Follow this blog to learn to invest and build wealth. The blog educates savvy professionals in how to create an investment portfolio that beats the experts. Barbara Friedberg is a former University Finance Instructor and Portfolio Manager.
Spring is the perfect time to improve your financial health.
Following is a list of learning opportunities for you to listen and learn about important finance and investing topics. From how to invest an inheritance to index funds and an invitation to a free “Wealth Warrior Summit” there’s an opportunity for everyone.
First are several of my recent podcast appearances.
Next, the free Wealth Warrior Summit is an opportunity to learn from various experts about how to build wealth.
How to Invest an Inheritance – and More: A 9-Step Guide on What to Do With Inherited Money in San Diego
“Imagine losing a parent or close relative and finding out that you just inherited $750,000. The money is overwhelming and the loss of a loved one is devastating.
Baby boomers today are an enormous cohort of nearly 80 million people and roughly 24 percent of the U.S population. These 55 to 73-year olds were born between 1946 and 1964. The average inheritance amount ranges from the low six figures to millions of dollars. You might think that despite the loss, it would be exciting to receive a large inheritance. For most, the entire experience is very overwhelming. Most don’t know where to begin.
Perhaps you’ve pondered how your life will change now that you’ve inherited money. You’ve probably thought about the real estate and travel opportunities that would arise. However, the reality is quite different. Processing an estate can take up to a year or more and shouldn’t be rushed. The time before you access your inheritance provides time to mourn the loss of your loved one.
Follow these nine steps to properly deal with a large inheritance…..”
On this show, we talked about all the ways technology is impacting investing, specifically 401(k) plans, with Barbara Friedberg, owner of RoboAdvisorPros.com, author and former portfolio manager. Listen to learn what you can do if your company doesn’t offer a 401(k) or you’d like to make changes to the existing plan!
For the Difference Making Tip, scan ahead to 22:14!
Ep 26: Index Funds: Security and High Returns, Demystified with Barbara Friedberg Profit Boss® Radio
Profit Boss Radio – Podcast with Hilary Hendershott
Barbara Friedberg and I dig into the differences between active and passive investment strategies. She supplies a wealth of information on exchanged traded funds. Barbara definitely has the heart of a teacher and she shares my passion for helping women take a more active role in their wealth management process.
I’m one of those dinosaurs that started her first IRA in her 20’s at the beginning of the IRA movement. At that time, there was no such thing as a Roth IRA, so I invested in a traditional IRA. On top of that anomaly, I was the only 25 year old at a retirement seminar in a room full of 60 year olds. The question of whether I needed need a Roth IRA if I have Social Security didn’t cross my mind since I believed that there’s no such thing as ‘too much financial security’.
Although my passion for saving and investing has stood the test of time, I am deeply concerned about the financial future of those who haven’t yet started to save and invest. Read on for some motivation to get started investing in a Roth IRA today. Get the answer to the question, “Do I need a Roth IRA if I have Social Security?”
A True Retirement Story
At 8:00 AM I receive a call from an older neighbor, just wanting to talk.
She started off by recounting the details of her husband’s firing from his job. My neighbor, June, believes he got fired because of his hot temper.
Strike one, keep your temper in check at work. The saga continues as she tells me about the new blinds she is buying for the home. I casually mentioned, that she might postpone this purchase since her husband, the main source of family income just lost his job. June replies, that expense was already planned so she will get the new blinds.
Strike two, don’t add more financial stress after a job loss. To top it off, June continues her financial mismanagement by sharing how she paid a consultant $100.00 to explain Medicare coverage to she and her hubby. Unable to keep my big mouth shut, I said that Medicare will explain their system for free. Strike three, don’t pay for information readily available for free.
The final blow came when she mentioned she has no Roth IRA, Traditional IRA, no 401k and little saved up for retirement.
She stated “We don’t need retirement savings, we’ll have social security soon.”
What is she thinking? She simply stated I don’t need a Roth IRA if I have Social Security.
Why You Must Start a Roth IRA Today
I understand that retirement seems a long way off for those in their 20’s and 30’s. Yet, the earlier you start saving, the less total money you need to save, and the more you will have at retirement time. The future of Social Security is uncertain. And even if you do receive Social Security, it doesn’t come close to replacing your pre-retirement income. Your Social Security benefits will likely replace from 26% of your pre-retirement income if you were a high income earner up to 53% if your pre-retirement income was low. At best, benefits will be smaller and start later than they do now.
Today, long term employment with a single employer is practically nonexistent. So, if you fail to take responsibility for your future, you face a scary life in old age. As we all live longer, we need more assets to ensure that we don’t outlast our money. We also need to be certain that our IRA beneficiary designations are up to date. Explore the data so you don’t end up old and poor.
Even if you have a 401(k) at work, you should set up a Roth IRA as well. The more you can save today for retirement, the better your entire life will be. Once you automatically have your contributions transferred into your retirement account, you won’t miss the money, and you’ll learn to live on the rest.
How to Invest Less and Have More Money in Retirement
At age 25, Joleen began investing $200.00 per month in a Roth IRA and her employer added another $100.00 per month bringing the total up to $300.00 per month. She invested the monthly retirement money* this way:
40% ($120.00) in Vanguard Total Stock Market Index Fund (VTSMX)
30% ($90.00) in Vanguard International Stock Index Fund (VTIAX)
30% ($90.00) in Vanguard Total Bond Market Index Fund (VTBLX)
She started investing at age 25 and stopped at age 65, for a total of 40 years. At age 65, Joleen’s contributions plus her employers’ grew to $787,444.00*.
Jamar, Joleen’s brother wanted to spend his earnings and didn’t think about the future. No retirement investing for Jamar, he was having too much fun; Jamar figured social security would take care of him.
At age 40, Jamar had a change of heart. He woke up one morning and realized that he had nothing invested for his future; and he was scared.
He decided to start investing and chose the same investments as Joleen, but decided to try to catch up.
Bonus; One of my favorite places to open an IRA is M1 Finance.
Jamar invested $400.00 per month, twice as much as Jill’s $200.00. Jamar’s employer matched his $400.00 per month with an additional $100.00, just like Jill’s. This brought his total monthly investment to $500.00.
