Elite Eight tournament for investing

Basketball hoop

March is here and that means so many good things—winter is giving way to spring, flowers are starting to bloom, and of course March Madness (the college basketball tournaments for those of you unfamiliar with the lingo) is starting.  Normally I would totally consume myself with 10+ hours of games a day on multiple TVs at the same time, and Foxy Lady would become a basketball widow for the next three weeks (and that still may happen).  But now that I’m doing this blog (plus Pitt didn’t make the tournament), I thought I would have a little fun and combine the two.

So here is my tournament-style contest to determine what is the single best strategy/approach out there to help you build your personal fortune.  I whittled it down to eight “teams” which will face off against each other until there is one champion.


Without further ado, here are the teams:

  • Asset allocation—investing your portfolio into different asset classes like cash, bonds, and stocks.
  • Diversification—buying different stocks or bonds to avoid “putting all your eggs in one basket”
  • Free money—taking advantage of free money from accounts like 401k’s or stock purchase plans
  • Index mutual funds—choosing mutual funds that invest in broad indices like the S&P 500 or the FTSE.
  • Mortgage—picking the best mortgage that gets you the house you want but pays the lowest amount.
  • Saving rate—simply put, how much you’re saving every month or every year.
  • Starting early—beginning putting money away at an early age
  • Tax optimization—using tax advantages like 401k’s, IRAs, 529s, and other accounts out there that let you eliminate or defer paying taxes.



Every day for the next two weeks I’ll break down the “game” between two of these investing strategies and determine which one, taken in isolation, will have the more important impact on your nestegg.  But in this tournament there are no losers (I’m getting ready for when I start coaching Lil’ Fox’s little league), and certainly each of these principles is very, VERY important as you think about your investing strategy.

The idea of this tournament (other than having a little fun while the real players are putting the balls through the hoops) is to help finish the sentence: “if you only do one thing in investing make sure you . . .”  I’ve evaluated these strategies along a few criteria:

  • How large of an impact could doing this right have on your nestegg? Are we talking about a few thousand dollars over the years, or could this amount to the millions?
  • How commonly do people screw this up? Is this something that everyone is already doing (so thanks for telling us something we already know, Stocky), or is this something that most of us can probably benefit from?
  • How easy is it to do correctly? Is this low hanging fruit that we can achieve with just a couple hours of work, or is doing this right going to require a huge time commitment and possibly a PhD in multivariate statistics?

Put all those together, and I’ll try to pick which of the head-to-head strategies “wins” the game.  I hope you have as much fun reading these next few blog posts as I had writing them.  If you’re feeling particularly ambitious, go ahead and fill out your bracket and send it to me and we’ll see how well your picks line up with mine.

Week in review (13-Mar-2015)

13-Mar-2015 graphic

What a crazy week on Wall Street.  Tuesday we were down over 1%, Thursday we were up 1%, and then Friday ended the week down another 1%.  Net for the week markets ranged from being about flat with Pacific was down only 0.3%, to really taking it on the chin with Europe being down nearly 2%.  So what was the cause of all of this?


Euro depreciates sharply against dollar:

The major news event that dominated the entire week was the major decline of the Euro to other currencies and specifically the dollar.  Pundits spent the whole week debating if this was good or bad for Europe and good or bad for the US.  Based on the stock returns for the week, it seems like it’s better for the US—the US markets were down about 0.6% for the week while the European markets were hammered about 1.9%.

The reason behind all this is if your currency depreciates it makes imports more expensive and your exports less expensive to other countries.  So this is supposed to have a bit of a stimulus on your domestic economy because of a twin effect—exports from other countries are more expensive so your people buy domestic instead; also, your exports are more affordable abroad so foreigners buy more of that.  So on the surface this should be good for Europe and bad for the other economies.

But the deeper issue seems to be that Europe’s economy is not that strong right now, plus you have the nightmare situation in Greece which could potentially spread to Spain and Italy.  Because of all that, the currency is in free fall, so when you evaluate things it’s true that the Euro depreciation should be good for the Eurozone economies from an import/export perspective, but that is more than offset for the negatives that are driving the value of the Euro downward.  Any way you look at it, it sure made for a wild week and people swung back and forth from this being a good or bad thing.  Undeniably, it makes the prospect of the Fox family taking a European vacation much more tempting since our dollars will stretch so much further.


Apple watch

Apple watch revealed:

Apple unveiled its latest gadget, the Apple watch, on Monday including a $10,000 version if you really like the gold look.  In general Apple is beloved by Wall Street and the general media so this story got tons of coverage.

The consensus seems to be the product won’t be a blockbuster that will change the world, and the holy grail of a super-functional device that fits on your wrist but contains all the features of a smartphone is still in the future.

