I write this blog for my daughter and, by extension, people like her. People who know getting investing right can make a huge, positive difference in their lives but who don’t want to obsess over it. For them I created the Stock Series and the book, The Simple Path to Wealth.
But, since this is primarily an investing/money/FI blog, it also attracts readers who do want to obsess over this stuff. As such, I get a steady stream of comments asking why not this, that or this other thing instead of The Simple Path as I’ve presented it.
So today let’s walk thru a few of these and I’ll briefly give you my take on each. This way I can just point future commenters to this post and be done with it.
I’ll start by saying, these concerns and ideas are not my concerns and ideas nor do I recommend them. If I did, they would have been in the Stock Series and book rather than the Simple Path to Wealth that is.
At the same time, if these concerns and ideas resonate with you by all means investigate further.
Too Hot
Regular readers know, I recommend investing 100% in stocks — ideally VTSAX — while you are in the Wealth Building Phase. Your high savings rate provides a steady cash flow from your earned income into your investments smoothing the ride and turning the stock market’s volatility to your advantage.
Then, when you leave your job and your portfolio is called upon to support you, you add bonds — ideally in VBTLX — to add ballast to smooth the ride. You set your stock/bond allocation to suit your personal temperament and risk tolerance. Periodically rebalancing this allocation serves to turn the stock market’s volatility to your advantage.
As I have said many times, a 100% stock allocation is extremely aggressive. It is designed for maximum returns over time and is absolutely dependent on you NOT panicking and selling when the market drops. You must understand that market drops, even severe ones, are an absolutely normal part of the process.
Like hurricanes they are intense, violent and scary. And, like hurricanes, they always pass. But if you panic and step out in the middle of the storm, none of the concepts I offer will save you.
This is something you want to think long and hard about. If you haven’t lived thru a major decline, if you haven’t watched your net worth get cut in half over the course of a few weeks with no bottom in sight, it is hard to fully describe how terrifying it can be. If you are going to follow The Simple Path, resolve now that selling in a downturn is simply never an option and don’t even let yourself think about it when it happens.
If you know yourself well enough to know you can’t be sure of staying the course in troubled times, stay tuned. I have a guest post coming up with an alternative strategy for you.
The Market Always Goes Up is the post and phrase that really gets the “you’re too hot” crowd fired up. It’s that word “always” which leads to “You can’t say ‘always!’ What about…
“…when the sun goes out? What happens to your precious stock market then smart guy?”
“…when the US collapses like the Roman Empire? It’s gotta happen someday you know.”
“…when the US economy craters and we’re all living on a barter system. Who’s gonna buy your index shares from you then?”
Or, and more reasonably…
“What if the US goes the way of Japan and suffers a multi-decade economic malaise?”
OK, you got me. Something could happen that will break the stock market’s 150+ year streak of incredible resiliency thru wars, depressions and economic turmoil.
If your analysis leads you to believe we are headed for a multi-decade (or worse) economic disaster, you will certainly want to avoid following my approach.
But understand such things are “Black Swans,” that is, exceedingly rare and unpredictable events. However, there is nothing rare about people claiming to be able to predict them.
The question you must ask yourself is, Do I want to structure my investments for a 1% chance event or for the other 99% of the time? And if so, what exactly do you plan to invest in?
Because if you invest for a Black Swan and it doesn’t come, you run the risk of being very much worse off.
Finally, there are the market timers who claim I am misleading my readers by recommending they stay fully invested and ignore market drops. Wouldn’t it be better, they say, to sell before it drops and buy back in at the bottom?
Well, duh.
Problem is, no one can do this and those that claim they can are trying to sell you something or are delusional. How can I be so sure?
Nothing, and I mean nothing, would be more powerful than being able to time the market in such a fashion. You’d be far richer than Warren Buffett and far more lionized. Speaking of Buffett, he has this to say on the subject:
“The Dow started the last century at 66 and ended at 11,400. How could you lose money during a period like that? A lot of people did because they tried to dance in and out.”
But, humans being humans, some are forever trying. Indeed an entire segment of Wall Street is focused on “Technical Analysis” which purports to be able to predict future market moves.
Currently, the Shiller CAPE P/E Ratio seems to be in fashion. At least I have readers who keep pointing to it of late. As I write this in August 2017, it is around an historic high of 30 and these folks think it obvious that stock market prices must come down dramatically in order for it to return to the norm.
