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| Credit: Harold Pollack |
I am a pretty big fan of this index card of financial advice from University of Chicago social scientist Harold Pollack.* It's not everything, but it's a lot of things I agree with in a short amount of space.
A question for the personal finance nerds that isn't on the card: how often do you 1) look at your financial position (such as it may be) and 2) how often do you rebalance? I've, um, never rebalanced my very boring index-fund heavy portfolio. Is that important?
Update: Prof. Pollack e-mails in to note that he has a book coming out on this index card's advice.
Update: Prof. Pollack e-mails in to note that he has a book coming out on this index card's advice.
"I've, um, never rebalanced my very boring index-fund heavy portfolio. Is that important? "
ReplyDeleteUnless you have the time to really understand every component of each index fund (by which I mean meaningfully project earnings for the next 5-10 yrs) then really no advantage to rebalancing. Whenever friends with real jobs ask what stocks to buy I always go with BRK.A/B.....that or "ones that will go up".
"Unless you have the time to really understand every component of each index fund (by which I mean meaningfully project earnings for the next 5-10 yrs) then really no advantage to rebalancing."
DeleteI think I agree with you for a different reason... if you're in a bunch of funds, particularly if they're target date funds ("Vanguard Target 20xx"), they could be redundant with other parts of your portfolio (say, a mid-cap fund). The benefits of rebalancing in that case are going to be more complicated than this non-finance-geek can handle.
No. 4 is not so great advice. While yes, others do know more, it doesn't mean you can't profit from stocks. The dividends are generally better than ETFs, and it's not too terribly hard to understand when something is undervalued, as long as you use traditional metrics. Apple forward earnings are less than the sp500 average. Coupled with their mountain of cash, it's a no-brainer. The less of a slam dunk approach: Tesla has a 30 billion dollar valuation with no profits. If apple goes into the electric car space (strong indications that they will), what will that do to Apple's valuation? Loyalty to the apple brand is huge, despite angry purveyor's of Android phones.
ReplyDeleteSorry, not buying it. #vanguardforlyfe
DeleteAgreed, 4 is terrible advice for the financially literate, Often those mutual funds do not know more, rather they become FORCED buyers or sellers due to index changes, debt downgrades (to non-investment grade), or the market simply has a short term distaste or disfavour for them
Delete"it's not too terribly hard to understand when something is undervalued"
ReplyDeleteWell, actually it is. Here: http://www.forbes.com/sites/davidsable/2015/09/14/five-reasons-why-your-biotech-comparative-value-theory-is-wrong/ is a useful example about btechs (though it mostly pretains to any industry) from a really smart guy.
" Apple forward earnings"
Forward earnings? You know AAPL's forward earnings? If you did, that would be great, but what you know is projected forward earnings made based on a bunch of assumption that could easily change or be wrong. Unless you've spent a lot of time understanding what went into those projections you're at a disadvantage to whoever is taking the opposite side of your trade.
This really is the advice I (mostly) take. Except 529's (some good articles on why it is better to save elsewhere) and occasionally dabbling in individual stocks. There, I generally use the "Buy what you use" philosophy. Which sometimes works out wisely, and sometimes not. Which is likely why I really should buy more cheap Vanguard index funds instead.
DeleteNot really. It's actually not too difficult to make money in the stock market. While projected earnings can change, overall it's a winning strategy if you diversify in established names and hold. You're not necessarily at a disadvantage to the other person unless they have critical insider info. Person on the other side isn't necessarily selling because s/he knows something is wrong with the company.
Delete"It's actually not too difficult to make money in the stock market."
ReplyDeletehttps://www.youtube.com/watch?v=0akBdQa55b4
WARNING, PROFANITY....
"One of these things is not like the others; one of these things just doesn't belong..."
ReplyDeleteI have a feeling you could replace the last item with "Promote lower taxes and donate to charity" or "Save 30% of your money" for as much data as it has to back it up. I guess "social scientist" isn't exactly an economist.
I agree with Harold Pollack. Unless you've got lots of time to study the market and its intricacies, better off to save, invest in the overall market over a long period of time without jumping in and out, don't put your eggs all in one basket, and lower your investment and interest costs. To answer CJ's questions: 1) I look at my overall investments once or twice per year, and 2) I don't rebalance (because when I used to, the sectors that I reduced subsequently went up, and the sectors that I increased went down... D'oh.)
ReplyDeleteI'll add another twist to this: consider tax implications. My sense is that poor decisions from a tax perspective can hurt you much more than slightly lower returns or slightly higher fees.
Taxes are a good point, but not an issue in tax deferred accounts like IRAs or 401k. Definitely an issue in non deferred accounts (though less than previously as LT cap gains have gone up to pay for Obamacare!!!!!!!).
DeleteBeware the Tax Man when it comes to tax-deferred accounts as well. At some point, you'll have to sell those investments (or donate them), and the taxes will come due. Many of my friends have been shocked as to how much they had to pay when they started to liquidate their "tax deferred" accounts. The Tax Man is a very patient person, so I have heard... My prediction for the coming decades: taxes will go up, in some cases substantially. Plan accordingly.
DeleteSo yeah, I've been following this advice, saving even more than 20% on average since I started working in 2006. Those handy-dandy low-cost Vanguard funds? My actual returns outside of the re-invested dividends are negative. With them, its like 2%, but then I would have to subtract off the taxes I have had to pay (less the credits in bad years, but these are relatively small).
ReplyDeleteSo, 2%. As in, matching inflation. Clearly the ticket to an early retirement.
I think my 401k's have done a bit better, but it is difficult to tell because they don't track my overall ROI in any coherent way, and since the money gets moved from provider to provider every few years as I switch jobs or my employer switches providers unilaterally, none of the data is tracked beyond what I do myself with manual downloads and calculations. I've done this but am missing some data. Frankly, the law should REQUIRE this be tracked, even if the money is moved. All the new provider needs is a table of transaction dates and amounts.
Yeah, well, I'm probably in the same boat. Here's hoping you and I don't get used to the taste of cat food when we're in our 70s.
Delete"Those handy-dandy low-cost Vanguard funds?"
DeleteTrying to pick individual MFs is no better than trying to pick individual stocks.
" since I started working in 2006"
Well there's your problem, never a good idea to start investing right before a massive mkt crash.... Hd you started investing in Feb 2009 you'd be doing well.
"the law should REQUIRE this be tracked, even if the money is moved"
It's your money, you should take the responsibility to track were it goes and what your returns are.
I doubt 5% of people in the country are even capable of doing that calculation if you handed them the data, which of course becomes inaccessible if you are laid off or your company switches from one servicer to another. It would be trivial for Vanguard et al to do this, but they don't. Since these are tax-subsidized accounts, they should be required to do so, and do so in a mathematically consistent and correct manner (my current 401k at work spits out some number, but for the life of me I cannot figure out how they calculate it, and it is way higher than anything I calculate...surprise!).
DeleteI shouldn't have to periodically go into my account, download the transaction history and then muck around with excel for twenty minutes to find out if I have actually made any money.