If it’s such a disappointment, then why am I writing about it?  Although it remains to be seen if the Apple watch will hit the mark, it does represent some incredible innovation.  Just like iPods changed our lives, and then iPhones and iPads, eventually this product or something like it will get traction and become a staple for us, creating tremendous value for its users and tremendous profits for the company that does it.  And that is really the cornerstone of the American economy—innovation—and that is why I am always to optimistic about investing in stocks, even on really down weeks like this one.



Video streaming displacing traditional television:

As if we needed to be told, numbers came out that showed that traditional cable television ratings were suffering in a major way due to streaming services like Netflix, Amazon Prime, and Hulu.  Similar to the idea of the Apple watch, in this case people aren’t watching less video programming (see you can’t even say “watching television” anymore because there are so many different devices they could be watching on).

Just some incredibly innovative companies are finding a way to make things more convenient, less expensive, and generally better for consumers.  This has led to amazing stock performance for those companies at the expense of some of the traditional media outlets.  As an investor, this changing of the guard will clearly have its winners and losers, but net-net you’ll come out ahead because a better product is being created which attracts for customers and leads to more profits.  Again, the innovation engine is clearly chugging in the US and around the world, and that will lead to higher stock prices for those companies who can best bring those advances to markets.


So there you have it.  Some sour political/economic news out of Europe put a damper on the week, but I still firmly believe that the value creation is still occurring at an amazing pace.  We won’t have a movie review tomorrow because next week I will have a post every day where I’ll be having a March Madness style tournament to see which investment strategy is the best.  Hope you have a great weekend.

Figure out your investment time horizon


“Time is on my side, yes it is” –Rolling Stones, Time is on my Side

Okay, you’re ready to join me in the land of financial freedom.  One of the first things you need to figure out your time horizon for the money you’re saving.  Will you need that money in a couple months or sooner, in the next couple years, in the next ten years, or at retirement?  These answers will have the greatest impact on how you invest it.  Here is my take (and as always, I’m not an expert, and these are just my opinions; any predictions I make about the future are just based on historical trends, and you should establish your own opinion on the future).


Extremely short-term (tomorrow to next 6 months)

Your property tax bill, ‘Lil Fox’s preschool tuition payment, living expenses if you’re retired like Grandpa Fox.  With such a short time horizon, you really don’t have a lot of options.  For amounts less than $5,000, it’s probably easiest to keep it in your checking or savings account, even though the typical interest rates on those accounts are practically zero.  Money market accounts would offer a little more interest, but even then you’d be looking at 2% or less, so it may not be worth the $1.50 per month in interest you earn on $1000 to set something up.

If you’re talking a larger amount of money, you want something that has a very low risk of decreasing in value, but still offers an interest rate that makes the effort worthwhile.  Short-term bond funds like Vanguard Short-Term Bond Index (VBISX) may fit the bill.  There’s a pretty small chance that your investment will decrease in value (but it’s not 0% so be prepared), but you can still earn a decent ~3% interest; that’s about $25 every month for a $10,000 investment.


Short-term (6 months to 3 years)

Car fund because you have a 2001 Honda Civic with a bad transmission (the Fox family in June 2013), vacation you want to take to Hawaii without the kids two years from now.  Because you have extra time compared to the “extremely short-term”, it’s definitely worth it to invest for any amount more than $500.  Similar to above, you probably want a bond fund of some sort, but because of the extra time you can take on a slightly more volatile investment and grab the higher return.  Something like Vanguard Medium-Term Bond Index (VBIIX) gives a decent return, about 4% historically, with a pretty low risk that you’ll lose more than you gain over a year or two.  Just so you hear that “cha-ching” sound in your head, if you invested $1000 in a bond fund, after three years at 4% interest, you would have about $1125, a tidy little $125 profit earned for nothing more than being smart about where you put your money.  That could fund those Mia-Tias on the beach in Hawaii while you remember all the extra free time you had before the kids came along.


Medium-term (3 years to 10 years)

Mini Fox’s college fund, down payment on Mrs Fox’s dream vacation house down the shore.  With a longer time horizon, your options really start to open up.  A few years starts to give you the time to weather some moderate financial storms, but probably not enough to go fully into stocks (ask someone who invested money in October 1929 or November 2000).  The winner is probably some balanced fund like the Vanguard Balanced Index Fund (VBINX).  These balanced funds will have a mix of bonds, with the price stability they provide, and stocks, with the potential for higher returns those provide.  For those closer to the 10-year mark or those willing to take a little bit more risk for a higher return, you could jump into an all-equity mutual fund like Vanguard Total Stock Fund (VTSMX).


Long-term (10 years to retirement)

Mr Fox’s 401k, Mrs Fox’s IRA.  Once your time horizon gets past 10 years, things start to get interesting and fun.  Because this is where most of your savings for retirement should be (unless you’re Grandpa Fox, enjoying retirement), this is where I’ll focus most of my time.  Also, because this is where you have the most options, this is where there’s the biggest risk that you can screw it up and cost yourself tens or hundreds of thousands of dollars over the years.