*Assume: Portfolio average annual return of 7% At age 65, Jamar’s contribution plus the employers’ grew to $405,036.00, while Jill’s lesser contributions grew to almost twice that amount at $787,444.00.
Jamar invested $24,000 more than Jill and ended up with $382,408.00 less than Jill.
Joleen & Jamar’s Total Contributions
Combined Total Roth IRA Contributions
Portfolio Value at Age 65
Do I Need a Roth IRA if I Have Social Security? The Answer
My friend June is living in denial. When Social Security comes, it won’t match her husband’s former income. As her savings are small and she didn’t plan for the future she faces major lifestyle cuts as she ages.
The alternative to old age is death. If you expect to get old, own up to reality, and invest through work or a discount broker in a Roth IRA and start contributing today.
Even if Social Security continues, don’t expect it to pay for a comfortable retirement. You can choose not to invest for the future, but be aware that Social Security is uncertain, and you will likely be poor in your old age without investing in an IRA. Start now, you won’t miss the money and you’ll appreciate the financial security later.
8 Money Saving and Investing Strategies Inspired by Warren Buffett
“Long ago, Ben Graham taught me that ‘Price is what you pay; value is what you get.’ Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.” ~Warren Buffet Letter to shareholders, 2008
Warren Buffett’s net worth is $82.7 billion dollars as of March 29, 2019, making him the third wealthiest person in the world, according to the Forbes 400 list. He is among the most successful investors of all time. He founded and runs the Berkshire Hathaway company which owns more than 60 companies including Dairy Queen, Geico and Duracell battery.
Buffett’s father was congressman, and he started investing at age 11. Warren Buffett is approaching his 90th birthday and is vital and engaged.
Despite his unique background, there’s much that savers and investors can learn from Warren Buffett.
Known to live beneath his means and to generously share his wisdom, Warren Buffett has motivated legions of investors with his knowledge and investment style.
This article is inspired by Warren Buffett’s writings and his lifestyle of conservative living and brilliant investing. Wealth-builders today can learn a lot from the fact that Buffett still lives in the home he purchased decades ago in Omaha Nebraska for $31,500.
1. Use the Power of Saving
Buffett says, “Don’t save what is left after spending; spend what is left after saving.”
If you want to become wealthy, you must allocate some of your current earnings towards the future.
By saving first, you eliminate the problem of not having enough money to save, at the end of the month. You also avoid having to budget, one of the most unpopular financial activities.
To implement the Buffett approach to saving, invest a portion of your salary into a 401(k) and a Roth IRA. This not only guarantees that you’ll be saving for the future, but that you won’t be spending all your income.
Then, direct another portion of your income into a short-term cash account, like a savings account, earmarked for emergencies.
If you can, save another portion in an investment account, like Schwab or a robo-advisor like M1 Finance or Betterment for medium term goals like a new car, vacation or college.
By setting up automatic deposit into these accounts, your financial future is secure.
Spend what’s left and you’re certain to be on the right path to build wealth for tomorrow.
You might imagine having an extravagant lifestyle if you were in Buffett’s shoes. Yet, the billionaire has simple tastes. Known for favoring Coke and McDonald’s hamburgers over a $100 meal, there’s a lot to learn from wanting less.
From a man who could buy anything, “I’m not interested in cars and my goal is not to make people envious. Don’t confuse the cost of living with the standard of living.,” Buffett says. He is a champion of living within your means and income.
Think, wait, and evaluate before spending. Consider, as you rip out your Visa card whether the $95 pair of shoes or new headphones today are worth sacrificing $950 at retirement?
Here’s how investing, instead of spending works:
Invest $95 today in a diversified stock market index mutual fund like Vanguard’s S&P 500 (VFINX or VOO).
Assume an annualized return of 9% per year.
Wait 27 years, until retirement.
The investment will be worth approximately $950.
That’s the power of compound returns!
Every time you spend money on something that doesn’t give you a return, you’re sacrificing your tomorrow. A simple rule of thumb is to multiply the cost of your spending by 10. And that’s an approximation of how much money you could have in retirement, if you invested the money instead of spending it.
Is it worth going out to dinner for $100 if you could have $1,000 more in retirement?
3. Save For the Unexpected
Warren Buffett keeps billions of dollars on hand, just in case.
If an outstanding investment opportunity arises, he has the money to act.
For you and me, having extra cash on hand means that if the stock market falls, we have cash on hand to buy good stocks at bargain prices.
Then there’s the day-to-day financial surprises. Emergencies happen… to everyone. Recently, we had a small fender bender. This set us back $1,000 for the auto insurance deductible, and our premium went up a few hundred bucks.
If you lack enough savings for emergencies, when that unexpected bill comes along you might be forced to take on credit card debt in order to pay for the unexpected expense.
If you pay $1,000 to repair your car and don’t pay the bill immediately, here’s how much you’ll end up paying the credit card company.
If you charge $1,000 on your credit card, which charges 18% interest, and you pay 2% of the remaining balance ($20 the first month), it will take you 151 months to pay off the $1,000. At the end of 151 months or over 12 years, charges will amount to $2,397 for an additional $1,397 in interest charges on top of the original $1,000.
Pay the minimum and you end up more than doubling the initial charge.
Join Warren Buffett and keep cash on hand for the unexpected.
4. Use Debt Carefully and Limit What You Borrow
When buying a home or a car, you may need to borrow money. Realize that too much debt limits your chance to save money and become financially wealthy. Every dollar you put towards interest payments is one dollar that is not invested and growing your wealth.
Just like money invested, compounds and grows for the future. Borrowed money compounds and increases the initial price paid for an item.
Bufffett doesn’t hate debt, but recommends using it wisely.
“I’ve seen more people fail because of liquor and leverage—leverage being borrowed money. You really don’t need leverage in this world much. If you’re smart, you’re going to make a lot of money without borrowing,” he says. Although that quote refers to borrowing money to invest, the principle applies to other types of debt as well.
If you are paying 18% interest on your credit card debt and earning 9% on money invested in the stock market, then you’re actually losing 9%.
Make a plan to get rid of credit card debt now to move towards wealth and prosperity.
5. Think Long Term
The Stanford marshmallow test by psychologist Walter Mischel, PhD demonstrated how children who delayed gratification became more successful.
