Category: Personal Investing

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.

Let me first give all of you my profoundest apologies for my recent 4-5 month sabbatical. Secondly, let me explain why it happened. For the sake of confidentiality and anonymity, I won’t say what the specifics are, I was recently offered the chance at an amazing new opportunity and I pursued it. Thirdly, I got it! Fourthly, as hard as the decision was to make, I’m closing the blog down as I cannot in good conscience continue doing it at all, let alone well, with my new responsibilities in addition to my day job as  a physician.

So, here we go with big finale…

We discussed index funds at each of the market capitalization levels last time. There are over 9,000 mutual funds in the US alone and they intersect every single kind of stock grouping you can imagine and many others you cannot. 

So, there’s no point in trying to rummage through each and every fund out there. That’s exactly what other blogs, TV shows, and magazines (digital or virtual) are for, so feel free to peruse them at your leisure…but always be mindful of not just your money and what risks you may be pouring it into, but exactly what your purposes of said investment is.

Rather than dig through the nearly ten thousand funds, let’s talk about funds that are directed in a very easily identifiable way. 

Sector Funds 

Sector funds are ones that are comprised entirely of the stocks of companies in one particular

industry (eg, technology) or sector of the economy (eg, energy)—thus the name. If it’s a sector you know a lot about such as health care or pharmaceuticals and, as always, your risk tolerance is high enough, then consider it if you don’t believe there is anything lurking in the near future to tank the sector. If you find yourself saying/thinking, “I don’t know enough about any one sector to know what the pitfalls are or when a downturn might be coming up,” then DON’T INVEST IN SECTOR FUNDS!

To be more broad of a category, there are specialty funds under which all sector finds fit. In other words, all sector funds are specialty funds, but all specialty funds are not sector funds. (Damn Venn diagrams!) Some examples of specialty funds that aren’t necessarily sector funds (ie, sectors of the economy) include real estate or even a better example would be commodities (ie, a basic good—coffee beans, sugar, corn, gold, cotton, etc—used in commerce that is interchangeable with other goods of the same type; commodities are usually used as inputs in the production of other goods—coffee, candy, food/candy, jewelry, and clothes respectively for example).

The most important things to note for sector funds is being a more experienced investor of moderately high risk tolerance before you dive in AND as someone said long ago (ie, one paragraph ago), if you find yourself saying/thinking, “I don’t know enough about any one sector to know what the pitfalls are or when a downturn might be coming up,” then DON’T INVEST IN SECTOR (OR SPECIALTY) FUNDS!

Fixed Income Funds

These funds are ones that buy investment products with a fixed rate of return such as government funds and/or corporate bonds. The specific fund will tell you what it is comprised of and pays you dividends from their proceeds or upon you selling the fund at a higher value than you bought it at earlier or possibly both. Government bonds tend to be lower yield and thus cost you less in fees whereas corporate bonds often (but not always) yield more and consequently cost more in fees. Don’t chase returns without understanding how much your costs are. A higher yield fund could cost quite a bit and return you less than a lower yield fund with lower fees…so look before you leap! 

Equity Funds & Index Funds

You already know what these are (and shame on you if you don’t) if you’ve been reading the blog and paying attention while you’re reading. 

Equity funds are ones that invest in individual companies’ stocks. So this is where your small cap, mid cap, large cap, growth stock, and value stock funds (plus every combination thereof) are categorized under.

Index funds…well, if you don’t know what index funds are at this point, I can’t help you. Prior blog posts went over both indexes and index funds in detail. Read them again, people!

Moving on…

Balanced Funds

These funds invest in a mix of equities (eg, stocks) and fixed income securities (eg, bonds). So, the more stocks you have in a fund, the higher the possible yield/returns, but also the higher the risk. A fund with more bonds or other fixed income securities than stocks will generally yield lower returns, but carry lower risk of loss. So, again, the specific fund you choose is directly linked to your risk tolerance.

So…figure out your risk tolerance before you go shopping. It’s no different than doing some Internet research before you go shopping for a big ticket item nowadays. 

Happy hunting!

Fund of Funds 

Sarcastic Reader: What in the hell is this??

Dr. Scared: This is it! This is it!! This is how they screw you!!!

Dr. Unwise: This sounds..weird…fishy even…maybe

Dr. Spend It All: No can do, boss. Gotta get that new Maserati.

Physician Wealth Thyself: Guys, while it’s kind of sad that is our last little round table, I will not miss you…at…all.

Sarcastic Reader: Ouch, As the kids say, savage!

