Ive been reading alot of books on investing lately. Buffet, Bogle, Solin, etc. This is gonna the first of a 12 part installment on retirement planning and investing (actual may vary) Most people get uptight when talking about money and what they are doing with it. Feel free to comment. I am pretty boned up on this stuff and would humbly guess that i know more about this stuff than most, but am still prone to error and wanna know what others thoughts are especially if you got a better idea/ if my thinking is flawed. None of these thoughts are original, most are recycled, retreded. My uncle gave a talk on this at a family reunion in 2003.
Part 1. Foundation.
What determines how much stocks go up or down?(feel free to skip this q)
Answer: According to John Bogle (founder vanguard) The annual total return on stocks =earnings growth minus Dividends plus"speculative return"
the annual growth rate of earnings+ dividends from 1900 to 2005 is 9.5% the total market return for the same period is 9.6%
Earnings growth is the real driver on stock market returns over a long period of time. as long as on average earnings are grown, the stock market over the long haul will go up.
Speculation is driven by marketplaces "educated" guesses on what will happen to the earnings growth rate in the future but it is also driven by fear and greed
Why is Compounding interest Magic?
% are slippery little devils. unless you put a calculator to it, normal people are often surprised/amazed at the results compounding interest has. take $10,000. 30 years at 9 percent interest= 132,676 is a very different number than 30 years at 8% ($100,626) so just a 1% diff is $32,050 diff after 30 years. spoiler alert-this is the main reason it is so important to save, allocate investments correctly, and control cost, and do all of this now. failures and successes now are magnified later (think exponentially) small victories now will be huge successes 30 years from now.
How much do I get to keep from my investments?
Your (inflation adjusted) annual return=your investment returns minus expenses (financial sector fees+taxes) minus inflation. Basically there are three things that eat your return.
The financial sector through fees and expenses and commissions (spoiler alert go for low fees, stay away from brokers)
The government thru taxes and inflation (spoiler alert Roths and 401ks)
2 of these you can control (you can't control inflation)
What makes a good investment? The Ideal investment is one that has High annual returns and low volatility or risk. You have got to decide how much risk you can accept(can i sleep at night knowing that my money could go down by?) and balance it out with what rate of return you need/want. this may vary for some people. So a good investment for one person is not necessarily a good investment for everyone. It is very important to sleep well.
Is investing in stock risky? Yes. The average stock can go up or down "wildly" If you picked 1 stock from a big (top 100) company 1920 and held onto it to today the chances are extremely high that that stock would be worth nothing. I am taking about a single stock.
the return: 9.6% historic average 1900-2005
Are bonds risky? Yes. Companies, and governments can and do default on bonds. bonds are less risky than stocks because if a company goes broke, bond holders get dibs on the bones. Also bonds are loans with contractual rate of returns. again single bond.
the returns long term gov bonds 5.4% historic average
Are Cd's risky? Yes. Cd's will not beat inflation (at least by much). If your CD is going up 2% and inflation is going up 2% you are really not investing your money, you are saving it. To save for a 30 year retirement think about saving 50% of your take home income 30 years before retirement. I don't know too many people who can save this well. This is risk in a sneaky way. If an investment can not possibly get you to where you are going, it may be the riskiest of all. Think of riding a turtle is safer than riding in a car. but if you are going to go to new york, the turtle will never get you there. so Id say if your goal is to make it to new york, a turtle is infinitely more risky than a car. average 3.7%
rate of return
How can I make stocks less risky? Diversification. It is the only free lunch out there in investing. by buying the whole stock market you get average market returns with way less volatility/risk than any individual stock. Bonds same story.
Average returns seems so average. I am above average. Shouldn't I gun for above average returns by picking things i think are above average?
No. you might get lucky for a year, ma by 2, but over say 30 years plan on being average. trying to beat average returns for 30 years is like flipping a coin 30 times and trying to beat 50% heads. what is worse is the whole time you are doing this your volatility goes way up. basically way more risk for same average return. If you get average market returns you are getting returns that are higher than 95% of all investors. This is counter intuitive but is due to investors getting greedy and fearful (market timing) and getting fleeces by the financial sector (fees and expenses, etc)
How do I max out my diversification?
By buying the whole stock market or if you are buying bonds by buying the whole bond market.
Should i just listen to a friend on how to invest for my retirement. no.
This is gonna take a while, you may wanna read some books on it "The smartest retirement book you'll ever read by Danial Solin is good (he has got a couple of the smartest books all are similar) "the little book of common sense investing" by John Bogle is good.
Next up, how to buy the whole market, how to allocate funds, how to save money by lowering fees and finnaly how to fix taxes Im gonna try to go for low hanging fruit (the things that will help the most ) first.
Subscribe to:
Post Comments (Atom)
4 comments:
Thanks Chet! I need to look at my 401(k) investments. I have too many funds, and some of those the expenses and management fees are high. I have to cut down to 6-10 funds and avoid some of the higher fees. Wouldn't you agree?
yep i totaly agree. Expec on getting down expenses. I think you can pair it down to 1-4. I probably got a similar number as you right now. gonna get into that next.ID say closer you can get to a .1% expense ratio the better. anything over .8% is getting high. I thought etf's were good ideas but am having second thoughts due to bid ask spreads. BTW to really lower fees for us dl pilots gotta get a brokerage link account going, actually you gotta really get 2 brokerage links, one for DC and one for you 401k. Like alot of 401ks there is some ok choices but not the cheapest choices. I finally am getting around to geting the one set up fo our dc account, I called yesterday and they are sending the paperwork. Fidelity spartan funds and vanguard seem to have the lowest fees for mutual funds. if you come up with something else cheaper, let me know.
Vanguard has very low fees and a good selection of funds. Their index funds also have very good expense ratios and have no brokerage fees if you have their account. I have a Fidelity 401k because of a former employer, but I haven't put any money into it personally because the selection of funds in that particular plan isn't very good and there are brokerage fees involved. Based on my experience I say go with Vanguard unless you have an employer matching contributions in something else.
vanguard is excellent. fidelity is a close second. I am gonna get int old 401ks too. Excellent observation on 401k's. since employers dont pay for em, many have limited funds and have employees end up paying em thru higher expense ratio funds. Employers dont care, but you can wright letters to them for better options. I am sure you know all this but you can roll over your old employers 401k into your own personal 401k thru whomever you want. a guy like you who is probably gonna change jobs a few times should keep this in mind as it is a great deal.(get to avoid the dis advantage of employeer 401k lousy options you described.) When you roll it over make sure they do not cut you a check. Bigger companies 401ks may have a "brokerage link" allowing you to invest in a wider variety of funds. I would suspect that for a guy like priority of filling up retirement money might be 401k match, roth, and if you still got some left, 401k (post tax if availible.
Post a Comment