While we can spend a ton of time discussing this (and believe me, I will) a simple starting point on where to put your money for something like this is the Vanguard Total Stock Fund (VTSMX).  In time, we’ll discuss other investment options but this is a good start.


In the cases of the medium-term and the long-term strategies, at this point you are truly entering the world of investing.  Welcome.  Your returns on any particular year can range from -10% or worse to 20% or better, and you can count on the fact that sometimes it will be a bumpy ride.

Inflation won’t be as bad as everyone thinks


“Ocean waves will grind the greatest boulder into sand if given enough time”

Inflation, the general rise in prices over time, is a powerful and unrelenting force which is eroding the value of your money every year, every month, every day.  How powerful is inflation?  Look at this simple example with my neighbors, Mr and Mrs Grizzly.

If they want to spend $50,000 per year (in today’s dollars) in retirement they’ll need about $1.2 million on the day they retire (40 year retirement, 6% return, 3% inflation).  Every year in retirement they’ll spend a little more than $50,000 to buy what $50,000 buys today because of inflation.  However, if you crank the inflation knob up a notch from 3% to 4%, they’ll need $1.5 million.  Up to 5%, they’ll need $1.8 million.  What makes inflation so scary is that the impact is huge—a 2% increase requires your nest egg to be $600,000 larger—and it’s also completely out of your control.

In the US, inflation is tracked by the Bureau of Labor Statistics, a division of the Department of Labor, with a tool called the Consumer Price Index (CPI).  Basically (I know it’s much more complex, but for brevity’s sake) it looks at a general basket of goods that people buy and tracks how those prices change over time.  It’s meant to track EVERYTHING that consumers buy: food, housing, cars, airline tickets, medical expenses, entertainment, and on and on and on.  The US boasts an amazing record of tame inflation over the decades, but even then it’s been quite a roller coaster: in the early 1980s, according to the CPI, inflation was averaging about 12%, and it has averaged about 1.6% since 2009.

That just ruined Mr Grizzly’s day.  So he needs $1.2 million today to retire, but depending on inflation it could range from $1 million to $8 million if it got as high as it did in the early 1980s?!?!?!  No bueno.  How the heck is he supposed to plan for a range like that?


The unfortunate answer is: there really isn’t a good answer.  Inflation is going to do what it will do, and there isn’t a lot you can do about it as an investor.  The US government sets an inflation target at 2%, but reasonable people can debate how good Washington is at managing stuff like this.  When I do my planning for the Fox family, I personally use 3%.  But there is some good news—I actually think the CPI waaaaaaay over estimates inflation and that it is going to be on the lower side of historic averages, which is a good thing for those of us saving for retirement (as always, this is just my opinion and may turn out to be quite wrong, also with my projections I am not predicting the future).

The CPI is supposed to compare apples to apples, so basically what did you buy last year and how much would that cost if you bought the exact same stuff this year.  I think over the short-term the CPI works pretty well; I’d believe that prices in 2014 were about 2% higher than in 2013 (in line with the CPI’s figures).  But over longer periods of time, the CPI really fails because I think it does a really lousy job of dealing with major technological advances.  So when you look at 10 or 20 or 50 years, which happens to be the time horizon we’re looking at for retirement, I think the CPI really overestimates inflation.

If you go back to 1965 (I picked 50 years ago, because I figure I have 50 years to live, so that’s my time horizon), the CPI says prices have risen about 7.5 times.  So something that cost $100 in 1965 would cost about $750 today.  If you do the math, that equates to about 4.1% per year.  We saw the impact that the level of inflation has in the above examples (pretty major impact), yet let me tell you why I think the government is getting it wrong and there is some real relief.  This is going to be a long post (but I hope a valuable post), so get comfortable.




In 1965 you could get a new 4-door sedan like the Chevy Impala for about $3000.  Today you could get a new 4-door sedan like the Honda Civic for about $20,000.  If you do the math, that calculates to about 3.9% inflation per year, right around what the CPI says (I know, you’re saying: “Stocky, so far I’m not impressed.”)  But remember, the CPI is supposed to compare apples to apples; when you compare a 1965 Impala to a 2015 Civic, the Civic has a ton of advantages.

The Civic gets 35 miles to the gallon, while the Impala got about 12.  The Civic has incredible safety features like airbags, antilock brakes, backup camera, and on and on; the Impala has seat belts across your lap (they didn’t even have the shoulder ones).  The Civic has Bluetooth to connect to your MP3 player, while AM/FM was an option on the Impala.  A new Civic will probably last you 200,000 miles or more, but your Impala would be lucky to get to 100,000 (like “go-out-and-buy-a-lottery-ticket” lucky).

Put all that together and how much of that 3.9% annual price increase is due to inflation, and how much is due to the Civic just being a better car?  It’s not an easy question to answer, but I would think an awful lot of the price increase is because you’re getting a safer, more fuel-efficient, and more durable car . . . just a better car.

