Personal Finance 

50 Financial Skills Every Person Needs To Know

Popular Mechanics created a list of 100 Skills Every man Should Know, which naturally gravitated towards DIY/physical skills like jump starting a car and split firewood. The Frisky listed 30 Skills Every Woman Should Have Before Turning 30, which actually touched on more than physical skills (though #12 is physical :)), with a handful of financial skills (#17 – #20).

This isn’t a checklist of things you need to necessarily do in your life, it’s just a list of things that you should know how to do (in case the need arises).

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Index Funds Are Only Part of Your Investment Plan

There isn’t a single reason why you shouldn’t like index funds. They’re cheap, they offer market rates of return without fail, and they are simple to buy. They beat actively managed mutual funds a majority of the time and they are often advocated as the best investment the average Joe can put their money in. So why not put all your money into an S&P 500 Index fund like the Fidelity Spartan 500 Index or the Vanguard 500 Index, call it a day and enjoy more time with the family? Because that would be a huge mistake.

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Pick Investments Strategies That Fit Your Lifestyle

Blurry Stock TickerThe key to a successful investment plan is to pick one that fits your personal style. If you’re always busy and simply can’t find the time to pay attention to your investments, you need to pick a style that matches your life. There’s no sense adjusting your life to your investments, it should be the other way around. It’s difficult to pigeonhole anyone into one particular bucket but find the various suggestions in each grouping to see how best to use them to match your life.

The Novice

Everyone starts as a novice, there’s absolutely no shame in being a beginner when it comes to the stock market. In fact, it’s probably better that you’re a beginner. It was the experts that got us into the whole sub-prime mortgage mess. Until they closed their doors, the halls of Bear Stearns was full of experts. That being said, if you’re a novice when it comes to the stock market, put your money into a high yield savings account and start playing with a “play portfolio” at one of the finance sites. While you’re learning, your savings will still earn a nice interest rate.

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Introduction to Lazy Portfolios

Ever heard of the Margarita portfolio? How about the Couch Potato portfolio? Or the No-Brainer portfolio? No?

They’re all Lazy Portfolios.

A Lazy Portfolio is one that you can just set it and forget it and relies on low cost index funds or ETFs. There’s nothing particularly special about any Lazy Portfolio, besides their use of low cost index funds, and one isn’t necessarily better than another in all economic scenarios. As with any investing strategy, there are pros and cons. The pros, that it’s simple and you make few decisions, results in cons in that you may become complacent and ignorant of your investment decisions. It’s better to keep it simple and well understood than to make it complex and obfuscated. I’d rather make a choice that turned out wrong than make a decision I didn’t understand.

How They Perform

Paul Farrell of MarketWatch tracks eight Lazy Portfolios each year and in 2008, they have extended their winning streak of beating the S&P 500 for the sixth year (on a three-year and five-year basis). In other words, having a one of the eight Lazy Portfolios over the last six years has gotten you a better return than the stock market itself. (This year, three of the portolio’s got beat because they had a lot of REIT funds, but they are still besting the S&P over the last few years).

Here are the funds with the best names: (some of which weren’t featured in Paul Farrell’s wrapup)

Couch Potato Portfolio

This portfolio is the brainchild of Dallas Morning News columnist Scott Burns and is as simple as they come. All you need is 50% in the Vanguard 500 Index Fund (VFINX) and 50% in the Vanguard Total Bond Fund Index Fund (VBMFX). That’s it. You can go a little more aggressive with the variant Sophisticated Couch Potato Portfolio of 75% in the Vanguard 500 Index Fund and 25% in the Vanguard Total Bond Fund Index Fund.

Margaritaville Portfolio

This portfolio is also another one of Scott Burns’s creations and is the second simplest portfolio with equal parts of three funds: Vanguard Inflation-Protected Securities (VIPSX), Vanguard Total International Stock Index (VGTSX), and Vanguard Total Stock Market Index (VTI).