Of course, the “P” in the ratio (price) is only one half. The market, with its lofty valuations, seems to think it is the “E” (earnings) that will change to the higher and that this is what will move the ratio back toward the norm.
Beats me. I haven’t a clue what the market will do or when. Or how the Shiller CAPE P/E will return to “normal” if ever. This excellent article by Larry Swedroe suggests reasons it won’t:
This Metric in Dire Need of Context
I am, however, convinced that its predictive value is zilch. In 1975 the Shiller CAPE P/E was around ten and in the comments in this post one reader suggested that this made valuations back then “extremely attractive.” Maybe so.
But if you had acted on this metric and invested at that “extremely attractive” valuation in ’75 you would have had seven long, lean years ahead of you. Indeed, in 1979, you would have reached:
…before finally being rewarded with the start of a great bull market three years later in 1982.
P/E ratios rise and fall based on many factors in the market and in the economy. But they are not useful in predicting the market’s direction. But then nothing is. You cannot time the market.
If you disagree with me on this, God bless, God speed and good luck. Yer gonna need it.
Too Cold
When people aren’t chastising me for being far too aggressive, wildly optimistic and blind to the obvious disasters hurtling our way, they are wondering why I am so timid and why I am not preaching more aggressive approaches that have out performed sad little VTSAX over the last couple of decades.
Let’s be clear. There is no claim or prediction in this blog or in my book that suggests that VTSAX will be the single best performing asset in 5, 10, 15, 20+ years. There will always be something that does better. But what that something will be is unknowable as we sit here today and, when we reach that future date and know it then, it will have zero predictive value for the next chunk of time. Past performance does not guarantee future results.
What we do know is that it is exceedingly hard to best the broad market over time and the longer the time period the harder it is. The research shows…
–In any given year, somewhere between 20-40% of active managers will outperform the index.
–Go out 15 years and ~15% succeed in doing so.
–30 years out and the number who can drops to less than 1%, statistically zero.
Of course the real issue is that even though some do outperform over some periods of time, knowing which will at the beginning is impossible.
Further, even if you get lucky, as I did in the 1980s with Michael Price and his Mutual Shares fund, things change. When Mr. Price sold out to Franklin Templeton I and all the other shareholders were left with a dilemma:
https://www.youtube.com/watch?v=7r0iuoj-KNU
Should we stay or should we go?
Price (likely as part of his $500,000,000 buyout deal) and Franklin Templeton made the case that we should stay. The argument was that the outstanding performance wasn’t the work of Mr. Price alone, but the result of the work of the team he had put together and, as such, it would continue. This was (and was proven over time to be), of course, nonsense. Besting the market for any length of time is exceedingly rare and is accomplished by exceedingly rare individuals, not by teams.
We saw this when Peter Lynch left the Magellan Fund and it is one reason I would urge caution to those of you who own Berkshire Hathaway.
These changes create the dilemma of then finding a replacement investment and, when held in a taxable account, paying the hefty capital gains tax due on the success.
For these reasons, and more (read the Stock Series), I dismiss the idea of actively managed funds out of hand. Thanks all the same, but I’ll hold VTSAX (or a similar broad-based index fund) and I’ll hold it forever.
More compelling in this “too cold” category is the fact that there are index funds out there that have outperformed VTSAX over the last couple of decades. If the idea is to buy and hold forever, why not chose one of those?
VSMAX (Vanguard Small Cap Index Fund) is one such. If you look at the chart going back to its inception in late 2000 until today you see it has returned just over 200% compared to VTSAX at just over 100%. Very impressive. And very tempting for an aggressive investor like myself. Maybe you, too.
If so, go for it. But keep a few things in mind:
- Small cap stocks are by their size and nature more volatile than larger stocks. The gains are potentially greater, but so are the plunges.
- Small caps have had a great run. But these things can go in and out of fashion. It might be that the large caps will rule the next decade or so.
- It is easy to say, in the midst of a major bull market, that you will stay the course and not panic when the Bear comes growling. But unless you lived thru 2007-09 with major money invested and stayed the course, don’t be too sure. It is more terrifying and unnerving than words can express.
As for me, VTSAX is aggressive enough. Besides, I already have the “Too Hot” folks…
….about to tar and feather me.
