Oct 01

If you have a teenager in the house, you’re likely to hear the expression,”that’s the stupidest thing I’ve heard in my life.” A few things come to mind, “I guess you haven’t listened to some of the people I worked with,” is one, but I can’t keep from saying,”make a list and see if the next stupid thing you hear actually tops it, and so on.”

When it comes to the mistakes investors make, I’m sure the list is long. It probably starts with spending more than you make which results in simply not saving at all. Then comes not saving nearly enough because most people don’t actually go through the exercise of calculating their retirement needs. For those actually investing, a major error is the propensity to buy high and sell low. I wrote about this in Disappointing Returns sometime ago and described how for the 20 years ended Dec. 31, 2006, the average stock fund investor earned a paltry 4.3 average annual compounded return compared to 11.8 percent for the Standard & Poor’s 500 index.

More recently, we discussed Frontline’s The Retirement Gamble, a PBS broadcast that focused on cost, how a 2% fee in one’s 401(k) would wipe out nearly 2/3 of your returns over time. If you use an advisor and find that his (or her) personal advice is worth a fee, that’s a different story. I’m strictly talking about ETF or mutual fund expenses. That said, I present you with the stupidest thing I’ve heard a financial author say. Ever. This may change, of course, but it’s the benchmark against which I’ll hold other foolish quotes I find for the rest of my life.


This is from David Ramsey’s Financial Peace Revisited. And I’m a bit taken aback. There are two implications here. First, that there’s a positive correlation between expenses and returns, as if to say “you get what you pay for.” This was disproved years if not decades ago. The second, and even more dangerous implication is that 16% is a number that one can ever see long term. The 80’s and 90’s (remember those years?) brought us a whopping true compound return of 17.99%/yr. But, of course the next decade’s fiasco brought the 3 decade average down to 11.29%. A look further back brings us closer to an even 10% CAGR. 10%. Not 12%. And certainly not 16%. Consider, at 16%, investments double in 4.5 years. 45 years would result in 10 doubles or your investment growing 1000 fold. Imagine putting $1000 away each year for your 10 year old knowing that starting at 55, she’d be able to withdraw $1,000,000 each year. Sorry, not going to happen. And when it comes to finance, hyperbole has no place in the discussion.

Sorry, Dave, expenses matter, .5% per year over one’s investing lifetime adds up to a sizable fraction of their account. Hopefully, you’ll have the patience to understand this and withdraw these remarks that can damage your followers’ hard earned savings.

written by Joe \\ tags: ,

Sep 20

A Guest Post Today –

When trying to find which Certificate of Deposit (CD) is best for you, there’s really no right answer as to which one is the best. However, there are ones that may be more advantageous for you when compared to others.

As it stands, more people continue to opt for the traditional CD, but there are newer ones that have been rolled out by banks and credit unions that are much different. Here is a look at the different type of CDs offered right now:


The traditional remains popular because it is so straightforward. You place a predetermined amount of cash in the CD for a predetermined amount of time and interest. Once the time span has ended (matured), you can either take out the cash that is owed to you, or roll it back into another CD.

For most banks, you can deposit more money while the CD is still in its term. However, if you want to take the money out, there’s likely going to be a large penalty for doing so. There aren’t laws in place to stop a bank from penalizing you, but they do have to tell you what it will be before you can get the CD.

Make sure to find out what the interest is going to be before jumping in and look at the best best 6 month CD rates at banks being offered right now.

Zero Coupon

When it comes to CDs, zero coupon ones aren’t very well known by most investors. It is very similar to that of a zero coupon bond, in the fact that you can get it discounted to the maturity value.

As a quick scenario, a 12 year CD of $100k can be bought for $50k at 6% interest. During the first decade, you would not get any interest. However, after the 12 years have passed, you will collect $100k which makes for a great investment.

