Saturday, August 5, 2017

Common Sense Investing

I found a lot to like about the The Little Book of Common Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Returns by John C. Bogle. Mr. Bogle was the founder of The Vanguard Group and is famous for creating the world’s first index mutual fund in 1975, the Vanguard 500 Index Fund.
The logic of his index fund was to invest in a large number of stocks, all the stocks comprising the S&P 500, to make money from the combination of their growth and dividends. This is a departure from the more common view of investing in undervalued stocks to make money from an increase in their stock value.

Bogle makes a convincing argument that the best way to get the value from the stock market is to invest in all the stocks by buying mutual funds based on indexes of the market that invest in all the stocks.

The author points out that the real net income from stock investments is the investments’ gain minus the cost of the investments. The costs are relatively easy to determine in the case of retail brokers charging for a stock trade when buying or selling  stocks. However, the costs are much more complicated for mutual funds because, in addition to the cost of the trade, in many cases there is an annual incentive sales fee for the broker for up to five years (up to 1.5% a year according to the author). I had no idea that there were hidden sales fees in addition to the purchase fee charged by the brokers. In addition to annual fees, most mutual funds typically have additional management fees of 2 to 3%. In comparison, index funds have low management fees (often .4% or lower) with no hidden sales fees.

What is more disturbing is that 99% of mutual funds significantly underperform the S&P 500 index. When the excessive costs combined with the underperformance of mutual funds are compared to S&P index funds, the long term income differences are shocking. The net return after taxes of $10,000 invested in an indexed fund from 1980 to 2005 would have been $76,200 versus $16,700 for other mutual funds (for those mutual funds that survived). This represents 456% more net income to the investor with far less risk.

If you are one of the 85% of investors who let their broker "manage" their assets, Bogle’s book may keep you awake at night. To sleep better, I switched to low cost, low risk index funds. 

The author’s perspective is unique since he invented the very first indexed funds. It is a little like reading Thomas Edison's thoughts about the light bulb. Bogle knows the issues and history of investing in indexes versus other types of mutual funds.

This "common sense investing" book was easy to read and easy to understand. I highly recommend it to anyone wanting their investments to produce more income with less risk.  Five Stars and hats off to the founder of index investing. 

Friday, July 28, 2017

How your Bank Balance buys you Happiness

I recently read an interesting study, How your bank balance buys happiness: The importance of "cash on hand" to life satisfaction, by Ruberton, Gladstone, and Lyubomirsky from the University of California, Riverside and Judge Business School, University of Cambridge. The study claims having more cash in your checking and saving accounts leads to increased life satisfaction.

This is the first study on money to use actual banking records from the participants to assess how their “liquid wealth” affected their life satisfaction. Previous studies only used self reported estimates of bank account information. In addition to the previous year of bank records, the participants took a Life Satisfaction survey and a two question Perceived Financial Well Being survey. Measures for the study also included Income, Total Spending, Total Investments, Indebtedness status, Employment status, and Relationship status. Another key detail was anyone who had greater debt than savings was excluded from the study.

The study’s results confirmed previous studies findings that people with higher debt have lower life satisfaction and people with investments have higher life satisfaction, as do people with an income high enough to have a moderately good quality of life (approximately $75,000). It also confirmed studies showing that life satisfaction is unrelated to income above $75,000 and people with no debts have higher life satisfaction.

The new revelation from the study was that having more cash in savings or checking accounts increased financial well being and life satisfaction more than any other factor, including total debt, income level, or investments. The study found that with each increase in cash by a factor of ten, life satisfaction increases by 3.45%. So an increase in savings from $1 to $1000 increases life satisfaction by about 10.35%. The next 3.45% increase in life satisfaction is at $10,000 in cash. And another 3.45% increase is at $100,000. The next 3.45% increase in life satisfaction requires a million dollars.

Even people with very large investments (over ten million dollars) who had small amounts of liquidity in their bank accounts had significantly lower levels of financial well being and life satisfaction than those with vastly lower investments yet more liquid wealth in cash.

What is unclear about this new finding is if it is the result of the 2008 financial collapse, since investments may not provide the same feeling of financial well being as before. Or is this something that has been true for a long time and not previously found due to self reporting biases, since actual bank statements were not used in the past. 

The researchers also raised the alarm about how much the long-term, extremely low interest rates from banks may be costing society in happiness and well being. These low rates punish those who have more cash in savings.  

Monday, May 29, 2017

How to Make Your Money Last in Retirement

I just finished reading Jane Bryant Quinn’s book "How to Make Your Money Last: The Indispensable Retirement Guide”. Ms. Quinn wrote this book last year and is now 78 years old, so her concepts are not theoretical or abstract. She shares clear, concrete, and very detailed information on how to make your retirement money last which made this book useful and enjoyable to read.


The most basic thing she recommends to do to make your money last is to earn income as long as you can (as old as possible) and not start taking your social security until you are 70 years old. The social security payout increases 8% a year for every year after age 62.

The second way to make your money last is to control spending. The happy place to be in retirement is where your expenses are equal to or less than your income.

For most retirees, their biggest reduction comes from downsizing the cost of their housing. 

Another major expense for many are high stock trade fees and hidden commissions in mutual funds, annuities, and life insurance products. These high costs and hidden fees can eat away as much as 50% or more of the long term value of a retirement portfolio. The best way to avoid this is to use a discount broker and manage investments yourself.

An area of great savings and great risk is Medicare. You can start taking Medicare at 65 and it may be much cheaper than your employers health coverage plan, however, there are big risks to doing this. If you start Medicare, the government will automatically start your social security payments. You have to have the payments stopped or you could lose your 8% lifetime increase. If you miss a payment to Medicare, they cover it with social security and that could impact your start date. You may not even be notified and only find out about it at age 70 when you file for social security. Not a small risk.

Although I have  considered Annuities and Reverse Mortgages foolish things to do, the author pointed out some circumstances where they can be very profitable. The book does a great job of explaining the difference between an IRA, a 401K and a Roth IRA and the tax implications of each. She describes the rules for taxes and inheritances and what income is and is not taxable.

One thing I found surprising is that you can open a Roth IRA at anytime and put in any amount. The earnings are not taxed and, unlike an IRAs, there is no minimum that must be withdrawn each year or maximum that can be withdrawn each year. Even better, the earnings are not taxed when taken out. It actually seems too good to be true, so I recently bought a book on the details of Roth IRAs to see what the downside might be.

The author recommends that you pay off all credit card debt before retiring; apparently people 50 and older have a lot of credit card debt - far more than younger people. She also thinks it is best to avoid buying rentals as a source of income because they are hard to manage.

The book’s detail and depth makes it a slow read but I found the information so useful that I used a highlighter to mark the critical details and consider it an important reference.

I highly recommend this book, five stars.