To look at it from a different angle, we know $3000 in 1965 would buy you a new Chevy Impala.  What would $3000 buy you in 2015?  A quick look at Autotrader.com shows that for $3000 you could get a 1998 Honda Civic with 150,000 miles.  Between those two choices, each of which is $3000, don’t you have to pick the Civic as the better car?  It’s safer, much more fuel efficient, has more convenient features (cruise control, automatic windows), and it will probably last longer.  All that says that inflation was actually a lot less than the 4.1% the CPI said or the 3.9% we calculated.



Housing is the biggest expense that people have, so how does that come into play?  In 1965 the average rent was about $90 per month while in 2011 it was around $870 which calculates to about 5.1%.  That’s higher than the CPI, but before we freak out about runaway inflation in the housing market, let’s do the apples-to-apples comparison.  In 1965 you were getting a place where you might have shared a bathroom with your neighbor and a phone too.  You had an icebox instead of a fridge (literally a cabinet that you kept cool with blocks of ice), and radiator heating.

Today you have granite countertops and stainless steel appliances, central air conditioning, and a fitness center downstairs if you’re lucky.  How much of that 5.1% increase is due to prices rising, and how much is due to you just getting a much, much nicer place with much better amenities?  Today, I’m sure if you tried hard enough you could get a total armpit of an apartment that was completely vintage 1965, and I bet you probably wouldn’t pay more than a few hundred bucks for it, showing that prices for apples-to-apples apartments haven’t risen near that 5.1% level.


Heart Stents


Ahhhh.  This is where you’re saying: “But what about healthcare?  Medical prices are spiraling out of control.  That’s where they get you.”  The Medical CPI shows that prices have increased an astounding 17 times since 1965—about 5.9% annually.  Mr Grizzly just had a minor aneurysm, which he knows is really going to cost him.  But before you despair, do the apples-to-apples comparison and realize that the quality of healthcare has gone up exponentially while costs it can be argued have come down.

Let’s say Grandpa Fox had a heart attack in 1965.  First, his chances of survival weren’t very good, but let’s assume he survives and gets coronary bypass surgery.  After two months of recovery he’s back at home living his normal life, but now with a sweet scar running all the way down his chest from the open-heart surgery.  That surgery back then would cost around $6000 (it’s hard to find exact numbers on this so I estimated; any reader who has better data please let me know) which is a drop in the bucket compared to the $100,000 price tag bypass surgery costs today.

Unfortunately, Grandpa Fox passed his lousy heart genes on to me.  However, instead of a heart attack hitting me out of the blue, my doctor discovers early on that I have high cholesterol and prescribes me Lipitor which costs about $300 per year, and that is even lower if you go generic.  My heart problems get taken care of for much less money, plus I didn’t have to go through a high-risk surgery and brutal recovery.

But maybe Lipitor doesn’t work, so after a while they find my coronary arteries are severely blocked and I get a stent (of course, I only use a Medtronic brand stent).  I have a non-invasive surgery where they insert the stent through a tiny incision in my hip, I go home that evening, and it all costs me about $20,000.  Like before I probably would have a much better outcome than Grandpa Fox, at about three times the cost which equates to about 2.4% inflation over the 50 years.

So while medical expenses have skyrocketed (and I totally agree they are out of control), if you look at the idea of taking someone with a heart problem and getting them back to health, prices have actually gone way down since 1965.  So much for aggressive inflation here; you could actually argue that there has been deflation.



So let’s compare apples to apples, literally.  Apples in 1965 cost about 16¢ per pound while today they are about $1 per pound (at least in LA)—that equates to inflation of about 3.6% inflation.  But there is actually a difference between 1965 apples and 2015 apples.  Back then there was this weird concept of fresh fruits and vegetables being “in season.”  You could only buy apples certain times of the year which was around late summer and fall (I had no idea so I actually had to look this up, which kind of proves my point).  Today fresh fruits and vegetables are in season when your grocery store is open and you have money.  So again, you’re paying more but you’re also getting a better product as well—year round fresh fruits and vegetables.


And there are many product categories whose prices have fallen drastically (air travel, anything with electronics), and others that we used to be charged for but are now free (telecommunications, news articles).  The whole point of all this is that depending on how you look at it, inflation isn’t going to be nearly as high as the CPI says which is a huge help to savers.  That means your dollar will stretch further in retirement than you might otherwise think, and that you’ll need less to retire on.  Consider this my gift to you.

Book review: The Millionaire Next Door



“I drink two kinds of beer—free and Budweiser”—millionaire interviewed in book

The Millionaire Next Door definitely deserves a place near the top of any list of books on personal finance.  Its two authors, Thomas Stanley and William Danko, were two professors who undertook a massive study of America’s millionaires to figure out what made them tick.  How did they get rich? How did they stay rich?  And generally, what are their views on money?

