I just listened to your podcast “Motif Investing and the Tale of Two Emails.”
I was shocked to hear that you used my email for the podcast. I felt like a little kid on Christmas morning! You answered all of my questions and then some. Thank you so much for all of your time and effort; it is greatly appreciated. – Alison V.
These past couple of weeks have been very satisfying as I’ve met with and presented to hundreds to people interested in our work, from college students and first-time investors to those well into retirement. At AAII Puget Sound presentation on May 20, 2017, I promised to address the following questions, which you’ll find answers to on this week’s podcast. Since many investors have the same or similar concerns, this podcast should be of interest and use to a broad range of investors. I hope you listen, enjoy and share. The podcast covers answers to the 20 questions below.
Also this issue, I’m pleased to feature articles from two of our experts. I’ve mentioned George Sisti before, CPA and retired pilot, George is someone for whom I have great respect and am delighted he has shared this and other articles with us. I recommend you subscribe to his newsletter as well by sending George a request by email. Then, enjoy a new article from financial literacy coach and author Joline Godfrey, offers sound advice to parents on listening to their kids’ ideas and encouraging them to take calculated risks. Both articles start below and finish by clicking on the “continue reading” links.
1. If many people invest in small caps, isn’t there a risk of creating a bubble?
2. How do you apply market timing in your investing strategy?
3. I’m confused. You appear to suggest young people should take less risk than older investors. Wouldn’t you agree young people could take the risk of aggressive actively managed funds?
4. What do you foresee regarding robo vs. traditional advisors? Will there be a merger of services?
5. What is your exit strategy with your own portfolio?
6. What has changed in your recommendations in the last 10-15 years?
7. Why didn’t you include international REITs in your Ultimate Buy and Hold strategy?
8. Do you think investors should include REITs in a taxable account?
9. Why do you recommend an advisor if I have assets in a Buy and Hold portfolio?
10. I have $2 million in IRAs I am considering converting to a Roth IRA. Good idea?
11. What investments do you recommend for 20-to-30 year old investors?
12. Now that European elections are done, is it a good time to invest in their equity funds?
13. Where do you see this market going in the next four years, given the long bull market and the current administration?
14. How do equally weighted S&P 500 funds compare to cap weighted funds? What kind of performance do you expect from each group?
15. Most retirement accounts include 40% to 60% in bonds. With the likely increase of interest rates do you recommend investors continue owning bonds?
16. Is there a 2017 update to the Ultimate Buy and Hold Portfolio?
17. I am 78 years old. I expect to pass half of my investments to my 45-50 year old children. What investment time horizon should I use?
18. What investment time horizon should I use for international small cap value?
19. Will the stock market tank in the next few months under President Trump?
20. How do I invest to protect against a crash?
Advice For New Graduates
By George Sisti
If you are a newly minted college graduate, you probably don't have much money to invest right now. But it's important to understand that the most valuable financial asset that you own is time and the most powerful tool at your disposal is compound growth. Consider my fictional friends, Stan and Ollie, 21-year-old twin brothers just beginning their professional careers, and their sister Lucy.
Stan is the prudent brother. He knows that by starting to invest at a young age, he maximizes the chances of achieving financial independence. He starts contributing $5,000 each year to a Roth IRA. After ten years, his contributions have totaled $50,000. Ollie is a procrastinator and saves nothing during the first decade of his working years. Ollie then has a Prodigal Son moment. He realizes that he has been wasting time and squandering money long enough. So, he begins making $5,000 annual contributions to a Roth IRA. After making contributions for ten years, Stan finds that the expenses of home ownership and raising a family leave him with no money to invest. So from this point until retirement he makes no further IRA contributions.
Let us assume that both accounts yield a 7% annualized rate of return and that Stan and Ollie work for 45 years. At retirement, which brother will have the larger IRA?
Stan's contributions totaled $50,000. Ollie’s contributions amounted to $175,000. Upon retirement, Stan's Roth IRA will have grown to $737,000 while Ollie's will be worth $691,000. Intuitively, it seems that this cannot be true.
With a 7% rate of return, an account will double in about ten years. When Stan stops his contributions, enough years remained for his account to double three times. By the time Ollie has made $50,000 in contributions, he will be 25 years from retirement and his IRA will have time to double only twice. As we can see from this simple example, compound growth rewards early contributions more than later, more numerous ones. When growing rich slowly, it's the last doubling that takes you from "I hope I'll be OK" to "I have more than I'll need".
Lucy is a college student looking for a summer job. She is offered a position for 30 days of work. Her prospective employer gives her the following salary options. Which one would you advise her to choose?
1) Upon completion of 30 days of satisfactory employment, she will be paid $5 million.
2) She will begin employment with an initial salary of one penny a day and her salary will double each day for 30 days.
By choosing the second option, her total pay for 30 days will be $10,737,418. Even as late as day 21, her daily salary is only $10,485. On day 29 her cumulative salary finally exceeds $5 million. And her pay on day 30 will be $5,368,709. Once again, that last doubling makes a huge difference.
Successful investing is 20% intellectual and 80% temperamental. Unfortunately, our natural inclinations do not generate the required temperament. Accumulating retirement assets is a marathon journey during which emotions will be your enemy and time will be your ally. The wealth created by long term compound growth is available free of charge to anyone with the patience, discipline and long-term optimism that it requires. The most successful investors I know have maintained a long-term view and let compounding work its magic. Hopefully, these two examples of the power of compound growth will motivate you to begin investing as early as possible -- even if your initial contributions are small. Continue reading
Fly Fishing and Financial Education
By Joline Godfrey
The story of financial literacy in the U.S.A. is discouraging. Though more schools have integrated financial literacy programs into their curricula and more families are intentional about nurturing financial fluency among their children, maxed-out credit cards, high levels of debt, insufficient savings, low credit scores, and family financial drama are indicators that we have a ways to go to increase the financial literacy and wellbeing of our families and our nation.
If even the most intelligent among us continue to have low FICO scores and make questionable financial decisions, what’s going on? I have two stories that offer a clue.
The first is the story of the Jones Family. I stood waiting in a sunlit conference room for family members to arrive for their quarterly family meeting. 15-year-old Evan was first to arrive: ”Ms. Godfrey, I want to tell you about my latest fishing trip!” Before I could respond, his dad piped in, “Oh Evan, there’s more to life than fishing.” I watched Evan deflate as his father minimized a passion Evan carried within his seemingly lonely soul. Other family members were streaming into the room and I had little opportunity to recover that moment, though it weighed on me as a missed teachable moment.
Six weeks later, in another part of the country, with a different family, we’ll call the Browns, an uncannily similar story with a different ending unfolded. Once again, I was waiting for the family to arrive in yet another sunny room. And as it happened, 15-year-old Adam was first to arrive. “Ms Godfrey, let me tell you about my fly-fishing idea!” With great excitement he explained his decision to “go fly-fishing in every state in the U.S. and blog about it!”
I had no idea if that was even possible, but before I could comment or ask a question, his dad mused out loud, “I bet if you contacted one of the big outdoor companies, they might sponsor your blog!” The two continued to talk, building on the idea. I simply watched the scene unfold, amazed by the difference in the outcome of these two, almost identical father/son moments. Continue reading
To your success,