No-Brainer Portfolio

Created by Dr. William Bernstein, a neurologist known for his work in modern portfolio theory and his book The Four Pillars of Investing, the No-Brainer Portfolio consists of four funds of equal weight: Vanguard 500 Index (VFINX), Vanguard Small Cap (NAESX) or (VTMSX), Vanguard Total International (VGTSX) or (VTMGX), and Vanguard Total Bond (VBMFX) or (VBISX). There is also a No-Brainer Coward’s Portfolio that includes 9 funds.

Coffeehouse Portfolio

This little gem was created by money manager Bill Schultheis, author of The Coffeehouse Investor: How to Build Wealth, Ignore Wall Street, and Get On With Your Life, created the Coffeehouse Portfolio that consists of seven funds:

  • 40% in Vanguard Total Bond Index (VBMFX)
  • 10% in Vanguard 500 Index (VFINX)
  • 10% in Vanguard Value Index (VIVAX)
  • 10% in Vanguard International Stock Index (VGTSX)
  • 10% in Vanguard REIT Index (VGSIX)
  • 10% in Vanguard Small-Cap Value Index (VISVX)
  • 10% in Vanguard Small-Cap Index (NAESX)

Those are the cooler sounding ones but there are many many others out there!

 Investing, Personal Finance 

Money: Only 7 Investments You’ll Need

Money Magazine recently released the only 7 investments you’ll ever need and, surprise surprise, my favorite firm, Vanguard, was listed first choice for five of the seven. Their founder, John Bogle, was a major proponent of index funds and it shows in their offering, as almost all of Money’s choices were low-expense ratio index funds.

Need another reason to have a mutual fund account at Vanguard? (No, Vanguard doesn’t sponsor this site!)

Blue-chip US-stock fund: Fidelity Spartan 500 Index (FSMKX) because it replicates the S&P 500 with an expense ratio of 0.10% (coincidentally, Vanguard’s version, the Vanguard 500 Index Fund Investor Shares (VFINX) is 50% more expensive with a ratio of 0.15%).

Blue-chip foreign-stock fund: Vanguard Total International Stock Index (VGTSX) because of its solid performance, beating 90% of its peers, and because it’s an index fund with an expense ratio of 0.27%. Another Vanguard fund, the Vanguard FTSE All World Ex-U.S. ETF (VEU), was listed as an alternative.

Small-company fund: T. Rowe Price New Horizons (PRNHX) is an actively managed fund, one of the few actively managed funds they selected, and is “one of the most efficient of the actively managed crowd.” Considering it is actively managed, an expense ratio of 0.8% is pretty good, about half the average.

Value fund: Oh look, another Vanguard fund – the Vanguard Value Index (VIVAX) and its 0.2% expense ratio and a record that trumps 78% of its peers. Value funds go after investments that appear overlooked or beaten down and try earn a little off those cigar butts and dividends, rather than looking for growth potential.

High-quality bond fund: Vanguard Total Bond Market Index (VBMFX) snags this category with a 0.2% expense ratio. Bonds are good to be the rock in your portfolio to give you some grounding as your other investments shoot up and crash down. 🙂

Inflation-protected bond fund: This last category was won by Vanguard’s Inflation-Protected Securities Fund (VIPSX) and it’s 0.2% expense ratio (Vanguard’s index funds are ridiculously efficient). “Among TIPS funds, Vanguard Inflation-Protected Securities has several things going for it, including lower costs and better management than you would get if you assembled your own TIPS portfolio. While the fund returned 6.6% over the past five years, you shouldn’t expect it to make a pile of dough. Its job is to protect the money you already have.”


3 Reasons Why I Love Index Funds

We live in a society where we are taught that we should try to be the best. Be #1 in your class, rise through the ranks of your company and be the best that you can be, be the fastest, smartest, or strongest, best best best. While I agree, we should always try to be the best, the point of investing isn’t to get the highest return, what most consider to be the best, but it is instead of get the highest return for what you’re willing to put into the process and what you’re willing to risk.