Reading this is almost like watching an archaeological documentary on PBS with Will Lyman narrating: “Americanis Millionairo is a subspecies whose prodigious wealth-building abilities have been studied for centuries.”  Basically, the authors conducted thousands of interviews with millionaires and asked them questions on nearly every subject of personal finance, and the book is those survey results.  Nearly every aspect of millionaires is examined to find common themes—working income, country of origin, education, divorce status, occupation, Rolex-ownership, and a hundred others.

Distilled down to its simplest, the book reaches two conclusions which are really opposite sides of the same coin:

  • Frugal spending habits are the single biggest factor to being able to become a millionaire.
  • Flashy spending occurs among a small minority of millionaires, and in fact flashy spending tends to be a major factor to not becoming a millionaire.

For those aspiring to be millionaires it’s a wonderful how-to guide on becoming rich the slow-but-steady (and boring) way of spending less than you earn, making luxuries an special indulgence instead of a daily staple, and generally have a grounded view on life and expenditures.  It’s analysis shows that most millionaires get that way by prudent spending and diligent saving; not by having jobs that pay million dollar salaries, not by inheriting the money from rich relatives, and not by “hitting it big” in some venture.   It’s this element of the book that is most powerful—it democratizes millionairehood (I just made that word up).

For those who are already millionaires and became so by leading a life with “sensible spending”, I think it provides comfort that they aren’t alone.  Our society is bombarded with images of what “rich” people should look and act like.  In the 1980s shows like Lifestyles of the Rich and Famous (I must confess a favorite of mine as a kid) celebrated the over-the-top extravagance of the wealthy.  That tradition has continued with a myriad of shows like Platinum Weddings (a favorite of Foxy Lady) and Million Dollar Rooms to name just two.  However, the book does a tremendous job of breaking through those stereotypes to show that the vast majority of America’s wealthy are just normal people who spend their money sensibly or even frugally.


In true academic fashion (one of my criticisms of the book is that is reads more like a research paper than a bestseller, but it is a best seller, so what do I know?) the authors break down pretty much every demographic element of millionaires and just as interestingly, those people who make a bunch of money but aren’t millionaires.  Some of the findings are obvious like there are a lot of millionaires who started their own business.  But others are make a ton of sense but wouldn’t have been top of mind as such a determining factor; an example of that is divorce which the authors describe as a millionaire killer (Foxy Lady—have I told you how much I love you?).

They slice and dice things and thousand different ways.  What do you want to know about your average millionaire?  Average age of car (2-3 years), percentage self-made (80%), attended public schools (55%), ancestry (Russian followed by Scottish), percentage who have a JCPenney card (30%), and on and on.


Of course, I look at these things through an investing lens, and I was a bit disappointed that the authors spent so little time on this subject.  In a book with almost 300 pages, only about 4 or 5 are dedicated to what millionaires do when investing their money.  And this seems like a major gap considering that investing can be as responsible for building wealth as earning the money in the first place.  They cover the most the millionaires have paid for a suit, a watch, a pair of shoes; but they don’t talk about what type of investments they make?  Seems weird.

The three major takeaways about investing you get from the book are:

  • About 80% of millionaires do invest in stocks and other securities. This seems obvious, and actually a little low.  What are the other 20% doing.
  • Most use a “buy-and-hold” investing strategy as opposed to actively and frequently trading stocks. I’m glad to see this (this is a topic for another blog post).
  • Considerable time is spent discussing how millionaires go about hiring a financial advisor.

If I had my way I would have loved the authors to really dive in here.  If you believe that the point of the authors writing this book is to show the masses how they can become millionaires (and I believe that to be true), then after they adopt the “frugal” spending habits, then it becomes important to know what to do with the money after they’ve saved it.  Here is my list of a few questions I would have loved to know:  What percentage use a financial advisor versus do it themselves?  Do they tend to invest in individual stocks or mutual funds?  How much of their portfolio is in stocks versus bonds?


Overall, the book reads a little stiff, and at some times it gets preachy (especially the section on how to discuss money matters with your kids) so that’s a bit of a turn off.  Also, it was written in 1999 and because of that there are a lot of areas that are quite dated and don’t really apply to the world 2015.  But it does provide tremendous insights into their everyday activities of these people and how those have help them accumulate so much wealth.  For all that it gets 2 ½ stocky foxes.

2.5 foxes


As a closing note, I want to thank my coworker who gave me this book as a Christmas gift back in 1999.  You know how you are, and I hope you know how much I enjoyed reading this.

Week in review (6-Mar-2015)

Weekly review (2015-03-06)


The week was dominated by moves (or anticipated moves) by central banks.  We had a pretty flat week until the bottom fell out for everyone.  Pacific stocks did the best (Thank you China) being down only 0.7% while the US and Emerging stocks were down about 2%.  That leaves the European stocks which really got hit hard, down almost 3%.  Wow!!!  So what caused it all?