“Mischel and his colleagues presented a preschooler with a plate of marshmallows. The child was then told that the researcher had to leave the room for a few minutes, but not before giving the child a simple choice: If the child waited until the researcher returned, she could have two marshmallows. If the child simply couldn’t wait, she could ring a bell and the researcher would come back immediately, but she would only be allowed one marshmallow,” APA.com
When these same children grew older, their self-control remained and they were more likely to score higher on the college entrance SAT test, were better able to handle stress and concentrate without becoming distracted.
The self-discipline the children illustrated in the marshmallow test is akin to the patience and ability to delay gratification that Warren Buffett demonstrates through his lifestyle and investing practice.
He’s known to say that the appropriate time length for holding an investment is, forever.
Warren Buffett explains how you could've turned $114 into $400,000 - YouTube
For many, it’s easy to become consumed with the day to day concerns. Yet, if you avoid saving and planning for the future, you’re likely to have a stressful retirement.
Money saving tips from Warren Buffett reminds us that money doesn’t grow overnight but takes a long time to build up.
Waiting to spend money along with waiting for investments to grow, will yield great outcomes.
Be patient and understand that the magic of compounding takes time. Invest for the long term.
Start investing a small amount every pay period and over the long term, the money will grow exponentially.
6. Invest Savings the Warren Buffett Way
In the video above, Warren Buffett advocates a simple investment approach. Buy an S&P 500 index fund and hold it for the long term. In fact, that is exactly what Buffett instructed his attorney to do with the inheritance that he’s leaving to his wife!
If you’re age 25 and begin investing $10,000 per year, then at age 50 you will have roughly $732,000 dollars. (Assumes a 7% annualized return.)
This isn’t as difficult as it sounds. If you’re working for an employer who contributes to your 401(k) retirement account, then you might invest $500 and if your employer kicks in $333 per month, you’ve met your $10,000 annual investment goal.
With compound interest, the money that you earn is added to the existing amount and grows exponentially.
Data and Image credit – https://wealthyretirement.com/compound-interest-calculator/
The chart above shows the yearly value of investing $10,000 in the financial markets and earning an annualized 7% return. In 25 years, the annual $10,000 investment grows to more than $700 thousand dollars.
So you see, with more time, your money makes more money on top of more money.
7. Maintain a Modest Lifestyle and Go Beyond Living Paycheck-to-Paycheck
If Warren Buffett can live in the same modest home for decades, why do you feel you need to live above your means? We live in a middle-class neighborhood in a condominium in the midst of a large housing development in Northern California.
I’m amazed at the apartment dwellers in the next building driving BMWs and Cadillacs when they could be putting that monthly payment towards purchasing a home and building long term equity and wealth.
No matter how much you earn, there are strategies to spend less, and dial down your wants. The simplest way to live within your means is to desire a simple life. When you lower the bar, to your lifestyle, you can get off the “keeping up with the Jones” rat race and live for you.
Live within your means and contribute to an investment account every pay period. Even if you don’t become as wealthy as Warren Buffett, you’ll be a lot richer than if you spent all the money that you earned.
8. Invest in Yourself
Warren Buffett frequently recounts a story of how terrified he was of public speaking as a young man. He would get nauseous and panicked before speaking in front of others. To combat his fear, he paid $100 for a Dale Carnegie public speaking course and credits that as one of his very best investments. In fact, halfway through the course he mustered the courage to propose to his wife.
Investing in yourself can mean many different things. If you can advance in your job through education, then spend the time, money and effort to get a certificate or degree. If traveling to a conference means more contacts and additional clients, then spend the money.
Saving is only important when using those savings wisely. Sometimes that means spending the savings on yourself, so that like your invested dollars, your efforts will compound by increasing your income.
Action Steps – Inspired by Warren Buffett
Save money by deciding where to scrimp and where to splurge.
Start diverting part of your income into an investment account.
Make a record of income and expenses and create a spending plan.
Values and Money Impact Whether You’ll be Wealthy or Not
“Values are the principles that guide you through every day, every task, and every encounter with another human being; even if you are unaware of what those values are.” By Richard Bolles in What Color is Your Parachute?
In another lifetime, when I worked as a career counselor, Bolles work influenced me in many ways. His wisdom far surpasses the career field and invades every aspect of life. Values and money are inextricably intertwined and can help you live a richer and happier life.
I wrote this article initially in 2010 and believe the topic deserves an overhaul.
As I enter the last trimester of my life, I reflect on how all of the years of saving, investing and deliberate spending have brought me to surpass my retirement number. If you consciously understand how values and money impact your life, you’ll be happier and wealthier.
Values and Money: Investment or Consumption?
What are your values? This philosopher explains what values truly mean.
“Values are basic and fundamental beliefs that guide or motivate attitudes or actions. They help us to determine what is important to us. Values describe the personal qualities we choose to embody to guide our actions; the sort of person we want to be; the manner in which we treat ourselves and others, and our interaction with the world around us. They provide the general guidelines for conduct.” ~EthicsSage.com
How are values and money related?
How you live and spend, explains your values. If you claim to value the poor and underserved yet don’t give to charity, then you don’t actually value philanthropy.
If you drive a 10-year-old car and send your kids to a premier academic academy, then you value education.
Consider whether you can free up a few dollars a day to invest for tomorrow. What would you give up?
Evaluate whether there are purchases or activities in your life that cost money and don’t bring you joy.
Or, are there ways you could earn more, and invest that money for tomorrow?
Values and Money: Wants vs. Needs
A want for me might be a need for you. Your values are personal. There’s no right or wrong answer. One of the most popular articles on this website is “How Trading in a Car Every Year Makes Good Financial Sense.” Matt talks about how he wants a new car every year, and what he’s willing to give up to make that happen.
The idea is to figure out your own personal wants vs. needs and then live accordingly.
Grab a pad and jot down the most important expenses in a month, the necessities.
Then write down the things that you want.
Examine both lists and decide, if your values and money are reflected in the lists.
Your goal is to spend money on your needs and items that you value.
If your needs and items you value cost more than your income, then you need to decide whether to earn more or want less.
Your only irreplaceable resource is time. You cannot earn more time. You can earn more money.
The greater the return on your time, the wealthier you are. If you can earn more money per hour, you have the opportunity to build greater wealth.
Look at your life through these two metrics:
Return on your time – How much value, either monetary or personal wealth do you gain from the time spent on an activity. For instance, a memorable family vacation can create immeasurable returns on your time.
