Saturday, December 31, 2011

Everything you need to know about investing, almost.

Almost everything you need to know is in this chart. It's worth looking at for a few minutes.

The chart above shows the last 15 years of investment returns by asset class. On the far right I have calculated the 20-year average for each asset class and pointed out the best and worst annual returns for the past 20 years for each asset class.  I love this chart - which is why I put it on the back cover of every book I have written.  Almost everything you need to know about investing can be learned from this chart:


  1. Stocks beat bonds over the long-run.  In the far right columns of the chart you will notice that all 4 of the major stock classes have a higher 20-year average return than all 4 of the major bond classes. You will notice that the various stock classes averaged 9-13% annual returns over 20 years while the various bond classes averaged just 5-8%.  
  2. Stocks don't beat bonds EVERY year, but they win about 75% of the time.  You will also notice that a stock class claimed the top spot in 11 out of the past 15 years (and 16 out of the past 20 years).
  3. Stock returns are much more variable or volatile than bond returns.  In the far right column of the chart you will notice

Monday, December 26, 2011

More on I Savings Bonds

I blogged about US Savings Bonds recently, but here is another nice article in the Wall Street Journal that sings the praises of the I Savings Bonds.  The I Savings Bonds are a great place to stash your emergency fund.  You can buy them at http://www.treasurydirect.gov/

A tip of the hat to: Shayne John

Saturday, December 24, 2011

10 Dumbest Things on Wall Street 2011

TheStreet.com has published a list of the 10 Dumbest Things on Wall Street: 2011

Actually, it's a quick video - no reading required!

So much to chose from, how did they manage to cut the list to just 10?

Tuesday, December 13, 2011

'Tis the Season to Give Financial Gifts to Children

Christine Benz of Morningstar recently published an interesting article called "The Best Ways to Give a Financial Gift to Children."  The article has good information for different ways to give a financial gift, but I might not classify them as the "best" ways. The article really focuses on more sophisticated ways to give larger amounts of money without letting the child spend it - at least not right away.

The article proposes 4 ways of gifting to children:
  1. Set up a UGMA/UTMA account (Uniform Gifts/Transfers to Minors Act)
  2. Contribute to a 529 Plan (college savings account)
  3. Fund a Roth IRA (Individual Retirement Arrangement)
  4. Give a financial knowledge gift (a basic finance book)
The article explains these 4 strategies pretty well so I'll let you read it yourself.  But, I'd like to add three simpler options below:

Monday, December 12, 2011

Read my books for FREE on Kindle in December!

If you are an Amazon Prime member, you can read three of my books for FREE in December!

The Rollover IRA Cookbook: Vanguard Recipes for your old 401(k)

The ETF Cookbook: Commission-Free Investing at TD Ameritrade

The Federal TSP Cookbook: Investment Recipes for the Thrift Savings Plan

Borrow the books absolutely FREE, with no due dates via the Kindle Owners Lending Library.

Sunday, December 11, 2011

Are you putting your investment advisor's kids through college?

The next time you walk into your local bank and their hot shot salesman investment advisor asks you to pay him 1% per year to place your money in his impressive list of mutual funds he has hand picked, all with stellar track records - simply turn on your heel and walk out.

Here's why.  Over a long period of time, say 20 years, the stock market will likely average about 8% annual return (2-3% from dividends + 5-6% in capital gains).  If you pay a salesman investment advisor 1% to put your money in mutual funds with expense ratios of 1% you will only achieve a 6% annualized long-term return.  In other words, you will give up 25% of your possible investment returns!

But, with these high fees, the power of compounding is working against you.  So it is actually worse than 25%!  Let me show you how.

If you invest $100,000 at 6%, after 20 years you might have $320,000 - or a gain of $220,000.  Sounds good right?  But, if you invest $100,000 at 8%, after 20 years you might have $466,000 - or a gain of $366,000.

You could have gains of $366,000 if you bought index funds, but since you paid that salesman investment advisor 1% to put you in mutual funds with 1% expense ratios, you only earned $220,000. That is a difference of $146,000 over 20 years.  In other words, you probably put your bank's investment advisor's daughter through college - instead of your own!

To think about it another way, you could have increased your investment returns by +66% if you bought index funds rather than listening to your bank's salesman investment advisor! (146/220 = 66%).

