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.

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.

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.

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.

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.

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.

Portfolio 2 (simple, moderately conservative): the fixed-income story

In this post we start digging into Portfolio 2 (from my post Some Real Portfolios). There are several interesting aspects to this portfolio, so I'll use more than one post to discuss the portfolio. In this post, we focus primarily on the fixed-income portion of the portfolio. This is likely to be of more interest to retired investors, or investors who are investing for shorter term goals (less than 10 years).

Portfolio 1: Simple, aggressive, global equity

In this post, we explore Portfolio 1 from my post, Some Real Portfolios. This portfolio is extremely simple, consisting of only two Vanguard index funds:

• 50% Total Stock Market Index (US stocks)
• 50% Total International Stock Index (non-US stocks)

We might call this as an aggressive, global equity (stock) portfolio because it is 100% invested in stocks (no bonds -- very aggressive), and has a relatively high allocation to international (non-US) stocks (hence, global).  First, let's consider the investor's willingness, ability and need to take risk, and see how this portfolio fits.

Risk Tolerance

Before I get into details of the portfolios presented in the previous post, it will be useful to discuss risk tolerance, since it's so fundamental to making investment decisions.

In his book, The Only Guide to a Winning Investment Strategy You'll Ever Need, Larry Swedroe breaks down risk tolerance into three components:

1. The willingness to take risk
2. The ability to take risk
3. The need to take risk

Some Real Portfolios

I thought it might be helpful to discuss some real portfolios that I've been involved in developing. I'll start with the simplest portfolios, and then move to the more complex. The idea is to expose you to a variety of asset allocations, each having been designed based on the willingness, ability and need of the investor to take risk, along with ability and willingness to handle portfolio complexity.

What Do You Want to Learn More About?

I'm often thinking about different investing topics I'd like to write about, but want to write something that is most likely to benefit someone (which of course means someone has to at least read it!).  Here are some topics I've been thinking about:

Time, Inflation, and Uncertainty

This article discusses a little of the theory behind why investors expect to make money on investments, and why they expect to make more money on some investments than others.  This post is a bit more theoretical than most so far.

Tax Reporting Basics for Taxable and Tax Privileged Accounts

As an investor, you should understand the difference between your taxable and tax privileged accounts with respect to tax reporting.  I've noticed that novice investors sometimes get confused about this, especially when they have both taxable and tax privileged accounts at the same financial institution (e.g., Vanguard, Fidelity, Schwab, etc.).  For example, they may hold the same mutual fund in both a tax privileged and taxable account, and they wonder why they got a 1099 tax form for one and not the other.  This article doesn't get into details about tax reporting for earnings from taxable accounts, but just tries to distinguish between tax reporting for taxable and tax privileged accounts at a high level.

Financial News: Worse than Useless!

I first thought I'd title this article Financial News: For Entertainment Only, but then as I thought more about it, I concluded that for most investors, watching or listening to financial news is probably not that entertaining, and more likely is detrimental to their investment success.  If the news is pessimistic, it probably will cause you to worry about your investments, and worst of all, change your rational investment strategy.  If the news is optimistic, it may cause you to be somewhat greedy, and again, change your rational investment strategy (in a different way of course).  As Warren Buffet said, as an investor, you're better off being fearful when others are greedy and greedy when others are fearful; here's the exact quote from his 2004 letter to stockholders: "Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy only when others are fearful."

Stocks, Bonds, Markets

This article is a primer on stocks, bonds and their respective markets.  It's not necessary to understand all of this material to be a successful investor; this is intended for people who are interested in building up their knowledge of the fundamentals of investing.

Dow, S&P 500, Nasdaq

If you read or listen to financial news, you can't avoid hearing how many points the Dow gained or lost today.  You also may hear how many points the S&P 500 and Nasdaq gained or lost.  For a number of reasons, you should ignore these reports entirely (I do), and I'll explain why if you continue reading.

IRAs: Traditional vs. Roth, Part 2

I'm always trying to learn more about investing, and although much of what I read covers material I already know and understand, sometimes I run across information that increases my understanding significantly.  I recently ran across a couple of articles on IRAs on moneychimp.com (mentioned in my last post on useful investing websites) that increased my understanding of the tradeoffs between traditional and Roth IRAs.  Based on what I read, I started working on a spreadsheet to further deepen my ability to analyze the tradeoffs.  Based on this work, I revised and added to my original post on IRAs: Traditional vs. Roth (December 16, 2009).  For those who may have already read it, I'm repeating the main additions to that post here, in case you don't want to reread the original article.  I'll also include some examples to demonstrate the tradeoffs.

Useful Financial/Investing Websites

I just ran across an interesting financial/investing website, and thought I'd use a blog entry to list various sites like this that you may want to visit.  I'll update this entry as I run across other sites of interest.

UPDATE:  Rather than updating this blog entry with new sites, I've added sections with links to investing blogs and web sites I like.  See the navigation bar to the right, under the blog archives.

Asset Allocation: Part 2

Introduction

In Asset Allocation: Part 1, I discussed some of the thinking behind diversifying your portfolio among stocks, bonds and cash.  You can accomplish this quite simply with 2 or 3 low cost index mutual funds, and some highly respected financial authors and researchers recommend keeping it simple, and doing exactly this.  However, other highly respected financial advisors/authors/researchers recommend splitting your portfolio into more asset classes, and cite research that demonstrates that this has often (but not always) provided higher return with lower risk over the long run.  This is what I'll be discussing in this post.