Thursday, August 25, 2011

Investing Reinvented

Especially in these tight times that will likely be with us for the foreseeable future, whatever savings we have should be invested wisely.

Fortunately, it's far easier than financial advisers--who make their money by making us feel we need them--would have us believe.

Even many sophisticated investment advisers agree that the following no-brains-required strategy is likely to, over the long run, yield better results than most investors obtain using strategies that are far more time-consuming, anxiety-provoking, and requiring great expertise or paying a hefty fee to a financial adviser.

1. Keep most of your money in a low-cost, no-load mutual fund. They offer greater potential rewards than a bank CD but with greater risk. One of the best is a Vanguard All-in-One Fund. Those come in different flavors depending on your risk tolerance and how long you plan to keep your money invested.

1a. If you're in the top federal tax bracket (the 35% rate), you might be better off in a tax-managed fund such as the Vanguard Tax-Managed Capital Appreciation Fund or the less aggressive Vanguard Tax-Managed Balanced Fund.

Do not try to time the market. Every time you have an extra $500-$2,500 to invest, do so that day. That way, your money goes to work for you immediately. Also, that automatically buys you more shares when prices are low, fewer when prices are high.

2. Keep an amount equal to six months living expenses in one of the nation's highest yielding bank CDs. How do you find them? Easy: lists them daily. It feels great to see your savings grow. It's like magic--you earn interest on your interest. That's making money without having to do a thing--and with bank CDs, there's essentially no risk, especially if you choose one of the banks with a high safety rating.

2a. If you're in the top federal tax bracket (the 35% rate), you might be better off in a Vanguard tax-exempt bond fund. than in a bank CD.

I believe that all citizens should be taught that model of investing. It would likely result in more net assets for the public, more confidence that it's worth saving for a rainy day, and a greater sense of security, something we could all use in these insecure times.

Disclaimer: I am not a professional investment adviser and thus am NOT giving investment advice here. This merely is a model I've used in my investing. Also, except for the bank CDs, please note that these are uninsured investments and subject to losses. Finally, I am not affiliated with the companies mentioned in this article and have nothing to gain from your investing in them.


Anonymous said...

Marty, you have some great ideas always. I believe this may have been a sound investment model in the past, but high inflation is changing things. Unfortunately, dollar-denominated assets are losing value more quickly than anyone seems to realize. I want to refer you to a website you may find useful: If inflation is calculated the way it was post-WWII, then we are now facing inflation of close to 11%, and NOT 4% as is published officially. This means a more active investment model is necessary if one is to have any chance at all of preserving or increasing one's hard-earned wealth. Since the government will likely continue printing money into the future, inflation will continue at this same high rate or even increase. If anyone wants to invest in dollar-denominated assets, e.g. stocks, bonds, CDs, T-bills, etc. those assets must either hold their value or beat inflation. The only things that traditionally hold their value over time are precious metals, certain commodities, and land/real estate, and the only assets that are currently beating inflation are somehow related to the emerging markets. For instance, your favorite, Vanguard, has an MSCI Emerging Markets ETF that has had 13% annual growth since 2005, for a total of nearly 120% cumulative growth. If you are interested in the history of paper currency (I'm a big nerd for this) I recommend reading Ralph T. Foster's "Fiat Paper Money: The History and Evolution of our Currency." He documents what happened to every major paper currency since the Chinese first started using fiat paper money in 1024 AD. As far as I know, (I could be wrong about this), every government-issued fiat paper currency that has ever existed eventually succumbed to inflation, increasingly rapid depreciation, and finally destruction, leaving the people holding colorful rags of paper. Exceptions were governments that had a paper currency that was FULLY backed by gold or silver, such as the early USA, Switzerland, and certain European countries in the past. Nowadays, over 92% of the money supply in the US is electronic, so we don't even notice inflation because it's all just a bunch of numbers in computers. At least during the Weimar hyperinflation, people could feel the effect, having to push wheelbarrows full of cash to buy food.

To sum up, I do not know if or when the US dollar will become totally worthless, but it's a safe bet that it will lose its value at an accelerating pace into the future.

Marty Nemko said...

Thank you, Anonymous. I could be wrong but I'm not in favor of your plan, especially, for the average person, for the following reasons:
1. The commissions are large.
2. The buy-ask spreads are wide.
3. The transaction costs around real estate are high.
4 Most important although most ethereal, I do not want to bet against the best of humankind. They are the people who are running the world's premier companies. And I'd rather bet on them than anyone. That's why the emphasis on the major stocks in my investment philosophy.
5. In what will likely be a roiling economy for a long time to come, probably in a downward spiral, the security of AA and AAA bonds (embedded in those funds) and US govt-backed CDs, while, as you say, perhaps yielding a net after-inflation return, will look pretty good in comparison with other investments.
6. The investment philosophy I tout here is idiot-proof. Anyone can execute it easily, unlike what you propose.

That all said, dear Anonymous, you could well be right.

John said...

I wish I had reason to be confident regarding the future of U.S. currency, as I wouldn't have felt impelled to get out of the dollar and dollarized investments and move into precious metals, select foreign currencies, and dividend paying commodity stocks in (largely) emerging economies.

While I get information from numerous sources, I believe this commentator best connects the dots for those seeking a boost up the learning curve:

Perhaps you're familiar with the Hyperinflation Update 2011 report, and it's author economist John Williams, who provides a more accurate (honest) interpretation of U.S. government stats.

Marty Nemko said...

I do believe the doomsday scenarios have some probability of being correct, in which case, yes, investing in commodities and gold would be called for.

But I'd rather bet my money on the world's leading companies. Do remember that those Vanguard Funds I recommended do invest in those top U.S. and overseas companies, all of which have significant investments in both small and large emerging countries, e.g., China and India. So the apparent domestic investment recommended in this post truly is a global one.

ST said...

Before the recession (by luck), I started getting my financial house in order, so when it hit, even though it was bad, I knew I had about a years worth of expenses in the bank (cash), and could probably weather a layoff. I didn't get laid off, in fact I had gotten raises (maybe a little less than normal).

I invest in targeted retirement funds at both TRowe Price (work 401(k)) and Vanguard (my own Roth IRA). I find the low cost mutual funds that are close to index funds (following a basket of stocks) are the best way to go. Even though I'm a numbers guy and think I'll get into "playing the market", I never really do, so the no brainer way to go is the best.

I'll never use a broker, either. Back in 2001, I moved my "thrift plan" from one company (had been in a mostly cash equivalent vehicle) to another into an IRA and the guy put it all in tech stocks (Microsoft, Cisco and a tech mutual fund). Well, it dropped by two thirds during the dot com crash. I have since moved it into a Vanguard target fund IRA and it is STILL only two thirds of what it was back in 2001 after those two major drops in the market.

Now, my answer to brokers is, "What on Earth are you going to do better than I can do myself. I'm sure you did very well during the recession".

Otherwise, my Vanguard has risen and fallen and risen, and is a little bit above my contributions (Roth). Since its after tax, I can withdraw some day without paying taxes. I could also withdraw contributions in a real emergency (but I still have the over a year's worth of an emergency fund).

Lately, one thing I've done is move a bunch of money into my checking account, because they're paying 4% interest (up to a limit) as long as certain stipulations are maintained. Since I do those already, I figure that's also a no brainer.

One other key to all of this, is you have to develop a discipline to saving. No matter how simple or complex your strategy, if you don't have the emergency fund set up, and regular allocations to savings accounts, none of this matters.

ST said...

By the way, my emergency fund is in an online savings account similar to ING Direct, and pays almost as much as the top CD's right now, and access to the money is only a couple of days, whenever you need it.