Personal Finance Guide

Archive for June, 2010

Most investors expect professional investment managers such as those managing mutual funds to outperform the stock market. However, this is seldom the case. Mutual funds rarely beat the stock market benchmarks such as the S&P 500, an index of the share of 500 large US companies. After all if the investment managers who work round the clock on choosing the right investments don’t outperform the stock market, why pay extra money to buy into their mutual funds? Isn’t it best to invest in index funds?

Research has shown that the majority of stock investment managers lagged the stock market in 12 out of 20 years from 1976 to 1995. Moreover, more than half of stock mutual funds managers have fallen short of the stock market ’s average return over longer periods as well. For example, less than 20% of the 402 US diversified mutual funds that had been around for the 10 years managed to beat the S&P 500 ’s 14% annual return for the 10 years to April 1, 1996.

The reason most mutual funds don’t outperform the stock market averages is because the professional investment managers at mutual funds, banks, insurance companies, etc are the market. The portfolios they manage account for half the value of US stocks and account for the bulk of the trading in those stocks. Therefore, their investment returns are the stock market returns. There are also mutual funds annual operating expenses. When you deduct mutual funds expenses, you are further away from stock market averages.

How did investment managers beat the stock market in some years?

Nearly 87% of all investment managers beat the stock market performance in 1977. Many stock mutual funds that outperformed the stock market (such as the S&P 500) invest in smaller cap stocks when small cap stocks are performing well, better than large cap stocks. These small cap stocks are smaller than those in the S&P 500.

• When to invest in Index Funds

Question: What are the best resources for personal Financial Planning and organization?

I’m wondering about books, web sites, software, magazines, etc. We have Macs at home, own rental properties, currently keep finances on customized spreadsheets in Appleworks. Would like better sync with online banking for a more comprehensive and integrated picture. Also want to have a comprehensive source for information so that we consider all the key elements of our finances without letting things fall through the cracks.

Thanks.

Answer: Having a Mac makes it hard. There are few money tracking software packages that will work with your computer. Do you have bootcamp or anything that you can use to run quicken off of windows?

As far as books/sites, I have a resources page that, while still under development, has some good starting suggestions: http://www.personalfinance101.org/resources.html

Good luck!

Investment Tips & Financial Planning : About Personal Financial Planners

Question: Smart long-term investments?

From reading these “how to retire a millionaire” articles, I think I have most of the work down. I live frugally, do the little things like cook my own meals, etc. Starting now (age 18) I can easily stash $20 weekly for the long term, which will increase to $50 soon. I have all this stuff down and am probably in a good position, since I have no debt I’m trying to pay off or anything. So….what now?

Annuities? Bonds? Should I seek advice from my banker? Someone told me I should take all my money and buy silver, another person said I should invest in Europe (I have family in London so it could work) because of the sinking dollar. I’m not looking for a quick profit from the hottest stocks, I want a place where I can put aside money, know that it’s working for me (albeit slowly), and not worry about it for maybe 50 years. I guess I would benefit more from answers on how to find my way through the world of Personal Finance like “Here, read this book” than “stocks!!”

Answer: Standard investment advice is that you should invest in a diversified mix of stocks, bonds, and money market funds. If you are like most people you will invest part of your money aggressively in stocks, and part conservatively in money market funds and bond funds. Vanguard has an on-line questionnaire which will give you an idea of how to do “Asset Allocation,” determining how much to put in each type of fund.

You want to buy a diversified portfolio of stocks as individual stocks are too risky. Highly knowleadgable people can buy a properly balanced portfolio, but most folks have a difficult time balancing things on their own. They will misbalance their portfolio by buying all small stocks or all growth stocks, or some other misbalanced assortment of stocks. Back in 2000, Some people bought all internet stocks; they got burnt when they all crashed together. You have to diversify across industries. Unless you know what you are doing, it is best to buy mutual funds. I like Vanguard.com, other people like Fidelity, TIAA-CREF, and DFA. Buy no-load, low cost funds.

If your company offers a 401K plan at work, try to invest the most you can. The money grows tax free, and some companies will match your contribution. Investing in a mutual fund IRA is also a good idea.

I like Index Funds. Because of their broad diversification, you are less likely to have a dramatic drop in value. They also have the lowest expenses. For stock funds, I would suggest putting ~70-80% of your money in the Vanguard Total Stock Market Index Fund. and ~20-30% in a foreign stock index fund. Unfortunately, these funds have a minimum investment of 3,000 dollars, which make them out of your range currently. T Rowe Price has some funds with lower minimum investments. There are many different opinions out there on what the best mutual funds are. Read the links below and form your own opinion.

You should have 3-6 months of salary saved up as an emergency fund in a bank or money market fund before trying more risky investments.

I am not a great fan of annuities, but that is a whole other discussion. Silver is very speculative. You can make a lot or lose a lot.

Believing advice you get on Yahoo answers can be risky, so read these websites for further information. If you find it too confusing, contact a professional financial advisor at a bank. They will charge you significant commissions, however.

Sources:

http://www.vanguard.com/VGApp/hnw/planningeducation

http://www.fool.com/school.htm

http://sec.gov/investor/pubs/assetallocation.htm

http://www.diehards.org/readsites.htm

http://finance.yahoo.com/education/begin_investing

http://finance.yahoo.com/funds/basics

Asset Allocation Calculators
(Determining how much to put in stocks and how much into bonds and money markets is a personal decision depending on your financial status. These Asset Allocation questionaires give you a rough idea how to do this. I like Vanguard best, but try some of the other sites as well.)

https://personal.vanguard.com/VGApp/hnw/FundsInvQuestionnaire?cbdInitTransUrl=https%3A//flagship.vanguard.com/VGApp/hnw/planningeducation/education

https://ais2.tiaa-cref.org/cgi-bin/WebObjects.exe/DTAssetAlcEval

http://www.ifa.com/SurveyNET/index.aspx

Web forum: http://www.diehards.org/
(Many investment web forums are overrun by scam artists. This one seems the most legitimate site.)

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