IF YOU’RE WORRIED that indexing threatens the smooth functioning of the stock market, it’s helpful to spend an hour chatting over coffee with Charles Ellis—which is what I did last week when I was in New Haven, Connecticut. Ellis is one of indexing’s most eloquent advocates, including in his bestselling book Winning the Loser’s Game and in his latest tome, The Index Revolution.
Charley dismisses the idea that index funds are distorting the market—and scoffs at the idea that active management is headed for extinction.
WHAT’S A GOOD reason to dial down your stock market exposure? A year after Donald Trump was elected president, many folks are still smarting from their decision to bail out of stocks. Clearly, we shouldn’t lighten up on shares just because we don’t like the guy in the White House.
We also shouldn’t bail out just because stocks sport high price-earnings ratios and skimpy dividend yields. No doubt about it, stocks today are expensive.
STOCK BUYBACKS are here to stay. The Securities and Exchange Commission opened the door in 1982, when it ruled that companies could repurchase their own stock without triggering accusations of share price manipulation. Ever since, more and more companies have taken advantage. Indeed, in recent years, U.S. corporations have spent more money buying back their own shares than paying out dividends.
Good news? I see both plusses and minuses. Here are the plusses:
Once you figure in buybacks,
THE BOGLEHEADS had their annual conference this week in the Philadelphia area, where Vanguard Group’s headquarters is located. Devotees of Vanguard’s 88-year-old founder John C. Bogle, the Bogleheads usually meet online at what’s probably the world’s best investment forum.
The star of their annual meeting was, of course, Jack himself. His latest book, an extensive revision of The Little Book of Common Sense Investing, just came out. What was on Jack’s mind?
I’M A BIG BELIEVER in transparency, so I’d like to tell you a little about my personal investments. As you might guess, the overwhelming majority of my money is allocated to simple, low-cost index funds—the same things I recommend in my writing and for my clients. That is true almost without exception. But today, I would like to describe one of those exceptions.
Many years ago, before I entered the investment industry, I purchased shares in a small mutual fund called the Mairs &
REVIEWING YOUR investment strategy? To get you started, here are 10 questions to wrestle with:
How much cash you will need from your portfolio over the next five years? That money should be out of stocks and riskier bonds—and invested in nothing more adventurous than short-term bonds.
What’s the total sum you expect to save between now and retirement? If you look at that future savings as a cash holding and count it as part of your portfolio’s conservative investments,
IT’S A COMMON PLOY among columnists: You start with the provocative statement—and then spend the rest of the article dancing like crazy, trying to defend it. Today’s provocative statement: Except in a few rare instances, I’m not sure why anybody would ever own municipal bonds.
At first blush, this sounds not just provocative, but downright stupid. If you’re in a high income-tax bracket and investing money through a regular taxable account, it would be foolish to buy taxable bonds and then pay income taxes on the interest you earn.
VANGUARD GROUP is my favorite fund company—and the place where I now keep all my investment dollars. There’s no mystery why: Among mutual fund companies, Vanguard has long been not only the biggest champion of index funds, but also the firm with the lowest annual fund expenses.
Except that’s no longer the case.
Fidelity Investments, BlackRock’s iShares and Charles Schwab have all muscled onto Vanguard’s turf, offering index funds with lower annual expenses. This is obviously a marketing ploy: By offering cut-rate deals on select index funds,
THIS BULL MARKET is more than eight years old, U.S. stocks are undoubtedly expensive and there’s even talk of war. Tempted to sell? Problem is, there was also ample reason to be worried three years ago and yet here we are, with shares both higher and more richly valued.
What to do? I fall back on my standard advice: Forget trying to forecast the market’s short-term direction and instead focus on taking the right amount of risk.
WHEN I LOOK at today’s world, I often think of Charles Dickens’s famous line, “It was the best of times, it was the worst of times.” Technology, including the web and smartphones, has made life so much more convenient.
Still, one thing I really miss from the “old days” is the experience of the traditional bookstore. Shopping online is great, but sometimes it’s easier to choose from a curated set of 10 books on a shelf than to sift through an unwieldy list of a thousand choices online.
AS I THINK BACK over the past three decades, I have one overriding investment regret.
No, it has nothing to do with the investments I bought. For much of the past 30 years, I’ve owned a globally diversified portfolio, with 100% in stocks when I was younger and closer to 70% now that I’m in my mid-50s. Initially, I owned actively managed funds and a few individual stocks, but I substituted index funds as they became available,
IT’S ANECDOTAL evidence, so take it with a grain of salt. Still, I’m once again hearing a dangerous argument—that you should always carry the largest mortgage possible, so you have extra money to stash in stocks.
During the roaring bull market of the late 1990s, and during the booming market for stocks and real estate in 2005 and 2006, readers regularly wrote to me, making the same argument. The strategy isn’t without logic—and it isn’t necessarily a sign that stocks are about to crash.
FINANCIAL ASSETS can seem like mere numbers on an account statement, especially at times of stock and bond market turmoil. But hard assets feel more substantial: Your home, artwork and gold coins have a comforting physical presence.
But are they good investments? I’ve been perusing Financial Market History, a collection of essays edited by David Chambers and Elroy Dimson. The paperback costs $38.95 from Amazon, but the Kindle edition is available for free.
EVEN BAD FINANCIAL products and strategies turn out okay for some investors. If that wasn’t the case, they probably wouldn’t attract enough customers to survive, no matter how aggressively they’re peddled. Still, some are so risky or so costly that the chances of a happy outcome are slim. Want to improve your odds of financial success? Here’s how I would categorize the products and strategies on offer today:
Buying stocks on margin
Leveraged exchange-traded index funds
Writing naked call options
Cash value life insurance
Unit investment trusts
Closed-end funds bought at the initial public offering
Brokers on commission
Carrying a credit card balance
Proceed with Caution
Actively managed funds
Bonds bought in the secondary market
Closed-end funds at a discount
Claiming Social Security early
Index mutual funds
Exchange-traded index funds
High-yield savings accounts
Certificates of deposit
Health savings accounts
Term life insurance
Rewards credit cards
Owning your primary residence
Home-equity lines of credit
Immediate fixed annuities
Deferred income annuities
Claiming Social Security late
The bottom line: With so many products in the promising category,
AS A YOUNG REPORTER in the late 1980s, trying to learn about investing, I read a slim 81-page volume with an unassuming title: Investment Policy. It remains one of the best investment books I’ve ever read.
Investment Policy was later reissued with a somewhat catchier title, Winning the Loser’s Game, and it’s now widely considered to be an investment classic. Over the years, the book has also been greatly expanded and the 2017 edition runs to 286 pages.