Book review: A Random Walk Down Wall Street

2015-02-21 (RWDWS book image)

“One ring to rule them all.”  –JRR Tolkien, Lord of the Rings

A Random Walk Down Wall Street by Burton Malkiel literally changed my life.  Back when I was an undergrad at the University of Pittsburgh, and I was showing a budding interest in finance, a professor recommended this book to me.  I ripped through it in about two days.  The concepts were so simple yet so complex.  It made so much sense to me, and a light bulb totally went off in my head, completely shaping the way I have looked at investing for the past 20 years.  If you’re going to read just one book on investing, this is the one you should read.

The book basically talks about two fundamental concepts of investing: what will happen in the future, and why some stocks (or asset classes) have higher returns than others.  Combine these two and you pretty much have an airtight understanding of why the stock market does was it does.

 

Efficient Market Theory

The entire book is based on the concept that stocks follow a random walk which basically means that you can’t predict their movements, especially over the short term.  Some days the market will go up, others down, and that pattern is totally random; in the same day some stocks will go up while others go down, and that is totally random.  Because of the randomness, it’s impossible to predict when the stock market will move up or which individual stocks will perform best, so you might as well invest in an index fund with a buy and hold strategy (much more on this in a future post).

Headline (full)
An article on Yahoo!Finance from Wednesday that perfectly illustrates the book’s central point

 

The theory rests on two core ideas:

  • New information drives stock movements and that new information affects the prices nearly instantly. So if Tesla develops a new battery technology, once that news becomes public, Tesla’s stock will rise to reflect the new value of the information.  A week, a day, an hour, or even a minute later, the market has already digested the information–the news has become old news.
  • People only buy or sell stocks for what they think they’re worth. If Apple was trading at $120, but everyone knew it was really worth $140, no one would want to sell it for $120 but instead would only sell it for $140.  If there were people stupid enough to do it, their shares would be bought instantly by people who knew the stock was worth more.  This means that whatever price stocks are trading at is the “right” price.

The efficient market theory makes investing both much simpler and more comfortable.  Simpler because you don’t have to waste countless hours trying to figure out if now is the right time to buy into the market or which stock will do best.  The stock markets are completely unpredictable in the short term so now is as good a time as any.

Comfortable because any price you pay is the right price.  You could buy a stock in a company you’ve never heard of in an industry you know nothing about, and market forces have done you the favor of ensuring it’s the right price.  If the price was too high sellers would have dumped shares and brought it down, while if the price was too low buyers would have snatched up shares and brought it up.  There’s a real load off—Thank you efficient market theory!!!

 

Risk-reward

Everything isn’t totally out of your control, and the book spends a lot of time discussing the one thing that investors can do to impact their returns—take on risk.  If you like “eating well” and want bigger returns, you should purchase stocks that are fundamentally riskier; if you like “sleeping well” and want steadier returns, you should purchase stocks that are fundamentally less risky.

Use the example of Tesla and Wal-mart.  Tesla is a fundamentally riskier stock: its technology is still novel and unproven, it’s entering a market with established competitors, and the legal system works against it (auto dealerships in New Jersey and Texas).  Maybe they “win” and become a dominant auto maker, but maybe they’ll “lose” and go bankrupt.   The downside is very real, so the upside has to be especially sweet to investors to compensate them for taking the risk.  Contrast that with Wal-mart: it’s already the dominant player with enormous economies of scale and a proven strategy that has been consistently successful.  If it “loses” it might be lower sales, but most people don’t expect it to go out of business.  Since the Wal-mart’s downside isn’t nearly as grim as Tesla’s, the upside doesn’t have to be nearly as big.  So over the long-term if you invested in a diversified portfolio of risky companies like Tesla, you would get a higher return than a diversified portfolio of less risky companies like Wal-mart (as always, I’m never predicting future stock movements).

 

Malkiel does an amazing job explaining these concepts (much better than I can in a thousand-word blog) and many others, and then shows how history has proven their accuracy with myriad examples.  My copy is an earlier edition (I bought it used because I’m cheap) published in 1980s, and those concepts apply to today’s stock market just like they did 30 years ago.  Subsequent editions have been updated to include the internet boom and bust of the late 1990s and early 2000s as well as the banking crisis of the late 2000s.  There’s a part of me that almost wishes he wouldn’t come out with new editions (but I get it, republishing is a real cash cow for him) just so he can say, “Look, the things I wrote 40 years ago are exactly apply to what is happening now.”

