Stocks — Part V: Keeping it simple, considerations and tools

Simple is good.  Simple is easier. Simple is more profitable.

What I’m going to share with you in these next couple of articles is the soul of simplicity.  With it you’ll learn all you need to know to produce better investment results than 80% of the professionals and active amateurs out there.  It will take almost none of your time and you can focus on all the other things that make your life rich and beautiful.

How can this be?  Isn’t investing complicated?  Don’t I need professionals to guide me?

No and no.

Since the days of Babylon people have been coming up with investments, mostly to sell to other people.  There is a strong financial incentive to make these investments complex and mysterious.

Babylon

But the simple truth is the more complex an investment the less likely it is to be profitable.  Index Funds out perform Actively Managed Funds in large part simply because Actively Managed Funds require expense active managers.  Not only are they prone to making investing mistakes, their fees are a continual performance drag on the portfolio.

But they are very profitable for the companies that run them and as such are heavily promoted.  Of course, those profits come from your pocket.  So do the  promotion costs.

Not only do you not need complex investments for success, they actually work against you.  At best they are costly.  At worst, they are a cesspool of swindlers.  Not worth your time.  We can do better.

Here’s all we are going to need:  Three considerations and three tools.

The Three Considerations.

You’ll want to consider:

  1. In what stage of your investing life are you:   The Wealth Building Stage or the Wealth Preservation Stage?  Or, mostly likely, a blend of the two.
  2. What level of risk do you find acceptable?
  3. Is your investment horizon long-term or short-term?

As you’ve surely noticed, these three are closely linked.  Your level of risk will vary with your investment horizon.  Both will tilt the direction of your investing stage.  All three will be linked to your current employment and future plans.  Only you can make these decisions, but let me offer a couple of guiding thoughts.

Safety is a bit of an illusion. 

There is no risk free investment.  Don’t let anyone tell you differently.  If you bury your cash in the back yard and dig it up 20 years from now, you’ll still have the same amount of money.  But even modest inflation levels will have drastically reduced its spending power.

If you invest to protect yourself from inflation, deflation might rob you.  Or the other way around.

Your stage is not necessarily linked to your age.

You might be planning to retire early.  You might be worried about your job.  You might be taking a sabbatical.  You might be returning to the workforce after several years of retirement.  Your life stages may well shift several times over the course of your life.  Your investments can easily shift with them.

F-you money is critical.

If you don’t yet have yours, start building it now.  Be relentless.  Life is uncertain.  The job you have and love today can disappear tomorrow.  Nothing money can buy is more important than your fiscal freedom.  In this modern world of ours no tool is more important.

Don’t be too quick to think short-term.

Most of us are, or should be, long-term investors.  The typical investment advisor’s rule of thumb is:  subtract your age from 100 (or 120).  The result is the percent of your portfolio that should be in bonds.  A 60-year-old should, by this calculation, have 40% in conservative, wealth preserving bonds.  Nonsense.

Here’s the problem.  Even modest inflation destroys the value of bonds over time and bonds can’t offer the compensating growth potential of stocks.

If you are just starting out at age 20 you are looking at perhaps 80 years of investing.  Maybe even a century if life expectancies continue to expand.  Even at 60 and in good health you could easily be looking at another 30 years.  That’s long-term in my book.

Or maybe you have a younger spouse.  Or maybe you want to leave some money to your kids, grand kids or even to a charity.  All will have their own long-term horizons.

Once you’ve sorted thru your three considerations you are ready to build your portfolio and you’ll need only these three tools to do it.  See, I promised this would be simple.

1. Stocks.  VTSAX (Vanguard Total Stock Market Index Fund)  You’ve already met this fund in earlier posts of this series.  It is an index fund that invests in stocks.  Stocks, over time, provide the best returns and with VTSAX, the lowest effort and cost.  This is our core wealth building tool and our hedge against inflation.  But, as we’ve discussed, stocks are a wild ride along the way and you gotta be tough.

2.  Bonds.  VBTLX (Vanguard Total Bond Market Index Fund) Bonds provide income, tend to smooth out the rough ride of stocks and are a deflation hedge.  Deflation is what the Fed is currently fighting so hard and it is what pulled the US into the Great Depression.  Very scary.   The downside for bonds is that during times of inflation and/or rising interest rates they get hammered.

3.  Cash.   Cash is always good to have in hand.  You never want to have to sell your investments to meet emergencies.

Cash is also king during times of deflation.  The more prices drop, the more your cash can buy.  But idle cash doesn’t have much earning potential and when prices rise (inflation) its value steadily erodes.

We tend to keep ours here:  VMMXX   This is a Money Market Fund and time was they offered higher yields than banks.  These days, with interest rates near zero, not so much.  Now we also keep some in our local bank.  If you prefer, an on-line bank like ING works fine too.

So that’s it.  Three simple tools.  Two Index Mutual Funds and a money market and/or bank account.  A wealth builder, an inflation hedge, a deflation hedge and cash for daily needs and emergencies.  Low cost, effective, diversified and simple.

You can fine tune the investments in each to meet the needs of your own personal considerations.  Want a smoother ride?  Willing to accept a lower long term return and slower wealth accumulation?  Just increase the percent in VBTLX.

Next time we’ll talk about a couple of specific strategies and portfolios to get you started.

Meanwhile, a brief note on….

You will have noticed Vanguard is the company that operates all of these funds.  It is the only investment company I recommend, and the only one you need (or should) deal with.  Vanguard’s unique structure means that its interests and yours are the same.  Vanguard the company is owned by the Vanguard funds.  In other words, by us, the fund shareholders. This is unique among investment companies.

Awhile back a commentator on Reddit, referring to one of my posts, said:  “This really just looks like a commercial for Vanguard.”  I can see his point, although I wish he’d made it directly on here.

I am a huge Vanguard fan, but I am not on their payroll and I have no financial interest in the company other than owning the funds I describe.

You might find an index fund in another investment company that is a bit cheaper.  They create some as “loss leaders.” But you can’t trust these other companies long-term.  Their interests are not your interests.  Their interests lie in making money for their owners.

If you play with snakes, to quote Dave Ramsey, you’ll eventually get bitten.

Don’t bother.  Stick with Vanguard.

Addendum:  What if you can’t buy VTSAX? Or even Vanguard?

Disclaimer:  Like everything on this blog, this is only sharing ideas.  You are solely responsible for your own choices.

