# Would you Rather Have a Million Dollars, or a New Car Every Three Years?

Would you drive a used car until you were 55 if someone would pay you a million dollars to do so?  Understand this doesn’t mean driving a junker – just driving a four-year-old car until it was eight years old and then trading for another four-year-old car.  If you would take this deal – and I think that most people would – why would you go on buying new cars anyway?

The fact is, if you can save up and buy used cars for cash every four years, rather than taking on a new payment schedule and dropping deeper underwater with each new car loan, you can invest the savings and have over \$1 million by the time you are 55 just from the savings on the car loans.  Even more insane, that \$1 million will turn into \$2 million by the time you are 62, \$4 million by the time you are 69, and a cool \$8 million by the time you are 76 (which will probably be the new retirement age, given current life expectancies).

How could this be so?  Two reasons: depreciation and interest.

Basically, any car will drop in value by 50% in four years.  This means that a new car which cost \$30,000 will be worth about \$15,000 in four years.  This means that the car will lose an average of \$3750 per year during each of the first four years.  This, by the way, is if you sell it to another individual.  If you trade it in, you’ll be lucky if the dealer will give you \$10,000 (because he wants to make a profit from the sale of your used car to someone else).

The same depreciation rate is true when you buy a used car – it will still lose about 50% of its value over four years –  but because the price of the car is less, the depreciation loss per year will be less.  Let’s say you pick up that car someone else bought new for \$30,000 after four years when it was worth \$15,000.  Even if it drops in value to \$7500 over the next four years, you’ll still only be losing \$1,875 per year.  This means that you will save \$1,875 per year, which you can invest.

The second reason that what seems like a small amount of savings can turn into a large amount of money in 35 years is compound interest.  Specifically, while you are paying interest when buying a car on payments, you are being paid interest when you are able to save money that would have been going to a car payment and invest.  If you were going to be paying 8% interest on a car loan, but instead pay cash for the car and invest the rest, you will be getting an effective interest rate of 20% on your money, assuming a 12% return on stocks.  This means that instead of working extra hours to pay the interest on your car loan, you will be making money for simply letting others use your money to build their businesses.

So before you fall into the trap of endless car payments, think about what that car payment is really costing you – millions of dollars over your lifetime.  Is that new car smell and 32,000-mile warranty really worth that?

Your investing questions are wanted.  Please send to vtsioriginal@yahoo.com or leave 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.

# Why You Should Invest in Stocks

Personal finance begins with budgeting and controlling your money.  You need to make sure you are spending less than you make, putting money away for future expenses, keeping some cash around for emergencies, and staying out of debt beyond, perhaps, your home mortgage.  Do these things and you’ll be way ahead of 80% of the people out there.

But if you want to become financially independent, meaning that you have enough money tucked away to pay for all of your expenses for the rest of your life, saving isn’t enough unless you have a million dollar per year income and you live on \$50,000.  Realize that in order to pile up money for a year through work and saving, you need to do enough extra work beyond what you need for daily expenses to replace a future year of work, which takes a lot of time.  Think of it this way:

If you were a farmer with a mule, growing food for your family.  If you worked really hard, you would probably be able to grow enough food for your family during the year, plus put some food on the shelf for winter.  If you really worked the fields from morning to night, growing on all of the ground you could,  in a given year you might be able to grow, can, and store enough food to last an extra month or two beyond the start of the next year.  Maybe three or four months.  This means that it would take you three to five years, working like a dog every day during the growing season (and a lot during the offseason too – farmers work hard) to save up enough extra food to last you a year.  If you wanted to save up enough to last you through a twenty-year retirement, that would take you sixty to 100 years.  That’s a lot of work, and a couple of crop failures in the middle, or an injury that put you in bed for a few weeks, and you might not make it.  Plus, while you might be able to work those hours when you are in your 20s and 30s, you’ll start slowing down and feeling the pain of all of that labor when you are in your fifties and sixties.

Great beginner investment guides.

Working an office job or factory job in the modern age is really the same.  If you want to have money to live on when you are not working, you need to put away extra when you are working.  Money is just stuff on the shelves – IOUs for someone to give you an hour of labor in exchange for the hour of labor your gave someone else in the past.  The trouble is that it is difficult to save up enough money before your sixties or seventies through work alone.  You never get that sense of peace that comes with knowing that you don’t need to work to pay the bill until you reach your golden years.  And if something happens along the way like a job loss or a major illness, it can set you back and you may never become financially independent.

