How I Learned to Love the Bond


In case you haven’t figured this out yet, I spend a lot of time thinking about financial things and how money works.  I think about the effects that raising the minimum wage would have on low-wage workers (they aren’t good).  I think about why our healthcare payment system is so messed up (you don’t have clear prices, plus everyone is trying to get more than they pay for, so you don’t have an efficient, competitive market).  I also think about things like when using an annuity would be good (normally when you don’t really have enough to live on in retirement through investing).

One conviction I’ve had for a long time is that you should always be 100% invested in stocks (with maybe a little invested in REITs) unless you cannot afford a 50% loss or bonds are paying really high interest rates.  I reasoned that the return on bonds is always a few percentage points less than the return from stocks, so why should you give up a 10% return for a 6 or 8% return?  Having a 50-50 stock/bond portfolio when you’re 60-years-old will help protect you should the stock market decide to drop 40% like it did in 2008, but if you were worth $10M and could live perfectly well with $5 M, why would you want to own 50% bonds?

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And then I kept thinking and started to realize an issue with my convictions: While it is very unlikely that you will lose money in stocks if you hold them for more than 5 years, and very, very unlikely that you will lose money if you hold stocks for more than 10 years, that does not mean that stocks will always do better than bonds over a given five or ten-year period.  While the average return from a stock portfolio is 10-15% per year, that includes some great periods like the 1940’s-1950’s and the 1980’s-1990’s that really goosed the averages up.

A chart showing the annualized returns (the kind of return you would need to get each year at a fixed rate to end up with the same return) for the stock market (the Dow Jones Industrial Average – DJIA) during different decades is given below.  If you held the DJIA stocks from 2000 through 2009, sure you would be up, but your average rate of return would only be 1.07%.  If you held the DJIA stocks through the 1930’s, you would have actually seen a negative average return of -0.63% per year.

(Source of data:  http://www.stockpickssystem.com/historical-rate-of-return/)

During most 20-year periods, you would have been better off in the DJIA stocks than you would have been in bonds, assume a rate-of-return of 6%.  This is only true for seven of the twelve 10-year periods shown.  Of course, during periods like the 1930’s, many of your bonds would have defaulted, so being in bonds during that period would not necessarily have saved you either.  During the 2000’s, however, bonds returned about 6% annualized.  You would have therefore fared better in bonds from 2000 to 2010, but not as well as you would have in DJIA stocks from 1990 through 2010. For the period from 2000 through 2018 so far, you would be about even, but we’re seeing extraordinary returns right now, so the next few years may well cause stocks to outperform bonds again for the 20-year period from 2000 through 2020.

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So what does this mean?  If you have at least 20 years until you need the money, I would stay 100% invested in stocks.  A twenty-year-old who is just starting a 401k account should therefore be 100% in stocks, assuming she can handle the market fluctuations that such a portfolio would provide.  (If you can’t handle the fluctuations, consider adding 20-30% bonds, which will help to stabilize things a bit but not hurt long-term returns too badly.)  If you’re sixty-years-old and planning to start living off of your portfolio over the next few years, you might want to consider a 60-40 stock-bond portfolio even if you have a lot more money than you need in your portfolio and therefore could stand a big decline in the stock market without falling short of spending cash.  If you make it to eighty, you will probably get a better return from being entirely in stocks,  but you might very well do better with a stock-bond portfolio between now and age seventy than you will if you are entirely in stocks.

What would this look like?  Let’s say that you were invested 50% in Vanguard S&P 500 Fund and 50% in Vanguard Small Cap Fund with a $4 M portfolio at the start of 2017.  If you were to have shifted $800,000 from each fund into the Vanguard Total Bond Market Fund you would then have had $1.2 M in the S&P 500 Fund, $1.2 M in the Small Cap Fund, and $1.6 M in the Total Bond Fund.  In 2017 you would have received $24,400 and $18,350 in dividends from the S&P 500 and the Small Cap Funds, respectively, and $41,000 from the bond fund.  This means you’d have about $84,000 in income from your funds each year.  You would also make substantial capital gains in the stock fund during 2017, making $316,000 from the S&P 500 Fund and $213,000 from the Small Cap Fund.  This would mean that your total return for 2017 would have been about $613,000, or about 14% for 2017.