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67 Comments

  1. Chris
    Posted May 9, 2012 at 12:20 pm | Permalink

    Hey great blog! I have been following the investing series and you offer some great advice. Quick question, I usually use ETFs instead. In this case I use VTI, BND, and VNQ which appear to be the ETF equivalents of the mutual funds above. What are you thoughts on this? Thanks.

  2. Posted May 9, 2012 at 1:23 pm | Permalink

    Welcome Chris….

    …and thanks for your kind words. Glad you are finding some value here.

    My only quibbles with ETFs (exchange traded funds) are minor:

    There can be a fee to buy and sell them.
    They are designed for and encourage frequent trading.
    They are unnecessary other than for lining the pockets of investment houses.

    That said, if you understand them and prefer to execute your strategy with them Ok by me. As with all investment vehicles I would look to Vanguard for them, as you have with VNQ (REITs), VTI (stocks) & BND (Bonds)

    Just curious, what are your allocations in them?

    • Chris
      Posted May 9, 2012 at 2:29 pm | Permalink

      I am 30 years old but somewhat conservative when it comes to investing. I am currently 60% VTI, 25% BND, and 15% VNQ. I have recently increased my allocation of VNQ and backed off a bit with VTI given the run up. By the way, I completely agree with your call on Vanguard. Nothing else compares.

      Chris

  3. Jan
    Posted May 9, 2012 at 1:36 pm | Permalink

    Looking online and doing a comparison between Vanguard and American Funds, American Funds outperformed the top Vanguard Index Funds, even after the loads. I will concede that I did this comparison when I shifted from Vanguard to American Funds some time ago, but what say you?

    • Posted May 9, 2012 at 3:10 pm | Permalink

      unfortunately, Jan….

      I’d say you got swindled.

      Funds that charge a “load” (sales commission) are aggressively sold by investment advisors. That money, about 5%, goes right out of your pocket and into theirs. Not surprisingly they’ll have nifty charts, brochures and sales pitches to show why this is a good idea. It’s not. Recovering from a upfront load hit is a tough road.

      Never buy a load fund.

      But this is now water under the bridge and the question is what to do with them now that you own them.

      Since load funds are such a horrible idea, I’ve not bothered to look at them much of late. That said, I seem to recall that American Funds are actually not too bad once you get past that hideous load deal.

      What you might do is to look at their current expense ratios and performance.

      For instance, popping over to their website, I see the Growth Fund of America. Its expense ratio, at .68% is one of the lowest in the family and not bad for an actively managed fund. But it is ginormous compared to the .06% of VTSAX. That’s a huge drag over time.

      American Funds are a classic example of a fund company run for the benefit of its owners, rather than its investors. They pay, with your money, sales people to push their funds. That gives them more money under management and that generate more fee income for them. All at your expense.

      sorry to be the bearer of bad news….

      • Posted May 9, 2012 at 4:10 pm | Permalink

        by the way, this is nothing of which to be ashamed. Indeed if this is your biggest misstep you’ve done far better than most, including me.

        Why I remember Myraih International, as does an irked pal who I had lunch with last week and who followed me into to it.

        50K up in smoke. for me. Lord knows what he lost. too much to forgive me but not enough not to speak to me….

  4. Michael
    Posted May 9, 2012 at 5:48 pm | Permalink

    Hey JL,
    What about Vanguard Admiral vs Investor funds, VTSAX vs VTSMX? With only $20k to start investing with, the $10k opening for the Admiral fund means I only have $10k to put in bonds, REIT, or somewhere else, which is why I’m thinking to start with $5k in VTSMX, and as I save more, eventually putting it over into VTSAX. (Same thinking applies to the other fund types.)

    Also, what about international funds? With the current European situation, the int’l funds don’t seem to be doing so well, but what over 5, 10, 15-year periods? And Asia (well, China), is on the rise, too, no?

    • Posted May 9, 2012 at 10:48 pm | Permalink

      Welcome Michael….

      ..and thanks for two great questions.

      You are right. Each of the funds I’ve mentioned are part of Vanguard’s Admiral Shares series. Basically they have rock bottom costs but it requires 10k to buy in. Not to worry.

      Each of these funds also has what they call Investor’s Shares. The fund holdings are exactly the same as in Admiral, but the expenses are a bit higher. But the buy in is only 3k. Once you go over the 10k threshold you can convert and the conversion is NOT a taxable event. So the Investor Share versions work just fine.

      Regarding international funds you can certainly add them if you’d like. Vanguard offers International Index Funds. I don’t bother for these reasons:

      1. The US is still the dominate world economy and, in my view, will remain so for the next 100 years and counting. That dominance will shrink over time, as it has been doing since the end of WWII, but it is not ending anytime soon.

      2. VTSAX is loaded with US companies that are fully international in their operations. Indeed many generate well over half their revenue and profits overseas. So it provides exposure to expanding world markets.

      3. This trend will continue to expand as the international economies around the world continue to grow and prosper.

      4. Accounting standards and transparencies in the US remain the envy of the world. Less funny business to worry about.

      5. Direct international investing introduces currency valuations into the mix and that is a whole other level of risk that needs to be considered.

      Hope this helps!

      • Michael
        Posted May 10, 2012 at 6:44 pm | Permalink

        Hi JL,
        That helps a lot.

        It’s pretty nice that the conversion from the Investor to Admiral series sounds so easy and, best of all, not taxable. That’s a great draw for me to just get started.

        I didn’t really think about the int’l aspect to U.S.-based companies and how that affects a fund like VTSAX. I think you’ve made some really good points there.

        Thanks for your reply!

  5. Posted May 9, 2012 at 7:45 pm | Permalink

    Vanguard is my favorite too. I can’t imagine handing my money over to so-called experts on the Wall Street. Most can never even match s & P for the 10 year period. That’s why they only advertise few years of performance. Trust no one. You can’r even trust those old ladies from Beardstown. They were miss calculating their return, and in fact losing money compare to S & P.

    • Posted May 9, 2012 at 10:29 pm | Permalink

      Hi Shilpan….

      ….glad but not surprised to hear you’re a Vanguard guy.

      those other fund companies also fold their losers into their winners. who can’t put together what looks like a successful fund family like that. more reason for my playing with snakes comment.

      Ha! the Beardstown Ladies. haven’t thought of them for awhile.