The answer to becoming financially independent is to get other people to help you.  You want to provide others with the ability to make a living without figuring out everything themselves, and in exchange get a little of the income produced by their labor.  If you were a farmer, this would be like letting other people farm on your land for a small share of the crops, or letting others borrow your mule and plow for some of what they produce.

One way to do this is to start a business and provide employees with a way that they can make money – feeding people in a restaurant, making something that other people want, or providing places for people to sleep for the night with a hotel – and in exchange you keep a small portion of the money produced through their labor.  For them, it means that they can make a living without going through all of the hassle of setting up their own business and figuring out something they can do that will make money.  For you, it means that you can make a bigger income using the help of others than you could by doing all of the labor yourself.  (Note, another thing you could do is to use machinery or computers to multiply your efforts, but we digress.)

Want all the details?  Try The SmallIvy Book of Investing.

Maybe you don’t want to start a business and deal with the hassles and take the risk, however.   Maybe you also don’t know how to start and run a business and don’t have the money to invest in a building, equipment, and inventory.  Maybe you also would like to just work for someone else and not need to be worried about market conditions, meeting a payroll, or preventing theft.

By investing in stocks, you can effectively own a business – in fact you can own great businesses like Apple, Google, or Amazon – but do so with just a small starting investment.  You get the advantages of ownership without all of the hassles of needing to run the business.  If you buy a mutual fund or an exchange-traded fund (ETF), you can own little parts of dozens or hundreds of businesses, meaning that you can reduce your risk should a particular business see declining sales or other issues.

So once you get past the initial personal finance issues like maintaining a budget, you really need to look at investing.  It can be complicated if you decide to make it that way, but it can also be really simple, in fact downright boring, if you invest through index mutual funds and ETFs.  So look into investing, perhaps starting with one of the investing books shown above (I, of course, recommend The SmallIvy Book of Investing).  In twenty years when you’re financially independent, you’ll be glad you did.

Have a burning investing question you’d like answered?  Please send to vtsioriginal@yahoo.com or leave in a comment.

Follow on Twitter to get news about new articles.  @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.

# Is Amazon’s Deal for the Needy a Good Thing?

Recently Amazon announced that they will offer Amazon Prime for a special discounted price for those on EBT cards:

EBT card holders get Amazon Prime for \$5.99 per month: Prime Discounted Monthly Offering

Now, Amazon is a private business and they can do whatever they want to do with their pricing, but in some ways this seems like a dangerous precedent to set.  Most things are priced based on the value of the good or service to the consumer, the number of competing sellers, the location where it is being sold,  and other factors.  As long as there is enough competition, the price of goods will drop to the point where the seller receives the minimum amount of profit needed to justify the effort of providing the good or product for sale.

By selling the same goods to different consumers at different prices, based on the life situation of the consumer rather than how they buy the goods (retail, online, with coupons, etc…) as is normally done, Amazon is changing the way things are priced.  They are means testing their customers, which will inevitably result in customers who make more money paying a premium to cover the people who are making and paying less.

If Amazon is the only one who does this, it really won’t matter for the average consumer because the system will simply not work.  If you go to Amazon and it costs \$30 for a month of free shipping and videos because others are only paying \$5.00 or even getting the service free, but then there is another service that offers the same service to everyone for \$19.99, consumers with means can just switch to the lower cost service.  As Amazon loses customers to the other service, they’ll need to increase the price they charge the remaining people paying full price or quit offering the discount.  If they raise prices, that will chase more people off, until Amazon will be forced to change or cease to operate.

If other companies follow suit, however, that would set up a socialist system, where people pay according to their means and take according to their needs.  Prices would rise for the people who had more since they would now be subsidizing those who made less.  Because the goal in such a system is to produce the least amount possible, since producing more simply means you pay more.  Plus, you “win” when you get more than you pay for in a Socialist system, but you “lose” when you provide more than you get.  For examples of this, look at how people will avoid paying student loans back when possible, even choosing a low paying job to keep their income low rather than taking a better job and getting on the path to doing well.