Return on your investment – How much money can you earn from a single dollar invested. A 7% annual return on your investment gives you $70 dollars on a $1000 investment. A 2% annual return on your investment gives you $20 on a $1000 investment.
Incorporating these concepts into your life can build both financial and personal wealth.
How to Maximize Values and Money and Time
Look around your house and ask yourself, are you getting a return on your investments?
Is the time spent playing video games returning enough relative enjoyment?
What about the money spent on your last car?
What about the $25 toy for your kid? Would a big box have been just as much fun for junior?
Is the pleasure spent driving the vehicle equal to or greater than the amount of effort required to pay for the purchase? I love my 1998 Isuzu trooper and enjoy driving it to this day!
Now is the time to take action, to maximize your values and money and time.
Take these simple steps to secure your financial future and make today better:
Invest in tomorrow with a retirement account. Invest in your workplace 401(k) or open a Roth IRA.
Think before you spend.
Make a plan to free up more cash for investing.
Create a side hustle for extra income.
Get together with the family and decide what you really value. Then spend on what’s really important and cut out the rest.
Get started investing today to build wealth for tomorrow!
Disclosure: Please note that this article may contain affiliate links which means that – at zero cost to you – I might earn a commission if you sign up or buy through the affiliate link. That said, I never recommend anything I don’t believe is valuable.
“Trying to consistently pick investments that are going to beat their benchmarks is like trying to win a marathon wearing muddy boots. There is a lot of drag, and your odds of winning are very low. The high costs associated with attempting to beat the market will almost guarantee sluggish results.” ― Richard A. Ferri, All About Asset Allocation, Second Edition
Who doesn’t want to amass a lot of money for retirement?
Of course you want build a big nest egg. But if you’re like most people, you’re not sure how much to save or where to invest. The Lazy Investors Asset Allocation Guide will help.
This article’s important if you:
Don’t want a lot of muss and fuss in your investing approach.
Want good, market-matching investment results.
Don’t be confused, this guide is a ‘lazy asset allocation’, but it’s not ‘easy’. Like anything of value, even the lazy investors asset allocation guide requires a degree of discipline and the commitment to make life trade-offs.
As Richard A. Ferri infers in the opening quote, trying to beat the market is difficult if not impossible. With so much information online about tricks and strategies to make boat loads of money with investing, you’d think it would be a snap. Yet, the average individual can end up overwhelmed, confused and immobilized. Additionally, it’s very difficult to assess who to follow and which approach makes the most sense.
This article gives you a lazy approach to build a high 6 figure retirement portfolio, no matter how old you are.
I started reading Jane Bryant Quinn’s finance writing before many of you were born. In an early investing book of hers, the title long forgotten, taught me one of the most important investing concepts. This is so simple it borders on insulting, so those of you who already practice this strategy, just bear with me a moment.
This wealth tip requires no budgeting or planning. It’s actually a total retirement planning approach without having to create a budget. You don’t need a budget if you follow Step 1-Lazy Asset Allocation, inspired by Jane Bryant Quinn.
Set up an automatic transfer directly from your paycheck (or bank account) into a savings/investing account. This ensures your financial future is secure (unless you subsequently withdraw the money). You don’t see the money in your checking or savings account, so you don’t spend it. It is growing for your retirement and other far off goals.
Here’s the budgeting part-you can spend whatever is left your account, knowing that your future is secure. No budget is necessary. When your spending money is gone, that’s it, you are done spending.
Following is the monthly amount you need to invest each month, assuming a 7% annualized return, in order to have $787,355 at retirement age 66.
Step 3-Lazy Asset Allocation-Where to Invest
Where to invest to reach $787,355 by retirement?
Invest a larger percent of your monthly allocation into this diversified all world stock index fund: Vanguard Total World Stock Index Fund-Investor Shares (VTWSX) or the related ETF (VT).
To increase diversification and reduce volatility, invest a smaller percent of your monthly contribution in a widely diversified bond fund such as iShares Core US Aggregate Bond (AGG).
With just 2 funds, you can create a diversified asset allocation.
In the lazy investors asset allocation example we used a 7% annualized rate of return. This is a hypothetical example and your return over time may be higher or lower based upon market returns going forward.
Your future return will depend on how the world stock markets perform over the upcoming decades. It will also depend upon how the bond markets perform in the future.
Finally, you personal future investment return will also be dependent upon what percent you allocate to the stock portion and the bond portion of your investment portfolio.
In general, a higher percent invested in stock assets leads to higher long term returns with accompanying greater price swings. The younger investors can afford to tilt their portfolios more heavily toward stock investments because they have a longer time horizon in which to make up any losses.
Step 4-Lazy Asset Allocation-What Percent to Invest in Stock vs Bond Fund?
Money Magazine recently suggested a new rule of thumb for asset allocation. Subtract your age from 120 and that is the percentage of your total investments you should hold in stock assets, with the balance in bond investments. According to this rule, a 50 year old should have 70% (120-50) in VT and 30% in AGG.
There is no guarantee that you’ll reach your goal! But if you start investing regularly now, it’s likely that you’ll reach your investment goal and amass $787,355.
Please be advised that this is not a recommendation to buy or sell any specific investments, for personalized advice, please consult your own investment advisor, I am not a registered investment advisor.
Do you know how well your investments are performing?
Are you wondering if a 10% return is good or bad?
Do you know the annual rate of return of your investments?
What about how well your investments are performing when compared with a standard benchmark?
Ever since a friend asked me to look over her investments and tell her if she’s doing well I’ve wanted to help investors answer this question;
“What are my investment returns?”
Most individuals don’t know if their investment returns are good or bad. Even investors with financial advisors don’t know how to evaluate their rates of returns. Many financial advisors don’t offer their clients the investment portfolio annual rate of return compared with the returns of unmanaged indexes. And that’s a big problem.
You’re hiring a financial advisor to help you manage your money and get a good annual investment return. Yet, if you don’t know your annual return, or even if you do, you still need to know if that return is good or not.
When managing your own finances, you need to know if you’re making the best investment decisions as well.
Is a 10% Return Good or Bad?