      For those of you who may not have heard of them, a few years back they had a brief moment of fame. They were a group of classic “little old ladies” who had formed an investment club. In short order they were posting gains that put all Wall Street to shame. Media commentators hung of their every sweetly uttered word. Until it came to light that the numbers were fake.

      I think it was never clear whether they were cheats or just confused. anyone know?

  6. MooSe
    Posted May 11, 2012 at 2:50 pm | Permalink

    Is the only way to get funds like VTSAX commission free to open a direct account with vanguard?

    Thanks.

  7. Posted May 12, 2012 at 12:09 am | Permalink

    Um…you’re amazing. I think this is the first time I feel like I actually completely understand a post about investing. THANK YOU!

    • Posted May 12, 2012 at 12:53 am | Permalink

      No, thank you FF….

      …you done made my day!

      That is exactly what I was aiming to do: demystify this whole investing thing for those who have other interests.

      very glad to hear it’s made a difference for you.

  8. Posted May 29, 2012 at 11:01 am | Permalink

    I’m one of the rabble who landed here via MMM’s blog. Great work! Now I’ve got another place to hang out and feed my dreams. FWIW, I’m 52, so a bit beyond the MMM demographic but find the discussion and attitudes there great.

    I’m curious if you’ve ever taken a look at which Fidelity funds might best mimic those you recommend from Vanguard. I’ve been using fidelity a long while now and very much like using their FullView (account aggregator) and planning tools, but would like to understand better how much I might be paying for those in fees vs. moving over to Vanguard, assuming I’m comparing similar types of index funds.

    Any input or opinions you have are greatly appreciated, and I’ll be tuning in here from now on! Always enjoy your posts over on MMM, too. :-)

    • Posted May 29, 2012 at 11:34 am | Permalink

      Hey Djoly…

      Welcome over here. Any friend of Mr. MM….

      It has been a long time since I’ve bothered to look at Fidelity so there’s not much I can offer in the way of fund suggestions there.

      I do know they have, over the past few years, introduced a line of Index Funds in response to the challenge they faced from Vanguard. Last I looked they had kept their fees on these competitive as well.

      If you invest in Index Funds and you are already comfortable with Fidelity, I don’t think you need to move.

      My concern would be that Fidelity uses their Index Funds as “loss leaders” and my guess is that once you’re on board they’ll try to entice you into their more expensive and (for them) more profitable offerings.

      Index Funds at Vanguard, on the other hand, are the soul of what they do.

      hope this helps!

      • Posted May 30, 2012 at 6:48 am | Permalink

        Thanks for your reply. Took a look and you’re right – Fidelity offers a line of Spartan index funds that are pretty reasonable. There was a good discussion at the Bogleheads site comparing Fidelitiy’s index offerings vs. Vanguard. The main negative re: Fidelity was the possibility they would raise index fees after luring investors in, and if you then sell to move to Vanguard you’re hit with capital gains. I’m of a similar mind as you; these are loss leaders for Fidelity and directly in competition with Vanguard for investors. I’d be surprised if they decided to give up on the competition and raise fees appreciably, losing a potentially large captive audience for their more expensive funds.

        • Posted May 30, 2012 at 6:22 pm | Permalink

          This is an important difference between Vanguard and the other investment companies like Fidelity.

          Low cost is a core principle of the Vanguard approach and it’s hard-wired into their DNA. They are always looking for ways to lower costs and fees.

          Low cost for companies like Fidelity is something they do grudgingly and only as required to meet the competition. They are always looking for opportunities to raise fees.

          That said, the competition should kept their fees in check for the foreseeable future.

  9. Dorothy
    Posted May 29, 2012 at 10:34 pm | Permalink

    What do you suggest if the majority of my nest egg is in my 401k at work, and I don’t have the choice of the Vanguard funds you mentioned? Should I be investing outside the 401k as much as possible?

    • Posted May 30, 2012 at 12:06 am | Permalink

      Hi Dorothy…..

      most 401k plans don’t have access to Vanguard. Mine didn’t when I was working. But they are wonderful tools.

      Most will have on offer at least one Index Fund tracking the total stock market and/or the S&P 500. That’s what you want.

      If your company has a match contribution you’ll want to put at least as much as it takes to get the full match. That’s free money.

      If you have more to invest it becomes a question of tax bracket (do you need the deduction) and when you plan to retire. If you’ll be retiring before 59.5 years old you’ll want some investments outside 401Ks and IRAs.

      I always maxed mine out and, because of my high saving rate, invested outside of it as well.

      • Jeremy
        Posted April 18, 2013 at 12:18 am | Permalink

        Jlcollinsnh,
        I have a related question. I worked for a company who used Vanguard for their 401K and I used it while workin for them to invest Roth 401K with company match. The nice part is i work overseas and dont have to pay taxes so doing the Roth is a great little bonus since i didnt pay taxes on that money and wont have to when i withdraw it. However, i have changed companies and the new company uses ING so i have picked a target retirement fund through them. My question is, if i want to retire before 59-1/2, how should i invest my additional savings in the vanguard VTSAX? Just as general savings instead of an IRA so that i am able to withdraw it when i want? So i will start with 10K and then add to it every month. Does it automatically reinvest dividends? then when i am ready to retire, i can live off the dividends and withdraw from the principal at 3-4%?

      • Jeremy
        Posted April 18, 2013 at 12:27 am | Permalink

        Forgot one question: When i have enough in the accounts to retire and live off of the dividends and 4% rule, how do i account for income on taxes? Will the dividends and ammount i withdraw be counted as income for that year? I have lived all of my working life overseas and only have to file taxes to show what i made, but never have to pay taxes so i am not up to speed on how it will work when i move back to the states and when i finally decide to stop working and withdrawing money out of the investments before i am 59.

        • jlcollinsnh
          Posted April 18, 2013 at 3:17 pm | Permalink

          Right now, dividends and capital gains distributions in a taxable account are taxed annually and at a favorable rate lower than ordinary income.

          Regular capital gains (or losses) are taxable events when you sell shares in your taxable account.

          Any money you put in and withdraw from a taxable account is NOT taxed as you have already paid taxes on it.

          Any money withdrawn from a tax-advantaged account such as an IRA or 401k is taxed as ordinary income and, if withdrawn before 59.5, subject to penalties.

          The exception is a Roth. Since Roths are funded with after-tax money and because of the way the law was written, they are NOT subject to tax on withdrawal after 59.5. It is what makes them a beautiful thing.

