The Small Investor Book Club Reviews Bogleheads’ Guide to Investing – Asset Allocation


For our second book club book,  I asked Small Investor readers to read The Bogleheads’ Guide to Investing.  This was really a great book.  If you have not done so already, pick up a copy from Amazon using the link below – you’ll be glad you did.  For many people, the information within this book would be all they really needed to know to invest successfully.  It also has some great information about insurance and a little on money management.   I’ve made several posts about sections of this book since there is so much great information.
 

The Bogleheads’ Guide to Investing

Today I would like to cover chapter eight, which is on Asset Allocation.  In addition to investing early and regularly and being aware of taxes and fees, asset allocation is key to maximizing your total investment returns.  There are two main reasons for asset allocation:  1) ensuring that you are invested in the areas of the market that are doing well at any given time and 2) reducing the level of fluctuations in your overall portfolio by buying assets that zig when the others zag, and thereby reducing the risk of a significant loss.

Asset Allocation for Improved Returns

If you have ever looked through your mutual fund statement, you may have noticed that some of your funds have performed much better than others during a given 1, 3, or 10-year period.  You may think to yourself, “I wish I had invested it all in that small-cap fund that made 20%, instead of havign some money in that large-cap fund that only made 8% over the last year.  In a worst-case scenario, you might decide to sell the shares of the large-cap fund and put it all into the small-cap.  Do this and you’ll be making 5% returns while the markets are making 12% returns.

The thing to realize is that you’ll never be able to predict which sectors of the markets are going to do well over any given period.  Efficient market theory says that all information that is known is already priced into the markets, so it is just as likely that the large-caps will do better than the small-caps over the next period as it is that the converse will occur.  By buying into both segments of the market, you’ll be sure to have some of your money in what is doing well next time.  While your whole portfolio will not be making as good a return as the best performing mutual fund in the mix, you’ll do better over time than you would if you were trying to jump from fund to fund and pick the one that will do well next.  The times that you pick the fund that makes 1% or declines while another one goes up 10% will more than offset any times you are lucky enough to actually pick the fund that makes 18% instead of 12%.

By moving into a fund that has done well, you are also buying shares that have already appreciated, meaning you are buying high.  While there is no reason that they cannot go higher for a period of time, which is why you should also not sell everything just because shares have gone up, on average shares that have been beaten down will do better than those that have shot up.  If anything, you’d do better buying the fund that did poorly since you’d be buying low instead of high.  Unfortunately, many people find the fund that has done the best during the last year and buy shares of that one, holding while it treads water or even declines, then sell just when they should be buying it because they are then trying to chase the next fund that did well.  It is better to invest in everything, then rebalance periodically to sell some of the shares in the funds that have done well and buy more of the shares in funds that have done less well.


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Asset Allocation Reduces Risk

A second reason to spread your money around is that it decreases the level of fluctuations in your overall portfolio, which means it reduces the amount of risk you are taking.  This risk includes not only the risk of losing money, but also the risk of not getting as good a return on your money as you should.  Different assets will do different things at any given time.  During the early 2000’s, you would want to be in stocks since they were increasing rapidly.  In 2008, you would want to be in bonds since they increased a little, plus paid interest, while a portfolio of all stocks declined by 40%.

When diversifying for stability, you want to pick assets that are as uncorrelated as possible, which means buying stocks, bonds, and real estate.  Stocks should also include companies of all sizes in both US and foreign markets, since sometimes the US is where to be and other times other countries do better.  Owning both a total US stock fund and a total foreign stock fund will cover all of the bases.  Bonds should be both US and foreign as well, and also have different maturity dates, ranging from short-term, which are safer but have lower returns, and long-term, which pay a better interest rate but fluctuate in price more.  You can get exposure to both of these markets with a total bond market fund.  Real estate should include your home, along with either rental properties or Real-Estate Investment Trusts (REITs) if you don’t want to be a landlord.  You could also throw things such as art or collectibles into the mix, but that really takes some knowledge (and some space), so that is better left as a hobby if that is what you like to do than as an asset allocation plan.

 

The Boglehead’s provide suggested asset allocations for people of different ages and risk tolerances at the end of Chapter 8.  They even provide suggestions of combinations of Vanguard funds that you could use, doing all of the work for you.  If you haven’t done so already, be sure to buy a copy of The Bogleheads’ Guide to Investing.  Please also share your thoughts with the group when you’re done reading.