I used to read news articles, annual reports, and all those financial pieces on various companies, trying to glean bits of information and figuring out if I could get an edge over the market. I had the time to do that because I was in college, but now? Forget it, reading annual reports? Scouring balance sheets and income statements? No thanks.

So, that’s when mutual funds come into play. You have research without all the hard work of research. You also have diversification (hopefully they’re not diversifying in the general population’s understanding of diversification and actually diversifying and taking into account co-variance and blah blah) without the hard work of actually calculating anything out. The only downside of mutual funds is that very few exceed the market and all are more expensive than index funds.

So, that’s when I moved onto index funds and target retirement funds. The problem with index funds is the geographic and equity exposure. If you’re in an S&P 500 Index fund, you’re in all stocks and you’re in all USA. USA is a wonderful country, man I love it here, but our dollar is getting pummeled because of the trade imbalance and the nearly universal hatred of our President (I voted for him twice, thank you very much), and so you don’t want 100% national exposure. So I’m in target retirement fund to get out of all equity and I’m also in some emerging markets to give me some exposure to EAFE (Europe, Australasia, and Far East).

The beauty of the index fund and target retirement funds is that they are cheap, they are easy, and they will give me at least the market average in returns every single time. The expense ratios are generally tiny for index funds and relatively low on the target retirement funds (not so on emerging markets). In terms of easy, they require no work on my part. I can do something else with that time, even if it is lounging around doing absolutely nothing and being worthless. As for the market average returns, well I think the index fund really speaks for itself on that one. So really, it’s three beauties at once and I love it.


Are Investment Newsletters Worth It?

I have having lunch with a co-worker last week when he mentioned he was considering signing up for Motley Fool’s Hidden Gems newsletter run by Tom Gardner himself. A single year’s subscription to the newsletter costs $199 a year! Is it worth it?

I have no idea, but I know who might, the resident investment blogger that I talk to on a semi-regular basis and the only one I’ve actually met in person – George of Fat Pitch Financials (you may remember he gave me a sneak peek at his Contributor’s Corner). What did George say?

I’ve tried most of the MF investment newsletter subscriptions. The Hidden Gems research is pretty good and they use to have a great message board back when I tried it out. The subscriptions also give you access to the Fool forums. The only drawback with Hidden Gems that I’ve heard of is that the members often drive up the price of these small cap stock picks real quick when they are selected and the price can drop dramatically when the stock is no longer recommended. The picks also often tend to be higher risk growth stocks.

I think the biggest drawback of the Motley Fool products is that you only get research on a few stocks each month. I like MorningStar as an alternative because they cover 1500+ stocks. I think for even less than the cost of a MF subscription, you get a lot more with the MorningStar Premium Subscription.

Sounds like the newsletter is certainly of value but there are certainly very obvious drawbacks. While there appears to be value in the MF Hidden Gems one specifically, I can see how most of those drawbacks are systemic problems for all newsletters. Just think of the picks Jim Cramer gives away for free on his television show, the stocks spike the next day and any value that was there is quickly diminished. While the picks may or may not be good in the long run, in the short run they are made “less good” by virtue of being broadcast on CNBC. The only mitigating factor (to the popularity issue) of Hidden Gems is that the annual entrance fee of $199 dissuades many an investor so you won’t get the throng that pant over Jim Cramer’s daily selections.

