Rick Van Ness's Blog, page 8

Rule #1: Develop A Plan (investment policy statement) (video)

The first of ten rules for common sense investing is to to develop a plan — preferably a written plan, although it doesn't have to be fancy! Sometimes these are called Investment Policy Statements, or Personal Investing Statements. Put it in writing. Review it annually, and it will improve!

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Best Mutual Funds in 2014 by Asset Classes

Summary of video: Best Mutual Funds in 2014 by Asset Classes (video) Key points about an ETF from this video: past performance does not predict future performance. asset class performance tends to revert to the mean it pays to diversify This video was released in 2015 but the data in the video is actually through 2013. Fear not, I’ve given you a link, both above and below, so that you can download and print a pdf of the table through 2014. However watch the video. It’s really excellent and the central point is that speculating by asset classes is rather pointless. Transcript of Best Mutual Funds in 2014 by Asset Classes Cast your mind back to chemistry lessons in high school and you’ll probably recall this: the Periodic Table. It contains all the chemical elements—the substances that make up everything in the world around us. Now, think the constituent parts of an investment portfolio—for example: growth stocks, small-cap stocks, emerging-market stocks, or government bonds. These too can be put into a table. In fact they already have been. The Periodic Table Of Investment Returns was devised in 1999 by Jay Kloepfer, Director of Capital Markets and Alternatives Research at Callan Associates in San Francisco, California. The table illustrates annual returns for ten asset classes from 1994 to 2013. The asset classes are color coded to enable easy tracking over time. [Get the Periodic Table of Investment Returns throught the most recent year here: https://www.callan.com/research/perio... or here http://www.bogleheads.org/wiki/Callan...] For each one, Callan uses a well-known industry standard market index. So, for example, it uses the S&P 500 for large-cap stocks and the Barclays Corporate High-yield Bond Index for corporate bonds. Each column illustrates the returns for a particular year and the assets are ranked according to the size of those returns. The asset that performed best in each year is placed at the top, and the one that performed worst at the bottom. So, what can we learn from this seemingly random array of colors? Well there are three key takeaways. First: past performance does not predict future performance. There are no reliable patterns or trends you can take advantage of. Asset classes fall in and out of favor very suddenly, and completely out of the blue. Take emerging markets for example. They fared very well between 2003 and 2007. But in 2008 they fell from top spot to the very bottom. The very next year, 2009, they were back at the top. In 2011, they were once again the worst performer. Then in 2012, the best. In 2013—you’ve guessed it—emerging markets were the worst performing asset class. Secondly, over the long term, asset class performance tends to revert to the mean. Every asset class has a strong run every now and again, and inevitably they all hit a bad spell sooner or later. But over long periods, the average return for each asset class is more or less what you’d expect it to be. Thirdly, and this is the most […]

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What is an ETF? Part 3 of 3 (video)

Summary of video: What is an ETF Mutual Fund? Key points about an ETF from this video: Has slightly less overhead than an open-ended mutual fund Can dynamically grow and shrink Can have very low annual expenses (expense ratio) Most ETFs are not actively managed Link to first video: What is an ETF? Part 1: Open Ended Mutual Funds Link to last video: What is an ETF? Part 2: Closed Ended Mutual Funds Transcript of What is an ETF? Part 3: Exchange Traded Funds So far we looked at open-end mutual funds that can grow and shrink depending on how many investors want to invest in that fund. They can grow by creating new shares and selling those shares to the general public, and they can shrink because someone who wants their money back goes to the fund and says, “You have to by this back from me at the NAV, at the net asset value per share.” The problem with it, actually there’s a couple of problems, is that the manager here has to always keep a little cash set aside in case some of the investors come to him and say, “Hey, I want you to buy my share back. I want liquidity.” The other thing that they have to worry about, or at least from the investor’s point of view, is they can only buy or sell at the end of the day, and that will only happen at the net asset value per share. On top of that, the fund manager or whoever’s running the fund has to worry about actually transacting between all of these different investors. Now on the other side of things we looked at the closed-end fund. The closed-end fund couldn’t dynamically grow and shrink by creating new shares or by buying them back, but what was good about them is, is that they were freely trading on exchanges, maybe on the NASDAQ or the New York Stock Exchange. Because there was none of this back and forth between the fund managers or whoever was doing the operations of the fund and the investors, they didn’t have to put cash aside and they didn’t have to have all of this overhead in dealing with the investors. Now you’re probably saying, “Isn’t there a way or maybe there’s a way to get the best of both worlds, a fund that could grow dynamically, that could create new shares when there was demand from investors, but at the same time those new shares could be traded on an open market?” That combination, or you can view it as a combination of the two, actually exists, and they’re called exchange-traded funds, exchange-traded funds, or ETFs for short. You might say “Hey wait, isn’t a closed-end fund exchange-traded?” It is. These actually do trade hands on the stock exchanges, but these aren’t officially ETFs. When someone tells you an ETF the way to think about it is a combination of both. What it does is it […]