So as you step into the pool of personal investing, this is an essential guide.  It will undeniably change the way you look at investing (for the better), and it might even change the way you look at life (geez, you’d think I had a man-crush on Burton or something, but the book is that darn good).  I unreservedly give it the maximum four stocky foxes.

4 stocky foxes (for movies)

Week in review (20-Feb-2015)

Weekly review 2015-02-20

The biggest stories this week were: Greek debt restructure (every day), oil train explodes in West Virginia (Monday), US Federal reserve takes dovish tone on interest rates (Wednesday), and Wal-Mart raising wages for workers (Thursday).  US stocks were up just under 1% while international markets were all up about 2%.

Greek flag

Greek drama, continued:

I’m no longer calling this a Greek drama—it’s more like a Greek saga or Greek epic.  Monday everyone was playing nicely, Tuesday the Greek finance minister didn’t wear a tie and that insulted the sensibilities of everyone else, by Wednesday they seemed to be making progress again, on Thursday Germany rejected Greece’s bailout request, and today at the eleventh hour they agreed on a four-month extension which powered the US markets up about 1%.

Next week I’m writing an entire blog post on how this story is totally overblown and that it really doesn’t impact ordinary investors that much.  Suffice it to say, similar to the weather, this story is going to change constantly (that weather analogy does not apply to Southern California where it’s pretty constantly sunny and warm—sorry all you people buried in two feet of snow).  Greece bought itself some time, but you get the feeling they’re just kicking the can down the road.  The media is going to continue to pound this story because it makes good copy, and the markets seems to be bouncing with it between optimism and pessimism.  No way in the world the Greek economy is important enough to have this type of impact on the world’s stock markets.

 

oil fireball

 Oil tank train crash

I actually think this one has the potential to be a big deal.  As the North American oil boom unfolds, the logistics of how to get the crude from North Dakota and Alberta to market are becoming increasingly important.  Oil tankers on trains have carried most of the burden, and so long as projects like the Keystone Pipeline languish on the president’s desk, those trains are going to continue to need to do so.

The concern I have is that the oil tanker cars that exploded in West Virginia over the weekend were supposed to be top-of-the-line with enhanced safety features.  Fortunately this time no one was seriously hurt, but there have been several of these accidents, some of which have caused loss of life, all of which have caused significant damage.  Extracting oil from those shale fields has been one of the great economic success stories in the past few years (remember when gas was $4+ per gallon?).  However, there aren’t enough people driving cars in North Dakota to use all that oil; it has to get to market somehow.  If trains can’t efficiently, cost-effectively, and safely do it (do you see the picture of the fireball?) and regulators won’t approve pipelines, I have a concern that a real albatross might hang over the domestic oil industry.  Transporting the oil is going to be much more regulated and a lot more expensive.

Accidents like this are just going to continue to highlight the dangers, and even if the accidents are happening less than 1% of the time, can you blame people for getting concerned?  I mean, it blew up the side of a town.

 

Fed decision:

The US Federal Reserve released its minutes and seemed to indicate that it was leaning towards raising interest rates later rather than sooner.  The equity markets increased a little bit, but bond prices shot up like a rocket.

Everyone agrees that interest rates will have to go up (which tends to lower stock and bond prices).  What is up in the air is when those rates will go up, and today’s news said we’ll still have the lower rates a little while longer, confirming what it seemed most were expecting.

 

Wal-mart chart
Wal-Mart stock reacts negatively to new of higher employee wages on Thursday

Wal-mart raises pay:

Surprise move from Wal-Mart, one of the most reviled companies in terms of worker compensation.  The major debate is asking if they did this because:

  1. The economy is strengthening and they need to pay workers more to attract and retain the best people. If that’s the case this is pretty unambiguously great news for the economy, although it could be a sign that inflation pressures might be returning.
  2. Political and social pressures finally compelled Wal-mart to pay its people more. If this is the case, it’s either good news or bad news depending on where you sit on the political spectrum.
  3. Wal-Mart’s culture in its lower ranks is so soul-crushing that they needed to do something to shore up people’s spirits just do they don’t actively try to sabotage the company while at work. If this is the case, that’s really, REALLY bad for Wal-mart.

Either way, the market didn’t think this was good news for Wal-Mart.  The stock was down over 3% on a day when the market was pretty much flat.  My take is of the three reasons above, it’s closer to #2 than #1, probably about 1.8, with just a smidge of #3 sprinkled in.  Wal-Mart just increased its cost structure about $1 billion without a corresponding increase in revenue, making it a loss of about $1 billion.  If this is a populist pay increase (reason #2) which spreads through the economy, I think it will hurt other stocks the way it hurt Wal-Mart’s Thursday.  So it will be interesting to see how other companies who employ a lot of low-skill, low-cost workers like McDonald’s who have been in the “minimum wage” crosshairs react.

