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by
J.L. Collins
There are many things money can buy, but the most valuable of all is freedom. Freedom to do what you want and to work for whom you respect.
Being independently wealthy is every bit as much about limiting needs as it is about how much money you have. It has less to do with how much you earn—high-income earners often go broke while low-income earners get there—than what you value. Money can buy many things, none of which is more important than your financial independence. Here’s the simple formula: Spend less than you earn—invest the surplus—avoid debt
Stop thinking about what your money can buy. Start thinking about what your money can earn.
Warren Buffett is rather famously quoted as saying: Rule #1: Never lose money. Rule #2: Never forget rule #1.
The Dow Jones Industrial Average 1900 – 2012
The DJIA is not a good long term metric because it is hand picked and not market cap weighted
The market always recovers. Always. And, if someday it really doesn’t, no investment will be safe and none of this financial stuff will matter anyway.
Everybody makes money when the market is rising. But what determines whether it will make you wealthy or leave you bleeding on the side of the road is what you do during the times it is collapsing.
According to the U.S. News and World Report,5 as of 2013 there were about 4,600 equity (stock) mutual funds operating in the U.S. Recall there are only about 3,700 publicly traded stocks in the U.S.
Governments love a little inflation. They can add money to the system, keep the economy humming and not have to raise taxes or cut spending to do it. In fact, it is sometimes called “the hidden tax” because it erodes the buying power of our currency. It also allows debtors, like the government, to pay back their creditors with “cheaper dollars.”
But the simple truth is this: the more complex an investment is, the less likely it is to be profitable. Index funds outperform actively managed funds in large part simply because actively managed funds require expensive active managers. Not only are they prone to making investing mistakes, their fees are a continual performance drag on the portfolio.
Bonds are in our portfolio to provide a deflation hedge. Deflation is one of the two big macro risks to your money. Inflation is the other and we hedge against that with our stocks.
When you buy stock you are buying a part ownership in a company. When you buy bonds you are loaning money to a company or government agency.
For example, with U.S. Treasury Securities (the bonds our federal government issues) we have: Bills — Short-term bonds of 1-5 year terms. Notes — Mid-term bonds of 6-12 year terms. Bonds — Long-term bonds of 12+ year terms.
A big factor in determining the interest rate paid on a bond is the anticipated inflation rate. Since some inflation is almost always present in a healthy economy, long-term bonds are sure to be affected. That’s a key reason they typically pay more interest. So, when we get an Inverted Yield Curve and short-term rates are higher than long-term rates, investors are anticipating low inflation or even deflation.
While offering lower interest rates than corporate bonds, they have the advantage of being exempt from federal income taxes. They are also generally exempt from state income taxes for the state in which they are issued. This makes them appealing to folks in high income tax brackets, especially if they live in a high income tax state. It also makes them less expensive in interest payments for the governments that issue them.
Mr. Bogle points to research Vanguard has done comparing stock and bond portfolios that were annually rebalanced and those not rebalanced at all. The results show the rebalanced portfolios outperformed but by a margin so slight it can be attributed to noise as much as the strategy. His conclusion: “Rebalancing is a personal choice, not a choice that statistics can validate. There’s certainly nothing the matter with doing it (although I don’t do it myself), but also no reason to slavishly worry about small changes in the equity ratio.”
The Vanguard mutual funds are held as separate entities. Their assets are separate from Vanguard; each carrying their own fraud insurance bonds and their own respective board of directors charged with keeping an eye on things. In a very real sense, each is a separate company operated independently but under the umbrella of Vanguard.
With all this in mind, here is my basic hierarchy for deploying investment money: Fund 401(k)-type plans to the full employer match, if any. Fully fund a Roth if your income is low enough that you are paying little or no income tax. Once your income tax rate rises, fully fund a deductible IRA rather than the Roth. Keep the Roth you started and just let it grow. Finish funding the 401(k)-type plan to the max. Consider funding a non-deductible IRA if your income is such that you cannot contribute to a deductible IRA or Roth IRA. Fund your taxable account with any money left.
“Wisdom comes from experience. Experience is often a result of lack of wisdom.” —Terry Pratchett
Everybody can be conned. Certainly stupid people are marks. But so are the exceptionally bright. The moment you start to think that it can’t happen to you, you’ve become a most attractive target.
Go here: http://ssa.gov/myaccount/. This is the Social Security website and, once you create an account for yourself, you’ll be able to track where you stand. You’ll also be able to check and make sure that the record of your earnings is accurate. This is very important as the size of your checks will be in part determined by how much you earned over the years.
“Everything you want is on the other side of fear.” — Jack Canfield
Spend the next decade or so working your ass off building your career and your professional reputation. This is not meant to suggest you must be some sort of office drone. Think of your career in the most expansive of terms. The possibilities are endless.
