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Persistent Saving in Regular Amounts, No Matter How Small, Pays Off
crack open the nest egg for living expenses in retirement, how much can you spend if you want to be sure that your money will last as long as you do? I suggested in previous editions that you use “the 4 percent solution.”
First estimate the return of the investment fund, and then deduct the inflation rate to determine the sustainable level of spending.
the core of the investment portfolio—especially the retirement portion—be invested in index funds or ETFs.
second system, you jog down Wall Street, picking your own stocks and perhaps overweighting certain industries or countries. This involves work, but also possibly a lot of fun. I don’t recommend this approach for most investors.
active managers must, on average, underperform the indexes by the amount of these expense and transactions costs disadvantages.
Taxes are a crucially important financial consideration because the earlier realization of capital gains will substantially reduce net returns.
the best general U.S. index to emulate is one of the broader indexes such as the Russell 3000, the Wilshire 5000 Total Market Index, the CRSP Index, or the MSCI U.S. Broad Market Index—not the S&P 500.
(MSCI) index of European, Australasian, and Far Eastern (EAFE) securities, and the MSCI emerging-markets index. In addition, there are index funds holding real estate investment trusts (REITs).
Total Bond Market index funds are available that track the Barclays Aggregate Bond Market Index.
suggest that a substantial part of every portfolio be invested in emerging markets.
EXCHANGE TRADED FUNDS (ETFS) Ticker Expense Ratio Total U.S. Stock Market Vanguard Total Stock Market VTI 0.05% iShares Russell 3000 IWV 0.20% Developed Markets (EAFE) Vanguard Europe Pacific VEA 0.09% iShares MSCI EAFE EFA 0.35% Emerging Markets Vanguard Emerging Markets VWO 0.15% iShares MSCI Emerging Markets EEM 0.67% Total World Ex-U.S. Vanguard FTSE All World (EX U.S.) VEU 0.15% SPDR MSCI ACWI (EX U.S.) CWI 0.34% Total World Including U.S. Vanguard Total World VT 0.18% iShares MSCI ACWI ACWI 0.34% Bond Market U.S.* Vanguard Intermediate-Term Corporate Bond VCIT 0.12% iShares Investment
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Beware of stocks with very high multiples and many years of growth already discounted in their prices.
low P/E strategy. Some people call this a GARP (Growth At A Reasonable Price) strategy. Buy stocks whose P/Es are low relative to their growth prospects.
do not recommend too much patience in losing situations, especially when prompt action can produce immediate tax benefits.
YAO (an index fund representing all Chinese companies available to international investors), HAO (a small-capitalization index fund that contains more entrepreneurial companies and ones with less government ownership), and TAO (a Chinese real estate fund).
best-performing actively managed funds have moderate expense ratios and low turnover.
closed-end fund can sell at a premium above or at a discount from its net asset value.
share of dividends from $1 worth of assets, even though you paid only 75 cents.
no longer an especially attractive investment opportunity.† But discounts exist for some international funds, funds investing in emerging markets,
invest to determine whether they are greater than 10 percent.
closed-end funds enhance their yields by using moderate leverage. They borrow moneys at very low short-term interest rates to buy higher-yielding long-term bonds.
increases the potential volatility and thus the riskiness of the closed-end funds.
the advice reaches enough people and they act on it, knowledge of the advice destroys its usefulness. If everyone knows about a “good buy” and everyone rushes in to buy, the price of the “good buy” will rise until it is no longer a good buy. This is the main logical pillar on which the efficient-market theory rests.
Derivatives are simply financial instruments whose value is determined by (or “derived” from) the price of some underlying asset, such as stocks, bonds, currencies, or commodities.
permit the transfer of risks and broaden the investment and hedging opportunities available to individuals and institutions.
futures, or forward, contract involves the obligation to purchase (or deliver) a specified commodity (or financial instrument) at a specified price at some specific future period.
settled in cash on the basis of the difference between the initial contract price and the final cash market price of the financial instrument. No physical delivery is made.
stock option, just as the name implies, gives the buyer the right (but not the obligation) to buy or sell a common stock (or group of stocks) at a specific price on or before a set date.
options allow an investor who makes correct forecasts about stock-price movements to increase substantially her percentage return.
sell short a derivative instrument on one stock or bond index and buy another instrument.
As long as small stocks did better than large stocks on a relative basis, you could gain whatever the direction of the general market. However, if the relative performance figures went the other way—that is, big-company stocks did better than small-company stocks—you could lose substantial sums of money.
Derivatives truly provide investors with staggering amounts of leverage.
“At-the-money” means that if the stock is currently selling at $40, the contract, or striking price, is also $40, right at the current market price.
Option buyers have to be right not only on the direction of the movement in the stock but also on the exact timing of when the move will take place.
The owner of the stock can sell (write) a call against his position. This is called “covered” call writing
financial futures have a special pay-as-you-lose system. At the end of each trading day, the value of a futures contract is determined and the party suffering the loss pays that loss to the gainer. (This is called marking to market.)
change a portfolio’s equity mix or hedge against market declines can do so more quickly and at lower transactions costs in the futures market than in the underlying securities markets.
Option Writing as an Adjunct to Portfolio Management
Use of Index Options and Futures as Hedging Instruments
Futures prices depend on the interest rate and storage costs.
can list the factors determining option prices.
The higher the exercise price, the lower the value of the option.