 

Have a great weekend.  I’ll be posting my book review of my absolutely favorite book on investing tomorrow so be sure to check it out.

Impact on investments of terrorist tragedies

“He saw the horrors and screamed, and that scream was heard for miles”

The world has been battered by a spate of deplorable militant Islamic attacks—17 French killed in the Charlie Hebdo attacks, over 2000 recently killed by Boko Haram in Nigeria plus nearly 300 girls  kidnapped and still at large, ISIS beheading and even burning alive hostages, and the Danish attacks just this weekend.  It’s beyond tragic, and it’s enough to make some doubt the future of humanity.  Translated to investments, events like these increase the VIX, commonly called the “fear index” in investing parlance.  As I write this, in no way do I want to diminish or trivialize the horror of these events.  What has happened to the victims of these barbarians sickens me, and my heart truly aches for them and their families.

Yet, how should we think of these events in the context of investors?  The answer is “not much.”  History, both ancient and sadly recent, is littered with these types of tragedies and other events that violently shook the faith of investors.  Yet, in each case, while the short-term may have been rocky, investors who stuck it out over the long term were rewarded by attractive returns.

I picked a few significant events, and looked at how an investor would have fared had he invested $1000 per month in the Dow Jones Industrial Average starting in the month of the event and every month thereafter for 1-year, 3-year, 5-year, 10-year, 20-year, and 30-year periods.

Nazis--Sep 1939
Returns on DJIA after Germany starts WWII (September 1939)

Nazis start WWII:  In September 1939 Hitler and the Nazis invaded Poland and started World War II.  Had someone started investing $1000 that month he would have a loss of $855 after one year and $4763 after three years which is understandable because the world was overtaken by war.  But after five years there would be a profit of $9663, a profit of $25,564 after 10 years, a profit of $540,843 after 20 years, and a profit of $754,004 after 30 years.  Entering the darkest period of the 20th century, when more soldiers were fighting than ever before, when more people were killed than ever before, when the holocaust was perpetrated and atomic bombs dropped—despite all those tragedies, it was a good time to invest.

Atomic bomb--Aug 1945
Returns on DJIA after atomic bomb dropped (August 1945)

Entering nuclear age:  In August 1945 Americans dropped two atomic bombs on Hiroshima and Nagasaki, killing 200,000 Japanese civilians.  After the Soviet Union developed its own nuclear capabilities in 1949, the threat of nuclear apocalypse and human extinction became a very real possibilities.  However, the following years were good years to be an investor; steady investing led to profits for the 5-year, 10-year, 20-year, and 30-year periods.

MLK--Apr 1968
Returns on DJIA after Martin Luther King’s assassination (April 1968)

Assassination of Martin Luther King, Jr:  In April 1968 a racist assassin struck down the civil rights leader, plunging the nation into deadly race riots.  Race relations precipitously deteriorated, and many could argue remain tragically strained.  While investments would have shown a loss after 10 years, they showed a profit after 20 years and an astounding $2+ million profit after 30 years.

Stagflation--Jan 1982
Returns on DJIA at “capitulation point” for US economy (January 1982)

Interest rates peak:  In January 1982 the US was in its worst economic situation since the Great Depression.  Inflation was 12% and interest rates were at 20%, both near the highest levels in the nation’s history; to put those in perspective, today both inflation and interest rates are less than 2%.  Back then the economy had never looked so bad, the stock market had been flat for nearly 20 years, and people were openly questioning whether capitalism was a viable economic system.  For those brave souls who were buying stocks (and probably chased stock purchases with a swig of Pepto), it turned out to be a great time to be an investor.  Every time period—1-year, 3-year, 5-year, 10-year, 20-year, and 30-year—were profitable.

 

The common theme is obvious: in all of those eras, investors who continued to buy stocks, no matter how scary the world looked at the moment, profited in the long run (of course past stock performance has no bearing on the future).  Putting the recent Islamic terrorist events in context with some of the events we just looked at (and again, in no way trivializing or diminishing the horror of these recent attacks), it seems reasonable to assume that as investors there isn’t a lot to fear.