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So what are your thoughts?  Is this a great marketing idea that will just bring Amazon customers it wouldn’t have anyway?  Do you think it is a great way to help the poor?  Are you resentful that you need to pay full price while others get a discount for the same thing?  Let me know 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 Find A Broker and Start Investing

If you’re interested in investing, you’ve probably spent some time looking at different websites and blogs on how to invest, and you’ve probably found several sites giving strategies.  There are some sites that give information on different investing strategies.  Even more talk about how to do important things like diversify.  Once you’ve spent some time learning, hopefully reading a few books on investing, and you have your financial house in order (no debt beyond your home, \$9,000 to \$12,000 in a bank account for emergencies, 10-15% of income going into the 401k at work and/or an IRA, and a budget to help control your spending), you may be ready to take the plunge and actually invest.  The question then becomes, now what?

If you’re investing in mutual funds, it is pretty easy.  You just go to one of the mutual fund provider’s sites, such as Vanguard or Schwab.  You can setup an account, send in funds, and then choose and buy funds, all from the site.  That is a big reason many people buy mutual funds – ease of use, in addition to automatic diversification.

If you’re looking to invest in ETFs or individual stocks, it is a little harder, but not much.  What you will need then is someone called a broker.  This is an individual who works with one of the big brokerage houses who has access to the stock exchanges.  Personally, I have always invested through a broker and called in orders over-the-phone.  I started investing in about 1982, way before the internet, and have just stuck with the same methodology.

I also work with what is known as a full service broker.  This means the account has all kinds of extras, and also that I have access to research on stocks and other tools.  It also means I pay a good amount when I trade.  Typically, if I were to buy shares of a stock for \$3,000 say, I would probably pay \$60 to \$80 for the trade to be made.  The amount  I would pay would increase if I bought more shares, but the percentage would drop.  This is expensive, but then I don’t trade very often, so it really doesn’t matter much.

A cheaper way to trade is to use an online broker.  Here, you would enter orders through a website and pay a lot less, like \$25 per trade or maybe even \$5 per trade, depending on the brokerage firm.  You would probably not have a specific individual you would deal with, but probably a help desk you would call if needed.   In general, there would be few frills like stock research.

A good article ranking online brokers is available through reviews.com here.  They evaluated several different brokers to find online brokers that offered both low trading prices and extras like stock research.  They really do a nice job of going through the online brokers and providing some great suggestions.

Now just because you may be able to trade for \$4.95 per trade through an online broker, doesn’t mean that you should be constantly trading.  Study after study has shown that those who trade a lot will have dismal returns when compared to the markets.  When you are buying and selling short-term, you are basically just flipping a coin and betting on heads or tails.  Some studies even suggest that trying to buy individual stocks at all instead of mutual funds is a fool’s errand in any case.

I do feel that, in addition to a core of mutual funds, especially in an IRA or 401k account, you should add a few individual stocks, but you need to buy the right kinds of stocks and buy them in the right way.  These should be companies that you buy for the long-term.  You should pick these companies based on the business, including things like a solid record of profitability and growing earnings, low or no debt, room to expand, and steady growth in the share price.  Try to pick just one great company each in a few different industries, rather than spreading the money around to several different companies.

Find stocks you plan to hold for 10-15 years, buy a significant amount (build up to 500 to 1000 shares, buying a few hundred shares at a time on dips), then ignore the noise.  Just concentrate on earnings growth and whether the company is expanding their business.  Don’t worry about analyst ratings, stories about where the economy is going in the next year, or stories about consumer sentiment.  Hold as long as the company is doing well, sell off a few shares if the position gets too big, and other wise just leave things alone.  Do this and find a great company or two, and you may be able to beat the markets with your individual stock picks.

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.

# This Surprise Millionaire Wants You To Live A Long And Happy Life

Whenever I think I have discovered all of the interesting Surprise Millionaires out there, I discover another!  While all of our Surprise Millionaires are interesting in their own way, occasionally I run across one who is outstanding.   Ted Nash definitely belongs in this category.   A man with the express purpose of becoming a millionaire in order to help make the world a better place.  Now that’s something I think we can all get behind!

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# 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.

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.

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.

Want a better life? Pick up a copy and learn how: Get a Financial Life: Personal Finance in Your Twenties and Thirties

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.

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.

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 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.

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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.