Beyond the short term spike, George mentions something that may be obvious if you think about it – they tend to pick higher risk growth stocks. Well they’re looking for hidden gems, so they’ll probably be picking riskier propositions but ones with long term potential. With venture capital, the old maxim is that you pick one home run, four treadwaters, and five busts (something like that… I’m not a VC); so if you apply that to stock picking, you don’t have to be mega-successful percentage-wise to be mega-successful dollar-wise. All it takes is one twelve-bagger…

Lastly, there is also the issue of coverage, since the newsletter has to make certain picks, it can’t cover the whole field and provide extensive research on a lot of securities. Also, what if there aren’t any hidden gems or they don’t find any? There is the possibility that right now there are no hidden gems worth taking a shot at, so do they trot out something or just research a bunch of securities and let you have at them? It’s an interesting question that I don’t know if anyone has asked them yet. That’s why George recommended Morningstar, especially if you’re a more active investor because you get significantly more information.

Lastly, I do have to give a shoutout to George’s Contributor’s Corner (especially since his email was very thorough), it certainly has value and comes with a cheaper sticker price of only a hundred dollars a year. George finds all sorts of arbitrage opportunities that come with little risk and requires quite a bit of work on George’s part. Making back the $100 is a cinch through the various going private, reverse split, and buyout opportunities he digs up. (George isn’t cutting me in on the action though :))

Anyone out there use MF Hidden Gems or any other investment newsletter and care to share their experiences? MF Hidden Gems does have a 30 day trial so my friend might dip his toe in to see how it is, I’ll report back if and when he does.


Kiplinger Doesn’t Advocate Target Date Mutual Funds

This is a guest post by Mapgirl, a single, 30-something woman with a mortgage who has all her student loans paid off. She’s outside most of the demographics being written about in mainstream personal finance media. She’s hoping to fill the niche. If you like what you read (I often do), stop by her blog or consider subscribing to her RSS feed.

Recently, I came across an old article from October 2006 Kiplinger about target-date mutual funds, and I agree with most of the arguments in the article about why these funds are aren’t for everyone. Jim recently wrote a devil’s advocate post about index funds, about which you could make some of the same arguments.

First of all, target-date funds are not without risk, and you’ll have to evaluate them on the same basis of performance as you would any other mutual fund. You could stick your money into one of these funds and get a piddly 4% return. If you’re not paying attention, you’ll be screwed when the targeted date comes around with an underfunded retirement. If you decide to go with a target date fund, make sure it’s performing to your expectations like you would with any other investment.

Second, the Kiplinger article points out that these funds are one-stop shopping and are meant to be the ONLY investment in your portfolio. However, if you already have investments, to reallocate them into these funds will have tax fallout. They say it’s probably not a good idea for someone already saving, but a great place to start if you are young in your 20’s. Sure, if you are young in your 20’s and you aren’t inclined to to save, nor to pay attention to retirement saving, then this is a perfectly fine investment vehicle.

The other part I can’t really say better, so let me quote:

The alternative to not remaking your existing portfolio is to undermine the purpose of the target fund. Suppose, to take an exaggerated example, you throw $1 million into a target fund that has three-fourths of its assets in stocks and one-fourth in bonds. But say you have another $1 million socked away in municipal bonds. Presumably, your goal in investing in the target fund is to acquire a portfolio that’s 75% stocks and 25% bonds. But if you keep the munis, you end up with a portfolio that’s 62.5% in bonds and only 37.5% in stocks.

Third, they write that a 55 year old investor is 9 years away from retirement, but the target date fund has only 60% stocks in it so a target date fund isn’t a very good choice. I have a way around that which is to move to the next one with a date in the future which will carry more stocks. I personally like a lot of risk and I would move to the fund designated for people 5-10 years younger than me just to keep a higher level of risk. I’m surprised the article doesn’t mention this as a possible strategy for being in a target date fund when you don’t think it’s holding enough stocks.

The final point of the article is the piece de resistance. They write that most people don’t have the stomach to sit in one investment for 30 years, which is the whole point of these target date funds. I would agree. I couldn’t have just one iron in the fire when it comes to retirement. Seems
kind of a bad idea, but I suppose a fund like this is better than holding onto CD’s or US Treasuries, which is certainly what some people do with their money.

What about you? Can you stomach holding onto one investment for 30 years? Are you in a target fund? Why?

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