While the recent attacks are atrocious, they seem quite small when compared to WWII, both in terms of human costs and overall destruction.  ISIS and Boko Haram have embraced barbaric practices, yet those have a destructive scope orders of magnitude smaller than the horrors of nuclear war.  Sadly for citizens in Nigeria, Syria, and Iraq, the threat of these extremists is palpable, yet those countries have tiny GDPs (about 1% of the world’s GDP for those three countries combined) and proportionally small investing relevance; it just doesn’t hit close to home in the big-GDP countries the way the US riots and racial discord did in the 1960s and do today.

As a human, those attacks are deplorable and I want civilized society to do everything in its power to end them and bring the perpetrators to justice.  As an investor, they are minimally important to the point of irrelevance.

#bringbackourgirls

The tax man cometh

2015-02-13 image (grim reaper)

“In this world nothing can be said to be certain, except death and taxes” –Benjamin Franklin

I love this woodcut from the 1600s.  I imagine the artist drew it so the skeleton’s hand is asking for the guy’s life, but it kind of looks like he has his hand out asking for money like he’s collecting taxes.  Either way, if you’re death or the tax man, you probably aren’t too popular.

Obviously taxes are important when you’re thinking about investments and your retirement.  Uncle Sam (for all you foreign readers, what is the name of the personified tax collector in your country?) is definitely going to take his share of your earnings and investments.  Given the progressive nature of most countries’ tax codes, as your nest-egg gets larger and larger, they take a bigger percentage, so that raises the stakes.

The government has built the tax code to offer huge tax breaks to people saving for retirement, particularly allowing people to defer taxes from their earning years to their retirement years. That’s really all that accounts like 401k’s and IRAs are doing, taking money you earn when your income is high and allowing you to pay taxes on it when your income is low.  It may not seem like a big deal at first but suffice it to say, optimally managing your tax situation can be the difference of hundreds of thousands of dollars.  As always, it’s important to remember that I’m not a tax expert; also I’ll be making assumptions on future stock returns which in no way guarantee that is what will actually happen in real life.

 

Working tax rate versus retirement tax rate

US tax rates go up pretty quickly the more money you make.  So when you’re in your prime earning years, that is when your tax rate is going to be the highest.  Take my neighbors Mr and Mrs Grizzly as an example.  They both work and have a combined income of $150,000.  Throw in a couple assumptions like they have two cubs, a mortgage, and live in the great state of California, and they are paying a total of about $41,000 in taxes, about 27% (there’s a great website that I used for these estimates).  Look a little deeper and their marginal tax rate is 43%; that means if they earned one more dollar they would pay $0.43 in taxes, and conversely if they lowered their income by one dollar they would save $0.43 in taxes.  Wow!!!  That’s a lot in taxes.

Now let’s fast forward and think of Mr and Mrs Grizzly in retirement.  Their house is paid off and they don’t have to save for their cubs’ educations, so what they need to support their retirement lifestyle is $80,000 (believe me, I will have many future posts dedicated to estimating how much someone needs per year in retirement, but for now let’s just take the $80k on faith).  Each year they tap into their savings and the $80,000 breaks down into three buckets: $20,000 is interest and dividends; $30,000 is long-term capital gains on the profits from their investments over the years; and $30,000 is the basis, the original money they invested which doesn’t get taxed.  Run your tax calculator again and they’re paying a measly $1,200 in taxes!!!  Read that again; it’s not a misprint.  That’s only 2% compared to the 27% they were paying while they were working.  And their marginal tax rate is 4% in retirement instead of 43% while they were working.

That, my friends, is some powerful stuff!!!  Now, how do Mr and Mrs Grizzly translate that into cash money?

 

The value of deferring taxes

During their working years, Mr and Mrs Grizzly set up their budget to save $1000 per month.  Because they are avid readers of the Stocky Fox, they know they should save that through their 401k’s (in this unfortunate example, let’s assume their cheapskate company doesn’t offer any matching).  In a year they will have saved $12,000 but since 401k’s are tax deferred they don’t pay taxes on that money, saving themselves $5160 in taxes (remember, their marginal tax rate is 43%).  Nearly $5200!!!  That’s some serious honey comb.  They do that each year and after 30 years (let’s assume a 2% dividend and a 5% stock increase), and they have a nice little honey pot of $1.12 million for retirement.  They’ll withdraw their $80,000 per year and pay the lower tax rate on it, and life is good.