Think about Keisha. She was thrilled in January when her advisor-managed all-stock investment portfolio returned 10% during the previous year. She knew that her bank savings account was not earning much, so she rejoiced in what looked like a stupendous 10% return.
Here’s why Keisha should have been disappointed.
During the same time, the unmanaged S&P 500 index returned 13.48%. All of a sudden Keisha’s 10% return doesn’t look too good. She thought, why am I paying my investment advisor 1% to manage my stock portfolio for a lower return than the unmanaged S&P 500 index fund? That’s a legitimate question.
Here’s how Keisha could have gotten close to a 13.48% return in that same year and thereby beaten the returns of her investment manager by 3%.
Passively Managed Index Funds Are the Way to Invest
Years of investing research, Warren Buffett, John Bogle, and Nobel Prize winners agree that most investors would do well to invest in a portfolio of passively managed index funds.
An index mutual or exchange traded fund is a passive investment. It simply mimics the investments in a basket or index of stocks (or bonds). The S&P 500 index is one of the most popular indexes and holds a market capitalization weighted group of large U.S. companies. This index is frequently used to reflect the complete U.S. stock market.
You can buy shares in a fund that mirrors the S&P 500 Index. If you choose to buy index funds for your investment portfolio, your investment returns will approximate that index.
Following are several low-fee S&P 500 index mutual and exchange traded funds (ETFS).
Notice that the returns are similar, with the Fidelity, low-fee fund yielding the highest 5-year return.
When investing in an unmanaged index mutual or exchange traded fund, your returns are slightly less than those of the actual index. The difference in return between the fund return and that of the index is typically explained by the expense ratio.
Although it’s wise to invest in low fee, passively managed index funds, I wouldn’t worry about several hundreds of a percent difference in fees or returns.
Is 10% a good or bad return? The answer is, it depends.
In Keisha’s case, since her advisor invested in a diverse portfolio of U.S. stocks and her return was well below the S&P 500 index returns that year, 10% wasn’t a good return. Had she forgone the advisor and invested all of her stock investment portfolio in one of the above S&P 500 index funds, her return would have been closer to 13.40%. (13.48% index return less a 0.09% fund fee)
Figure Out If You’re Getting a Good or Bad Rate of Return
You shouldn’t look at your investment returns in a vacuum. The return is meaningful only in light of potential returns available for similar investments.
You wouldn’t compare the returns of your all stock portfolio with the annual return of a 50% stock and 50% bond portfolio. That’s because bonds, typically offer a lower rate of return than stock investments.
Here’s a simple approach to figure out whether your investment portfolio is getting a good return or not. The goal is to match or beat an unmanaged index invested in a comparable asset allocation.
Follow these steps to figure out your investment return:
1. Create your asset allocation pie. What percent of your assets (or asset allocation) are in stocks, bonds, and cash? You may need to drill down even further into various types of investments. For example, if you want to go into depth you could examine the percent of your total investment assets are in large capitalization U.S. stocks, developing market international stocks, emerging market stocks, value U.S. stocks, small capitalization stocks etc.
When creating your asset allocation pie, next move on to the fixed portion of your portfolio. Do you have a U.S. bond fund, corporate bond fund, government bond fund, etc.?
The next step is a job for you or your financial advisor.
2. Find out which index funds relate to your asset allocation. In other words, categorize your individual stocks, bonds, and/or funds according to type. For example, imagine that your investment portfolio-asset allocation pie looks like this:
In each of these categories you might have individual stocks and/or mutual funds that fit the category.
3. Calculate the returns on each of your asset classes and list those alongside the percent invested in each asset category.
Here’s how to calculate rate of return on your portfolio:
Now, you know your one year investment return is 5%.
4. Compare your returns with the returns of a benchmark portfolio.
But how do you know whether this is a good or bad return?
As we discussed earlier, you know whether you’re getting a good return if your returns are equal to or better than your portfolio’s comparison benchmark. Since you know your asset allocation pie, all you need to do is find out the benchmark returns.
Following are the hypothetical benchmark returns compared with your returns:
Did You Get a Good or Bad Return?
Now you’re equipped to answer this question. You invested in stocks, bonds and funds and your annual return was 5%. Had you gone the easy route and chosen 4 index funds, in your desired asset allocation, you would have beaten your own returns by 0.5% per year. Your stock picking efforts weren’t rewarded.
Imagine if you had hired a portfolio manager who diversified your investment portfolio, invested in a broad mix of stocks, bonds, and mutual funds and earned a 5% return. But the manager’s fee was 1% and was subtracted from the 5% return. Now your advisor managed fund only earned 4% (5%-1% fee).
Compare your 5% return or the advisor managed 4% return with the 5.5% index fund portfolio return. The unmanaged index fund portfolio outperformed both your own and the advisor managed investments. The results are clear, the passively managed portfolio of index funds outperformed your own and the advisor managed investments.
Is that always the case? You won’t know unless you or your advisor compares your investment portfolio with that of the comparable benchmarks.
You decide if your return is good or bad. The best way to answer that question is to compare your own returns with the returns you might have received on a comparable passively managed index fund portfolio.
If you’d like a free investment manager that offers thousands of funds and stocks, consider investing with M1 Finance.
Disclosure: Please note that this article may contain affiliate links which means that – at zero cost to you – I might earn a commission if you sign up or buy through the affiliate link. That said, I never recommend anything I don’t believe is valuable.
When Jackie, at the Debt Myth emailed and asked me to participate in the #debtisnotforever initiative, I had to pause. I live debt free and have never taken had a “debt problem,” The only debt I currently have is our 15 year home mortgage. And I’m not one of those bloggers whose story includes getting rid of a bundle of debt. Yet, I’ve lived my life with a minimum amount of debt and completely avoided consumer debt, so I figured that I have something to offer to the debt is not forever campaign.
I can tell you about how to live an exceptional life without debt.
How to Live Debt Free
There are 3 steps to living debt free.
1. It Starts With the Mind
Like most decisions, if you want something, or its important to you, you’ll make it happen. Although there are plenty of folks at the lottery counter hoping and dreaming about the “big win”, very few actually hit the jackpot. Notice the relationship between what you say you want and how you behave.
Decide what you want, make a plan, and act. What you want and your actions must be congruent in order to get what you really desire.