          You can also withdraw money you contribute to a Roth anytime without tax or penalty. BUT, any dividends or capital gains ARE subject to penalty if taken before 59.5.

          Make sense?

        • Jeremy
          Posted April 18, 2013 at 6:47 pm | Permalink

          so, since i am still living overseas and plan to for at least another year or two, it makes more sense for me to open a general savings (what vanguard calls it) account outside of my 401k and invest the $10,000 in VTSAX. This will be considered i have already paid taxes on this money correct? then open a Roth IRA account and contribute max allowable amount each year in 50% VGSLX and 50% VBTLX. I will also be putting a monthly amount into the VTSAX general mutual fund account to keep it as the bulk of my investment. I am thinking 80% in VTSAX and 10% each in VGSLX and VBTLX since i am 29.

          Also, i know you say the stock market always goes up and not to try and time it, but i sure wish it would go down quite a bit right now so i could put in my 10K into VTSAX.

          • jlcollinsnh
            Posted April 18, 2013 at 11:22 pm | Permalink

            sounds like a plan, Jeremy. Your allocation is a fine match to your age.

            of course, whatever dividends and cap gain distributions your “general” VTSAX account generates will be taxable. As will be any capital gains when you sell shares in the future.

            it’s fine to wish, but don’t get hung up on trying to time the market. you are playing long ball here.

  10. ChetBodet
    Posted June 5, 2012 at 1:47 pm | Permalink

    Great blog! I have really enjoyed going back through all the posts.

    I was wondering if you had some advice for my current situation. I am 24 and I have about $20K in my Roth IRA all in the Vanguard STAR fund. I am looking to invest in the VTSAX going forward, but with the $10K initial requirement I am not sure how exactly. Can I take $10K of the STAR fund and basically just switch it to the VTSAX Fund? If so do you know what if any tax implications or Vanguard fees I would incurr? Also, would I then be able to buy more VTSAX funds, but in a seperate account from my Roth?

    • Posted June 5, 2012 at 4:04 pm | Permalink

      Thanks Chet!

      First, the STAR fund is a fine choice. Basically it is a “fund of funds” comprised of eleven different Vanguard funds and it has a mix of 60/40 stocks/bonds. The idea is a full and diversified portfolio in one fund, and you never have to worry about rebalancing it. That happens automatically.

      It’s expense ratio, at .34%, is higher than VTSAX at .06%, but that’s still low in comparison with most other funds out there.

      I would have no problem with you just keeping your STAR fund and adding to it over the next few decades. It should serve you well and with a smoother ride.

      VTSAX (100% stocks) will likely give you a greater final return when the dust settles 30-40 years from now, but it will be a bumpier ride.

      a mix of 60/40 stocks/bonds, as in STAR, is very conservative for a guy your age.

      If you do decide to switch, the process could hardly be easier. You just log on to vanguard.com, go to your account, find the section on exchanging funds and follow the prompts. If you haven’t established your online account, you’ll need to do that first, of course.

      If you like you can even call Vanguard and they’ll walk you thru the process.

      There are no fees to buy and sell Vanguard funds.

      If you are opening your new VTSAX as a Roth account and transferring money from your current STAR Roth, there is no tax conscience.

      If, however, you are taking money from the Roth to open a VTSAX (or any other) investment outside the Roth there will likely be tax consequences. Not a good idea.

      Of course, you can always open a new VTSAX account with money NOT in your Roth. No problem.

      Hope this makes sense!

      • ChetBodet
        Posted June 5, 2012 at 4:23 pm | Permalink

        Thanks so much for the quick response! I think I will start putting more of my contributions in the VTSAX fund, mainly because as you mentioned the STAR fund seems a little to conservative for me right now, although the last time I checked their returns the STAR fund had actually slightly outperformed the VTSAX over the last decade.

        Thanks again for the help and the great blog!

        • Posted June 5, 2012 at 4:44 pm | Permalink

          No worries Chet….

          ..glad to help.

          Looking over the last decade, it makes perfect sense that STAR (60%stocks/40%bonds) would outperform VTSAX (100% stocks). The last decade has been tough for stocks and great for bonds.

  11. Albert Choy
    Posted November 23, 2012 at 8:01 am | Permalink

    JH,

    I think you have this flipped:

    ” The typical investment advisor’s rule of thumb is: subtract your age from 100 (or 120). The result is the percent of your portfolio that should be in bonds. “

    • Posted November 23, 2012 at 10:10 am | Permalink

      Thanks Albert….

      ..you could be right. Either way: nonsense.

      • J dawn
        Posted April 8, 2013 at 6:56 pm | Permalink

        Albert is right. You subtract your age from 100 to get the percentage that should be investing in stocks. This means a younger person, say 20, should buy more stocks and less bonds. As you get older, you should generally buy more bonds and less stocks. It makes sense as stocks are generally more volatile and risky. A younger person has more time to recover from stock losses. That is the theory at least.

  12. Debbie
    Posted March 12, 2013 at 10:37 am | Permalink

    Would you compare TRoweP to VAnguard? Spouse invested with TRP for years and managed my IRA. Since his passing, looking at my finances and reading your blog and Q&A I don’t know where to begin, how to compare the two companies. You certainly make a strong case for V.

    Thanks for your response.

    • jlcollinsnh
      Posted March 12, 2013 at 11:09 am | Permalink

      Welcome Debbie…

      Very sorry to hear of your loss. My condolences. That’s tough on so many fronts, including sorting out finances. This is just one more reason I am such a strong believer in simple investing.

      I am a huge Vanguard fan and all other things being equal it is my choice hands down. But in your case, all other things are not equal.

      The good news is TRP is a fine company (my favorite actually after V) so you can start by resting easy that your husband chose it. Certainly don’t feel you have to do anything right away. And certainly ignore all the ‘advisors’ who will be knocking on your door with ‘the solution.’

      When you are ready, you might want to look at exactly what funds in TRP you have. As with Vanguard, TRP offers low cost index funds and that’s where you want your money to be. For the funds held in IRAs and 401Ks this is easy. You can move the money tax free if you need to.

      For investments outside tax advantaged accounts, you’ll want to be more careful. You could be in a less than ideal fund but facing a large capital gain if you move it.

      I hope this helps. Please feel free to check in again if you have more questions.

