Investing is Not Entertainment

Carl Richards is a certified financial planner and the founder of Clearwater Asset Management. He answered questions from Bucks readers in November.

One of the biggest mistakes we make is confusing investing with entertainment.

Somewhere along the line, investing became America’s favorite spectator sport. Everywhere you went people were talking about finding the next hot stock, mutual fund or alternative investment. Magazine covers like “10 Hot Funds You Have to Own Now” and “Five Stocks that Sizzle” made investing sound fun, and you couldn’t go anywhere without seeing Jim Cramer screaming “Buy! Buy! Buy!”

All this reinforced the idea that investing is all about action and that taking bold, swift action is fun. But the idea that investing is fun and entertaining can lead us to make costly mistakes.

Read the complete article here: 

http://bucks.blogs.nytimes.com/2010/02/08/investing-is-not-entertainment/

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Investing Strategy Part 3 – Use Low Cost Mutual Funds

In earlier posts, I discussed the first two keys to a successful investing strategy:

Key 1 – Be Risk Appropriate

Key 2 – Be Well Diversified (by using mutual funds)

Key 3 is to Use Low-Cost Mutual Funds to increase your returns.  The impact of investment costs is never emphasized enough. In order to see how much it affects mutual funds returns, let’s compare a few different domestic stock mutual funds:

Fund A: A Total Stock Market Index Fund which charges no sales load and has an annual expense ratio of 0.15%.

Fund B: An actively managed Mutual Fund with a 5.75% sales load and an annual expense ratio of 0.59%.

Fund C: An actively managed Mutual Fund with no sales load and an annual expense ratio of 2.03%.

In other words, Fund A is no-load, with low costs. Fund B does charge a sales load, but it has fairly low annual costs. And Fund C charges no sales load, but it has substantially higher annual costs.

Assume that you invest $10,000 in each of these funds and that over the next 30 years the market earns a 9% annual rate of return and that both of the actively-managed funds (B and C) end up being exactly average. That is, their before-expense returns over the period are equal to the market return (which is a very realistic assumption).

The investor in each fund would end up with the following amounts:

Fund A $127,307

Fund B $106,258

Fund C $75,485

That’s a significant difference!

On a $10,000 initial investment, you will have paid an extra $50,000 over 30 years for the high-cost fund.

An investor in Fund A would have almost 70% more money than an investor in Fund C. This example shows that costs really do matter!

A 2% annual expense may seem small. But over an extended period of time, it can absolutely crush your returns.

It also shows that paying a sales load obviously doesn’t help your results, but for long-term investors, annual expenses have an even greater impact.

 You may wonder if the higher expenses will get you a higher return. The answer is NO and this has been demonstrated over and over by actual return data over the years.

This phenomenon is explained by the “efficient market hypothesis”, first developed by Gene Fama.

While other thinkers had long questioned whether stock prices were really predictable, Fama’s work gave the efficient-market hypothesis its most rigorous intellectual grounding (as well as its name). Fama argued that the stock market is a matchless information-processing machine, whose participants collectively price shares correctly and instantaneously. Unlike the market portrayed in mutual fund advertisements and personal-finance magazines, it is not a place where the smartest managers outwit the less smart. Instead, the market is so full of well-trained, well-motivated investors avidly gathering information and acting on it that not even Nobel Prize winners can hope to beat it consistently.

Sure, some managers will outpace the market for a few years, but it is impossible to prove that those runs are more than just sheer chance. The efficient-market theory still raises hackles on Wall Street, for obvious reasons.

But in academia the debate is all but over, and among pension fund fiduciaries Fama’s theories are now so accepted that an estimated 24% of the trillions of dollars in pension assets is invested in index funds.

The bottom line – control your costs and reap the rewards.

Passively managed funds, such as index funds, are the best way to do this.

“The Taste” – Fund Raiser for Neighbor-to-Neighbor and The Food Bank

FORT COLLINS’ PREMIER CHEFS COOK TO END HUNGER AND HOMELESSNESS IN OUR COMMUNITY

 The Event is: Thursday, April 29th, 2010 Fort Collins, CO —

 With flavorful food, complementing beverages and a passion for helping the hungry and homeless, Fort Collins’s top chefs, restaurants, wineries, and breweries will gather for “THE TASTE” benefit for Larimer County.

This annual fundraiser will provide support to fight hunger and homelessness in this community. All proceeds directly benefit the Food Bank for Larimer County and Neighbor to Neighbor, two of the area’s largest non-profit organizations designed to provide resources for the hungry and homeless.