For example, if you want to be healthier, look at your lifestyle and actions. What steps are you taking to make yourself healthier? Are you parking your car further from the store entrance? Are you taking the stairs. Are you counting steps and making sure to hit 5-10,000 steps per day? What about food, are you choosing fruit over candy, most of the time?
Will your life be better debt free? If not, stop here and do something else.
If you want to live debt free, begin by creating the steps or plan to make it happen. Here’s how…..
2. Create a Plan to Live Debt Free
If you have debt, obviously, the first step is to get out of debt. There are many ways to get out of debt, and there is no perfect solution. Choose a plan, write it down, and put it into action. My personal favorite ‘get out of debt plan’ comes from my book, How to Get Rich; Without Winning the Lottery.
BARBARA’S DEBT REDUCTION PLAN:
Do not take on any additional debt. Put your credit cards away! Cut up all but one or two, stick them in water and put in the freezer.
Pay at least triple on the smallest debt every month.
Pay the minimum payment on all of the others.
When one debt is paid off, treat yourself to a free or cheap reward. Consider a visit to the dollar store or a long hike at a nature park. Choose something that’s a real treat for you. Don’t skip this step. Too much deprivation is unsustainable and a small reward keeps your debt payment on track.
Start all over and pay triple on your next smallest balance and continue until paid off.
As you get in the habit of paying down your debt, and your confidence grows, try this approach to speed up the debt repayment. Tackle the highest interest rate debt.
When debt is strangling you, it’s important to pay more than the minimum payment, or you will never be able to save. Put all pay raises, tax refunds, and unexpected income towards your debt.
Keep at it; do not quit paying down the debt. And stop using the credit cards.
3. Fail + Restart Plan, to Live Debt Free
When I was 16, I wanted to lose 10 pounds, so I went to Weight Watchers. The first week I stuck to the weight watchers diet, went in to be weighed, and I didn’t lose any weight in week one. So I quit.
I was unprepared for the long road. And the long road is bumpy and filled with upsets. You can do everything right (like I did with week 1 of Weight Watchers) and not experience success. However, if you continue to take the proper actions, you’ll eventually succeed. Obviously, quitting Weight Watchers after 1 week is not a true test of the program.
The best way to succeed is to prepare to fail. How to live debt free is not a quick plan. It is a lifestyle. Just like eating healthy is not a one and done endeavor, either is living debt free.
Consider this, your roof springs a leak, and the repair turns into more. You discover you need to replace the roof. That is a huge repair, into the thousands of dollars. What happens to your live debt free goal. If you’re like many people, you may not have an extra ten thousand dollars in the checking or savings account to replace the roof. In this case, you might need to take on some short term debt.
Does this mean you’ll never live debt free. No, it means you hit a roadblock.
Expect these types of setbacks, and have a plan to mentally and practically handle them.
Your plan might be a simple as saying to yourself, “This is one of those setbacks. I’ll reorganize my ‘get out of debt/live debt free’ plan. I’m not going to give up.”
One of the biggest lessons I’ve learned is that regardless of the goal you might have in life, there are going to be roadblocks, and if you quit, you definitely won’t meet that goal. The more frequently you overspend, the more often you’ll experience buyers remorse.
It’s crucial to remember that when you hit a roadblock, take a breath, and figure out how to go around. The winners in life and money aren’t those without debt, setbacks or difficulties, but the ones who, after a fall, get back up, dust themselves off and keep going!
How to Live Debt Free When the Debt is Gone
When the debt is gone, continue to live debt free. That means, adjust your lifestyle to one that doesn’t involve debt. It could be as simple as following this rule: “If I can’t afford to pay with cash, I don’t buy it.” Accept that every lifestyle and habit change comes with maintenance. After you’ve achieved the goal, continue in maintenance mode by following the smart habits that got rid of the debt.
Debt is not forever. Stay the course, readjust when you hit a bump and you can live debt free.
From asking my cousin how to invest, to researching and picking stocks on my own to becoming a professional investment portfolio manager, I’ve searched for the perfect investment management strategy.
Newsflash – There isn’t a perfect investment strategy. But, there just might be near-perfect investing platforms.
Robo-Advisors Have Revolutionized Investing
Robo-advisors might be the next best thing to flawless investment management.
I’ve become enamored with robo-advisors, or automated investment managers. These computer driven investment managers charge lower fees than human financial advisors and offer sound investing strategies. In fact, several years ago, I launched a robo-advisor review website called Robo-Advisor Pros. On this website I cover all the latest robo-advisor news and dig in to individual platforms with expert reviews.
If you’re an experienced investor or a newbie, just starting out, I want to introduce you to M1 Finance, a combination robo-advisor and investing website which just might offer flawless investment management.
Here are a few reasons I think this is a superb investment management platform:
You have the opportunity to invest in over 6,000 stocks and investment funds for free, without any trading costs or commissions.
If you’re a new investor and need help, there are more than 30 pre-made investment portfolios to choose from.
The M1 Finance computer algorithm automatically keeps your investments in line with your preferred percentages, or asset allocation.
I updated my M1 Finance review and want to share the features with you.
If you want to take care of your financial future in earnest, by letting your money make money, please read the M1 Finance Expert Review.
Following is an excerpt from the review, and if you’re interested, please continue to our sister site, Robo-advisor Pros to read the complete article (there’s a link at the bottom of this post.).
So, if you’re seeking a flexible, low fee investment management platform, then you won’t be disappointed.
M1 Finance Review-For the Engaged Investor
“Forty years of research into behavioral finance tells us that the best way to invest is to define a strategy and then automate it, a process that enforces discipline and encourages us to ignore short-term noise and capitalize on long-term trends,” said Brian Barnes, CEO of M1 Finance.
One of the most comprehensive robo-advisor platforms to hit market, M1 Finance offers a unique twist to the fintech landscape – hundreds of investment options for free.
No trading fees, and free rebalancing of your investments!
In fact, I opened an account with M1 Finance yesterday!
What makes M1 Finance stand out in the robo-advising arena is its access to thousands of investments from exchange traded funds to individual stocks.
You can create your own portfolio – comprised of up to 500 investments. Or, you can create several distinct portfolios.
You can copy experts investment portfolios too.
M1 Finance portfolios are easy to visualize as each investment is shown as a slice of pie, with the whole pie representing your entire investment portfolio.