The Grizzleys are sitting pretty, but what would happen if didn’t use their 401k to defer taxes and instead invested their money in a normal brokerage account?  Each year, they’d pay the $5200 in taxes but then they would also have to pay taxes on the dividends of their investments at about a 33% marginal tax rate (special thanks to my ChicagoBooth classmate, Rich, for correcting me on this).  If you assume the same investments as we did above, 2% dividends and 5% stock increase, after 30 years they would have $815k.  That’s nothing to sneeze at, but that’s about $300k less than what they had with their 401k.  Those numbers seem crazy, but that’s the power of tax deferral.

2015-02-16 deferred taxes graphic (qd)

So the lesson is that using tax deferred accounts offers a really powerful way to accelerate the growth of your nest-egg by cutting out the tax man (in a totally legal way, of course).

Movie review–Wall Street

2015-02-14 image (Wall Street movie)

Happy Valentine’s Day.  Nothing says romance like a movie review of a film about Wall Street.  On the weekends, instead of writing riveting articles about investing, I figured I would lighten it up a little bit, and write reviews of some of my favorite investing related books and movies.  What better way to start than one of my absolute favorite movie about Wall Street—Wall Street?

 

The movie follows Buddy (Charlie Sheen—when he was still likable and before he was living with porn stars) as a young and hungry broker on Wall Street with blue-collar roots, his dad (Martin Sheen—Charlie’s father in real life) being a union mechanic for the airlines.  He lives in a cheap apartment and has a crappy job cold-calling people trying to sell them equally crappy stocks.  He wants to be a player, and he gets his chance when he finagles a meeting with Gordon Gecko (Michael Douglas), a major Wall Street titan.

Buddy almost blows it when he invests Gecko’s money in “dogshit stocks [he] spent all night researching” and only redeems himself when he starts trading him inside information he got from his mechanic father.  Buddy’s fortunes improve as he gets a better office, a hot girlfriend (Daryl Hannah), and a sweet apartment; but these all come at the cost of Buddy descending further into illegality with increasingly brazen acts of insider trading.

Ultimately Gecko, with Buddy by his side, decides to take over Buddy’s dad’s airline with the intention of selling it off piece by piece, something that would lead to Buddy’s dad and all his coworkers losing their jobs.  In a crisis of confidence Buddy defects, turns himself in to the Feds, and then wears a wire to take Gecko down.

 

The movie does a great job of depicting what I imagine life is like on Wall Street.  You have a ton of ambitious kids dying to make it big, vying to become masters of the universe.  So many of my business school friends said the movie did a good job of capturing the spirit-crushing nature of life when you’re just starting out.  Of the thousands that enter the game, only a very few make it, but man do they ever make it.  You’re living a life of penthouse apartments, beach houses, private jets, posh restaurants, and even the occasional blow job from a high-priced call girl (when it was still shocking to show such things, as opposed to today when oral sex makes its rounds on network TV during prime time).

The cast is a real tour de force.  It’s packed with stars who were huge at the time and others who would become huge.  Obviously Michael Douglas, Martin Sheen, and Daryl Hannah were A-listers.  You had Charlie Sheen as a budding star and a young James Spader as well as John McGilney playing a hilariously crass stock broker in one of his first roles.  Plus there were some Hollywood veterans who turned in really great performances like Terrance Stamp and Sylvia Miles, whose cameo as a New York realtor is pitch-perfect.

But the movie totally belongs to Michael Douglas for his portrayal of Gordon Gecko.  It’s far and away the best of the movie and an absolute performance for the ages.  He deservedly won the Academy Award for best actor and his character has come to epitomize all the bad things about Wall Street.

We first meet him cutting deals on a conference call (back when being on a conference call was a pretty big deal), shredding his birthday cards, and checking his blood pressure between drags of a cigarette.  His hair is slicked back, he wears suspenders, orders off the menu, and of course gets around in either a limousine or a private jet.  I mean, the man is cutting deals on Hong Kong gold before the sun rises with a sweet cell phone the size of a brick.  He’s a total stud—he knows it and you know it.

2015-02-14 image (Douglas cell phone)

About halfway through the movie, as he’s launching his hostile takeover of Teldar Paper, he delivers his best line: “Greed is good” (2:39 is the money shot).  It’s a bit of a rip off of a speech that Ivan Boskey gave in real-life for a commencement address at the University of California-Berkeley, but Gekko’s version is amazing none-the-less.

As films go, this one has taken on a bit of cult status.  It wasn’t one of the top 10 highest grossing films of 1987 (Three Men and a Baby was #1, so there you go), but it has probably had some of the most staying power.  When people think of what’s wrong with Wall Street, many go to this movie, Douglas’s role, and even that particular line: “Greed is good.”  I totally recommend this movie and give it four stocky foxes.