      • Debbie
        Posted March 12, 2013 at 1:51 pm | Permalink

        Your information helps to ease my mind as to “what to do” re fund investments. No action seems most appropriate short term.

        Neglected to mention there’s also a small amount invested with Fidelity funds. Am thinking of moving everything under one umbrella, TRP, at this time. Input?

        BTW your site was instrumental in my “getting” involved in my investments. Thanks.

        Debbie

        • jlcollinsnh
          Posted March 12, 2013 at 6:29 pm | Permalink

          Glad to hear it, Debbie!

          If you plan to remain with TRP, and there is not a big tax hit with moving from Fidelity, no problem.

  13. CG
    Posted July 29, 2013 at 4:59 pm | Permalink

    JL,

    First off, you’re running a terrific blog. Thanks and kudos to you for sharing great information. This blog is one of the best that I’ve seen on these topics.

    I just wanted to pick your brain on something. I’m quite interested in investing in Vanguard index funds, but my situation is a bit tricky. I’m currently working in a foreign country (but a US citizen).

    I don’t think I’ll be returning to the States in the foreseeable future–which is sad, but it is what it is. I pay my taxes here locally; that is, I don’t pay taxes in the States. So, that precludes me from enjoying non-taxable/tax-deferred/retirement accounts like IRA or Roth-IRA.

    In other words, I can only go for taxable accounts. As I understand–and correct me if I’m wrong–if I want my investment to be tax efficient, I should avoid putting money in bonds- (e.g., VBTLX) or real estate-based (VGSLX) index funds with taxable accounts, as dividends/returns from them are taxed at a higher level, compared to stock-based index funds.

    Assuming my understanding is basically correct, that leaves me with the VTSAX or similarly comprised index funds as the only option. I would still be willing to invest in such index funds, but putting money in only stock-based index funds seems to be insufficiently diversified (although they are, of course, well diversified across different stocks).

    In a situation like this, do you know of any other way to hedge against other risks, such as inflation or deflation? Or, would you say one should disregard the tax considerations in cases like this? I would be happy to hear your thoughts. Thanks! All the best. –CG

    • jlcollinsnh
      Posted July 29, 2013 at 10:48 pm | Permalink

      Wow! Thanks CG! You made my day. and welcome.

      VBTLX and VGSLX are considered tax inefficient because they throw off dividends and interest.

      VTSAX has a modest dividend of around 2% these days and importantly as an index fund does little trading. That last means little or no taxable capital gains distributions at the end of each year.

      Runaway inflation and deflation are the two economic events that can cause real havoc. But these are also rare events. VBTLX and VGSLX are my favorite hedges for such things and if hedging is important to you I’d say it trumps the tax consideration.

      But I didn’t bother with them until I was older, retired and the income was more attractive. Were I younger, VTSAX is all I’d own. Wild ride, but the best performance potential over time. But I have a very high risk tolerance and a willingness and ability to ride out the crashes I know will come and that I know are normal.

      Hope this helps!

      BTW, if you don’t mind saying, where are you located and what took you there?

      • CG
        Posted July 30, 2013 at 3:19 am | Permalink

        Hi JL,

        thanks for the insight! It makes a lot of sense. I can only go with a taxable account with these investments anyways, so I’m just trying to maximize within the given constraints.

        I absolutely do not mind. I’m in Taiwan. I’m a junior faculty at a university here. I joined the faculty last year. As for what took me here, as you may know, academic jobs are extremely scarce and poorly distributed, especially if you’re looking for a tenure track position. When you get an offer, you basically take it, no matter where the location is. :(

        The academic salary here is low (I guess that goes for pretty much anywhere), but it’s a stable career compared to many others out there. That means I feel like I can be quite risk tolerant. I’m trying to set aside a chunk of my salary and invest consistently for a long haul. So, when I put my money in Vanguard index fund(s), I don’t plan on moving it for a very very long time.

        Keep up the good work here! I’m enjoying it a lot. And thanks again!

        –CG

        • jlcollinsnh
          Posted July 30, 2013 at 9:30 am | Permalink

          so you are on the tenure track at this university? That is a long term commitment to Taiwan!

          How do you like it there? What is your field?

          • CG
            Posted July 30, 2013 at 7:36 pm | Permalink

            Yes, it is. Well, “long-term” commitment for the time being. Being on the tenure track doesn’t necessarily mean that I can’t change school/location, although I would like to stay here at least until I get that tenure. Similarly, I can also move to somewhere else after getting tenured. Of course, there is also no guarantee that I’ll get tenured. So, a lot of things can happen, and I might move out of Taiwan down the road. The other–and more important–reason why it looks like I’ll be committed to this location for a long time is because my wife is a Taiwanese, and she didn’t really want to move to the US. I don’t think she’ll change her mind anytime soon… But, on the bright side, I love it here. It’s a very livable place, and people are nice and friendly. I teach political science.

  14. Kevin
    Posted November 10, 2013 at 12:06 pm | Permalink

    One small thing… I think that the advisors rule of thumb is that your age or your age minus 20 should be in bonds with the rest in stocks. The way it is stated here you would actually have less in bonds each year that you age. Your point is still completely valid, but I think the rule is backwards.

  15. Stephen
    Posted February 24, 2014 at 1:31 am | Permalink

    I love this blog and am making my way through this series avidly.

    I was wondering how much of this applies to international investors? I live in Australia. Does “the market always goes up” still apply to the Australian market? It seems to historically, however since it’s such a small slice of the international market I was doubtful it was as secure.

    I would like to simply invest in VTSAX, but the vanguard situation is different over here.

    https://www.vanguardinvestments.com.au/adviser/adv/investments/overview.jsp

    Most of those charge a fee of 0.70% or .090%, and they track the Australian share market, not the US.

    However there are also ETFs listed at Vanguard Australia – these appear to have much lower pa fees. There is one which is the “total US market” for 0.05% pa! Is buying such an ETF the same as buying VTSAX in the US, or am I missing something?

    https://www.vanguardinvestments.com.au/adviser/jsp/investments/etfs.jsp#etfstab

    Im sorry if this is confusing, I guess I’m just wondering the best way to attempt to emulate your strategy of buying the total US stock market whilst living in Australia

    • jlcollinsnh
      Posted April 6, 2014 at 10:03 am | Permalink

      Welcome Stephen…

      Sorry for the delay in responding. Hopefully you read the part about my disappearing to Central America for a few weeks.