The visual nature of this platform makes it easy to see that your investing style is reflected in the investment options you have chosen.
M1 Finance also offers pre-made expert pies to choose from. I just invested in one of the expert pies! (Find out which one at the end of this post.)
I’m excited to find out how it performs in comparison with my other investments.
M1 Finance is the most creative automated financial platform online at present.
Investors can choose from pre-made investment portfolios based upon risk tolerance, similar to comparable robo-advisors. But, this is just the beginning, there is so much more.
If you’re a DIY investor, you can create your own investment portfolio, in the percentage allocations that you prefer, and choose from over 6,000 stocks or ETFs traded on the NYSE, NASDAQ + BATS exchanges. After you’ve created your portfolio (or pie), M1 Finance will rebalance the assets back to your preferred allocation.
If you want more help with your investing you can choose from pre-made “expert” portfolios from the following categories:
General Investing – perfect for well-balanced investments that match up with your risk level (like a typical robo-advisor).
Plan For Retirement
Responsible Investing (Socially Conscious)
Hedge Fund Followers
Industries + Sectors
Just Stocks and Bonds
The new M1 Borrow allows anyone with an account balance of at least $10,000 to borrow from their account. Interest rates are low and this is a great solution if you don’t want to sell your investments, but need money for another use.
The portfolio that I opened is from the expert portfolio, “Just Stocks and Bonds.” I opened a simple two stock portfolio with 60 percent invested in the Vanguard Total World Stock ETF (VT) and 40% invested in the Vanguard Total Bond ETF (BND). You might wonder why I didn’t just buy these funds on my own in an investment account. The answer is, M1 Finance will rebalance these funds back to my preferred 60% stock – 40% bond portfolio at any time, just like other robo-advisors. And since M1 Finance doesn’t charge fees, it’s an ideal investment management approach.
I’m also doing an experiment to find out how the returns on this simple portfolio compares with those of more complex robo-advisory investments!
Who Benefits from the M1 Finance Advisor Robo?
The DIY investor who wants to farm out the laborious task of rebalancing his or her portfolio.
The new investor seeking a pre-made investment portfolio in line with her risk tolerance.
The investor who wants to copy the hedge fund investors, without researching their strategies.
The retiree seeking access to target date investment portfolios and the opportunity to invest on their own.
The income investor who wants a pre-made portfolio .
The cost conscious investor who wants their personal portfolio managed and rebalanced for free.
Disclosure: Please note that this article may contain affiliate links which means that – at zero cost to you – I might earn a commission if you sign up or buy through the affiliate link. That said, I never recommend anything I don’t believe is valuable.
Do a Premortem to Avoid the ‘Buy High – Sell Low’ Problem
We’ve all heard the old adage:
Buy low – sell high
But how many investors actually follow this ‘best investing practice’?
Are you guilty of this big investing mistake?
Turns out, there are reams of data about how investors consistently make this big investing mistake; buy high and sell low. You’ll learn about how this happens, and how to counteract this losing investing strategy.
Over decades of investing, I’ve seen this investing mistake replayed over and over again. Specifically, the market dives-investors panic and sell. Then, the market rebounds, but investors are still scared by the prior drop so they wait to buy back in. After a major price advance, investors gain their courage, and reinvest in the markets – only to watch a cyclical market decline soon after they got back into the market.
Notice this chart of SPY ETF, a proxy for the S&P 500. From August 1995 through mid-August, 2015, there have been several market dives and peaks. There’s nothing unusual about this pattern. You’ll find normal economic and stock market volatility throughout history. The great stock market declines are called, systematic or market risk. Events such as the bursting of the tech boom in 2001 – 2002 or the mortgage market melt down and U.S. debt crisis in 2008-2009 cause systematic drops in the major U.S. stock markets.
The Big Investing Mistake
“Many investors—both individuals and institutions—are moved to action by the performance of the broad stock market, increasing stock exposure during bull markets and reducing it during bear markets. Such “buy high, sell low” behavior is evident in mutual fund cash flows that mirror what appears to be an emotional response—fear or greed—rather than a rational one.
For example, from 1993 to the market peak in March 2000, investors’ allocation to stock funds nearly doubled, and in the two years preceding that peak, as the market climbed 41%, investors poured nearly $400 billion into stock funds. Unfortunately, the stock market then reversed rather dramatically and returned –23% over the next two years.” ~ Vanguards Principals for Investing Success.pdf
Vanguard artfully describes how many of its investors make this same big investing mistake of selling after a stock a market drop and waiting to get back in after missing out on the greatest part of the rebound.
The chart above shows the scenario of fear and greed which leads to the big investing mistake of buying high and selling low.
October, 1998 – buy $100
May, 2003-sell $85
September, 2005 – buy $131
August, 2009 – sell $100
September, 2013 – buy $165
You’re not going to get rich letting your emotions drive your investing practice.
I’m a worrier by nature. I constantly fight against the ‘what ifs’. Despite my anxious nature, I understand the volatile nature of financial markets.
Most of the time, the worry that the stock market will fall, is for naught. Yet, 2018, was a wake up call for investors.
As the Fed began raising interest rates from their near zero level, and trade tariffs began influencing the economy, investors got jumpy. During the past 52 weeks, from January 30, 2018 through January 29, 2019 the SPDR S&P 500 ETF (SPY) ranged from $234 to $294 for a 25% span between the peak and trough. Yet, the S&P 500 index closed out 2018 with a 4.23% loss.
After a 10 year bull market, investors got complacent, and then freaked out as markets dropped.
An older WSJ article quoted Allan Roth, a financial planner from Colorado Springs, Wealth Logic. Allen described meetings with 3 new clients with cash assets of $8 million to $30 million. These investors pulled out of the markets during the 2008 – 2009 market drop and never got back in!
After several years of explosive market growth, those same clients were looking to get back into the stock market.
Their situation sounds remarkably like the big investing mistake of sell low and buy high.
If these wealthy individuals are guilty of this big investing mistake, is there hope for the rest of us?
The Fix for The Big Investing Mistake – The Premortem
The premortem solution is simple. Understand the nature of the economy and investing markets. They go up and down. Realize that it’s extremely difficult, if not impossible, to time the markets and know when to buy and when to sell in order to miss the market drops and participate in the peaks. You’re wise to pick an asset allocation, invest regularly, and rebalance annually-regardless of the economic news.