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What is an ETF? Part 2 of 3 (video)

Summary of video: What is an ETF? Part 2: Closed Ended Mutual Funds Key points from this video: You don’t need to learn about closed end funds, but his discussion might help you understand what it means that most mutual funds are open-ended. Closed-end funds are also similar to ETFs, so this may help you understand that. Don’t concern yourself with closed-end funds too much because there is no circumstance where this would be a better idea than low-cost index funds that are open-ended. In an open ended fund (the most common type of mutual fund), when an investor wants their money back they have to deal with the fund itself. In a closed ended fund, once the fund is created if someone wants to buy or sell a share, it happens in the secondary markets. In an open ended fund, there is an incentive to constantly market and grow the fund to get more as management fee. In a closed ended fund, once the fund is created they don’t have to market it anymore. Link to last video: What is an ETF? Part 1: Open Ended Mutual Funds Link to next video: What is an ETF? Part 3: Exchange Traded Funds Transcript of video: What is an ETF? Part 2: Closed Ended Mutual Funds insert some bold keywords and some alternative keywords like exchange traded mutual funds insert some pictures with keywords in captions and jpg filenames. In the last video, we had Pete starting an open ended mutual fund that was managed by Pete Inc.  Mutual funds normally have nice grand names. Maybe they call this the Saturn Fund, and if there is a Saturn Fund out there I just picked that name at random. I’m not implying that this is you or anything like that, or something like the Galileo Fund, anything like that. I”m sure there is probably is a Galileo Fund, so once again don’t sue me, I just made up that name on the fly, but it’s managed by Pete Incorporated. We called it an open ended fund because at any time one of the people who own a share, or a unit in the fund, can redeem it back from the fund that Pete or the management company would say, “Okay if you want … If you want, at the end of that video your $180 back we’ll buy that. We’ll give you $180, you give back the share, and then we cancel the share.” If anyone wants to add to the fund, if they want to invest, the corporation can create new shares and then issue it to people, and sell it to people, and then that their money will go into the common pool, and the management company would take fees off of it. What is a closed end fund? That probably had you asking, “Well if this is an open ended fund, what is a closed end fund? Or do they even exist?” They do. That’s what I’m going to […]

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John Bogle Says: Don’t Trade ETFs! (video)

Summary of video: John Bogle Says: Don’t Trade ETFs! For long-term investments, Jack Bogle says using either ETFs or the traditional index funds can be a perfectly intelligent strategy. At Vanguard they both own the exact same portfolio. And for investments greater than $10,000 the costs are identical. His objection is the basic ETF selling proposition, which is the ability to get out of the market in the middle of the day. Market timing or speculation is gambling. Anything other than total market funds is another form of speculation. Buy the broad market indexes and don’t trade them. Buy and hold! Transcript of John Bogle Says: Don’t Trade ETFs! Ron DeLegge:    Hi everybody, I’m Ron DeLegge with ETF Guide, and we’re pleased to have with us, John Bogle, founder of the Vanguard Group, author of many books, his latest, Clash of the Cultures. Pick up a copy on Amazon. It’s a great book. John Bogle, always great to catch up with you. John Bogle:    Ron, good to see you. Thanks for all the nice things you’ve written. Ron DeLegge:    I appreciate that. Let’s begin with something that you said years ago about ETFs, that ETFs are like giving an arsonist matches. Do you still feel that way today? John Bogle:    Yes. It’s even worse today actually. Ron DeLegge:    Explain for us the reasons why you feel that way. John Bogle:    ETFs, using the proper ETFs and using the proper ETFs in the proper way is a perfectly intelligent strategy just so as long as you don’t fall for their basic selling proposition, which is get out of the market in the middle of the day. Anytime you want to get out real-time, sell them in real-time is a terrible investment strategy. You don’t need to do that. The temptation is there. ETFs like the original traditional investments do offer total stock market, S&P 500, international market, total bond market, maybe even emerging market. They’re perfectly intelligent ways to own them just so long as you don’t trade them, but ETFs make it possible to trade them momentarily so they’re no better than anything else and they have the temptation to be worse. Actually in Vanguard’s case, the ETF, our S&P 500 ETF owns the same portfolio, identical portfolio, as the traditional index fund, so just don’t trade them. The rest of the business, I’m going to guess, Ron, that out of 1400, 1500 ETFs there are maybe 40 broad market ETFs and they’re larger, SPDR is the biggest of all, but that leaves you 1460 that are in many respects fruit and nutcakes. Ron DeLegge:    Right. That’s a good place is for people to begin, is with the broadly diversified investment or ETFs that follow broad-based indexes? John Bogle:    Provided they don’t trade them. Ron DeLegge:    Right. Talking about trading volume, let me ask you, you’ve mentioned it many, many times about the massive trading volume of these ETFs, for the buy and hold ETF investor, how does that hurt […]