Bump Up

What makes bump up CDs appealing is the ability to use a variable rate that continues to rise. As an example, you can buy a CD that lasts for two years. If the bank were to offer a CD for a higher rate to new customers after a certain time frame, then you can get your rate to match the new one.

There are a couple of things to consider with this. The first is that you are likely to have the ability to raise your rate just once. The other is that the beginning rate is possibly going to be lower than that of a more traditional CD.

Liquid CD

A liquid CD grants you the ability to take out money from your CD without being charged any penalty amount. There is likely going to be a minimum amount set as your balance to take advantage of this, but that shouldn’t be a problem.

Traditional CDs typically have higher rates than liquid CDs, but you get the flexibility and freedom that the traditional can not offer. You will want to find out how soon you can take money out of your CD first, as law states that it must be at least seven days. The last thing you need to know about liquid CDs is that there may be a set amount of times you can withdraw money.

Now that you know which types of CDs are offered to customers, it’s time to shop around. There is a lot to consider but if you find one that fits your financial interests the closest, it is sure to be a good investment. Do your homework and you will see some solid returns down the road.

written by Joe \\ tags: ,

Aug 17

Today, a guest post from Ryan.

A few months ago we talked about the benefits of DIY investing vs. hiring a financial planner. There are definitely reasons to go both routes. Maybe you thought that the DIY approach was your best option but after six months of trying to go it alone (albeit with the help of sites like 1Wealth Trading to help you master the basics) you’ve decided you’d feel safer hiring a financial planner to help you get your portfolio (and financial future!) on track.

So how do you do that?

1. Beware the Commission

Before you even meet with a financial advisor or planner, find out whether or not that person is working on salary or commission. It is always better to work with someone on salary. Why? Because commission based financial planners and advisors only make money on what they sell you for your portfolio. This makes it harder for them to resist taking risks with your investments. You don’t want to have to worry about your planner’s motivation.

Note: Obviously not every commissioned financial planner is going to sell bad stuff to make a commission! Most commissioned advisers and planners are highly honorable people. But do you really want to have to wonder about the person’s motivation?

2. Look for the CFP Certification

Believe it or not, most financial planners only have to pass two tests to be considered “qualified” to sell investments and insurance. From there, they can go on to purchase a lot of other certifications to help them add credibility to their reputations. Sorting through all of the certification initials after a planner’s name can be difficult and confusing. The certification you want to see the most is CFP®. In order to obtain this certification, the planner is required to go through extensive training, testing, pass a background test and have three years of full time experience to their names.

3. Experience Matters

CFP certification requires a minimum of three years experience, but it’s good to go with a planner who has been on the job for a while. The lengthier your potential planner’s history, the more experience he or she has with finance as an industry. The “greener” your planner or advisor, the more likely it is that he or she is relying on sales training than any sort of practically built financial experience. A good rule of thumb is ten years. Ten years is the average length of a market cycle.

4. References Matter

Always always always check a potential planner or advisor’s references. Get these references from multiple sources as well. You don’t want to rely solely on the references given to you by the planner you’re interviewing. Ask around to see who your friends and colleagues choose to work with. Run your potential advisor or planner’s name up the proverbial flagpole to see if your friends or colleagues have heard of him or her before and to find out what sort of impression they got. Do an actual background and reputation check on every potential candidate. This includes double checking certifications, checking with the BBB, etc. It’s better to be safe than sorry. After all, it’s your money, right?

Finding and choosing the right financial planner or advisor isn’t something you can do with a quick Google search. This isn’t online dating (though it can feel that way sometimes). You need to actually spend time with and thoroughly vet every potential candidate before you trust anybody with your money and your financial future.

written by Joe \\ tags:

Apr 18

I wrote about this five years ago, in my pre-blog days, time to revisit and share with new readers.

