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.

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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.

What Can Whites Learn from Blacks? And Why Would It Help?


In an oped in our local newspaper, the writer stated that “white folks should learn to listen when black people speak.”  She then went onto gave her story of how, as a young grad student TA who grew up in a white neighborhood with mainly white friends, she was surprised by what she learned in a sociology class she was assisting on the issues facing black Americans.  She then went on to become an adjunct professor and teach a similar class.

She talked about things like how people frequently touch black people’s hair without asking.  About how there are schools in black neighborhoods where they are lucky if one teacher shows up to teach.  About how housing discrimination that benefited whites has had a lasting impact on the ability of black families to build wealth.  And also about how she was unaffected by the unintentional racist comments that students in her class expressed because she was white, but how black professionals are affected by similar comments, but need to pretend like they aren’t.  Her conclusion was that whites need to listen when blacks speak, and that they should not get defensive when they kneel for the national anthem or talk about discrimination.


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Personally, I am all for hearing different views and from people with different experiences.  Being a libertarian, I particularly like to hear the viewpoint of liberal individuals since the proposals they make seem senseless to me.  I want to understand their beliefs and see the evidence that supports their beliefs so that I can understand why they feel the way that they do and understand why they think the ideas they express will work.  Since I feel that government control leads to waste, high costs, and poor quality products, based on my experience, expanding social programs makes little sense to me.  When you realize that liberals feel most individuals have the intelligence of moss, however, suddenly having everyone (except for the liberal elite) put their healthcare in the hands of government bureaucrats makes some sense.   The question then becomes who is right about the capabilities of the average person and average government worker/agency to do what is best when deciding which course to take, private control or government control.

In the case of the oped, however, when you get past the racist ideas that you can lump all blacks together as victims and all whites together as privileged, I still don’t know why having “white folks listen to blacks” would be helpful.  What exactly are whites supposed to do, and what makes the writer think that blacks would need whites to do anything for them?  I think that whites already know that things are bad, and dangerous, in many inner city black neighborhoods.  The issue is that the solution to those issues will come from people within those neighborhoods, not from whites in suburbs and penthouses.

From my understanding, which granted is based on documentaries and newspaper articles since I have never lived in places like Compton, CA or South Chicago, most of the issues that blacks in those areas face aren’t due to their race or something whites are doing to them.  I don’t think there are white people working to keep blacks locked into those areas, or even taking resources from them and leaving them disadvantaged.  In fact, in the case of schools, I actually think a great deal of money is being funneled from the suburban areas into the inner city schools.  Conservatives groups, which are majority white, are also working to offer alternatives to inner-city kids such as private school tuition and charter schools.  It isn’t like whites could do something, or stop doing something, that would cause the lives of inner-city blacks (and whites, and Hispanics) to become better unless inner-city residents are willing to do what is needed to change their lives.  In fact, I think you could swap the populations of Compton and Beverly Hills and within a year Compton would start looking like Beverly Hills and Beverly Hills would start looking like Compton.

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This issue has nothing to do with race, but of culture.  And this is not black culture or white culture.  It has nothing to do with soul food or African headdresses, or with boiled meats and kilts.  It has to do with the inner city culture and the suburban culture.  With the culture of poverty and with the culture of self-sufficiency.  The primarily white culture centered around meth and welfare found in some rural areas is equally destructive as the primarily black culture centered around crack and welfare found in inner cities.  It is more a function of the cultures of the communities than of skin color or racism.

From my limited understanding, again based on documentaries and news stories, the issues in inner cities, which are primarily populated by blacks and Hispanics, are things like gang violence, a lack of parents in the home (particularly male parents), and drugs like crack and meth.  I agree that it would be difficult to get a good education in a school with constant disruptions, teachers that are not present and not motivated to teach while they are there, and the danger of getting stabbed or shot in the hallways or on the way home from school.  But the typical family currently living in the suburbs today would not accept those types of schools.  The parents would be down at the school in the principal’s office every day.  They would be at the school board meetings too, or voting to replace the school board.  If those options did not work, they would move somewhere else with better schools, because their culture places a high value on education.

Note the flight, of mainly whites, from the urban centers to the suburbs during the 1960’s through the 1980’s when schools and communities in general started to decay.  Granted, some of the reason was based on racism as the number of blacks and Hispanics in these areas grew, but there was also the feeling that the values and culture of the neighborhoods were changing, and the residents who historically occupied those neighborhoods were not willing to live under the new conditions.  There were also factors that further affected the inner cities in the 1970’s and 1980’s, which by that time were mainly occupied by blacks and minorities, like the loss of factories and the rise of drugs.  These factors affected the culture of those neighborhoods, which became “The Hood,” where power, money, and drugs became more important than education and family stability.

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It is true that there were a lot of factors that affected those neighborhoods.  That was then, however, and this is now.  Most of the wealth middle-class individuals accumulate during their lifetimes comes from their own work – not inheritance.  Most people buy their own homes, pay for their own children’s college (or the kids pay for their own school through loans), and buy their own cars.  There is no secret society for white that provides jobs, access to schools, and other perks.  If anything, minorities have an easier time due to affirmative action at colleges and companies wanting to increase diversity, which never means hiring more whites.  Poor people have it easier since they do not need to pay for anything – they just need to put forth the effort to apply and then apply themselves.  The inner-city communities can continue to complain about the past and live day-to-day, or they can change their culture and make things better.  It will take a large number of people in those communities to decide to make a change since a few individuals cannot make the change.

As a white person growing up and living in suburbs most of my life, except for about six years during college, I don’t think there is anything I could do to help inner-city communities.  All I can do is say what I would do, since perhaps that would be helpful, but those living in those communities really need to chart their own path and help themselves.  If I woke up in the Southside of Chicago today, and there were a large number of other people who wanted to make a change, the first thing I would do is form a community improvement council to work together since I could not do it alone.  I would work to make the streets safe, which would require a lot of help from the police.  And chasing the police out, as Black Lives Matter is trying to do, is exactly the wrong action since the police are the solution, not the problem.  If the police really were the problem, I would work to replace the city government, who hire the police, and I would encourage people in the community whom I trusted to go into law enforcement.  (Realize that the black residents of Furgeson, MO, could easily replace the entire city board and mayor at the next election, and then form whatever sort of police force they wanted.  This makes more sense than burning their town down, if they really want change.)  Because the drug dealers and the criminals would likely not go quietly, I would make sure I was regularly armed and that those in the neighborhood watched out for each other since the police take time to arrive.

Once the streets were safe, I would then work to improve the schools by getting rid of the students who weren’t there to learn (setting up alternative schools with strict discipline to help turn those around that could be saved).  I would also work to elect a good school board, which in turn would hire good superintendents, who would hire good teachers and improve the schools.  As the interest and work-ethic of students increased, many teachers would improve on their own as they became more motivated by being teachers and not babysitters.


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As the streets became safe and schools improved, these neighborhoods would start to see people move back in who would improve things.  There would be entrepreneurs, restauranteurs, and wealthy individuals who want to live in urban areas close to lots of customers and entertainment.  These individuals would not only bring jobs, but also the work ethic and the culture of success.  They would be mentors for people growing up in those areas who today are mentored by gang leaders and drug dealers.

So that is what I would do.  I would love to hear from Black Lives Matters individuals to understand their viewpoint.  Would your lives be better without police officers in your neighborhoods?  Why can’t you just elect a different city council and make changes in the police force?  Why don’t your sons and daughters join the police to make things better?  What do you think would make your lives better?  I’m listening – what do you have to say?

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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