learning why the market went up or down on a particular day. I loved following “my stocks” and buying new ones and selling the losers. Most of all, I loved that I finally knew what it was like to be a real investor! Let me tell you, I was young and stupid and didn't know any better. “The Stock Market Game” may be one of the worst “games” used to attempt to teach basic wealth management.
The class was economics. It was one of those classes where many people used to catch up on sleep because the concepts being taught were completely foreign to anything they had ever learned before. While I was not the most interested in economics, the class was completely worth it because for the last 15 minutes of class, we all got to go down to the computer lab and pretend we were real investors with our portfolio of stocks. Learning a company’s ticker symbol, trying to fathom what it meant if a company had market cap of $30 billion, and becoming lost in the meaning of a P/E ratio were a few of the experiences I faced in that computer lab.
After several weeks, my team’s portfolio was doing great. It was one of the top teams in the state even. I was gaining confidence in my abilities to pick winning stocks (also known as luck) and I wanted to invest some real money. I came across this company called Superconductor Technologies (SCON) (probably from googling “hot stocks”) and I learned that it would soon enter the Chinese market and I probably thought “there are billions of people in China. How can it not do well?” I convinced my Dad to let me buy some actual stock in the company, so I took $100 and bought 10 shares in Superconductor Technologies. Finally I’m a real investor!
But then disaster struck. This is the stock chart of the S&P 500 over the life of game.
As you can imagine, my portfolio (along with everyone else's) in the “The Stock Market Game” soon tanked. For many, that was the end of investing. It was just a game and the game was over. If that was a person’s first exposure to investing, I imagine people took one of three routes after that: 1) They saw how the market dropped substantially and will be scared to invest any money when they have real money to invest, 2) They learned a little bit about what “investing” was about and when they have real money to invest, they will become traders, constantly buying and selling stocks because that was their only exposure to "investing", or 3) The game will intrigue them and they will want to learn more about the markets and investing. I took route 3. I’m sure I was in the small minority.
Let me just say that if “The Stock Market Game” was a person’s only exposure to the stock market and they have journeyed down routes one or two, then it’s an absolute travesty. Let's discuss the pros and cons of this game:
Pros:
1. Exposure to the stock market, different companies and important market terms - if there is any point of this game, this should be it. People need to know the basic building blocks before they even think about investing.
Cons:
1. It teaches investing the exact opposite of how it should be taught - this game encourages high risk trading over a very short period of time. A team gets rewarded if they are one of the top performing teams in the area and state. However, there is no penalty if you lose every dime you invest. What is that teaching people? Investing is not an activity stretched over a few months. It's an endeavour stretched over several decades. How a portfolio performs over a two month span is essentially meaningless in the grand scheme of things. Investing education needs to focus on having a long-term approach. There is no room for a high-risk, high-reward gambling game in this education.
2. Each team is given too much cash to invest - the great majority of people do not start investing when they have $1 million or even $100,000. Most probably start investing a few $100. Wouldn't it be better if kids were taught where and how they could start investing a few hundred dollars? Granted imagining you have hundreds of dollars to invest isn't as fun as imagining yourself with a millions dollars but this should be about realistic investing and not some fantasy game.
Obviously I think the cons outway the pros. I'm not sure how a teacher who understands the basic of investing could endorse this game. Oh did I mention that wall street endorses a lot of the stock market games that I've seen? Well of course they do! It means grooming young investors to become naive investors which puts more money in the hands of the big banks.
So to wrap things up, the stock market game that is played in schools all over the country is not a good learning tool. It is actually doing the opposite by teaching kids how to gamble with their money through high-risk, high-reward trading. If a teacher really wants to teach kids about investing they should focus on indexing, diversification, and compound interest. A teacher should encourage their students to read essays/books/speeches by Warren Buffet and John Bogle. These teaching will create the true building blocks for a life of investing.
