Comparing Returns Against the Markets


This has definitely been a great time for stocks.  Ever since the election in 2016, stocks have been heading up.  The Dow Jones Industrial Average, an index often used to judge the returns fo the markets,  has risen about 25% since election day.  The S&P 500 index, a common index used to determine the performance of large US stocks, is up about 15% (16.7% if you reinvested dividends).

While I’m only really interested in long-term returns, I still like to periodically review how I am doing against the major indices to get some perspective.  I tend to invest a good portion of my money in individual stocks that I think will do well over long periods of time.  If I were to consistently get lower returns than I would have just investing in index funds, I might just shift to index funds since that would be simple and require very little effort.  In the very least, I might rethink how I invest and in what I invest in.

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Looking at the returns of the S&P500, I see that it has returned 14.32% since the start of the year.  Over a 1 year period, it has returned about 15.7%.  Looking at my IRA account, it has increased by about 18% since the start of the year and 31% over a 1-year period.  I have a second account that unfortunately hasn’t done quite as well, rising 12% since the start of the year and about 19% over a 1-year period.  It is outpacing the returns of the S&P 500 for the full year but lagging a bit year-to-date.  The Russell 2000 has returned 10.3% year-to-date, so the smaller stocks have not been doing as well as the larger companies.

Be sure to check out this month’s book, The Bogleheads’ Guide to Investing.  

I’m investing long-term, so returns for a short period aren’t as important as the financial performance of the companies I own in general.  I believe that if I pick stocks that consistently see earnings grow in the 12-15% per year rate, I should see returns on that order over long periods of time.  Sometimes the price will fluctuate up or down due to other, unrelated factors, but eventually the stock price will return to the fair value dictated by the earnings and dividend growth of the company.


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Note, a great site to determine the return of the S&P 500 for any given period is at: https://dqydj.com/sp-500-return-calculator/ .  The nice thing about this calculator is that you can pick any period you want, and it also includes the effect of reinvesting dividends.  If that is included, my returns look even worse since the S&P 500 return with dividends reinvested is 8.3%.

Have a question?  Please leave it in a comment.  Follow me on Twitter to get news about new articles and find out what I’m investing in. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

The Small Investor Book Club Reviews Bogleheads’ Guide to Investing – Professional Money Managers


Do you need a professional money manager?  Chapter sixteen of The Bogleheads’ Guide to Investing does a great job covering this question.  A couple of months ago I asked folks to read The Bogleheads’ Guide to Investing with me so that we could discuss it.  This was really a good book, deserving of many posts.  Today I wanted to talk about the discussion of professional money management provided in the book.
 

The Bogleheads’ Guide to Investing

The first thing the book covers is all of the different designations that you can use without any sort of financial training or education.  These included things like Accredited Financial Counselor, Chartered Asset Manager, and Certified Financial Planner.  (I’ll confess that this gave me hope, since I am entirely self-taught through experience, so I’m happy that I could hang out my shingle as a “Wealth Management Specialist,” and help people set up an investing plan without needing to do a lot of coursework.)  Apparently, the only certifications that mean anything are Chartered Financial Advisor and Certified Financial Planner.  The chapter then goes on to describe the types of money managers, along with how to select someone who generally is there to help you as opposed to someone who will just try to sell you the financial products offered by the firm.

One of the other things that you pick up from the book, however, which you will also pick up from this blog, is that it is really easy to learn to invest, particularly in index mutual funds as recommended by the Bogleheads.  Basically, it is a just a matter of developing an asset allocation strategy, investing regularly, and then rebalancing once or twice a year.  Since financial advisors will charge you a fee to manage your money for you, which gets added to the mutual fund fees, having someone invest your money for you also goes against another Boglehead principle of keeping your expenses low.  Let’s look at each of these activities, through the eyes of the Bogleheads.

Asset Allocation

Asset allocation, as described in Chapter 8, is determining what percentage of your money to put into equities (stocks), and bonds.  It also includes deciding how much to put within the subcategories of stocks and bonds, such as large or small stocks, domestic or international bonds, and so on.  Basically, when investing for retirement, the younger you are and the more tolerant you are of risk, the greater the percentage of your asset you want in stocks, and your stock investments should be evenly spread between small and large stocks.  Between US and international, the Bogleheads say you should have about 80% in US stocks and 20% in international stocks.  They then give sample portfolios.  For example, a young investor using Vanguard funds could have a portfolio consisting of 80% in Total Stock Market Index Fund and 20% in the Total Bond Market Fund.  An investor late in retirement might have 20% in the Total Stock Market Index, 40% in The Short-Term Total Bond Market, and 40% in Inflation-Protected Securities.  Simple.