NASDAQ hits 5000 for first time since 2000:

On Monday Wall Street celebrated a bit of a milestone when the NASDAQ returned to above 5000 for the first time since the internet bubble popped 15 years ago.  It wasn’t a story to drive the market, as much as it was a story about how the market has been driven by amazing companies like Apple, Whole Foods, Amazon, eBay, Amgen, Cisco, and others.  Of course that didn’t stop all the news outlets from devoting considerable time to remembering 15 years ago.  My favorite part was looking at the CNBC footage from then and the hairstyles in vogue at the time.  You never realize how much those things change, even in a few years, but man do they ever.

Interestingly, the milestone did prompt a lot of soul-searching  as to whether or not we were in a bubble now, the way we were back then.  15 years ago, a lot of people got taken up in the euphoria of the skyrocketing stock market, only to get crushed when the party ended.  It’s natural to want to look at that now to avoid those painful experiences, but as we learned in A Random Walk Down Wall Street, crashes are really hard to predict.  Overall, this was a nice trip down memory lane, but nothing that really had meaningful implications for the markets.


Both China (Monday) and Europe (Thursday) ease monetary policy:

Janet Yellen isn’t the only central banker that can monkey with interest rates to drive markets.  The week started on Monday with China lowering its key interest rate.  As you would expect, this had a very positive effect on Pacific and Emerging markets.  However, this is always a bittersweet move, and one that may have some major implications in the future.  China is lowering its interest rate to spur economic activity because it thinks its economy is slowing.  In the past several years, China has been a manufacturing juggernaut, so to think that the second biggest economy in the world may be slowing down is not a positive for stock markets.

In a similar story in a different part of the world, the European Central Bank announced that it would mimic the US’s quantitative easing program by buying over €1 trillion (trillion with a “t”) in bonds.  Broadly speaking, the European economy is a mess right now.  At best you have the stronger economies experiencing slower growth, and at worst you have Greece in shambles and other countries like Italy and Spain thinking about following Greece’s “budgets be damned” path.  Certainly quantitative easing seems to have worked for the US (but the jury is still out as to its long-term effects), but Europe is in a very different place economically and politically compared to the US.  You kinda get the sense that the ECB is just throwing a bunch of “stuff” against the wall and see what sticks.  Not surprisingly European markets were down more than anywhere else, although they had a slight recovery on Thursday with this news (which was erased and then some on Friday).

There is no doubt that lowering interest rates (what China did) and providing liquidity (what Europe did) has a positive short-term effect on stocks.  But it’s like eating sugar; that gives you a short burst of energy, but it’s not sustainable in the longer term.  Continuing that analogy, a healthy body needs real food instead of sugar, just like a healthy economy needs earnings growth instead of government stimulus.  That’s why the markets were up on the day the stimuli were announced but have since fallen lower as people realize the state of the economy as the reason “why” the stimulus was needed.



Benjamin Netanyahu speaks to the US Congress:

When the Israeli prime minister spoke to Congress (without President Obama’s blessings) on Tuesday he took the gloves off and started blasting the Obama administration’s proposed treaty with Iran over its nuclear program.  As the speech went on and became increasingly belligerent, stocks softened moderately, but oil started to increase.

The fear of course is that Netanyahu’s speech portended armed conflict in the volatile Middle East.  A regional conflict wouldn’t be that big of a deal since the Middle East only represents about 3-4% of the world economy; that’s a significant amount but not a lot.  The initial concern is oil and the disproportionate amount that is produced there, and you saw how the threat of war impacted oil prices for a day (of course, the enormous glut in world oil reversed those gains quickly).

The bigger concern is that region has a tendency to draw other countries into its conflicts, especially the US.  As we know, wars are expensive and tend to be bad for the stock market as a whole (although good for particular industries like defense).  While the odds of that are pretty slim in my opinion that there is another Middle East war in the US’s future, Netanyahu’s speech showed the chances are rising, and the stock market acted accordingly.



Supreme Court hears arguments against Obamacare:

This is actually a big deal.  Healthcare has been one of the huge drivers of the US economy (and the world economy) during the past several years.  The Affordable Care Act really reshaped the landscape of the industry, and was largely seen as a boon to healthcare companies who started receiving more customers because of the insurance mandate.  Additionally, the government’s subsidies of insurance for lower-income people acts as a huge financial injection from the Treasury to the pockets of the health care industry.

As the Supreme Court reviews a key provision of the law, there’s the potential that all of Obamacare could unravel (certainly something the Republicans want).  That would be bad for the health care companies for sure.  When news came out that Justice Kennedy made some comments that seemed skeptical of the challenger’s case, hospital stocks rose sharply.  But even the uncertainty surrounding all this is bad, making it really hard for these companies to plan very far into the future, and I think that’s another reason that generally you saw stocks soften this week.


Job up but wages stay lower:

Friday’s news was dominated by the jobs report.  The good news was that employment was up, with the jobless rate being at its lowest level in about seven years, so that definitely seems to be a good thing (although the calculation is kinda weird because it doesn’t include people who have stopped looking for jobs).  However, the types of jobs are not high-paying jobs as reflected by the fact that wages were flat.  This means that more people are working, but they are tending to be lower paying jobs which is definitely a sign of underemployment.