The class was economics. It was one of those classes where many people used to catch up on sleep because the concepts being taught were completely foreign to anything they had ever learned before. While I was not the most interested in economics, the class was completely worth it because for the last 15 minutes of class, we all got to go down to the computer lab and pretend we were real investors with our portfolio of stocks. Learning a company’s ticker symbol, trying to fathom what it meant if a company had market cap of $30 billion, and becoming lost in the meaning of a P/E ratio were a few of the experiences I faced in that computer lab.
After several weeks, my team’s portfolio was doing great. It was one of the top teams in the state even. I was gaining confidence in my abilities to pick winning stocks (also known as luck) and I wanted to invest some real money. I came across this company called Superconductor Technologies (SCON) (probably from googling “hot stocks”) and I learned that it would soon enter the Chinese market and I probably thought “there are billions of people in China. How can it not do well?” I convinced my Dad to let me buy some actual stock in the company, so I took $100 and bought 10 shares in Superconductor Technologies. Finally I’m a real investor!
But then disaster struck. This is the stock chart of the S&P 500 over the life of game.
As you can imagine, my portfolio (along with everyone else's) in the “The Stock Market Game” soon tanked. For many, that was the end of investing. It was just a game and the game was over. If that was a person’s first exposure to investing, I imagine people took one of three routes after that: 1) They saw how the market dropped substantially and will be scared to invest any money when they have real money to invest, 2) They learned a little bit about what “investing” was about and when they have real money to invest, they will become traders, constantly buying and selling stocks because that was their only exposure to "investing", or 3) The game will intrigue them and they will want to learn more about the markets and investing. I took route 3. I’m sure I was in the small minority.
Let me just say that if “The Stock Market Game” was a person’s only exposure to the stock market and they have journeyed down routes one or two, then it’s an absolute travesty. Let's discuss the pros and cons of this game:
Pros:
1. Exposure to the stock market, different companies and important market terms - if there is any point of this game, this should be it. People need to know the basic building blocks before they even think about investing.
Cons:
1. It teaches investing the exact opposite of how it should be taught - this game encourages high risk trading over a very short period of time. A team gets rewarded if they are one of the top performing teams in the area and state. However, there is no penalty if you lose every dime you invest. What is that teaching people? Investing is not an activity stretched over a few months. It's an endeavour stretched over several decades. How a portfolio performs over a two month span is essentially meaningless in the grand scheme of things. Investing education needs to focus on having a long-term approach. There is no room for a high-risk, high-reward gambling game in this education.
2. Each team is given too much cash to invest - the great majority of people do not start investing when they have $1 million or even $100,000. Most probably start investing a few $100. Wouldn't it be better if kids were taught where and how they could start investing a few hundred dollars? Granted imagining you have hundreds of dollars to invest isn't as fun as imagining yourself with a millions dollars but this should be about realistic investing and not some fantasy game.
Obviously I think the cons outway the pros. I'm not sure how a teacher who understands the basic of investing could endorse this game. Oh did I mention that wall street endorses a lot of the stock market games that I've seen? Well of course they do! It means grooming young investors to become naive investors which puts more money in the hands of the big banks.
So to wrap things up, the stock market game that is played in schools all over the country is not a good learning tool. It is actually doing the opposite by teaching kids how to gamble with their money through high-risk, high-reward trading. If a teacher really wants to teach kids about investing they should focus on indexing, diversification, and compound interest. A teacher should encourage their students to read essays/books/speeches by Warren Buffet and John Bogle. These teaching will create the true building blocks for a life of investing.
Tuesday, May 14, 2013
50 Unfortunate Truths About Investing
I came across this article called "50 Unfortunate Truths About Investing" by Morgan Housel tonight and it's amazing how many of these are spot on. If only more people knew them...well worth a 15 minute read.
Thursday, April 25, 2013
The Retirement Gamble
I watched a great little documentary today from PBS's Frontline called "The Retirement Gamble" and the retirement crisis in this country. It was fascinating really. It all came down to how uneducated our country is when it comes to investments and how people really have no idea how to invest for their retirement.