Investing Regularly

  Chapter two talks about the importance of investing regularly.  This chapter shows what happen with compounding when you start really early, versus starting later.  If you have never seen the effect, I advise you to check out Chapter two for yourself.  Hopefully, you’re 20 and not 45 when you do so that you can start investing early.

Rebalancing

 Rebalancing is the act of periodically shifting money among your funds to keep your investments consistent with your asset allocation plan.  This can easily be done in most mutual fund accounts.  Many accounts have automatic tools for doing this.  The only issue is that if you are not investing within an IRA or other tax-advantaged accounts, you may need to pay some taxes after rebalancing.  If this is the case, you may wish instead to direct new investments to funds that have done poorly, such that you are underinvested in these funds, rather than selling portions of winning funds and shifting to losing funds.

If you haven’t done so already, be sure to buy a copy of The Bogleheads’ Guide to Investing and share your thoughts.

Follow me on Twitter to get news about new articles and find out what I’m investing in. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

How to Fund Everything without Filling Out Tax Forms


A while back, probably right after I’d finished filling out my income tax forms for 2010, I made a post about a tax idea called the Fair Tax.  The beauty of the Fair Tax is that it would eliminate all of the hassles involved in paying taxes.  Income taxes, Social Security, and other Federal taxes would be replaced by a single sales tax on goods and services when purchased (a national sales tax).  Because taxes would be figured out and charged automatically when you purchased something, you would no longer need to keep track of expenses, have tax-deferred accounts, set up medical savings accounts, 401ks, IRAs, etc… and go through other hassles.

You would simply receive your whole paycheck each month and then spend or save as you choose.  One benefit beyond the simplification of tax compliance is that saving would be rewarded while spending would be penalized.  The current system encourages spending and borrowing, through tax breaks for things like business expenses and the mortgage deduction, and penalizes earning.  This means that under the current system there is a disincentive to grow businesses or work harder because more of your income is taken the more you earn.

The Fair Tax is prevented from being regressive, or level in any case, through the use of a prebate.  In the prebate, a certain amount is refunded to each person each year at the beginning of the year.  For example, if the sales tax is 10%, and $3000 were prefunded to everyone each year, then no one earning less than $30,000 would pay any taxes that year ($30,000*10% = $3000), even if they spent their entire paycheck on taxable goods and services.

One issue with implementing the Fair Tax is the radical change to the tax system.  We have spent so many years having taxes taken from our paychecks and doing things to reduce income taxes that it would be a big shock to the system to see it changed overnight.  Imagine the shock of going to buy a new car and seeing a 20% tax added to the top of it!  Never mind that you have 20% more cash in you pockets – you still see that big tax on the car.  You were paying that big tax before, but it was taken in small increments so you did not see it all at once.  There is a way, however, to implement the tax in a way that will be a smaller shock on the system.

(Never read The Millionaire Next Door?  It is a must for anyone wanting to actually become a millionaire.)

Currently about 50% of people pay no income tax at all.  In fact, many get cash given to them by the tax system since they receive a refund through the Earned Income Tax Credit.  This means that implementing the Fair Tax to replace the tax payments of the lower 50% of earners would not require a large sales tax since the amount of revenue collected from them is mainly Social Security and Medicare, which aren’t large amounts of money.  Also, implementing the Fair Tax would enable taxes to be collected from those who currently don’t pay taxes – those who get paid under the table and/or have illegal sources of income (drug sales, prostitution, illegal labor) – since they would also be charged the sales tax when they spent the ill-gotten money.

If the Fair Tax were implemented only on people making $60,000 per year or less say, it would only be necessary to have a sales tax of about 5% or less.  This means that everyone would see a prefund each year of $2000 (5% x $40,000) and see their sales taxes increase by about 5%, assuming that it is desirable to continue to see 50% of the people pay no income taxes.

After a few years of seeing those at the low-income levels not need to file taxes and also seeing how the system worked, those in the middle and upper-middle classes would probably want to join the system.  The threshold for the Fair tax could be then be ratcheted upwards as political winds allowed.  The prefund would need to be ratcheted upwards as well since the level of the sales tax would need to increase as the income level of the Fair Tax threshold increased.  This is because in order to generate the same level of revenues the sales tax percentage would need to increase since those at the higher income levels are paying a larger portion of the taxes.  If the Fair Tax were ever to fully replace the income tax, including for those in the top 1% of earners, the rate would be about 23%.  It is thought, however, that the drop in the expenses paid by businesses for tax compliance and tax avoidance would allow them to charge less for the goods and services; therefore, the actual price of the goods might stay about the same.

If you like this idea, please tell a friend – let’s get rid of the IRS!

Follow me on Twitter to get news about new articles and find out what I’m investing in. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

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