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How Big Is Your Umbrella, Follow-Up
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AUTHOR: Philip Stein on 5/1/2025
FIRST: Ben Rodriguez on 5/2 | RECENT: Philip Stein on 5/3
How Big is Your Umbrella?
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AUTHOR: Philip Stein on 4/11/2025
FIRST: Edmund Marsh on 4/11 | RECENT: baldscreen on 4/13
Meet Marcus
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AUTHOR: Philip Stein on 6/23/2024
FIRST: David Powell on 6/23/2024 | RECENT: Bottom Feeder on 6/29/2024
MANY FOLKS EQUATE a stock market downturn with losing money. I often hear comments like, “I lost money yesterday. The stock market went down.”
I believe this impression of loss is an illusion, one that can be detrimental to our financial health—because it blinds us to certain fundamental truths.
1. Illusion of lost money. You only lose money if you sell shares at a loss. If you don’t sell amid a downturn,
I RECENTLY FINISHED reading the second edition of William Bernstein’s The Four Pillars of Investing—twice. This new edition is a significant rewrite of the first edition that was published in 2002. Even if you’ve read the first edition, reading the second edition is worth your time.
Though I’ve read most of the books written by well-known investment luminaries familiar to HumbleDollar readers, there were still pearls of wisdom I gathered from this second edition.
COMMENTARY ABOUT America’s wealth inequality seems to be everywhere. According to Wikipedia, as of 2021’s fourth quarter, Federal Reserve data indicate that the top 1% of households hold 32.3% of the country’s wealth.
Meanwhile, Pew Research Center reports that the median wealth of the richest 20% of American families increased by an inflation-adjusted 45% between 1998 and 2007, while the median wealth of middle-income families rose just 16%.
And then there’s the Federal Reserve Bank of St.
DURING MY 30s, I worked for a defense contractor. The Berlin Wall fell in November 1989 and the Soviet Union imploded just over two years later. Many at work believed that the end of the Cold War would lead Congress to reduce defense spending. Sure enough, layoffs at my company commenced soon after.
I was fortunate to avoid being laid off. I do recall, though, overhearing one coworker in his 50s who, after receiving a pink slip,
NASSIM NICHOLAS TALEB has written a trilogy on the topic of chance: Fooled by Randomness, The Black Swan and Antifragile. I didn’t find these three books to be easy reading, plus Taleb has strong opinions, which may turn off some readers. Still, there’s a host of investment lessons to be culled from his works.
Taleb argues that randomness plays a powerful role in financial markets and,
IF I MADE A LIST of all the dumb things investors do, I likely committed them all. I chased performance, sold stocks in a bear market, invested in things I didn’t understand—you get the picture.
Yet, despite the numerous setbacks I suffered before I matured as an investor, I was able to retire comfortably. How was that possible? My conclusion: compound growth. Indeed, I believe compounding is a surer way to wealth than picking market-beating investments.
Comments
Kathy, do you feel that your stock market investments have provided you with returns that, over time, have exceeded the inflation rate? After all, as useful as a COLA might have been, it would only have enabled you to match inflation with a zero real rate of return. Your stocks may have enabled you to earn a positive real rate of return and, thereby, increased your spending power.
Post: The Silent Compounding Cost of a 1% Fee
Link to comment from May 17, 2025
Howard, you didn’t mention if the manager charging the higher fees and posting better performance ran a higher-risk portfolio than the lower-fee manager.
Post: The Silent Compounding Cost of a 1% Fee
Link to comment from May 17, 2025
Jan, two years seems like an awfully short period of time to conclude that your advisor will continue to outperform your hypothetical investment portfolio. There are two things you haven’t mentioned: (1) The investments your advisor has placed in your account. Is it possible that your advisor invested in riskier stocks or funds that have done well recently, but whose performance may decline as markets change going forward? (2) The annual fee your advisor charges you. Your advisor will have to beat the returns of your hypothetical portfolio by more than the advisory fee each year to continue to outperform. If history is any guide, doing this over an extended period, say 10 years, is unlikely. Your hypothetical three-index fund Fidelity portfolio sounds like a good, basic core holding to me. I suspect that your advisor may later struggle to outperform this portfolio if you’re invested in actively-managed funds or ETFs. That said, as mentioned in the comments below, if your advisor provides more services than just portfolio management, you may find that additional guidance worthwhile and worth the fee you are paying.
Post: The Silent Compounding Cost of a 1% Fee
Link to comment from May 17, 2025
You make excellent points, Kevin. Thank you for posting. I especially like your admonition to avoid being “penny-wise and pound foolish.” It appears that one's insurance agent may be a better source of guidance than one's financial advisor, especially if the latter lacks insurance industry experience.
Post: How Big Is Your Umbrella, Follow-Up
Link to comment from May 3, 2025
I suspect that many people consider themselves middle class if they worked for a living, as opposed to those with inherited money.
Post: I don’t feel comfortable being “wealthy”
Link to comment from April 5, 2025
In his book A Wealth of Common Sense, Ben Carlson claims that the 2000s being a lost decade for the stock market was a myth. According to Carlson, from 2000 through 2009, the total return of the S&P 500 was -9.1%. Pretty dismal indeed. But over that same decade, emerging markets returned 162%, small cap value returned 158.6% and REITs returned 169%. If you had invested beyond the S&P 500, you would not have done too badly. The lesson is to spread your bets widely and not focus on just one asset class.
Post: Twenty-five years ago today… by Sanjib Saha
Link to comment from March 30, 2025
Entrepreneurship is not characterized by “trivial initial investment of effort.” Such efforts don’t build successful, innovative companies—they build lemonade stands. Are we equating effort with physical labor? John Bogle built Vanguard using intellect and vision. He worked hard mentally, not physically.
Post: Care to join me on my yacht cruising the Mediterranean? Do you envy the super wealthy? RDQ
Link to comment from March 22, 2025
I’ve known people of modest means who thought they knew everything. Just ask any teenager.
Post: Care to join me on my yacht cruising the Mediterranean? Do you envy the super wealthy? RDQ
Link to comment from March 22, 2025
Good point. I’d rather be a healthy person of modest means, than a billionaire with a cancer diagnosis.
Post: Care to join me on my yacht cruising the Mediterranean? Do you envy the super wealthy? RDQ
Link to comment from March 22, 2025
Workers are hired to perform jobs that need to be done. They don’t make the management decisions that can make or break a company. In this sense, the workers don’t build the company. It is the owner’s decisions, guidance and vision that build the company. If a startup fails, the workers lose their jobs, but owners could take a bigger financial hit. They may have taken out a second mortgage on their home or used their personal investments as collateral for a loan. Owners and workers don’t bear the same amount of risk. Besides, if you work for a startup company, you certainly aren’t there for job security or pension benefits. You hope to get wealthy if the company prospers. If a startup succeeds, given the asymmetric risks borne by owners and workers, fairness wouldn’t dictate that owners and workers benefit to the same degree. It is the opportunity to become wealthy that fuels the entrepreneurial drive. The owners are the entrepreneurs, not the workers.
Post: Care to join me on my yacht cruising the Mediterranean? Do you envy the super wealthy? RDQ
Link to comment from March 22, 2025