      “The market always goes up” refers to the US stock market, which has the advantage of being such a large and dominate player on the world stage. The same would apply to the world markets overall. I would be hesitant applying the idea to Australia as the economy there is far smaller. I encourage investors outside the USA to consider investing in World Index Funds that include the US market.

      VTS, in the second link you provided, is indeed the equivalent of VTSAX and the ER of .05% is great. Be careful, however. Since it is an ETF you might well face commission charges when you buy or sell.

      Since you’ve been working your way thru the blog, perhaps you’ve already come across these two posts:

      http://jlcollinsnh.com/2013/05/02/stocks-part-xvii-what-if-you-cant-buy-vtsax-or-even-vanguard/

      http://jlcollinsnh.com/2014/01/27/stocks-part-xxi-investing-with-vanguard-for-europeans/

      You’ll especially want to read the comments in both those posts. Several Aussies have weighed in with their ideas and experiences.

      Cheers, mate and good luck!

  16. Rich
    Posted February 25, 2014 at 9:29 pm | Permalink

    Hi Jim,
    Great information and thank you for sharing all this.
    I can tell you that with all the career emphasis most folks have, we just don’t seem to wrap our minds around the investing logic until it’s late in the game.
    I’m retiring in May this year when I turn 62. I have a pension that will “just cover” my monthly expenses.
    I plan to ‘not’ take my social security benefit until I reach full 66yr status. I also have an employer 401K with sufficient funds that is managed by Vanguard. I will likely need to tap into earnings to bridge the gap until I reach age 66.
    81% of my holdings are currently invested in company stock (oil) and I’m considering utilizing your “4 tools” advice.
    Any advice on how to arrange dividend/earnings income withdrawals and whether to roll into an IRA?
    Also I notice you state the rule of thumb for Stock/Bond ratios, but then you say…doesn’t matter. Can you explain why?

    Thanks,
    Rich

    • jlcollinsnh
      Posted April 7, 2014 at 12:07 pm | Permalink

      Hi Rich…

      Thanks and glad you find it useful.

      Were I in your position I would be VERY concerned about having 81% of my assets in just one stock. Even if I loved that stock.

      If this holding is in a tax advantaged account I’d promptly shift it into the broad-based index funds discussed in the post. If not and assuming you have a large capital gain, I’d begin shifting as rapidly as possible consistent with limiting the tax hit as best you can. This, of course, will take a careful analysis of your full tax picture; something well beyond the scope of this blog.

      Structuring withdrawals can be almost anything you choose. For us, we first spent down the various investment “mistakes” I’d accumulated. Now we pull what we need each month from our joint VTSAX fund in our non-tax-advataged account. In our IRAs we have more VTSAX along with the bond and REIT funds described above. The dividends from these I have reinvested. We also shift some each year to our Roth IRAs to reduce the amount we have once we hit age 70 and the Minimum Required Distributions (MDRs) kick in. The idea is I’d prefer to pay up to 15% now than 25%+ later.

      Once I have to take the MDRs, those will provide our living expenses and our joint VTSAX fund in our non-tax-advataged account will be left alone to grow again.

      As you can see, this is all unique to our situation and needs. It may or may not be useful to others.

      But I would suggest not worrying about just spending your dividends and interest. Better to look at all your investments as a whole, limit yourself to total withdrawals of 4% or less and take those withdrawals from wherever it makes sense at the time.

      I don’t recall saying stock/bond ratios don’t matter. They are a tool for smoothing the ride. Once you stop working and start drawing on your investments, this is important. But while you are still working and adding money to your investments, I suggest toughening up and accepting the wild ride for the greater return stocks provide over time.

  17. Brian Boatman
    Posted March 12, 2014 at 7:02 pm | Permalink

    I LOVE YOUR BLOG! I have a question for you. I’m 37 years old and work for a Governmental Agency with a Pension. On the side, I contribute some money into a 457(b) plan. I currently have $67,000 in there in a Vanguard Target Date Fund, 2045. The Expense Ration is .18. Now, I understand that this ER is great, but I had a thought…can’t I invest in each of the three index funds that make up the 2045 Target Date Fund and save some on the ER? Am I missing something here!?

    Thanks for your blog and for your willingness to share your wisdom with us young, dumb people!

    Brian

    • jlcollinsnh
      Posted April 7, 2014 at 12:25 pm | Permalink

      Thanks Brian!

      And no one who asks questions is dumb. I wish I’d been smart enough to ask more back in the day. ;)

      Anyway, your thinking is spot on. You can absolutely replicate any target date fund using a selection of index funds, and with lower ERs (expense ratios) to boot. You’ll just have to remember to do the rebalancing on your own, something the TDF does automatically for you.

      In fact, I just did our annual rebalancing of the three funds described in the post last week. Easy peasy! And fun. At least for me.

  18. Andrew
    Posted May 23, 2014 at 6:33 pm | Permalink

    Great Blog! I’ve been reading this and MMM and working on getting my financials on a better track (fortunately they haven’t ever been bad, just not as optimized as they could be).

    I’m right now looking to get rid of higher expense ratio Mutual Funds. Looking at the Vanguard Funds I’m confused by the existence of:
    - VTSAX (appears to be a Mutual Fund)
    - VTI (appears to be the ETF version of the same)
    - VTSMX (appears to be an more expensive version of VTSAX)

    It seems like I could buy VTI and avoid the minimum contribution of the Mutual Fund with no downsides, what am I missing here?

    One other question: I currently have my money with Fidelity, which I like their online tools and they let me buy Vanguard Funds and ETFs. Is there an advantage of being a Vanguard customer directly?

    • jlcollinsnh
      Posted May 27, 2014 at 2:22 am | Permalink

      Thanks Andrew!

      Great move dumping your high ER funds.

      Your understanding of those three funds is pretty much spot on: They each hold exactly the same portfolio but are slight different animals. I cover this in detail here:

      http://jlcollinsnh.com/2013/05/02/stocks-part-xvii-what-if-you-cant-buy-vtsax-or-even-vanguard/

      As for VTI the only concern would be avoiding any transaction fees in buying/selling and because it is so easy to trade be careful not to fall into the sucker’s game of trying to time the market.

      If using Fidelity is comfortable for you and they aren’t charging you to buy & sell, you can stay with them. Just don’t get lured into their high-priced funds.