Not Pure Enough
As I have pointed out many times, when you own a broad based index fund like VTSAX you by definition own a piece of each company held in the fund. Your piece may be tiny, but it is very real none the less.
There are some (maybe most) folks out there who are very uncomfortable with having ownership in certain companies and types of companies. I know I am.
My solution, and my guess is the solution for most following The Simple Path, is to maximize returns with VTSAX and then use part of those returns to Give Like a Billionaire to organizations that further causes that speak to our values.
That means, holding our collective noses and living with those companies in the index that give us pause. For some that is not enough, and for you the investing world has created…
…Socially Responsible Funds
The problem with these, as I see it, is…
When you ask your money to do more than make money for you, you are asking a lot. It is akin to having a swimmer compete while wearing a weight belt.
The vast majority of these funds are, and almost must be, actively managed. As you know from reading the Stock Series, actively managed funds have high fees (to pay those active managers) and as we saw above are almost always doomed to underperform.
Vanguard does offer a socially responsible index fund, VFTSX. Its ER (expense ratio) is .22% which is far lower than the active funds you’ll find in this category. But still, this is 5x higher than the ER of VTSAX which Vanguard recently dropped (again, Yay!) from .05% to .04%.
If we track performance since VFTSX started in mid-2000, we see it has returned ~49% to ~72% for VTSAX….
Only you can decide if you do more good in the world by avoiding the “bad” companies in VTSAX or by taking the extra profits from it and deploying them to achieve your social aims. I do know which my chosen charities would prefer.
But even with VFTSX, your definition of socially responsible investing might not be met.
For instance, it holds Wells Fargo and Bank of America. If you adhere to Islamic principles, which forbid charging interest, this isn’t going to work for you.
Its #1 holding is Apple. Perhaps the manufacturing of iPhones in low wage countries gives you pause.
You might also want to be sure your other holdings match your standards. I recently heard a woman rather sanctimoniously tout her selection of socially responsible funds over broad-based index funds while simultaneously bragging about her US Treasury bond still paying 8%. Either she…
- …is completely comfortable with the policies of the United States Government, yet unwilling to own certain companies in the index
- …appallingly ignorant of the investments she owns
- …or breathtakingly hypocritical
The point is “socially acceptable” means different things to different people. The more precise your personal definition, the harder your search for an acceptable fund will be. And when you find it, you can expect higher fees and the performance trade off will likely be bigger.
For you, none of this might matter and that is a very personal choice only you can make. Just be sure you are making it with your eyes wide open.
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Addendum: Please note this policy from my Disclaimers Page…
The investment ideas of others:
Occasionally I am asked to read some book, article and/or blog and dispute the ideas in them. I simply don’t have the time or inclination to do this. I’m not the least bit interested in trying to persuade anybody of anything.
If you read my blog you’ll soon have a very clear idea of my views. You can then read other sources, compare and decide for yourself what resonates.
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Chautauqua UK: The Greatest Week of Our Lives
I may never write another Chautauqua post again. How could I possibly capture the magic and the essence as well as Firecracker does in the linked post above? Not bloody likely, to continue the British accent of this remarkable event from the week just past.
You’re more of an audio/visual type? Shane brought along a drone and Brandon (Not the Mad Fientist one) used it to create this 78 seconds of brilliance:
Brandon (Not the Mad Fientist one) also wrote this very personal post on his Chautauqua experience:
Chautauqua UK & Self Awareness
From Justin….
How Brandon (the Mad Fientist one) plays croquet
My profound thanks to…
- Alan and Katie who pulled it all together and made it run seamlessly
- Firecracker, The Mad Fientist and Alan, who each gave wonderful talks and one-on-one sessions for our guests (and to those same guests for not walking out on mine. Whew!)
- Bryce who added so much more than called for or expected
- most of all, those folks who made the time and effort to come join us and to share their own remarkable stories, ideas and insights
I had an absolute blast with you all!!
Stay tuned. We have very cool plans, and a new country coming for 2018!
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Wait! How can you afford to go to something like Chautauqua???
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A while back I had a blast with Brad & Jon on their podcast Choose FI. So we did another:
and their follow-up conversation about it
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If you are interested, here’s a link to more of my…
podcasts, videos and interviews
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