Month: July 2018

Know the Lingo

Never forget these two axioms:

Money frees us, but its pursuit may enslave us.

It’s not how much you have at the end; it’s how much you could have made.

INVESTING SLANG, PART 1

Let’s take a little break from hard core financial literacy and investing and talk about some of the lingo you’ll hear used on financial shows or blogs/books or even worse movies.

Amaranthed: A fund that takes large positions in companies that turn out to be wrong and then goes bankrupt much like Amaranth, a hedge fund focused on energy, in 2006

“I lost everything because my dumbass fund collapsed. I got Amaranthed.”

Bear: An investor who has a pessimistic view of how the market will do OR a market with negative returns currently

“Don’t listen to him. He’s a bear even in good times.”

“This bear market has pushed back my retirement at least two years.”

Blowup: When a critical mass of investors in fund all sell is a short time usually due to poor performance (but possibly other issues) resulting in the fund’s closure

“Great, Just great. My Latin American fund sucked so bad that it had a blowup leaving me with nothing. And Venezuelans thought they had it bad.”

Bull: An investor who has an optimistic view of how the market will do OR a market with positive returns currently

“This is such a bull market that even grandmas are becoming millionaires.”

Dead Cat Bounce: The temporary increase in a stock’s price after a huge drop before it starts falling again which may be mistaken for a stock that is now through its temporary troubles and is ready to climb up seeming like it’s a value when it’s actually a trap. Even a dead cat bounces up off the sidewalk.

“Don’t touch that stock. It was a falling knife and just entered its dead cat bounce phase. Don’t be fooled.”

Falling Knife: A security (usually a stock) experiencing a sharp downturn which may be mistaken for a good value on a company or fund

“Don’t dare put money in that thing. It’d be like catching a falling knife.”

Go long: An investor or fund that goes from a neutral or bearish outlook to a bullish one

“Wow! Did you see those new job numbers? I’m going long!”

Go short: An investor or fund that goes from a neutral or bullish outlook to a bearish one

“Ugh. Did you see those new job numbers? I’m going short!”

Hedge fund: An investment fund composed of capital from accredited (ie, high net worth) investors or institutional investors (ie, college endowments, retirement or pension funds, even cities if you can believe that) run by firms that use debt or leverage as a way to invest in any type of security, but usually are high risk/high reward and charge fees along with a percentage of profits that they generate for their investors (at least in their best years when they actually generate profits)

“I’m putting my money in a hedge fund because I’m probably too rich anyway and could use the tax write off when I inevitably lose all my money in this thinly veiled Ponzi scheme.”

Hedgie: Anyone working for or running a hedge fund

Hedgistan: The I-95 corridor between Manhattan and Westport, CT including the epicenter of the hedge fund world, Greenwich, CT

“Beware as we drive through Hedgistan. Guard your wallets.”

Paying for Beta: Fees to a fund that only gives investors returns that any index fund does at a much lower fee rate

“I love paying for beta because in addition to my stupidity in all money matters, I’m also a masochist.”

Perma-bear: an investor who has a persistently or even permanent negative outlook on the market

“He’s such perma-bear they call him Dr. Doom.”

(Probably not what you were expecting if you’re a Marvel comic books fan.)

Perma-bull: an investor who has a persistently or even permanent positive outlook on the market

“Look at that guy, The market is getting crushed like a car at the junkyard and he is still a perma-bull. Makes no damn sense.”

Random walkers: Investors who do not believe that they cannot outperform the market in any sustained period of time due to the inability of anyone reliably predicting the future performance of the market

There’s tons more where this came from and more will be posted both next week and again in the future for sure.

I’d love to hear from any and all of you about your thoughts, so we can all learn from one another.

Please spread the word about this blog to your friends (real and virtual), family, and colleagues. Talk to you soon.

Until next time…

Portfolio Building Part VB: Examples of What We’re Talking About

Never forget these two axioms:

Money frees us, but its pursuit may enslave us.

It’s not how much you have at the end; it’s how much you could have made.

Portfolio Building, Part VB

In the last post, we discussed a reasonable (perhaps even great) investing strategy with little (no?)  day-to-day effort on your part.

As a reminder, here is what was proposed:

25% S&P 500 Index Fund

25% Mid cap Fund

25% Small Cap Fund

25% Stocks

Let’s leave the stock behind for now and talk specifics on the funds.

As I’ve said many other times in other places, low fees is the key to outsized gains long term for index funds since they are more passive investing where they are matching (or, at least, attempting to match) the index they are designed to match.

Realize that there are several indexes that funds can follow at each level of market capitalization.

The S&P 500 and NASDAQ Composite Index are the two best known large cap indexes that are tracked. Another large cap index is the Russell 1000 (which is the compilation of the 1,000 largest publicly traded companies in the US).

The mid cap indexes are the  S&P Mid-Cap 400, the Russell Midcap Index, and the Wilshire US Mid-Cap Index.

The best known small cap indexes are the Russell 2000 Index and the S&P 600.

Cheapest Index Funds

S&P 500 Index Funds:

Vanguard 500 Index Fund Investor Shares

Symbol:  VFINX

Net Expense Ratio:  0.14%

Minimum Initial Investment:  $3,000

But if you can reach the initial investment requirement of $10,000 for their “Admiral” share class (symbol: VFIAX), you can get the cheapest available S&P 500 index fund with an expense ratio of 0.05% which translates into a $5 fee for every $10,000 invested.