You would have done better during 2017 if you had been entirely invested in stocks, but if stocks had declined a bit during the year, you would still have $84,000 in income to use as needed while you were waiting for your stock portfolio to recover.  If 2017-2027 looks like 2000-2010, with the meager stock market returns during that period, you would gain about $400,000 over the period with an all-stock portfolio.  If you had the stock-bond portfolio, you would still gain about $1,080,000 through the period due to the dividends and interest payments that you were collecting during the time.  You would have substantial gains from your portfolio, rather than having a lost decade.

So, in conclusion, while you will probably do better with all stocks over long periods of time (two decades or more), you might actually do better if you mix in some bonds for shorter periods of time.  This is because the high stock returns are due to a few short periods, while bond returns are fairly steady and constant.  So don’t fear the bond.  Learn to love it for the steady returns it provides.

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.

Any Interest in a Class on Investing?


With the release of the first book on finance and investing, SmallIvy Book of Investing: Book1: Investing to Grow Wealthy, and the upcoming new book, Cash Flow Your Way to Wealth, one thought I’ve had is to start teaching a weekend class/seminar on investing and money management.  While it is great to pick up a book and read about investing and finance, or to read a blog post a few times each week, there is just something about going to a seminar where you really sit down and focus on a topic that really gets you ramped up the learning curve fast.

I’ve also found that there are a lot of bad books on investing if you go to the local bookstore (if you can find one anymore) or go browse through the finance books at Amazon.  You’ll find one book that talks about buying mutual funds, another that talks about flipping real estate, and another that talks about day-trading your way to wealth and happiness in just four hours a day.  Someone could easily get confused with all of the different strategies offered, some that are valid and others that aren’t.

My question to my readers is, therefore, would you have interest in a seminar that teaches you how to invest or other personal finance/money management topics?  I’m thinking of a full-day seminar on a given investing/finance topic.  This would give time to really focus in on a given area, allow you to ask questions, and include a copy of at least one of my books and a set of notes/hand-outs to refresh your memory at home.

Hey – if you like The Small Investor, help keep it going.  Buy a copy of the SmallIvy Book of Investing: Book1: Investing to Grow Wealthy or just click on one of the product links below, then browse and buy something you need from Amazon’s huge collection.  The Small Investor will make a small commission each time you buy a product through one of our links.

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Classes could be on topics such as:

How to select mutual funds

Choosing funds and investing in your 401k

How to select individual stocks and manage a stock portfolio

How to manage a portfolio and generate investment income in retirement

How to manage your cash flow to build wealth (what to do after you’re out-of-debt)

Smart ways to manage your money (so that you can have your cake and eat it too)

Want all the details on using Investing to grow financially Independent?  Try The SmallIvy Book of Investing.  

The other question is the best format for the class.  Given that I’m located in the South East United States, classes could be held in or near cities such as Atlanta, Huntsville, Nashville, Louisville or Ashville.  I could also offer an online class, maybe spread out over a few days/evenings, with lectures/discussions using Go To Meeting or some similar website.

So, here’s where I need your help.  Would you be interested in a class such as this?  If so, what would be the best format (in person or remote)?  If in person, would one of the places listed work for you?  Finally, what would you think would be a reasonable cost for an 8-hour seminar such as this, complete with notes and books (and maybe lunch)?

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.

Women Aren’t Investing? Come On, Ladies!


