Monday, May 31, 2010

Lumpers vs. Splitters

Among investors who agree that using low-cost index funds is the winning investment strategy, there is an ongoing and unresolved debate. On one side the lumpers believe that since markets are very efficient, the best approach is to use a few total market index funds; e.g., a total US stock market fund, a total bond market fund, and perhaps a total international stock fund. On the other side, the splitters believe that the academic research justifies slicing and dicing the stock portion of your portfolio into more asset classes; e.g., large-cap, small-cap, value, growth, developed (foreign) markets, emerging markets, REITs, etc. Depending on which book you read or which web site you visit, you can find compelling evidence for each point of view. Let’s briefly explore the debate.

Friday, May 28, 2010

Your Retirement Goal

Setting goals and targets is part of the investment process. Retirement is a goal for most people. How do you determine your target for your retirement savings? This isn’t something that can be fully answered in a short blog post, but it’s something that most people probably should think more about. Here are some guidelines that may help.

Friday, May 21, 2010

US Corporate Bonds Are Holding Up

The US stock market is down about 10% in the last month, and before today’s bounce, non-US stocks were down about 15%. This is nothing compared to the 50%-60% drop in 2008-2009, but another difference is that US corporate bonds have not dropped along with stocks. This is one indicator that the fears of today are nothing like the panic of the 2008-2009 financial crisis.

Thursday, May 13, 2010

Winning The Loser’s Game

Winning The Loser’s Game, by Charles D. Ellis, is one of the books on my recommended reading list. It’s not the first book I’d recommend for a novice investor, but it’s definitely worth a read if you’re serious about learning about investing. I don’t own it, but recently checked it out of the library to re-read, and thought I’d share a few key points from the book.

Saturday, May 8, 2010

Implementing Portfolio 5: A Current Example

The investor who currently is invested in Portfolio 1 [about 50% Vanguard Total Stock Market Index (US) and 50% in Vanguard Total International Stock Index (non-US)] has decided to diversify into a more complex asset allocation, along the lines of Portfolio 5 (see my April 25 post, Some Real Portfolios). Here are my thoughts on how to implement this change.

Thursday, May 6, 2010

Every Now and Then …

Today was a reminder that every now and then the financial markets go nuts. In case you missed it, there was a major panic in the global stock market today. At one point the US stock market was down about 10% from its high of the day, but recovered to end the day down a bit over 3%. There were price swings (down, then up) of more than 5% within 5-10 minutes.

A Vanguard ETF (VEU) that tracks the non-US market had prices ranging from 40 to 34 within a 5 minute period (that’s almost a 20% difference!), ending the day down about 4.8%. There were even crazier swings in individual stocks, but you can read about that elsewhere if you’re interested.

It’s natural to feel fear when things like this happen. The parts of our brain that react emotionally and physiologically to perceived threats evolved long before the rational parts. It takes discipline to bring your rational mind to bear when your emotional mind doing the thing it evolved to do. With investing, it helps to put things in perspective, and remind yourself that investing in stocks is a long-term proposition.

Wednesday, May 5, 2010

Vanguard Offers Commission-Free ETF Trades

As of May 4, Vanguard is offering commission-free trades of its 46 Exchange Traded Funds (ETFs), and has lowered brokerage commissions on purchases of other stock and ETFs to $7 per trade (and even less if you have $50,000 or more with Vanguard). I’m thrilled to see this, as it makes them competitive with Schwab and Fidelity in terms of ETF trading costs. It’s now feasible for a small investor to create a low cost, highly diversified portfolio using Vanguard ETFs.

Sunday, May 2, 2010

A Conservative Approach to Investing

Not everyone agrees that you should invest in stocks to meet critical financial goals. It’s probably a good idea to at least consider this viewpoint, and familiarize yourself with a conservative alternative investment strategy. In the end, you must decide for yourself how much risk is appropriate for you, and make your investment decisions accordingly.

Saturday, May 1, 2010

Portfolio 2: The rest of the story

In this post I conclude the story of portfolio 2. I review how the portfolio has performed, discuss some aspects of managing the portfolio, and talk a bit more about the asset allocation.

Portfolio 2: Genesis

In this post, we look at the genesis of Portfolio 2. This may be of interest to those of you who are currently relying on an investment firm or broker to manage your investments, and who are interested in moving to a lower cost, more efficient solution.