Len Cabrera's Blog, page 4

More Evidence for Index Funds

There are always individual actively-managed mutual funds that bring outstanding returns, but it is rare for these funds to actually outperform passively-managed funds in the long run. According to the Wall Street Journal, 82% of all U.S. stock mutual funds have trailed their respective benchmarks over the last 15 years. Do you think you can pick the 1-in-5 winner? And then, do you think you can switch to the next hot fund before your current hot fund loses its heat?

For those interested in a...

Hot Stocks Or Hot Potatoes

An article by Jeff Sommer in the New York Times points out the potential rewards of picking individual stocks, but also warns about the riskiness: “Over the long run, while the total stock market has prospered, most individual stocks have not.” He summarizes a study by Arizona State University professor Hendrik Bessembinder, which likened individual stocks to lottery tickets: a small chance of winning with a large chance of making nothing. The study showed that since 1926, over half (58%) of...

Privatizing Social Security, Part III

The Expense of Transition Will Prevent Privatization

The previous posts already showed how privatizing Social Security would result in better returns for beneficiaries and how most opponents to privatization simply make emotional arguments in opposition to privatization. The real reason the system will not get privatized is the same reason the system will eventually collapse: it’s a Ponzi scheme. If that term is too inflammatory, call it a pay-as-you-go system.

John Goodman (not the actor) pr...

Privatizing Social Security, Part II

Comparing Returns

Usually, any opposition to Social Security privatization will use some kind of emotional argument about the risks of stock investing versus the absolute certainty of the safety net embodied by Social Security. They never seem to produce numbers to back up the claims, unless they cite specific days when the stock market performed especially poorly (i.e., any market crash day). You can just as easily pick days when the government performs poorly (e.g., missed someone’s paychec...

Privatizing Social Security, Part I

It Already Happened, and the Detractors Are Silent

I touched on Social Security in Chapter 6 of my book, Basic Personal Finance. It was a simple warning to younger generations to not rely on Social Security because the system will not exist much longer in its current state. In 2016, the Board of Trustees of the Social Security trust fund said the annual cost of the program will exceed its income by 2020. Despite repeated warnings by the Trustees over the years, any attempt to modify or privat...

Investors Beware of “Best Investment” Claims

A recent post by Rutgers University’s Center for Real Estate claims owning a rental home is a good investment. From the post: “A comparison of Sharpe ratios suggests the risk-adjusted rate of return to housing in New Jersey might be high relative to both stocks and bonds.” If you read deeper, you realize the author used a little sleight of hand to come to that conclusion.

The study was limited to New Jersey, which itself is misleading for anyone thinking of rental property because NJ is one o...

Non-Financial Rules for Financial Success

In my book Basic Personal Finance, I listed Ten Rules of Thumb for financial success. After that list, I said there are “non-financial rules that have an even bigger impact on whether you live a successful life (e.g., don’t do drugs, don’t get arrested, etc.).” In the back of my mind was a very short list of things I was thinking about, but thought might be too controversial for a finance book. That list was:

Don’t do drugs Finish high school Don’t have kids until you’re married

The origina...

Plan for Uncertainty in Retirement

A column by Gail MarksJarvis in the Chicago Tribune over the weekend talked about the danger of planning your retirement with average returns. It’s a simplified story quoting “experts” rather than explaining the math. Pages 153-156 of Basic Personal Finance illustrate this exact topic with a concrete example. It’s based on The Flaw of Averages, a book by former professor, Sam Savage.

Basic Personal Finance uses a scenario developed in the math appendix: a 35-year plan to live off $80,000 per...

Discipline, Not Income, Prevents Debt

A recent post by @akieler on consumerist.com (part of Consumer Reports) reports on a Northwest Mutual commissioned survey that says the average debt (excluding mortgages) for U.S. adults is $37,000. This is a case where being below average would be good!

Although it was an online survey, the results are disturbing:

21% were unsure what portion of their income goes to debt repayment 18% only make minimum payments 14% expect to be in debt for the rest of their lives 25% admit to excessive/friv...

Trade Protections Beget Trade Wars… We All Lose

I’m trying to keep politics out of the blog, but it appears the talking heads on TV and Capitol Hill don’t understand basic economics. They’re spouting a lot of hot air about trade and tariffs, things that anyone who stayed awake in Econ 101 would know are incorrect and/or harmful.

Sadly, many classes these days only teach a macroeconomic perspective of international trade, focusing mainly on exchange rates and current account balances. But I’m a micro guy, and from my perspective, all that s...