Overall this has to be net good news, but of course it would be better if both employment and wages were rising for the economy.  Interestingly markets were down sharply on this news, which is counterintuitive; I think it’s probably because this good news makes it more likely the Federal Reserve will raise interest rates sooner.  But of course, that would change a million more times in the next few weeks.


So there you have it.  A bit of a bummer of a week for the markets considering we were on a pretty sweet winning streak.  Unfortunately, except for the NASDAQ 5000 celebration (ironically, the NASDAQ promptly fell to 4980 after it hit its mark) there seems to be some developments that are genuinely concerning.  I hope you have a great weekend and I’ll see you tomorrow with my review of The Millionaire Next Door.


My optimism overfloweth

“The report of my death was an exaggeration.”  –Mark Twain

A couple weeks ago Robert Schiller published an article warning investors that the next couple decades are going to be tough ones for the stock market, and they should prepare themselves accordingly.  I read this and I have to say that I disagreed with him.  Professor Schiller won the Nobel prize in economics last year and is a world renowned professor at Yale; I was one of 100 students to graduate with honors from the University of Chicago’s MBA program in 2006.  It should be pretty obvious which of the two of us is just a little more credible.

The premise of Professor Schiller’s argument is that stocks are at all-time high valuations, and they have to come down.  Intellectually I agree with this, but I think he’s missing the mark in two major ways:

Nobel laureate, Robert Schiller


Predicting major moves in the stock market is really, really hard

As we learned from A Random Walk Down Wall Street (I’m sure you all went out and read it after reading my incredible review, right?), it’s nearly impossible to predict when things will happen with the stock market.  In 2015 Professor Schiller is predicting we’re going to have a major correction/sustained period of flat stock prices.  Sure, he’s probably right that that will happen, but is it going to be in 2015, or in 2020 when stocks are 50% higher than they are today, or in 2030 when they are double what they are today?

I think this is where history is a good guide.  The 1980s were an awesome decade for the stock market* with returns averaging an astounding 14% per year.  As you can imagine, there were a ton of pundits saying the stock market rose too fast, valuations were too high, things just weren’t making sense–you had to get out of the stock market.  What happened?  The 1990s came along and outperformed the 1980; stocks returned 18% per year.  People didn’t realize that the computer revolution of the 80s was leading to the internet revolution of the 90s, and if you missed the 1990s investing boat because the 1980s had been so good, you were hating life.

Even look at the internet boom and the bubble that eventually burst in 2000.  In the 1990s year after year, the stock market was putting up tremendous gains.  I remember in about 1997 or 1998 the chorus of naysayers was deafening; they were predicting that valuations didn’t make sense, a bubble was building, and stocks were going to plummet.  It turned out they were right, but the plummet happened 4-5 years later.  In the meantime, the DJIA went from 6800 in 1997 to a peak of 11,200 in 2000.  Of course, the bubble burst, but the stock market only went down to 7600 (Sep 2002).  Sure the pundits were right .  . . sort of.  The bubble burst, but if you took their advice when they gave it, you would have missed out on a market that rose from 6800 to 7600 with a crazy ride in the middle.

The history of the stock market is littered with these examples; literally everyday you have some market expert saying the end is near, yet the market consistently proves them wrong.  Professor Schiller is much smarter than I am, and there probably will be a time they the stock market crashes or goes sideways for a long time.  But no one knows when that is (and I would think Professor Schiller would agree that he doesn’t know that either), and you might miss out on a great run in the meantime.


Innovation is always happening

Innovation is one of the main drivers of the stock market.  Companies innovate, figuring out new ways to do it better, faster, cheaper.  This leads to higher profits which lead to higher stock prices.  It was the electronics innovations of the 1950s that led to 160% increase in stocks in that decade, computing innovations of the 1980s; and internet innovations of the 1990s.  Sure you have off decades like the 1970s and 2000s, but those happen less often; even then innovation is still happening, but it’s just not translating to stock gains until later.  Is there any reason to believe that in the next 20 years we won’t have unimaginable innovations that will change our lives the way computers and the internet did?  I think those will happen and I think those will drive stocks higher.

google car

Eventually cars will drive themselves.  My neighbor just bought a Tesla and the thing can start itself, open the garage, pull out, and have the car all nice and toasty, so all Mr Grizzly has to do is get in and go.  There is no doubt in my mind that in a few years they’ll be driving themselves.  Can you imagine once that happens?  Auto accidents and drunk drivers will all but be eliminated.  Old people, blind people, pre-16 kids will have incredible mobility.  Traffic jams will fade away.  Commuters will have hundreds of hours of their life back each year.  And all this innovation will make some companies tremendous profits and their stocks will skyrocket.