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.

What NFL Players Can Really Do to Help the Inner-Cities


One has to wonder if the NFL players who are upsetting fans and driving down TV ratings ever took an economics class while they were in college.  Perhaps then they might understand that regardless of what their contract says, unless there are people willing to pay to go to their games, buy their jerseys, and watch their games on TV, they will not be making the millions of dollars per year that they have in the past.  They only command a high salary because the demand for their services is high.  If that demand decreases, so will the amount of money they can make.

Hopefully, while they were in college, they received a real degree, instead of just getting credit while they never actually attended classes as it seems some college athletes do.   If things continue as they are now, with NFL revenues imploding, the players may need to use whatever skills they learned in college to find a different line of work.

While political expression is fine, people don’t generally want to have your political views thrust upon them while they are at your place of business.  You would not want your server in a restaurant giving you a speech on the need for single-payer healthcare while you were trying to order your meal.  You would not want your accountant going on about right-to-carry while you were handing in your tax paperwork.  And you would not want your doctor lobbying for a larger military while you were getting your yearly physical.  There is a place for protests and there is a time for speeches, but it is not when customers have decided to use your services.

People watching a football game want to be entertained.  They want an escape.  Even if they agree with your points, they do not want to be lectured when they have come to watch a game.  The game is held for the entertainment of the fans, not so that football players would have a place to play a game.  Certainly not so that players could use their captive audience to lecture them.

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Just by virtue of being on a big stage each week with a big audience, NFL players have a big microphone.  Players could call a press conference whenever they wished and have TV crews show up, eager to hear what they have to say.  Sports Illustrated would probably publish their comments on whatever they wished to talk about.  They could do a lot of good for the inner-cities, and do so in a manner that would not hack off a lot of their fans.

If players really want to help those in inner-city neighborhoods – places where they would not dream of living once they become stars – there are many ways they could help using their celebrity.  Things they could say include:

1.  Most people won’t get into the NFL or NBA, so kids had better make sure they get a good education.  Of the tens of thousands of kids who play in Pop Warner football or grade school teams, only a couple of dozen will make it to the pros.  NFL starts could encourage kids to make sure they go to class, do their homework, and go to college or a good trade school after high school, just in case the Raiders don’t call.

2.  Parents should demand teachers teach, principals maintain order and safety in their schools, and that students are respectful and put in the work needed to learn.  Inner-city school, despite costing thousands of dollars more per pupil than many of their suburban counterparts, have dismal records when it comes to the number of students who can read and write by the time they graduate.   NFL players should encourage parents to get involved with their school and if they are going to protest something, they should demand a better learning environment.  That will often require that other parents do their job when it comes to raising their kids.

3.  Clean up your communities.  Rather than attacking the police officers who patrol inner-city neighborhoods, NFL players could work with residents and law enforcement to get rid of the crime and violence that causes residents to come into contact with law enforcement in an adversarial fashion so often.  The more often police are called in to investigate a shooting or remove drug dealers, the more likely it is that innocent people will be swept up in the confusion (or non-innocent, but minor offenders will perform an action that causes them to be shot or hurt during the excitement).

4.  Choose your partners well and wait for the situation where you would welcome children before having sex.  (This is something that people in virtually all communities could learn.)  One of the greatest causes of poverty is having a child before finishing an education.  The lack of a parent in the home leads to children who grow up unsupervised, making them targets for gangs and trouble, and leading to future generations of uneducated, single-parent homes.  NFL players could encourage girls to wait for a male partner who is willing and able to support a family.  They could encourage boys to be “real men,” wait to have sex until they are in a position to raise children, and be there for their wives and their children.

 


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5.  Become teachers, firemen, police officers, military personnel, and business owners.  If the police departments truly are racist, the easiest way to change things is for those in inner-city communities to join the force.  They could also take on roles that would enrich their lives and their communities.  Instead of complaining about “the man,” open a business yourself and serve others.  Instead of disrespecting those who sacrificed themselves to protect the freedom the NFL players enjoy, the players could encourage youth to join the military and protect their country.

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.

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.

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