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ETF investing: Why John Bogle Doesn’t Like ETFs (video)

Summary of video: ETF investing: Why Jack Bogle Doesn’t Like ETFs Actually, for long-term investments, Jack Bogle couldn’t care less whether an investor prefers ETF investing or the traditional index funds. At Vanguard they both own the exact same portfolio, and for investments greater than $10,000 the costs are identical. His objection is to those who believe there is an advantage to being able to trade all day long. Speculation is gambling. Anything other than total market funds is another form of speculation. Transcript of ETF investing: Why Jack Bogle Doesn’t Like ETFs Janet Novack:    The dominance of index funds, I believe 28% of the market, is partly due to ETF which are more than half of that. But I gather you are … It’s not that you have something against broad ETF’s per se, you have something against the narrow ones, the managed ones and the way people are using the broad ones, is that it? Jack Bogle:    That is exactly it and let me just give it to you a little more specifically. First to be crystal clear on this, I couldn’t care less if an investor decides to go into the Vanguard S&P 500 ETF or into the Vanguard—I had to create a word for this, an acronym to go with ETF—TIF, traditional index fund. They both own exactly the same portfolio, they’re both part of the same portfolio, their returns will be identical. They both go for around 5 or 6 basis points at the admiral class level. Many, many years ago when I was running this place and I perceived a little bit about the future, we put on a pricing thing where you got higher returns as your average investment rose. I think now the admiral threshold is maybe $10,000, so if you got below 10,000 you’re probably paying 10 or 12 basis points. Once you get to $10,000, and they will be identical so I couldn’t care less. If I have a little bias against the ETF it’s because you may say and believe that when trouble comes you will not get out in the middle of the day. The middle of the day, I mean come on. It won’t be the point of that at all. As long as you avoid that type of thing … Janet Novack:    You can sleep that night. That’s the reason people get out in the middle of the day. Jack Bogle:    Oh wait a minute though, the market went down 300 points in the middle of the day, you got out and it went up 300 points at the second half of the day. I mean a lot of bouncing around is meaningless. In the long run, that’s a nuance, no difference whatsoever. Fine and fine for any broad market index fund which I, in which I would include the total bond market, with some limitation, and the total US stock marke,t and the S&P 500, international, and even if you want to put a little […]

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What is an ETF? Part 1 of 3 (video)

Summary of video: What is an ETF? Part 1: Open Ended Mutual Funds Key points from this video: You don’t need to learn about closed end funds, but his discussion might help you understand what it means that most mutual funds are open-ended. Closed-end funds are also similar to ETFs, so this may help you understand that. Don’t concern yourself with closed-end funds too much because there is no circumstance where this would be a better idea than low-cost index funds that are open-ended. Mutual funds are regulated by the Securities and Exchange Commission (SEC) in the U.S. Fund managers earn a percentage of the assets under management. An open-ended fund can dynamically grow or shrink. The net asset value (NAV) is the total value of the assets in the fund divided by the number of shares. An open-ended fund doesn’t invest 100% of investors’ money. It keeps some in cash to handle those who wish to sell sharess Link to next video: What is an ETF? Part 2: Closed Ended Mutual Funds Link to last video: What is an ETF? Part 3: Exchange Traded Funds   Transcript of video: What is an ETF? Part 1: Open Ended Mutual Funds Let’s say Pete over here thinks that he’s a pretty good investor, so what he does, or he has an idea that says look I’m going to create a corporation. I’m going to get a bunch of people to contribute money to that corporation. Then I’ll manage that money, and maybe I’ll take a little fee for myself, so that I can maybe hire some analysts or get some computers, or get some office space. What he does is he sets up a corporation. Let’s say he sets up a corporation right over here. Let’s say the way he first sets up the corporation, let’s say he just has four shares. I’m making the number really small, just to make the drawing and math easy; this wouldn’t be realistic. Normally it would be something in the hundreds or thousands of shares, or maybe even more than that. Let’s say it has four shares, and let’s say all of the four shares are owned by Pete initially, just to simply the explanation. He puts in $400, $400 into this corporation. Another way to think about, in exchange for him putting $400 into this corporation he gets four shares, or each share is worth $100, each of these shares right over here. What he does is he registers this corporation, and I’m talking about a U.S. specific case, but there’s similar types of organizations in other countries. He registers this organization right over here with the U.S. S.E.C., Securities and Exchange Commission. He also registers himself with the S.E.C., or even better, he registers a management company that he runs with the S.E.C. Let’s call it Pete, Inc., is a corporation he starts off that he also registers with the S.E.C. When he registers with the S.E.C. he tells them that look […]