4 stocky foxes (for movies)

Week in review (13-Feb-2015)

“If stocks didn’t go up and down, which way would they go?”

The sheer volume of information related to the stock market is truly staggering.  Everyday newspapers like the Wall Street Journal, Financial Times, and many others fill countless pages of copy on this topic.  Similarly, cable channels like CNBC, Bloomberg, and many others spend countless hours with their talking heads telling viewers why the stock market acted the way it did today and what it will do tomorrow.

It’s easy to get overwhelmed by all of this.  You don’t know whether you should be doubling down on Chinese internet stocks or selling everything because Russia is about to start World War III.  As a long-term investor, I try to stay above the fray and keep to my buy-and-hold strategy.  However, it’s always good, and maybe even a little fun, to look at the big news stories of the week and see if they really do justify the crazy movements of the stock market.  I think what we’ll see is that the news events are way too small to justify such large swings in the stock market.  Let’s find out.

 

2015-02-13 weekly review image

Every Friday I am going to write a blog giving my take on the week.  I’ll always show the chart above, so let me orient you on it really quickly.  This shows the year-to-date returns for ETFs which represent the US stocks (VTI) in red, the European stocks (VGK) in blue, the Pacific Rim stocks (VPL) in green, and emerging market stocks (VEA) in orange.  So looking at the US stocks, they started the week down 1% from where they started the year, and over the course of the week they increased about 2% to end the week up 1% from where they started the year.

The biggest stories this week were: Apple worth over $700b (Monday), Tesla misses earnings (Tuesday), Greek bonds (Wednesday), Ukraine truce (Friday).  These stories drove US and international stocks up about 2%.

 

Apple worth over $700 billion

This week Apple’s stock rose so that the entire company is worth $700 billion, a truly astounding number and an amazing success story.  But this is more effect than cause.  A couple weeks back Apple announced on its earnings call that it sold enough iPhones that every man, woman, and child in the world bought one (I may have exaggerated some figures).  That’s the real story; Apple’s business is incredibly strong, and I think that speaks to the overall strength of the US economy—people are “splurging” on electronic toys and that must mean people are feeling good.

As a result of that amazing earnings, its market capitalization has risen to over $700 billion, but that’s really old news, good news for sure but old news.

 

Tesla earnings miss

Tesla is a media darling.  It has super-cool and sexy products and its CEO, Elon Musk, is a super-charismatic visionary who has captivated the world.  One day its technology might become the world standard, but that day is not today and it won’t be tomorrow or next month or next year.

So when Tesla only grows 45% and sells a mere 120 cars in China, what does it really matter?  For every car that Tesla sells, GM and Ford sell thousands; while Tesla is an amazing story it is such a drop in the bucket compared to the giants of the auto industry.  One day I hope that changes and my two cubs won’t need their driver’s licenses, but today when stories about Tesla move the market it just seems like the Texas saying “big hat, few cattle”.

 

Greek bonds

Have you ever seen a car wreck in slow motion?  That’s what the Greek bond crisis seems like, and it’s going to go on and on and on.

Eventually, one of three things will happen:

  1. The Germans will force austerity and reform measures on the Greeks which will continue to depress their economy. Given that Alexis Tsipras was elected prime minster on the platform that he wouldn’t allow this, this doesn’t seem likely to happen in the short-term.
  2. The Germans will talk a big game but eventually give more relaxed terms to the Greek bailout package. This will kick the can down the road, and the Greeks will continue to be dependent upon the international community (kind of like the 26 year old still living at home and sponging off his parents).
  3. Germany and Greece won’t agree, Greece will default on its debt package, and they will ultimately leave the Eurozone. Germany will take its ball and go home.

At the beginning of the week it was #1, and then yesterday it was #2.  It will flip flop about 90 more times before they kick the can down the road—Greece will get some relief but it won’t fundamentally change their non-competitive economy.  Ultimately I think #3 is what will happen, but not for a few more years as they tear this bandage off excruciatingly slowly.  And through it all, who cares?  The world is getting super worked up over a country that has 11 million people with an economy about the size of Connecticut’s.

 

Ukraine-Russia cease-fire

A cease-fire was brokered, and for the investing community that seems like really good news.  The Russian economy is a mess right now: mostly because of the low oil prices, but also because of the sanctions the world has placed on them.  Also, wars are expensive, really expensive.  Add all that up and there is a serious drag on their economy, an economy by the way that is about 15 times larger than Greece’s (and you know the tizzy everyone is in over the Greeks).

