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.

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Jun 30

Let’s start this week with Roger Wohlner’s post at The Chicago Financial Planner, Understanding Your Bond Fund’s Duration. Bonds feel safer than stocks, or at least that’s the impression I get listening to how people reference bonds. The issue? Bond prices fluctuate, and drop as rates rise. Duration is the explanation of how this happens, a nice primer on the subject.

Joan Otto doesn’t mince her words when she posts at Man VS Debt. This week she told her readers How to Sell Your Crap Using Facebook. I read this with interest as there’s a category of stuff that’s not easy to sell on eBay as the cost of shipping is crazy compared to the value of the item. A nice refurbished desk, anyone? Joan explain how to use Facebook to sell your stuff locally. You won’t get rich doing this, but some pocket money is better than a full trash barrel.


The Investor Junkie asked (and answered) Is Lending Club or Prosper a Risky Investment? With rates so low, and P2P (peer to peer) lending being a higher yield alternative, it’s an interesting thing to consider. I’ve not used P2P myself, but the more I read on the net returns, even after defaults, the more I’ll research and decide if I’d like to get my feet wet in this new (to me) area.

When’s the best age to start investing in an IRA? This was the discussion at Darwin’s Money. The argument for ASAP is compelling. Stories of how those who deposit for some years in their 20’s and stop, will still be way ahead of those who start with the same deposits in their 30’s. The 30’s starter never catches up. On a personal note, my 14 year old just made her 4th annual Roth IRA deposit. Babysitting is pretty lucrative in our neighborhood, with $10/hr being the low end of what people are willing to pay.
At WealthLion, the Lion shared his Retirement Plan. It’s a great plan, and the only criticism he seemed to get was that he clearly has an above average income. I’ll agree, someone whose goal is $3M is above the current median for income. That just reinforces one point, finance is personal. This is the first I’ve seen this blog, a nice find.
Next, you’re aware that DOMA was struck down. This has implications for married same sex couples for their Social Security Benefits, Tax Returns and more. Joe Kristan offers a nice DOMA carnival of his own, sharing links to a dozen blog articles on the subject. Note – the image above is from the next issue of The New Yorker, Sesame Street has issued statements in the past that Bert and Ernie are just friends.

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May 30

A Guest Post today –

Treating your investments as anything less than a business is a mistake. Following advice of your broker isn’t always bad, but just like in business you should see a return on your investments and most brokers have interests that might not align with yours. If you have found yourself losing money, then you aren’t investing, you’re spending. Just like any business venture it’s essential to understand what brings success and success in the investing game is all about ROI.

A business cannot take major losses, and remain a business for long. Why would you be any different when investing your money? Brokers still get paid when you lose money, so excuses like “everyone’s losing money” or “it’s a bad market” are just that… excuses.

In business, having an employee consists of being able to utilize that employee in the most efficient way possible in order to maximize your return on investment. Think of your broker as an employee–can you afford him? I am sure that firing your broker isn’t what you want to do, but just like in business you can’t spend money if you aren’t making any.

Stocks are Products

Running a business comes from selling either a service or a product. In the personal investing side of things, it runs the same way. You buy and sell products (stocks) – in this case pieces of a company – in order to maximize the return on your money. Having a weak link, such as a bad broker or a computer that can’t keep up with the current trading software is costing you money, just like a bad employee would in a small business.

You Need a Plan

Every good company started with a solid business plan and every solid investment portfolio should utilize a plan as well. A business plan involves promotion, whether in the form of business cards, t-shirts or see these promotional products, a Nashville, TN company has to offer. Stock portfolios are essentially the same, only instead of promoting your business you are doing your best to promote your portfolio to hungry investors that’ll buy these stocks and make you some money in the process.

Set Goals

Another piece of the plan is goal setting. Make a list of things you want to accomplish. At what age would you like to retire? How much debt do you have and at what point does it need to be paid off? Which financial wants and needs are a priority?

Once you have solid goals, you can begin to calculate what needs to happen to get you there. For example, on a 7-percent annual return, do you need to invest 15-percent of your salary each year, or could you get there with 10-percent and wait to reap the rewards for another couple of years. Financial planners are great assets when trying to decide on your short and long-term goals, and they should be utilized unless you are an experienced and savvy investor.

Build a Team

Every business needs a good team to function. When investing, your team is essentially yourself, an accountant, a broker, and a financial advisor or consultant. The accountant is the easiest to justify a return on, as they keep you on track and help you navigate tricky tax codes and deal with capital gains. If you have previously experienced losses, he will help you to apply them over the next few years, thus saving you money right away. The broker isn’t going to show you a huge return (even with their “hot” tips), but they are a necessary evil unless you do 100-percent of your trading online.0

Now, the advisor or consultant is probably the easiest to calculate a return on. If you are solely relying on their advice, it’s pretty simple to calculate your annual returns, thus calculating the ROI from that team member should be a breeze.

Successful investors treat their portfolio as a business. They plan, they strive to make sound decisions and every dollar put in has to generate a return – not unlike a small business. Treat your investments as a product and get out there and start generating a return.



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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.

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Mar 24

We start this week with Young Cheap Living’s Open a Roth IRA and Buy a House? Um, No Thanks. It seems that Kraig doesn’t care to tie his money up long term, not in a house nor in retirement accounts. I never minded the tied up factor, but agree it can be a bit off-putting to some investors.

At Afford Anything, Paula Pant discussed whether to Pay Down Your Mortgage or Invest the Cash? It’s not a simple decision, in fact, there’s no ‘right’ answer, only what’s right for you.

The Amateur Asset Allocator asked Dave Ramsey Investment Advice: Is It Really THAT Bad? Kyle’s concerns included David’s suggestion that investors can expect 12% annual returns, and plan for 8% per year withdrawals at retirement. I’m in agreement, neither of these expectations are sound advice.

The Investor tells readers Why you probably shouldn’t be picking stocks (again). A great read on why individual stock picking is a losing battle, and the average investor lags the market by a huge margin.

We’ll end this week with Donna Freedman’s In which I cop to some odd habits. Sorry, Donna, you are 100% normal, an interesting look at what you may think odd, but a list of quirks that most of us probably can relate to.

Spring is here, but we still have 6 foot piles of snow out back, global warming, I know.

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