Schwab S&P 500 Index (SWPPX): The expense ratio is 0.09%, or $9 for every $10,000 invested. The minimum initial investment is $100.

There are many, many large cap index funds that do not track the S&P 500 index, but rather other large cap indexes such as the Russell 1000, so feel free to look for them if you would prefer those rather than the ones that track the S&P 500.

Mid cap Index Funds:

Northern Mid Cap Index (NOMIX):

The expense ratio is 0.15%, or $15 for every $10,000 invested, and the minimum initial investment is $2,500.

Vanguard Mid Cap Index (VIMSX):

The expense ratio is 0.20%, or $20 for every $10,000 invested, and the minimum initial investment is $3,000.

Small Cap Index Funds:

SPDR S&P 600 Small Cap ETF (SLY):

The expense ratio is 0.15%, or $15 for every $10,000 invested.

Vanguard Russell 2000 ETF (VTWO):

The expense ratio is 0.15%, or $15 for every $10,000 invested.

Vanguard Small-Cap Index Fund Investor Shares (NAESX):

The expense ratio is 0.17%, or $17 for every $10,000 invested with a minimum initial investment of $3,000.

However you can pony up the minimum initial investment of $10,000, you too can be invested in the Vanguard Small-Cap Index Fund Admiral Shares (VSMAX) which charges a microscopic expense ratio of 0.05% or only a $5 fee for $10,000 invested.

How do they do it? Vanguard does it again!!

iShares Russell 2000 ETF (IWM):

The expense ratio is 0.20%, or $20 for every $10,000 invested.

Northern Small Cap Index (NSIDX):

The expense ratio is 0.15%, or $15 for every $10,000 invested, and the minimum initial investment is $2,500.

Schwab Small Cap Index (SWSSX):

The expense ratio is 0.17%, or $17 for every $10,000 invested, and the minimum initial investment is $100.

And for those of you who want to look beyond the US borders…

International Stock Index Funds:

Vanguard Total International Stock Index (VGTSX):

The expense ratio is 0.19%, or $19 for every $10,000 invested, and the minimum initial investment is $3,000.

Schwab International Index Fund (SWISX):

The expense ratio is 0.19%, or $19 for every $10,000 invested, and the minimum initial investment is $100.

Let’s discuss two other types of funds that are less commonly invested in, but may be of interest to some, especially if you’re not going to invest in individual stocks and have a 25% void to fill (rather than making your S&P 500 fund, mid cap fund, and small cap fund 33% each which is a completely reasonable option).

You have never heard of micro cap companies/funds (if you don’t read all my posts—shame on you, reader—or have a faulty memory), but as hinted at they are smaller than small cap companies/funds.

A Quick review:

Mega caps>$200-$300 billion in market capitalization (remember that?) (it’s arguable on the cutoff especially since it’s a newer term that holds no real value in terms of funds, etc being set up to follow just these companies since there is no significant growth in these companies given how big they already are)

Large caps>$10 billion

Mid caps=$2 billion-$10 billion

Small caps=$300 ($500) million-$2 billion

Micro caps=$50 million-$300 million (or $500 million depending on who you ask/use as a resource)

Nano caps<$50 million

There are no true micro cap indexes as the two best known (the Russell Micro Cap Index and the Dow Jones Wilshire US Micro Cap Index) also include small cap companies in them thus skewing what the performance of the micro cap market actually is which makes it difficult or even impossible to see how your micro cap fund is doing versus all micro cap companies en toto.

And just forget the tracking of nano caps.

Micro Cap Index Funds:

For a relative unknown group of companies, there are dozens upon dozens of choices in the micro cap index fund world. So, good luck in your search at this market capitalization level of funds since it’s likely you may not know any of the component companies in these funds.

Bond Index Funds*:

Vanguard Total Bond Index (VBMFX):

The expense ratio is 0.16%, or $16 for every $10,000 invested, and the minimum initial investment is $3,000.

Northern Bond Index (NOBOX):

The expense ratio is 0.16%, or $16 for every $10,000 invested, and the minimum initial investment is $2,500.

*I loathe bond index funds as mentioned earlier as they combine the downside of low returns of bonds with the relative higher risk of mutual funds. But for the sake of completeness, the above are some inexpensive bond funds.

Blech!

As you can see, there are quite a few Vanguard funds here which is not surprising as they made their name and fortune on low cost index funds as others ridiculed them for it. Vanguard got the last laugh as it is now the largest fund family in the world with over a TRILLION dollars invested with them (AKA assets under management AKA AUM).

Certainly, there is no reason to invest in only the Vanguard funds alone as they are not always the cheapest as you can see from the above listings, but for the sake of convenience, Vanguard is as close as you can get to a one stop shop for all you low cost index fund shopping needs. Is that slightly increased cost on 1-2 funds worth less hassle than a few funds under Vanguard and then one under another fund family and yet one more under a third fund family? Only you can answer that question for yourself.

Well, that should about do it for this post.

I’d love to hear from any and all of you about your thoughts, so we can all learn from one another.

Please spread the word about this blog to your friends (real and virtual), family, and colleagues. Talk to you soon.

Until next time…