Hopefully this cease-fire will stick, but I suspect there will be a few false starts.  However, if this cease-fire is the green shoots of the end of this conflict, then that will be really great for the stock market.

 

So there you have it—markets are up about 2% across the board for the week on mostly good news with a couple pieces of bad news which really aren’t that big of a deal.  I hope you have a great weekend and pump some money into the economy this Valentine’s Day via Hershey kisses and 1-800-Flowers.

How to get started saving for retirement

BXP135660

So many people I talk to love the idea of investing for retirement and know they need to be doing it, but they just don’t know how to start the journey.  As a result, they don’t do anything, months and then years go by and they’re still at square one, but now they’re pissed because they missed out on the red-hot stock market that increased 50% over the past few years.  So here is what I would do in order of “Stockiness” (stockiness is a word I just made up that loosely translates to investing wisely).

 

401k or 403b

If you work for a company that offers a 401k or a 403b, that is probably the best and easiest place to start investing.  First, most companies have it set up so it’s pretty easy to sign up and get started.  Also, since they deduct the money out of your paycheck, it might be easier for some people to save the money “without having to do anything”.  Plus there’s the benefit that most of these plans don’t have any minimum amounts you have to start an account with, so you can sign up, have then deduct your 4% or 10% or whatever, and you’re set.

Of course we’ve saved the best for last—there are two MAJOR advantages of 401k and 403b accounts that really help you boost your nestegg.  First, both are tax-deferred (much more on this in a later post) which means that you don’t get taxed on your contributions.  So when you put $10,000 into your 401k this year, you don’t pay taxes on that money; had you not used your 401k then you would be taxed at normal income rates which could go all the way up to 40% or even higher, depending on what your situation is—that’s $4000 right there.  Certainly, you’ll have to pay taxes when you withdraw the money in retirement but it’s pretty likely you’ll be paying a much lower tax rate then, compared to the tax rate you’re paying while you’re working.

The other MAJOR advantage of these accounts is that most companies offer some type of matching.  It’s typically something like they will match $0.50 for every dollar you put into your 401k up to 6% of your salary.  Every company is different on their match but there is one thing they all have in common—they’re giving you free money if you’re willing to take it.  Like so many things in investing, over time this matching can add up to a lot— tens or even hundreds of thousands of dollars for this little jewel.

As with all things, if it seems too good to be true, you should probably read the fine print.  There are a lot of rules associated with 401k and 403b accounts (as I said in the disclaimer, I’m not an expert here).  The big one is when you can withdraw the money.  The government allows those great tax advantages at the cost of limiting your ability to get at the money; the idea is to have you save that money for your retirement, not your next car or next Berkin handbag (which can cost as much as a car—totally blew me away when Foxy Lady told me that).  If you’re in a pinch you can get the money sooner, but it is a major pain in the butt, and often times there are penalties.  So the general rule is: put money in your 401k or 403b that you won’t need until your late 50s.

 

Individual Retirement Accounts (IRAs)

If your job doesn’t offer a 401k or 403b, the next best thing is probably an IRA.  They are similar to 401k accounts in that they have tax advantages that can really add up over time, so that is one of the MAJOR advantages.  Unfortunately, they don’t have the matching feature which is a bummer.  Also, similar to 401k and 403b accounts, these are meant for retirement savings (and have similar penalties for early withdrawal) so it’s best to put money here that you don’t plan on needing until your 50s or 60s.

Unlike 401k and 403b accounts, you have to set these up on your own.  It’s not difficult, but it certainly isn’t as easy as if you just check a box at work.  The first thing you’ll need to do is pick between a Roth IRA or a traditional IRA.  There’s a ton of debate on which is better, but as a general rule I would go with a traditional IRA.  Ironically, when I made that decision for myself 15 years ago I went with a Roth IRA and I think I made the wrong decision.

Then you’ll need to set up an account with Vanguard or Fidelity or one of a hundred other firms.  Another unfortunate feature of IRAs compared to 401k accounts is that they tend to have a minimum amount required to open an account.  For Vanguard it tends to be about $3000, so that may take a little while to gather before you can get started, but it’s still definitely worth the effort.

But there is a nice advantage that IRAs have over 401k accounts—you have many more investment options.  With a 401k you are limited to the mutual funds that the company has set up.  My experience with 401k accounts is that you have a good variety—bond funds, domestic stock funds, international stock funds, target retirement funds—but you may only have 10 or so choices.  With an IRA you can choose from almost any mutual fund there is (just to put that in perspective, Vanguard has 100 funds to choose from).