      My guess is, over time, you’ll want to consolidate everything at Vanguard. It’s just a bit easier. That’s what I’d do/have done. But you can take your time and make the move whenever you’re ready.

      • Andrew Sullivan
        Posted May 27, 2014 at 1:15 pm | Permalink

        Awesome – that make sense. Thanks for the info!

  19. Richard
    Posted June 3, 2014 at 9:48 pm | Permalink

    I’m so glad I learned about Vanguard and index funds from your blog! I feel so much more comfortable having my money with them than anywhere else now. Thank you for sharing all your wisdom and experience!

    I was curious about this:

    “With it you’ll learn all you need to know to produce better investment results than 80% of the professionals and active amateurs out there. ”

    Index funds make sense to me to use as investment tools, and I’m guessing 80% is a bit of ballpark figure….is this roughly a commonly agreed upon percentage?

    Thanks!
    Richard

    • jlcollinsnh
      Posted June 3, 2014 at 11:32 pm | Permalink

      Welcome Richard…

      Great question and yes, that 80% is a ball park figure based on the many articles on this I’ve come across on this over the years. In fact you can Google this question and find several falling around this percentage. I’m not sure why they vary. Some look at different time frames. Some at different metrics. Some factor in costs, some don’t.

      The truth is, 20% is optimistic and is based on short time frames. Clearly it is easier to get lucky and outperform the shorter the time you need to do it. Even I called the market almost exactly last year, and I can assure you it was no more than luck: :) http://jlcollinsnh.com/2014/01/01/1st-annual-louis-rukeyser-memorial-market-prediction-contest-2013-results-and-your-chance-to-enter-for-2014/

      Vanguard has done research on this looking at a 15-year time frame:
      https://personal.vanguard.com/us/insights/article/infographic-outperformance-112013
      In it they point out that 45% of actively managed funds fail to even survive over that time, let alone outperform. Only 18% both survived and outperformed. And even those frequently had long periods of underperformance.

      Even if you are lucky enough to pick one of the out performers, it will be tough to live with.

      This article references studies done for an even longer period: 1976-2006, 30 years. http://www.marketwatch.com/story/almost-no-one-can-beat-the-market-2013-10-25

      The results are even more shocking. As the article says:
      “Barras, Scaillet and Wermers tracked 2,076 actively managed U.S. domestic equity mutual funds between 1976 and 2006.

      “And — are you sitting down? Only 0.6% — you read that right, 0.6% — showed any true skill at beating the market consistently, ‘statistically indistinguishable from zero,’ the three researchers concluded.”

      On reflection, calling the out-performers at 20% I am too generously off the mark. :)

      • Richard
        Posted June 4, 2014 at 9:08 pm | Permalink

        Wow, very interesting information!
        Thanks for the response and the links!

  20. AF
    Posted June 5, 2014 at 9:54 am | Permalink

    Hello, jlcollinsnh,

    After reading very informative (thanks for that!) articles on your blog as well as on MMM’s site, I opened an account at Vanguard. Before that I called them several times and I had a good feeling after talking to their people.

    Then I got my money ready to be transferred to Vanguard and so I attempted to link my banking account to my Vanguard’s account. I just clicked the button “Add bank account” (I don’t remember exact name) and… my account got blocked.

    It was three days ago. Since then I called them multiple times a day, every time they take my phone number, tell me that “associate managing my account is not available, but they will live a message and he/she will call me back”. Nobody ever called me since then, instead I keep calling them.

    Googling for “vanguard technical support sucks” returned this article among many others:
    http://www.complaintsboard.com/complaints/vanguard-valley-forge-pennsylvania-c137283.html

    I always heard and thought, and your articles supported that, that Vanguard is a solid company, but so far I have serious concerns. If I am being treated like that when they don’t have my money, I am afraid to think what would happen after I make a transfer.

    Can you make a comment on that, please?

    Thanks!
    AF

    • jlcollinsnh
      Posted June 5, 2014 at 10:48 am | Permalink

      Hi AF…

      Vanguard assigns an individual account manager to each investor. I’ve had mine for 20+ years and have never talked to him. As busy as people are these days, the chances of him being available when I call are slim to none. So I don’t bother.

      Instead I call the Vanguard number and whoever answers helps me. Almost without exception, these folks have been knowledgable and friendly. On the rare occasion that they can’t answer the question they whistle in a supervisor who can.

      The Vanguard website also has a section where you can email your manager. They promise a quick turnaround and the few times I’ve used it, the response, from my manager, has been very prompt. But usually I just call.

      So my advice is to abandon the “deal with just my assigned manager” model and go “free-range” :)

      The other thought I leave you with, is that the Vanguard model and mission is low cost. That savings goes into our pockets. It could be that sometimes, in their drive to keep costs low, they go too far and service suffers a bit in comparison.

      Frequently, I’ve heard high praise for the customer service from firms like Fidelity and T Rowe Price. Due to the competitive pressures from Vanguard, both now offer low-cost index funds (sort of loss-leaders to get you in the door), along with their high-profit (to them) high-cost actively managed funds. Could be those high fees allow them to offer a more premium service experience.

      If you continue to be unhappy with Vanguard, you might consider them as an option. Just be careful not to get seduced into their high-priced products.

      As for that link you provided, I wouldn’t pay too much attention. Vanguard certainly isn’t perfect and I’m sure like any large organization they drop the ball sometimes. But most of the complaints there have the ring of bullshit to me.

      Remember that in creating the only investment firm that genuinely aligns its interests with its customers, it has created a lot of enemies in the business. Including legions of money managers who have lost business to them.

      • AF
        Posted June 5, 2014 at 11:13 am | Permalink

        Thanks for your quick response! :)

        The problem is that their “free-range” does not provide any support. They just take my phone number and promise to call back. Last time on my request to talk to a supervisor then they called a team lead who… well… took my number and said that the “associate managing my account will call me back”. How can I argue with that?

        To be honest, I was not even aware that I have an “assigned manager” – I’ve never had one in brokerage firms, neither I wanted one. And hearing multiple times about mysterious “account manager” added more into my frustration until your explanation.

        I will try to contact them via email, but I am not holding my breath on that too as I emailed them my question about whether I can label my accounts on the website (I have multiple, so I want a better differentiation) last week and still waiting for a response.

