Month: February 2019

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.

Before we get into talking about non-index funds, let’s talk about what you’re going into before you do Consider this the look before the leap.

I’ve always maintained that if you have low risk tolerance, then put 90% of your investment dollars should be in a S&P 500 fund and 10% in short term bonds. (An alternative is always all of your investment in a S&P 500 fund. Sounds risky, right? Well, you’re betting on the future of the entire American economy—9% a year every year for over a century. It’s a pretty good bet and the best and still safest one that is commercially available.) If you have a slightly higher risk tolerance, then put 90-100% of your investments in a combination of a S&P 500 fund, mid cap fund, and a small cap fund and 0-10% in short term bonds. Add slightly more risk and add in blue chip multibillion dollar Dividend Champions to whatever your comfort level/risk tolerance is—5, 10, 20, 25%, or a higher percent of your entire investment portfolio. (Something along the lines of 25% of all your investment dollars in Dividend Champions with all dividends reinvested back into each stock, 25% in an S&P 500 fund, 25% in a md cap fund, and 25% in a small cap fund would be be a moderate risk tolerance portfolio that can garner good returns and would be appropriately aggressive enough for a young investor [ie, <40 years old}.)

If you do any of the above and slowly add bonds into your investment portfolio as you age, you’ll do perfectly well.

Just start early and steadily invest weekly, biweekly, or monthly.  

The rest will take care of itself.

It always has in the past and despite short term market turmoil, there is no reason to believe it will not in the future as well.

Realize also that when you are told to increase the amount in one type of asset rather another, you don’t have to put in more money than you usually do. You just have to divert more money into the desired asset class than any other. This is where once again dividends are beautiful as they allow for ongoing purchases of stocks or funds without any extra from you. You can divert money into another asset class while the dividends keep rolling in and act as a way to increase your stake in these dividend producing assets, WIth dividends, you get to increase some assets while not necessarily losing other assets.

So where does that leave you in terms of investing?

It’s a matter of what you want in in your portfolio and what you are invested in allowing you to sleep peacefully at night. If you have doubts, invest as detailed above and be happy. However…if you want to try something beyond index funds (perhaps first as a small part of your investment portfolio and then perhaps an increasing amount over the years or decades as you feel comfortable with it and it continues to perform well), then let’s talk about other funds as investment option…next time.

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…

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.

Micro caps and Nano caps are the focus of this post.

These are the smallest investable companies available—any smaller and you’d be investing in a small business to help them start up, stay open (hopefully not) , or grow (hopefully) as an angel investor possibly.

I don’t advise anyone delve into this until they have not only planned out their critical mass of index funds, but also built it up to a significant amount (ie, a million dollars or greater). If it takes ten years (or even longer) to build that first (yes, first—if it’s the only million by the time you retire, you’ve got serious problems) million dollars with index funds, then fine—you’re just not ready financially or experience wise to invest in this space.

If you thought the small caps could suffer significantly before the rest of the economy, the micro caps and nano caps not only do that, but may not even survive a major downturn in the economy given their tiny size and inability to raise capital and/or finance debt when it is needed most. So buyer beware…

Nano caps do not have any long term reliable funds that you can invest in to capture their growth, so if you’re investing in nano caps, you’re doing it company by company on your own or possibly even worse via a new fund with no track record.

DO YOUR HOMEWORK BEFORE YOU LEAP INTO NANO CAPS!!!

So on to the micro caps then…

There are four US based micro cap ETF’s with a track record listed in order of size (ie, assets under management):

1. iShares Micro-Cap ETF (IWC) (begun 8/17/05) holds just over 1,300 stocks each with an average market capitalization just below $500 million. It seeks to track the Russell Microcap Index (which excludes the 2,000 largest [by virtue of their respective market capitalizations] US based publicly traded companies). The fund’s expense ratio is 0.60%. It has over a billion dollars in assets under management.This is the grandaddy of the micro cap ETFs and the gold standard.
2. First Trust Dow Jones Select MicroCap ETF (FDM) which launched in 9/30/05 tracks the Dow Jones Select Microcap Index which is limited to just stocks listed on the New York Stock Exchange (NYSE). The ETF has just over 500 stocks with over $100 million in assets under management and an expense ratio of 0.60%.
3. Guggenheim WIlshire Micro-Cap ETF (WMCR)* which launched on 9/21/06 tracks the WIlshire Micro-Cap Index. It holds over 800 stocks with an average market capitalization of under $200 million which is the smallest average market cap of these four ETFs, It’s expense ratio is 0.59% The assets under management for this fund is <$100 million.
4. PowerShares Zacks Micro Cap Portfolio ETF (PZI)* which launched on 8/18/05 holds just over 400 stocks, eah with an average market capitalization of just over $400 million. It is the smallest of the four ETFs at <$50 million. The fund’s expense ratio is 0.50%.

*Of note, the last two ETfs are now under the management of investment firm Invesco.

Keep in mind, you’re under zero obligation to follow through with any of these investments. If you have serious reservations or doubts or anxiety about investing in such small companies that you’ve never heard of and likely know nothing about which can get crushed with any big downturn in the economy, don’t get FOMO (ie, fear of missing out) because you’re not.

Never forget this: Some money isn’t worth making.

See you next time as we start in on evaluating funds of other kinds.

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…

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.

The hunt for better/higher returns while still index investing continues apace (NIce SAT word, nerd!). Since we had already discussed S&P 500 (ie. large cap) index investing and mid cap index investing in earlier posts, we now can turn our attention and focus on to the last group (more or less…more on that later) of companies for index investing.