You may be in your mid-twenties and thinking, "retirement huh? I don't need to worry about that yet." With all due respect, you are wrong. But it's not necessarily your fault. It's not your fault that our school system fails to teach us basic money management, arguably one of the most important topics that everyone needs to learn because no matter what job you have later in life, you will still need to manage your money. It's not your fault that the banking and investment industry mesmerizes us with their talking baby commercials encouraging us to trade stocks and trade often (this increases your cost). It's not your fault that you start working and your company advises you to put money away in a 401k but then it doesn't give you any instruction on how to invest wisely. This is a problem. This is a big problem.
There are three very basic things all people need to know about investing:
1) Keep costs low! Costs of your investments and fees from the management companies make a huge different on how much money you end up having. Usually costs/fees can range anywhere from 0.04% of your investment to more than 2%. If you don't want to watch the entire video, skip to minutes 25-29. That will tell you all you need to know.
2) Compound Interest is another key and it's why you need to think about saving early. Don't be that person in his/her early 30's who hasn't started saving for retirement yet. The key to compound interest is time. The greater length of time you invest, the larger your money grows. Here is a great seven minute video on the topic.
3) Diversify your investments. Simply put, you don't want to load your 401k with company stock. The risk is too high. A much better choice, like Mr. Jack Bogle (founder of Vanguard) talks about in the documentary, are index funds which invest in hundreds of companies all in a single fund for minimal cost.
One thing Jack Bogle said stuck with me. He explains that millions of Americans invest while putting in 100% of the money, taking 100% of the risk, and only getting 30% of the return (in reality it's a little over 36% seen in the video at the 25 minute mark). People do this by investing in these ridiculously expensive mutual funds instead of cheap, broad-market index funds even though study after study shows that over long periods of time, you will earn more money by investing in index funds than the average mutual fund.
If you only watch a second piece of this documentary, please watch minutes 39-43. They are golden.
Oh and one more thing. If you are truly interested in learning about investments, I recommend reading anything you can get your hands on written by Jack Bogle. If you need somewhere to start, how about this interview. Enjoy.
You may be in your mid-twenties and thinking, "retirement huh? I don't need to worry about that yet." With all due respect, you are wrong. But it's not necessarily your fault. It's not your fault that our school system fails to teach us basic money management, arguably one of the most important topics that everyone needs to learn because no matter what job you have later in life, you will still need to manage your money. It's not your fault that the banking and investment industry mesmerizes us with their talking baby commercials encouraging us to trade stocks and trade often (this increases your cost). It's not your fault that you start working and your company advises you to put money away in a 401k but then it doesn't give you any instruction on how to invest wisely. This is a problem. This is a big problem.
There are three very basic things all people need to know about investing:
1) Keep costs low! Costs of your investments and fees from the management companies make a huge different on how much money you end up having. Usually costs/fees can range anywhere from 0.04% of your investment to more than 2%. If you don't want to watch the entire video, skip to minutes 25-29. That will tell you all you need to know.
2) Compound Interest is another key and it's why you need to think about saving early. Don't be that person in his/her early 30's who hasn't started saving for retirement yet. The key to compound interest is time. The greater length of time you invest, the larger your money grows. Here is a great seven minute video on the topic.
3) Diversify your investments. Simply put, you don't want to load your 401k with company stock. The risk is too high. A much better choice, like Mr. Jack Bogle (founder of Vanguard) talks about in the documentary, are index funds which invest in hundreds of companies all in a single fund for minimal cost.
One thing Jack Bogle said stuck with me. He explains that millions of Americans invest while putting in 100% of the money, taking 100% of the risk, and only getting 30% of the return (in reality it's a little over 36% seen in the video at the 25 minute mark). People do this by investing in these ridiculously expensive mutual funds instead of cheap, broad-market index funds even though study after study shows that over long periods of time, you will earn more money by investing in index funds than the average mutual fund.
If you only watch a second piece of this documentary, please watch minutes 39-43. They are golden.
Oh and one more thing. If you are truly interested in learning about investments, I recommend reading anything you can get your hands on written by Jack Bogle. If you need somewhere to start, how about this interview. Enjoy.
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