Every year solar panels become more efficient and less expensive.  Soon they are going to be as common on roofs as DirecTV dishes.  Electricity bills will go down, carbon emissions will drop (also thanks to automated, electric cars from above).  The world will benefit and some companies are going to make a killing.  Amazing medical advances are happening every day; really smart people at Amazon.com are figuring out how drones are going to change the world; light bulbs are going to last 100 times longer and use 100 times less power; new methods are going to find more oil less expensively.

I’m going to be wrong on nearly all the details I listed above, but I truly believe that I am going to be right on the general message that the innovations we have in store for us are going to dazzle our minds.  And they’re going to make tons of money for the companies that do them, and tons of money for the investors who own those stocks.


So I respectfully think Professor Schiller is wrong.  Investing in stocks is a great investment now and will be a great investment for years to come.  In fact, I’m putting my money where my mouth is and have 95% of the Fox’s portfolio in stocks.  I would welcome Professor Schiller to respond—he’s always welcome to write a guest post 🙂 .  Of course if he does, I will become giddy as a school girl and ask that he pose with me for a picture and then autograph it.


*  I’ll be using the Dow Jones Industrial Average in these examples

How to invest a windfall


We got this letter from a reader:


Sadly my father passed away, but he had a $200,000 life insurance policy.  My mom spent $60,000 as a down payment on a house and $40,000 for my sister’s medical school.  That leaves $100,000 left; I was thinking about going into business with a couple shady guys to start a liquor store, but my wife talked some sense into me.  So we decided to invest the money in an S&P500 index fund (VFINX). 

My question to you is, should we invest the $100,000 all at once or spread it out in smaller investments over a couple months?

Walter Y from Chicago, IL


I admit I may have made this letter up as a framing device, but Walter’s problem is a pretty common one.  Maybe it’s an insurance payout, a tax refund in April, a bonus check, or a bunch of cash you’ve accumulated in your checking account.  In fact, every July the Fox family faces this exact scenario when I get my bonus check.  Let me tell you my thoughts on the matter (which of course is not an expert opinion, and which looks at historical price movements but makes no prediction on future stock movements).

When I get my bonus, and what I would have suggested to Walter, is to take the big chunk of money and invest it in equal pieces over a couple months.  Vanguard and most places will let you set up an automatic investment, so in the words of Ron Popeil “you can set it and forget it.”  So let’s imagine for Walter he would invest $10,000 per week into his mutual fund for the next 10 weeks.   Why do I do it this way?  Because I’m a spaz.

If I invested all the money at once, I would be totally freaked out that I would buy at the wrong time—either I would buy the day after stocks went up 1% or I would buy the day before stocks dropped 1%.  Using Walter’s scenario of $100,000 to invest, that would mean I could “lose” $1000 by investing at the wrong time.  That would totally tie me up in knots and I would be looking at the stock market trying to find the exact right time to jump in, like a kid on the playground playing jump-rope.  Of course we know from A Random Walk Down Wall Street, that all that stuff is random so there’s no point trying to time it, but I’m not totally rational when dealing with that much money.

For the blog, I did a little analysis and found that 12% of the time stocks* lose at least 1% in a single day; if I bought the day before that happened, I’m out at least $1000.  On the other side, about 13% of the time stocks rise 1% or more in a day; if I bought the day after that I’d similarly be out $1000.

My fragile nerves just can’t take that so I want to “diversify” the timing of my purchases to even out those big ups and big downs.  This is a strategy called “dollar cost averaging”.  So as I said, initially I would have recommended to Walter that he take the cautious path, take his $100,000 and split it into $10,000 chunks, and invest those each week for the next 10 weeks.


windfall analysis 2

But then using the magic of spreadsheets and the internet, I decided to see what the actual data said.  I looked at every week for the market since 1950 and did a comparison of the two scenarios:

  1. Invest your entire chunk of money all at once
  2. Spread your investment evenly over 10 weeks (dollar cost averaging)

Wouldn’t you know that on average it’s better to invest your entire chunk at once?  I’ve been doing it wrong this whole time, so thank you Stocky Fox.  In fact it’s not even close—historically it has been better to do option #1 about 61% of the time.

The thinking is that historically, stocks have always gone up.  Sure there have been some rough patches, some of which can last a really long time, but the general trend is definitely upwards.  So if you wait to invest your money over a longer time period, you’re missing out on some of that upward trend.  I looked at every week since 1950 (if you were curious, there are about 3400 weeks) and on average you gain about 0.7% by going with option #1 instead of option #2.  0.7%!!!  Holy cow.  Remember that post on The power of a single percentage?  We just found a 1% coupon right there.

So Walter, my advice is to pick a day this week and invest it all in one fell swoop.  You might get hit with bad luck, but the odds are better that you’ll get hit with good luck to the tune of about 0.7% (which in your case is about $700).  On the day you do it, don’t even look at the stock market and have several tablets of Alka Seltzer on hand.

*For this analysis I am using the S&P 500 data going back to 1950.