If you are fortunate enough to have $500,000 to invest, just multiply the above numbers by 5.  After 20 years you would amass $2.3 million with an 8% return, but just $1.6 million at 6% annual return. That's right, you would be out a whopping $730,000 over 20 years (146 x 5 = 730).  You likely paid for your investment advisors house - instead of your own!

I think these numbers speak, no SHOUT - very loudly why I believe everyone should learn do it yourself investing using Vanguard index mutual funds.  Even if you think you might make a mistake or two doing it yourself, there is no question you will come out ahead.  One of the worst things you can do with your money is give it to your local bank investment advisor and pay him 1% per year to put you in mutual funds with 1% expense ratios.

Saturday, December 10, 2011

Investment Performance Persistence Improbable

Standard & Poor's released their most recent S&P Persistence Scorecard.  It clearly shows why it makes no sense to pay someone to pick "good" mutual funds for you (or for you to try to pick funds yourself).  It's easy to find plenty of mutual funds with terrific track records in the PAST, but nearly impossible to identify funds that will outperform index funds in the FUTURE.

The problem is funds with great track records rarely give a repeat performance.

The study looked at a 10 year time period. First, they identified the top 25% of mutual funds for the first 5 years. Then, they looked to see what percentage of that top 25% stayed in the top 25% over the next 5 year period.  Here is a summary of the results:

Year-End Tax Tips

Click here for a list of year-end tax planning tips provided by Bogleheads.

Friday, December 9, 2011

Bye Buy US Savings Bonds :(

Starting January 1, 2012 we will no longer be able to walk into our local bank and purchase a US Savings Bond - at least not the traditional paper form.  US Savings Bonds are NOT going away - they are only going to be sold in "electronic form" via www.TresuryDirect.gov

Here is the press release from back in July.

I have always liked the I Savings Bonds that guarantee an interest rate above inflation. They accrue interest but the interest is not subject to federal tax until you redeem the bond and is completely exempt from state or local income tax.  If you use the proceeds for education expenses, you may not owe any federal tax at all.

Thursday, December 8, 2011

When and How to Use an Annuity

Here is a terrific article by Oblivious Investor on when and how to use an annuity in retirement.

I completely agree with the Oblivious Investor's opening paragraph:
 "Many annuities (maybe even most) are a raw deal for investors. They carry needlessly high expenses and surrender charges, and their contracts are so complex that very few investors can properly assess whether the annuity is a good investment.  
That said, one specific type of annuity can be an extremely useful tool for retirement planning: the single premium immediate annuity (SPIA)."

89% of 401(k) investors want help

According to a study by the Boston Consulting Group, 89% of employees want help figuring out how best to invest in their 401(k) plan.  And, 84% want help calculating how much money they need and/or will have at retirement.

Sorry for another blatant self promotion, but that is why I wrote my first book. So, I wonder why "The 401(k) Cookbook" does not sell better?  401(k) investors can figure out the answer to both questions in about a half hour using this book.

Tuesday, December 6, 2011

Does a Dead Cat Bounce?

George Putnam, editor of the Turnaround Letter advisory service thinks dead cats can bounce as outlined by Mark Hulbert at Marketwatch.  I would not condone this type of investing except for entertainment purposes as trying to time a dead cat bounce can sometimes be as tricky as catching a falling knife. Putnam produces a list of stocks that have been pummeled during the year. The idea is that these stocks can rebound (a bit) after big mutual funds dump the stocks before year end in an effort to "window dress" their year end portfolio holdings list.

This year's list of possible year-end dead cat bounces includes:

The Battle for the Soul of Capitalism

Just finished the audio-book version of, "The Battle for the Soul of Capitalism" by the great John C. Bogle (inventor of the first index fund and founder of the Vanguard Group of mutual funds).

I love Jack Bogle and recommend everything he has written, and

Friday, December 2, 2011

The Eurozone Will Survive When PIGS Fly

Below I've attempted to simply explain the European Sovereign Debt Crisis.

P = Portugal
I = Italy or Ireland (take your pick)
G = Greece
S = Spain

The above 5 countries are the weakest link in the Eurozone.  The Eurozone are the 17 countries within the 27 country European Union that use the Euro as their single common currency.  Monetary policy for the Eurozone can only be decided with a unanimous vote of the 17 member countries (nearly impossible), however