This year’s event will be held on April 29th, 2010 at the Fort Collins Hilton, 425 W. Prospect, from 6:00 p.m. to 9:00 p.m., with a VIP reception beginning at 5:00 p.m. More than 30 of the county’s finest restaurants and nearly 20 of the its finest wineries and breweries will participate in THE TASTE, providing a uniquely memorable evening that highlights the best Larimer County has to offer in local food, wine and beer.

In addition to fabulous food and drink, the event will feature an exciting silent auction featuring local products, services, and artwork as well as live jazz entertainment provided by Mark Sloniker and Friends. The silent auction will feature the “Palette of Plates” – special plates designed by local artists – as well as birdhouses decorated by local artists in our new special presentation…“Nests for Neighbors.”

Generous support from local sponsors ensures that 100 percent of ticket proceeds benefit the fight to end hunger and homelessness in our community. THE TASTE is organized by a volunteer committee comprised of local Larimer County residents who commit their time to making a difference in our community.

Advance purchase for tickets to THE TASTE are $95 VIP (4:00 pm-9:00 pm) and $65 General Admission (5:00 pm-9:00 pm).Tickets can be purchased by visiting http://www.tastebenefit.org. General admission tickets purchased at the door the night of the event are $75.

About the Food Bank for Larimer County The Food Bank for Larimer County provides approximately 7.5 million pounds of donated food and other products to the community each year through three programs: Food Share, Kids Cafe and Food Link. Food Share is a food pantry with locations in Fort Collins and Loveland that provides free surplus and government food to income qualifying individuals up to two times per week. Over 27,000 Larimer County residents received assistance through Food Share in 2009. Kids Cafe® provides free, nutritious meals to low income children after school and during the summer. More than 66,000 meals were provided to at-risk children last year. Food Link provides food to 70 other non-profit organizations for use in their programs for low income individuals. These organizations include food pantries, soup kitchens, after school programs and domestic violence shelters among others. For more information please visit http://www.foodbanklarimer.org or http://www.facebook.com/foodbankforlarimercounty For more information, please visit http://www.foodbanklarimer.org. About Neighbor to Neighbor Neighbor to Neighbor helps people establish and maintain housing stability.

The organization helps homeless people find homes; counsels renters and home owners in unaffordable housing situations; provides 145 affordable apartments; and educates people looking to purchase a home. So, wherever people are on the “housing continuum,” Neighbor to Neighbor helps them get to the next logical place. Neighbor to Neighbor is celebrating 40 years of service to Larimer County in 2010; during this time, it has helped thousands of Larimer County residents, making our community more stable one household at a time.

 THE TASTE 2009 played an integral role in sustaining Neighbor to Neighbor’s services in a year when the need soared to unprecedented levels. Foreclosure Prevention counseling doubled from 2008-2009, yet the agency maintained a 96% success rate of helping clients avoid foreclosure. For more information, please visit www.n2n.org.

Investing Strategy Part 2 – Be Well-Diversified

This is the second of an 8-part series on building a successful investing strategy.

The second key practice in building a successful investing strategy is to make sure that your portfolio is well-diversified.

A properly-diversified portfolio will increase you returns and reduce the risk of your portfolio.

One part of diversification is to own a large number of equities (stocks). But, good diversification means more than just that.

A well-diversified portfolio will also be diversified in terms of:

  • the size of the companies in the portfolio (your portfolio should contain the right mix of large, mid-sized and small company stocks)
  • US vs international (your portfolio should include the proper mix of equities from the US, established international counties and emerging markets)
  • Sectors (your portfolio should contain equities from all market sectors)
  • Value vs. Growth stocks (your portfolio should contain some of each)
  • Equity vs. Real Estate (your portfolio should contain some of each)

 

The best way to achieve diversification in your portfolio is to use mutual funds. When you buy a mutual fund you obtain instant ownership in hundreds of individual stocks or bonds. The use of mutual funds gives you broader access to the equity market at a lower cost than you could achieve by investing in individual stocks. A mutual fund allows for diversification between many different stocks and also allows for diversification between various sectors, styles, etc. This diversification allows you to reduce the risk of one particular stock or sector, but also allows for more potential reward by offering a broader exposure to various stocks and sectors.

Future articles will address specifically how to select which mutual funds will be the best for your portfolio and how to design a portfolio with the proper diversification along all of the criteria mentioned above.