 

Brokerage account

If neither of the above options work for you (and that would seem really odd that they wouldn’t, but I guess you have your reasons), then you can open a regular brokerage account with Vanguard or Fidelity or others.  Here you could invest in all the same mutual funds that are available to you with IRA accounts.

As you’d expect, the major drawback on these is that they don’t have the tax advantages of the 401k, 403b, or IRA accounts and that can be a pretty huge deal.  On the other hand, they do not have any of the penalties associated with early withdraws, so that might be something attractive depending on what you have on the time horizon.

 

So there you go.  Investing is a long journey, but as some poet who’s been deal a long time said, “Every journey begins with a first step.”  So the first step is opening an account so you can start investing.

 

How did you get started investing?  We’d love to hear your story.

Greetings from the Stocky Fox

2015-02-11 image (sitting on a beach)

Why aren’t you a millionaire?  Why aren’t you retired, reading this blog while sipping a drink with a paper umbrella in the glass right now?  You read these crazy statistics that 80% of households have less than $10,000 saved and 90%+ of people don’t think they’ll ever be able to retire, so I guess that means they’re just planning on working until the day they die.  Thanks, but no thanks.

This is a blog about investing.  This is a blog about how I have wisely invested the family’s savings to become a millionaire before my 34th birthday.  This blog is about how I take all that money that Wall Street is dying to give out, while avoiding all the sucker bets that Wall Street uses to try to take it all back.  This is a blog about getting a ticket on the Financial Freedom Express.  The ride is great and the umbrella drinks are tasty, so I’ll see you there.

 

Hello, nice to meet you

My name is Stocky Fox.  I am 37 years old (that’s incredibly old for a fox whose average lifespan is only about 5 years, by the way).  Mrs. Fox and I have a 3-year old cub, ‘Lil Fox, and second, Mini Fox, who just joined us about four months ago.

I am a self-diagnosed personal-finance hobbiest.  Some people like building model airplanes or collecting stamps, some enjoy running marathons (never got that one—foxes are really fast over short distances, but we don’t have the stamina) or shopping for shoes.  I enjoy managing our family’s finances: setting up the accounts, determining which investments to choose, tracking the results and comparing them to the market benchmarks, creating graphs that show the Fox family’s progress towards its financial goals, and so on.  As hobbies go, I think it’s actually a pretty constructive one in that doing this well will help you achieve financial security and independence.  Read that line again . . . if you invest wisely and minimize the most common investing mistakes, you will take a major step towards financial security and independence.  That is Mr Fox’s goal (for really important statements I revert to third person), and maybe it’s yours too.

Mrs Fox and I met in business school, we have typical office jobs, and live in the suburbs of Los Angeles.  Like a lot of you out there, we want to have a secure future for ourselves and our little ones.  Since we don’t make millions of dollars each year, we know that saving our money and then investing it wisely is paramount to achieving those goals.  Over the past 15 years of our adult working lives, we have saved diligently and in my opinion we have invested those savings wisely.  What’s our end goal?  We want to retire while we’re still young so we can spend more time with our little cubs as they grow up, we want to buy a sailboat and cruise around the world, we want to ensure that our cubs can go to the absolute best university their grades and drive can get them in to, we want to go into our golden years without financial constraints or worries.

I started saving money when I was in college, and I immediately started investing that money in the stock market.  I continued to save more, and after a few years I got a wonderful surprise: The money I made on my investments each year was more than I was saving each year.  I had caught the wave and was starting to ride it in.  Today we have a tidy little nestegg that will keep us flush well into our golden years.

 

Why is this blog worth your time?

Successfully investing isn’t hard and it doesn’t require a ton of brains (as evidenced by me), but it doesn’t come naturally for everyone.  Some of the smartest and most professionally successful people I know aren’t good financial planners.  A lot don’t have the time to dedicate to investing that I choose to.  Most don’t enjoy it near as much as I do (and they are probably less socially awkward than I am because of it).  Others are brilliant in many areas but investing doesn’t really “click” for them.

Maybe one of those descriptions applies to you.  If so, I hope this blog helps.  I’ll use this blog to show you how I stroll through the forest of Wall Street, gathering all the berries, salmon, and honeycomb my family could possibly want.  I’ll also show you how I avoided all the bear traps and enraged bee hives that could have really put a crimp on my plans.  I’ll make no promises (see disclosure), but if you read this blog and take the ideas into consideration as you make your own financial plans, I believe that you will be well on your way to catching the Financial Freedom Express.

All aboard.