This month’s Money magazine features a cover with five women dressed in black, looking aggressive and ready for business battle, with the title “The Investing Gap.”  The article then goes into The Debt Gap, The Pay Gap, and The Investing Gap between women and men.  I must confess that I get confused when articles talk about women’s money and men’s money, women’s investing and men’s investing, or women’s retirement savings and men’s retirement savings.  When we were married, my wife and I became one, which means that there is no mine and hers.  Her salary is my salary.  My debt is her debt.  Her home is my home.  My retirement accounts are her retirement accounts.  Her investments are my investments.

The person earning  the bigger salary (or the only salary) is only able to do so because the other person is there to make sure the kids are safe, are getting what they need in terms of education, healthcare, and social activities, and being taught important lessons on how to be successful and contribute to society.  One person takes the majority of the load of doing or hiring home and auto repairs, running errands, and doing other things needed to maintain a household so that the other person can be a better employee and earn a higher salary.  (We share the cleaning and yardcare tasks.)

This means that everything earned, saved, and borrowed belongs to both, not 50-50, but 100% for both people jointly.   This makes a lot more sense to us than both trying to do everything and thereby being lousy workers and lousy parents while our home and cars fall apart from neglect.  It is more effective for each to focus in on certain areas, knowing that the other person will focus in on other areas.  I don’t ask her for rent each month from her earnings and I don’t expect her to tell me, “Sorry, this is my IRA.” when the time comes for retirement.  We’re married, not roommates with kids.

So I don’t know if the article was looking at married women and men as separate entities (which is ludicrous), or looking at young single men and women, or perhaps divorc’ees and windows/widowers when drawing their conclusions.  Regardless, one item that was particularly troubling for me, because I spend so much time writing articles such as this one to teach people how to invest and handle their finances, was the Investing Gap mentioned.  The article stated that women are more likely to have savings in cash because they are less confident to invest (although they tend to be better investors than men when they actually do invest).  To that, I say, “Come on, ladies.  Get educated and get over it.”

Hey – if you like The Small Investor, help keep it going.  Buy a copy of the SmallIvy Book of Investing: Book1: Investing to Grow Wealthy or just click on one of the product links below, then browse and buy something you need from Amazon’s huge collection.  The Small Investor will make a small commission each time you buy a product through one of our links.

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If you think that cash is safe, think again.  Every second that your money sits in some bank CD or, heaven forbid, a savings account, you are losing money.  Inflation is taking at least 1%-2% per year, meaning that you will lose one-quarter to half of your money over a working lifetime.  I can’t tell you what the return will be from an investment account, but I can almost guarantee it will be positive over a working lifetime (civilization collapse or take-over by a communist regime excluded).  I can guarantee that you’ll have less purchasing power in a bank account in 40 years than you had when you put the money in there.

Now I know that there are a lot of women out there who are fearless, confident investors that will be retiring with seven-figure portfolios.  But if you are worried about investing because you don’t know enough about it (whether you’re a woman or a man), I’m taking away that excuse right here, right now.  Here is everything you need to know about investing to be successful and get a better return than 90% of the people out there, mutual fund managers included.  It really doesn’t take more than about 300 words.

1.  You need an account with one of the major mutual fund companies.  I would recommend either Vanguard or Schwab since they have a great selection of low-cost funds.  (Low-costs are the key, which is why you invest in index funds.)   You can set these up online in about 15 minutes.  To purchase funds, you can do this online through their website (for free) or call them (usually for a small fee).

2.  For retirement investing, start with your work 401k up to the company match provided (this is free money), then go to an individual IRA at Vanguard or Schwab, then finish with your company 401k.  You’ll want to be putting between 10 and 15% of your salary away into retirement, not counting any company match.  If you have no 401k option, maximize your IRA contributions ($5500 per year right now), then save the rest in a standard mutual fund investing account.

Want all the details on using Investing to grow financially Independent?  Try The SmallIvy Book of Investing.  