Today, we’re going to look at a complex topic, how diversification helps reduce your risk when investing in stocks. I’m going to use an analogy, coin flipping, to simulate stock returns in a way that should help simplify the concept. We’re going to start with a simple idea, a game in which you flip a dollar coin and if you bet right, you gain 30 cents, if wrong, you lose 10 cents. It’s an exaggerated way to simulate the stock market, either +30% or -10% on a dollar bet.


The above summarizes the results for one flip. For sake of easy math, -10% is listed as .9, and +30% is 1.3. The average is 1.1, a 10% return, not too far from reality, and a simple standard deviation calculation shows .283 quite a bit higher than the S&P standard deviation. For annualized return I take the geometric mean, the square root of .9 *1.3. Bear with me. It gets better. The next step is to split the bet. After all, the odds are in your favor, right?


You can see that a loss requires two heads, a one in four event. Half the time you will get the average 10% return, and a one in four chance at 30%. The important thing to note is that while the average didn’t rise, the standard deviation dropped quite a bit. And the geometric mean of the 4 results gives us an annual return of 9.1%. We can continue this process following the pattern of Pascal’s Triangle


The third row here helps us understand the three coin scenario, of 8 possible outcomes, one is all heads, three is two heads one tail, etc, a pretty cools chart to understand the odds involved.


The math gets a bit more complex with each added coin, but it’s easy to see that the more flips the bets are spread across, the lower the standard deviation, in other words the results cluster more closely to the average, and the geometric mean also improves in the process. That’s my thought for today, the math of stock diversification is similar, yet far more complex to explain as each stock has its own set of risks. I hope this made the process a bit easier to understand.

written by Joe \\ tags: ,

Apr 16

Every so often, it’s time to look at the terms that we use when discussing financial matters. I’d like to take a look at the terms ‘Average Return’ vs ‘Compound Annual Growth.’ These two phrases sound similar, yet the results can be quite different.

The math isn’t complex, so we’ll start with a simple example. Two years, the first year is up 20%, the second, down 20%. It’s pretty obvious that the average of +20 and -20 is zero, no surprise there. But the compound annual return is a bit different, as 1.2 * .8 = .96 and this results in -4% over a 2 year period or a true return of -2%/yr CAGR. I know that too many numbers make your eyes glaze over, so an image:


This comes from the site Money Chimp, where you can check the market return between the end of two years, and adjust for inflation if you wish. It’s one thing to see random numbers trying to illustrate a point, and quite another to see how it would actually impact your money using real data. You can see that the Compound Annual Growth of “True CAGR” as the Chimp calls it, lags the Average by a full 2%. This is a result of the volatility of returns, as in my exaggerated example, a -20 cannot simply be averaged with a +20.

I don’t know what the market will do in the future. No one can know, really. But I do know how to look at the past, and to look at this specific period, 1926-2011, and suggest it returned 12% is simply incorrect. Had we actually seen 85 years of 11.84%, the result would have been a $13,513 return, four times the final return. Lest you think that the difference of 2% was a result of the 85 year time horizon shown, head over to the site and just enter 2001 and 2010 as the beginning and final years. You’ll learn the disparity is formed by both volatility as well as time, so even short periods are affected.

I was recently reminded of Dave Ramsey’s 12% ongoing market claim, and re-read his article The 12% Reality. In his article Dave confuses simple with compound average and stands his ground. He even discusses the so called Lost Decade; From 2000–2009, the market endured a major terrorist attack and a recession. S&P 500 reflected those tough times with an average annual return of 1%. Last I checked, ten years of 1% returns would grow your money at least 10%, no? The calculator shows us a True CAGR of -.99% for a cumulative loss of 9% over the decade. Let me spell that out – You started the decade with $10,000, and ended with $9,100, a bit less after expenses. Dave’s claim that you’d have $11,000 or so misses the true number by 20% for the decade.

I’ve always loved math, and find that it’s tough to argue with facts. Next time someone starts quoting market returns, remember, knowledge is power, and you’re now armed with the knowledge to help you understand the numbers and educate others.

written by Joe \\ tags: , , , ,