        Thanks for mentioning alternatives to Vanguard and warnings about high costs. Besides Fidelity and T Rove Price, I will check Dodge & Cox – this name was mentioned a couple of times in discussions that I found after googling for alternatives to Vanguard.

        I did not give up on Vanguard yet, but if they won’t let me access my account to transfer my money into it – what can I do?

        • jlcollinsnh
          Posted June 5, 2014 at 12:14 pm | Permalink

          This is a tough one as in decades of dealing with Vanguard I’ve never had an experience like yours. Nor has anyone I know. Nor can I replicate it.

          In fact, I just called them to discuss it. 1-800-284-7245 The “free range” guy I got this time was helpful as always but is as baffled as I.

          He did suggest that, if you are asking a complex or technical question, that might require them to take a few days and then get back to you. Other than that, assuming you’re not just yanking my chain, phone calls should work.

          • AF
            Posted June 5, 2014 at 1:08 pm | Permalink

            I am lucky to have a wife who is better than me and who in 30 minutes can solve a problem that I cannot solve in 3 days. :)

            My better half called Vanguard and she was able to clear things out:

            For many years my wife had individual web account with Vanguard where she had IRA and 401(k) investment accounts. When I opened a new web account for both of us, I used her SSN along with mine, and this is what created a problem.

            Apparently, technically Vanguard allows the same SSN to be used in multiple web accounts, but it does not really handle it well. As the result our new account was eventually blocked. At the end of our conference call Vanguard’s technical person (really knowledgeable, unlike others I spoke with) said that he will merge new investment accounts that I created into my wife’s web account, and I will be able to create my personal web account to access them.

            In my defense I can say that I did not see any warnings about SSN not allowed to be used in multiple web accounts. On the contrary the customer service people kept telling me that I would have to create individual web accounts for each investment account that I would like to buy the same security for – e.g. 3 individual web (!) accounts (different username) if I would like to have 3 investment (!) accounts holding the same VTSMX security.

            I hope this time Vanguard’s tech gave us correct information and within 24 hours we will be able to access our new accounts.

            To help others to avoid my experience with Vanguard – don’t open multiple web accounts (different usernames) with the same SSN.

            Thank you for checking with Vanguard and trying to help. :)

  21. Kat
    Posted August 27, 2014 at 12:08 am | Permalink

    Hey! I’m looking to start investing soon. I’m 27 and recently inherited a large amount of money. I’ve had it in cash for the last year or so, because I just felt like I still had a lot to learn before I would feel comfortable investing. Your blog has taught me so much so thank you!

    I really gravitate toward your simply philosophy, but I wonder what you think about value-weighted index funds like the one suggested in this article. http://www.nasdaq.com/article/the-fundamental-flaw-of-stock-indexes-cm288671

    (In summary, if you don’t have time to read it, basically they say the problem with index funds is they force you to buy high, sell low, so they suggest a value-weighted index fund instead.)

    Thoughts? Or can you point me in the direction of an article you’ve written on the subject if you have one?

    Many thanks!

    • jlcollinsnh
      Posted August 27, 2014 at 9:02 am | Permalink

      Hi Kat…

      Over the years I’ve read countless “better index idea” articles including those on the value-weighted approach, so thanks for forgiving me for skipping this one. :)

      People are forever trying to build a better index fund and, so far, all they’ve come up with are things that work better some of the time. Of course that implies they work less well the rest of the time.

      Pure index funds as created by Jack Bogle are beautiful things. I’ve yet to see anything I’d rather have my money in.

      Good luck!

  22. Jacek Glinkowski
    Posted September 30, 2014 at 11:01 am | Permalink

    Do you have a comment on the Vanguard “simplifying account structure” – moving Vanguard mutual funds under ” Vanguard Brokerage Account”, so all holdings will be under VBA?

    • jlcollinsnh
      Posted September 30, 2014 at 2:37 pm | Permalink

      Hi Jacek…

      I hadn’t heard about this so I reached out to my pal Linda at Vanguard. This is what she had to say:

      “Ok, here you go. The reader is referring to our new consolidated account structure, which will enable all clients to hold Vanguard mutual funds in the same account as Vanguard ETFs and other brokerage assets. The aim is to provide additional investment flexibility and more streamlined service, and it is part of a broad effort to simplify the investing experience with Vanguard.

      “The new account structure will include:
      The ability to manage and view mutual funds, ETFs, and other brokerage securities in the same account.
      A streamlined online process to buy and sell investments.
      The ability to use proceeds from security sales to immediately buy Vanguard funds—no more 4-day wait.
      A single tax statement for tax filing convenience.

      “Clients will receive notification from Vanguard —via e-mail, letter, or prompt when they log on to their account—when their accounts become eligible to upgrade to this simplified structure. To avoid disruption to their existing account options, clients will be unable to upgrade until they receive notification of their eligibility. Clients with questions about eligibility are encouraged to call Vanguard for additional information.

      “Hope that helps. If not, let me know what else I can get for you.”

      Linda

      My take: Since I only hold the funds, it won’t much effect me. Although I do have a brokerage account with Vanguard dating back to when I used to buy individual stocks.

      For those who it will effect, I can see some advantages in efficiencies with no downsides I can tell.

      Make sense?

3 Trackbacks

  • […] If I had it to do over, this blog would be likely named The Simple Path to Wealth after one of my very earliest posts and currently the working title of my upcoming book. Financial geeks like me are the aberration.  Sane people don’t want to be bothered.  My daughter helped me understand this at just about the same time I was finally understanding that the most effective investing is also the simplest. Complex and expensive investments are not only unnecessary, they under-perform.  Relentlessly fiddling with your investments almost always leads to worse results. Making a few sound choices and letting them run is the essence of success, and the soul of the simple path to wealth. If you’ve read this far in the Stock Series you already know this. You also know that, with simplicity as our guide, we look at our investing lives in two broad stages using just two funds: […]

  • By My ETF Strategy and Portfolio | No More Waffles on July 23, 2014 at 3:47 pm

    […] Again, this applies to me personally. I know, for example, that the situation for Dutch investors is completely different since they are better off with Irish dividend paying funds. And to all of you American readers hardly any of this will apply. […]

  • […] By early 2014 when information surfaced that a second Chautauqua was being planned, I had made some major progress towards FI, thanks to the above mentioned blogs, mainly by cleaning up financial messes and by moving investments to where they ought to be (one word: VTSAX thank you Uncle Jim!). […]

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