PWT: ANYWAY…

Fund of Funds are ones that, believe it or not, invest in mutual funds. And they can be of any type. So, the fund of funds can be comprised of all purely small cap funds, mid cap funds, large cap funds, growth stock funds, and value stock funds (plus every combination thereof)

Sarcastic Reader: So, let me get this straight…instead of owning pieces of stocks or owning pieces of funds that own pieces of stocks…you own pieces of funds that own pieces of funds that own pieces of a company’s stock…right?

PWT: Yes. Exactly. Nailed it!

Dr. Unwise: Whoa! It’s like a Russian nesting doll of investing…

Dr. Spend It All: Can’t go from 0 to 60 in 5.8 seconds in a Fund of Fund though, bro!

Dr. Scared: So, what’s the catch with these fund of funds thing?

PWT: The expense ratio (ie, the fee you are charged for owning the fund) in a fund of funds is usually higher (sometimes significantly higher) than that of a standard fund

Dr. Scared: So this is how they screw you…

PWT: Yeah. Possibly, depending on the expense ratio. Finally, you got one thing right. If that isn’t a sign to end this blog on, I don’t know what is.

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

This is it…

It feels odd to say this after such a short time (which doesn’t seem short at all behind the scenes), but this is truly the end.

Though the end of any venture is always bittersweet, I’d rather leave on a high note knowing I gave it my best than giving a half hearted effort for another 6-12 months and then ended it. So, I hope you all learned a lot and even enjoyed it along the way.  

Talk to you soon.

Until next time…in another place…in another way…farewell and best of luck to all of you…

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…

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 last time we spoke about funds, we went over the options for index funds for the S&P 500. I then teased the possibility of more than just the bluest of blue chips and the largest of the large caps to help juice the total returns of your investment portfolio.

So here we go…

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.

Welcome to mid cap index funds…

Believe it or not, there are funds that track the vast array of companies in the US that range from $2 billion to $10 billion in value. That sounds like a stratospherically high value for a company,so surely you would have heard of these companies. But, in reality, unless you follow the market closely, you would not have. Red Hat, Autodesk, Amphenol, ONEOK Inc, and Roper Technologies are some of the better known mid cap companies If you haven’t heard of these, there’s no chance you would have hears of the lesser known mid cap companies.

There is/was virtually an industry standard of mid cap index funds—-the highly regarded

Vanguard Mid-Cap Index Fund Investor Shares (VIMSX) which is apparently so highly regarded that Vanguard closed the fund to new investors due to the massive influx of capital flowing into it (or crazy fat stacks of cash as the kids call it). Therefore, we must now focus on other mid cap index funds.

Here they are:

1. Vanguard Mid Cap Index Fund Admiral Shares (VIMAX) Vanguard Mid CAp ETF (VO) traded at $182.91 as of the end of 1/22/19. The ten year return has been 13.87% annually on average. (This translates to $10,000 being invested in 2008 growing to $36,640.22 today.) There is a dividend (always greatly appreciated) of 1.8%.The expense ratio is a highly favorable 0.05% (meaning $5 per $10,000 invested). Of note, there is a $3,000 minimum initial investment after which any amount of  money can be invested in the fund.
2. Vanguard Mid Cap ETF (VO) traded at $147.69 as of the end of 1/22/19. The ten year return has been 13.87% annually on average. (This translates to $10,000 being invested in 2008 growing to $36,639.71 today.) There is a dividend (always greatly appreciated) of 1.84%.The expense ratio is a highly favorable 0.05% (meaning $5 per $10,000 invested). Of note, there is no minimum initial investment for this fund.

And that’s about it…

Yes, there are other mid cap index funds.

No, I cannot recommend them.

The top few non-Vanguard mid cap index funds are (expense ratios in parentheses) are the Dreyfus Mid Cap Index Fund (0.50%), the Fidelity Spartan Mid Cap Index Fund Investor Class (0.22%), and the Columbia Mid Cap Index Fund Class A (.0.45%). Feel free to click the links and see the specifics of each of these funds.

But, realize this before you take the plunge into any of these funds, you’re paying 400%-1,000% more for the same product with the hopes of the same returns. Would you pay four times as much for the same house? Would you spend ten times as much for the same car?

If not, then why are spending so much more on your index fund? As stated before (and likely many more times in the future), equities are the only item where people often spend far more than they need to—often willingly and stubbornly refusing to change to something cheaper as if recognizing a mistake and correcting it is a sin rather than a virtue like we would be urged (and even celebrated for) to do at work.

Bizarre, but true…

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.)  

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…