3.  Start funding the accounts and make contributions regularly, ideally with automatic drafts.   If you sign-up to have an amount automatically transferred each month from your checking account, mutual fund companies will often lower the minimum investments they require to start an account and waive other fees.  Autodraft will also make sure you actually put money away, rather than just intending to do so.  Whether you choose to autodraft or just send in a check or e-check each month, you will want to invest regularly to get better prices on your purchases, rather than saving up and dumping money in all-at-once.  This is called dollar cost averaging.

4.  Diversify your investments into low-cost index funds in different segments of the market.  Sometimes large stocks do well, other times small stocks do well.  In general, they will all be rising over long periods of time.  Diversification makes sure that you’ll always have some money in the segment of the market that is doing well at any given time.    Buy index funds since they will have the lowest fees.  To get proper diversification, buy a 1)Large-Cap or S&P 500 index fund, 2) Small-Cap index fund, 3) International stock fund, 4) REIT fund (real-estate fund) and, if you’re over 50, 5) a total market bond fund.  Just go to the website for your mutual fund company and look for funds with these names.  Then, check the fund objective in the prospectus and verify that their goal is to try to match an index, rather than having a manager pick stocks.  Fund costs should be 0.50% of assets or lower (0.05% is possible).   Do this in both your retirement accounts and personal investment accounts.

Invest your age minus 10% in the bond fund (if you’re over 50), put 20% into of the remaining funds into the REIT fund, then split the money evenly among the other funds.  This means that your target percentages, if you’re under age 50, are 20% REIT, 27% Small Cap, 27% Large Cap, and 26% International.  If you’re over age 50 this means you should put your age minus 10% in bonds (for example, 40% when you’re 50 years-old), then divide the rest of the money the same way as before.  A 50-year-old would therefore have target percentages of 40% in bonds, 12% in a REIT fund, and 16% each in a  Small-Cap fund, a Large-Cap fund, and an International fund.

When you first start with personal accounts, you may only have enough money to buy into one fund.  If this is the case, pick the Small Cap fund to start, then start building up the other funds as you gain enough cash.

5.  Rebalance your funds once per year.  You should not make changes often, but it is useful to sell shares in funds that perform well and buy those that perform poorly over any given period of time to maintain your target percentages.  In your 401k and IRAs, you can just use the tools provided by the fund companies to reset your accounts each year.

6.  Avoid selling or exchanging funds in your personal accounts.  You’ll need to pay taxes on profits made in your personal accounts if you sell them, even if you immediately invest in another fund.  You’ll therefore want to limit your selling in these accounts, so rebalancing by selling shares in one fund and moving them into another fund is not tax-efficient.  Instead, direct new cash to underfunded accounts.  For example, if you are supposed to have 20% of your portfolio invested in the REIT and you’re only 15%, start directing all of your new contributions to the REIT fund until it catches up.  Another option is to shift some funds in your retirement account to make up for imbalances in your taxable account.

Within your retirement account, you can just shift money around as desired since there are no taxes until you withdraw the money, at which time it will just be treated as income.  If you do need to sell shares in a fund to raise cash for something, try to sell positions in which you have a losing position to offset those in which you have a gain.  This will probably not be possible if you’ve had the account for a long period of time since every fund will have gains.

7.  Don’t forget your investment gains outside of your retirement accounts when tax time comes.  You’ll need to pay taxes on capital gains, interest, and dividends for investments outside of your retirement accounts.  (Those inside retirement accounts are tax-free if you have Roth accounts or taxed as regular income when you withdraw the money, provided this is done after you reach retirement age.)  Your mutual fund company will send a 1099 form each year listing the dividends and interest you have had.  You should keep track of your cost basis (when you bought new shares and for how much) since you may need to figure out capital gains yourself.

8.  Start reading The Small Investor regularly to become smarter about investing.  I’ve only covered the “what” to do with this article.  Keep reading if you want to know the “why.”  These are also just the basics, so you can fine-tune things to get even better returns with a little more knowledge.  This is the 90% solution at this point.

So there you go ladies (and men).  You now have no excuse for not getting into the markets and killing it.  I don’t want to hear about any investing gap in five years.

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.