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ETF Index Funds versus Mutual Funds (video)

Summary of video: ETF Index Funds Key points from video: At Vanguard, ETFs and traditional mutual funds are virtually identical. Each may have a cost advantage over the other, depending on the amount invested. But ETFs have additional costs since they’re traded on an exchange. So add potential commission costs and bid-ask spread costs for each transaction. For that extra trading cost, with ETFs you get the ability to trade throughout the day at the intraday prices. It’s arguable whether this is useful to investors, but some like the price certainty. If you are investing regularly (say from every paycheck) or withdrawing regularly (perhaps in retirement), then the traditional mutual funds avoid those transaction costs and may be best. Transcript of video: ETF Index Funds Elizabeth:        Guys, we’re actually going to switch gears a little bit here with a question from Bill in Danville, Virginia. He’s asking, “What are the pros and cons of index investing through mutual funds versus using ETFs, exchange-traded funds?” Scott:               I’ll take a shot at that. I like to think about the choice between an exchange-traded fund, or an ETF, relative to I guess what I’ll call a traditional mutual fund, or an open-end mutual fund. And the debate typically comes down to the fact that there are some I’ll call advantages to really each, but it comes down to the, what’s your preference for the structure to get the exposure that you’re trying to achieve? And if you think about ETFs these days, the overwhelming majority of them are index based, so if you’re going to compare an ETF, you’re usually or should be comparing them to an underlying corresponding index fund. So you look at the cost. We’ve talked about how important costs are. Generally, the cost differentials between ETFs and traditional index funds are not that great. For instance, even at Vanguard we actually have traditional index products that are even lower than our ETF products, depending on the amount of money that you’re looking to invest. So, depending on those cost differentials, which are really not that big of a difference, the ETF offers an additional cost layer that you need to consider. They’re traded on an exchange, like a stock, potentially, so you could have commission costs, you could have bid-ask spread costs, the difference between what you’re going to buy it at, and then the difference of the cost of what can immediately sell it at. There is a cost there. So those trading costs are over and above what a traditional index fund might employ, but, for that extra cost, you get additional trading flexibility in an ETF than you do a traditional mutual fund. What I mean by that is you have the ability to trade throughout the day or intraday at more of a known price than you do with a traditional index fund that closes at all of the values of all the securities or price at the end of the day, and you close […]

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What is an Exchange Traded Fund? What are ETFs? (video)

Summary of video: What is an Exchange Traded Fund? What are ETFs? What are ETFs? Another simple way to buy a share of a large index of stocks, like S&P 500. How do they work? (video at 1:35) You can buy as little as one share, or as much as you like. You buy just like a stock. Annual costs are very low because they take away the fund manager. Problems with ETFs (video at 6:47) Potential one-time transaction costs include bid-offer spread and broker commissions. ETFs, like mutual funds, have small tracking error compared to a market index. Potential currency issues for foreign assets. Not all ETFs are good, passive, and low-cost. Stay away from ETFs that are not essentially equivalents to low-cost mutual funds that follow a broad market index. Transcript of What is an Exchange Traded Fund? What are ETFs? What are ETFs? Tim: One of MoneyWeek’s favorite investments is the exchange traded fund, or ETF. In this video I’ll do a beginner’s guide to what exchange traded funds are, why we like them, and in fairness, why they’re not perfect in every situation. They do have one or two drawbacks, and it would only be fair of me to point out what they are. What is an exchange traded fund or ETF? In short, it’s a security, normally a share, that simply tracks an index, a basket of stocks, or something like a commodity, say gold. What’s the point of that? The point of that is this. If you want exposure to, say, the S&P 500 index or the FTSE 100, what better way to get it potentially than to simply buy one share through your broker listed at the London Stock Exchange so it’s nice and easy to get a hold of, it’s got similar charges attached to buying a normal share in a standard company, and that gives you exposure to an entire index, or something that might be quite difficult for you to buy and sell in the commodities market. That’s the point of exchange traded funds in a nutshell. These are listed shares typically that give you exposure directly to something else, and that something else is typically an index, a basket of, say, shares, or a commodity. How do ETFs work? (video at 1:35) How do they work? Basically I could telephone my broker and say I want to buy an exchange traded fund, and I need to pick one. They all have names. Now the earliest ones had snazzy names. A spider [SPDR] was a fund that tracked the S&P 500. A diamond was a fund that tracked the Dow Jones 30. That’s financial markets wizards being a little bit exciting about the way they name products, but these days there are loads of ETFs that track all kinds of indices, so I need to be sure about what I’m asking for. If I want something that tracks the S&P 500 I might indeed ask for the spider, which is […]

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