Gary Klein, a senior scientist at the decision-making firm of MacroCognition, suggests using a premortem technique. In a premortem, you assume that a disaster is inevitable and imagine what may have caused the catastrophe. This allows you to consider what might way lay your portfolio and cause a decline.
After thinking about a big market drop and possible causes, you’re charged with figuring out, in advance, how to minimize the damage.
Imagine that the market will drop 30% during the next year or so.
The decline might be caused by; a terror attack, an Asian economic disaster spearheaded by a falling Chinese Yuan, slowing global growth, a U.S. weather disaster, rising interest rates etc.
Although these possibilities may or may not transpire, after you’ve considered worst case scenarios and their causes, you may look at your investment portfolio in a different light.
Although the future is unknowable, there seems to be general patterns of stock market advances and declines. If you can’t handle too much market volatility and are tempted to make the investing mistake of selling low and buying high, you should limit your exposure to stocks.
Now is a good time to review how you handled the recent stock market volatility.
Evaluate your emotions, reactions and investment portfolio. Use that information to design your investments for the future. Risk is inevitable. Unforseen event happen. You can be better equipped to cope with investing uncertainty by looking at various future scenarios and calculating their impact.
Try out the premortem strategy and see if it helps you keep a level headed investing approach.
So you’re thinking of buying a home in Texas—congratulations! Between Texas mortgage payment calculators, reality agreements, and FICO scores, there is a host of information to process as you make your home ownership dreams a reality. Getting a mortgage in Texas is easy – if you follow these tips!
Buying a house is an exciting and nerve-wracking time, but these 5 tips will take the mystery out of the Texas mortgage process.
1. Know Your Finances Before You Apply for a Mortgage in Texas
Before you jump into a mortgage in Texas, you need to be aware of your own finances and how they stack up against Texas mortgage requirements. There are three numbers that potential home buyers should know: their credit scores, debt-to-income ratio, and down payment amounts.
The minimum credit score typically needed for a mortgage in Texas is 620, which puts you squarely in the “fair” category. However, mortgage lenders will often see borrowers with credit scores under 700 as riskier applicants. You can raise your credit score over time by making timely payments, keeping your credit utilization low, and paying off debt.
Debt-to-Income (DTI) Ratio:
Mortgage lenders want to make sure that you make enough money to repay your mortgage. A DTI ratio of 43% is usually the maximum allowed for borrowers who hope to secure a mortgage, but a lower DTI is better.
To calculate your DTI, add up all your monthly debt payments. For example: $500 (auto loan) + $250 (student loans) + $100 (credit card minimum) = $850.
Then, divide that number by your gross monthly income. If you make $2,000 per month, your DTI calculations would look like this: 850/2000=0.425, or right at 43%
Pay off some debt to reduce your monthly payments, and you will be more likely to be approved for a mortgage.
For a conventional mortgage, lenders typically prefer a 20% down payment. Putting down 20% means that you won’t pay Private Mortgage Insurance (PMI), which will reduce your overall mortgage payment.
While average homes in Texas are reasonably priced, saving a 20% down payment is just not feasible for many would-be home buyers. If you don’t quite reach this hefty down payment requirement, there are some Texas-specific assistantship programs that can help you make homeowner ship a reality.
You might also try speaking to a mortgage lender to determine whether you qualify for an FHA loan or another loan type that allows you to make a down payment of as little as 3%.
2. Take a Close Look at a Mortgage Calculator to Speed up Getting a Home in Texas
In addition to making sure you have an adequate down payment and a healthy credit score, it’s essential to examine your budget before you buy a house in Texas.
A good starting place is look at a mortgage payment calculator. There are Texas mortgage payment calculators available online, but you should verify that they are calculating the correct property taxes for your city, PMI rate, and any HOA or insurance fees.
While your mortgage lender will give you an official breakdown of your payments when you take out a mortgage, it is always a good plan to calculate how much home you can afford before you start searching.
3. Get Pre-Approved for a Mortgage
It is best to get pre-approved for a mortgage before putting an offer on a home. Sellers will be more attracted to buyers who can demonstrate their credit worthiness and financial commitment to purchasing a home, and buyers with mortgage pre-approval can feel more confident in their offers.
Finding a trusted mortgage lender at this stage is crucial. While there are many self-service mortgage companies available online, working with a mortgage professional in person can facilitate the process from pre-approved to full approval, and can be improve the purchasing process.
4. Work with a Mortgage Professional – While Getting a Home in Texas
Real estate websites make it easy for would-be home buyers to contact the listing agent for any property and set up a showing. However, you should choose your real estate agent as carefully as you choose your mortgage lender!
When you start looking to buy a house in Texas, you should also look closely at local real estate agents and pick someone with a good reputation. Just like choosing a mortgage lender, you want to go with someone who will look out for your best interests in this process.
5. Do Your Due Diligence
In Texas, home sellers must fill out a Seller’s Disclosure Notice in addition to many other forms. This disclosure notice informs potential buyers about any problems with the home that the current homeowner is aware of.
While legally this disclosure must be completely honest and transparent, before buying a house in Texas it is a good idea to hire a private home inspector. Homeowners may not be aware of an upcoming problem or could have forgotten to list something on the disclosure form. A home inspection is one of the best ways to protect yourself.
The Takeaway: What You Should Know Before Buying a House in Texas
We can’t emphasize enough the benefits of knowing your financial situation before jumping into a mortgage. Consulting a mortgage calculator and being aware of key financial details (your credit score, DTI, and budget) will help with the pre-approval process.
The next step of the process is finding a trusted mortgage professional to help you move through the pre-approval documents, provide accurate mortgage payment calculations, and process the paperwork to secure your mortgage.
Once you find your dream home, it’s important to make sure that you protect yourself by reading the seller’s disclosure notice carefully and hiring a private inspector. Huge issues, such as a faulty septic system or a leaking roof, can be cause to walk away from a purchase or can give you room to negotiate the price of the home.
Real estate and mortgage professionals are here to help you, but you should always do your research before buying a house in Texas—or anywhere else, for that matter. If you ever doubt that your real estate agent or mortgage professional has your best interests in mind, reevaluate the situation.
Purchasing a home is a life-changing decision, one you should make with careful planning and trusted professionals by your side.
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