Small cap index investing here we come…

The same principle regarding mid cap index  funds remains true for small cap index funds. Despite the fear of being called an egoist for quoting myself, here is what I said in the last post “Think of the smaller companies out there that will eventually grow bigger and may become large caps over time. Who wouldn’t want to capture the (possibly) double digit growth year after year of such companies? And rather than hunt for these companies yourself spending dozens to hundreds of hours of research, there’s a far more efficient (both in time and cost—material and opportunity) way to steer some of this growth into your long term portfolio.”

Before we delve into the world of small caps, it should be noted what is unique about small caps compared to mid caps and large caps. Here is the best summary I could find of both the risks and rewards embedded in small cap companies and their associated funds:

“Small caps are unique in that they are highly leveraged to the economy. These companies have smaller balance sheets and are more exposed to the economic cycle. During recessions, many may go bankrupt. This is in contrast to mid-cap and large-cap companies that have more established operations and reserves to get through and thrive during turbulent times.

For these reasons, small caps are considered a leading indicator for the economy. When traders become enthused about prospects for economic growth, they move into small caps. When they are worried about a slowdown, they start to sell small caps first.”

So, assess and then re-assess your risk tolerance before you plunge in.

But, if you’re ready for a higher risk/higher reward investment.

So let’s dig into the small cap index funds that are available:

1. Vanguard Small Cap ETF (VB) traded at $143.73 as of the end of 1/24/19. The ten year return has been 13.62% annually on average. (This translates to $10,000 being invested in 2008 growing to $35,713.03 today.) There is a dividend (always greatly appreciated) of 1.77%.The expense ratio is a highly favorable 0.05% (meaning $5 per $10,000 invested) just like the mid cap funds. Of note, there is a no minimum initial investment to be invested in this fund.
2. Vanguard Small Cap Index Fund Admiral Shares (VSMAX) traded at $68.87 as of the end of 1/24/19. The ten year return has been 13.57% annually on average. (This translates to $10,000 being invested in 2008 growing to $35,712.57 today.) There is a dividend (still and always greatly appreciated) of 1.8%.The expense ratio is also a highly favorable 0.05% (meaning $5 per $10,000 invested). Of note, this fund requires a $3,000 minimum initial investment after which any amount of  money can be invested in the fund.
3. iShares Russell 2000 ETF (IWM) traded at $147.34 as of the end of 1/25/19. The ten year return has been 11.99% annually on average. (This translates to $10,000 being invested in 2008 growing to $39,887.47 today.) There is a dividend (still and always greatly appreciated) of 1.40%.The expense ratio is 0.19% (meaning only $19 per $10,000 invested, but it is 400% more expensive than the Vanguard funds). There is no minimum initial investment for this fund.
4. Vanguard Russell 2000 ETF (VTWO) traded at $118.33 as of the end of 1/25/19. The return has been 10.30% annually on average since 9/20/10 (the inception date of the fund), but only 4.44% over the past five years. (This translates to $10,000 being invested on 9/20/10 growing to $22,531.62 today.) There is a dividend (still and always greatly appreciated) of 1.44%.The expense ratio is 0.15% (meaning only $15 per $10,000 invested, but it is 300% more expensive than the other Vanguard funds). There is no minimum initial investment for this fund.
5. SPDR S&P 600 Small Cap ETF (SLY)  traded at $65.54 as of the end of 1/25/19. The ten year return has been 14.93% annually on average. (This translates to $10,000 being invested ten years ago growing to $40,210.00 today.) There is a dividend (always greatly appreciated) of 1.43%.The expense ratio is 0.15% (meaning only $15 per $10,000 invested, but it is 300% more expensive than the Vanguard funds). There is no minimum initial investment for this fund.

Once again for the sake of comparison:

“When comparing the above returns to what the S&P 500 would have done by itself, keep in mind that the average total return for the S&P 500 dating from January 2008-December 2018 was 7.185%. (This improves dramatically to 12.603% if you started putting the money at the end of 2008 in December of that year after the financial crisis had hit fully and the market had already sunk significantly with more to come until it hit bottom in March 2009.)”  

Sarcastic Reader: Man, this guy just can’t stop quoting himself like he’s Oscar Wilde or something. What an egoist!

So there’s quite a few choices as you can see. The first two Vanguard funds (VB, VSMAX) are the cheapest ad have performed well.

IWM has performed as well as these Vanguard funds, but is four times as expensive for that same performance. Same performance is the minimum requisite of an index fund, but it shouldn’t be much more expensive than others for that same performance.

So..nah for IWM.

The Vanguard Russell 2000 ETF is not an option as it has performed poorly regardless of cost—which, by the way, is still three times more than the VB or VSMAX thus making it a two time loser.

Sorry, but bye bye, Vanguard Russell 2000 ETF.

That leaves SLY which is still three times more expensive, but has performed the best of all of these small cap funds by over one percent over the past ten years.

So it appears we have VB/VSMAX versus SLY for your best small cap index fund.

Now, we get down to splitting hairs.

Assume a few things first:

You don’t have an array of Vanguard or SPDR funds. If you do, then stop and just go with the fund that matches up with what you already have.

There is no exact right answer here, but more of a way to think about what you’re seeking in an investment. If you’re worried about the future performance of the any of the funds more than anything else, then pick the cheapest fund(s)—VB/VSMAX. This lets you control the only thing you can (the fees) with the realization of what you cannot—the big bad market.

If you’re confident that you will ALWAYS outperform the cheaper funds, then go for the gusto. Personally, I like the security of cheaper funds (control what you can control to your advantage) rather than hoping everything keeps coming up roses…because you know it won’t—there will be down years. You just don’t know when. ALWAYS is rarely a good option both on med school and Board exams; the same holds true for the market.

Let’s hold here for now.

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…