Marcia, Marcia, Marcia!

Eve Plumb, AKA Jan Brady, recently made headlines for selling her Malibu beach house for $3.9 million after buying it for $55,300 in 1969.   A tidy profit for sure.

I’m a child of the ‘70s and grew up with a heavy dose of the Brady Brunch.  If you grew up watching the Brady Bunch, I’m sure you can recall almost any episode at a moment’s notice.  To this day people are still enamored with this sitcom classic.   One of my all-time favorite episodes was the Tiki Caves.

Ms. Plumb did well with her investment.  How can you go wrong buying Malibu beach front property?  Malibu real estate is probably one of the shrewdest investments one can make.  The return on her investment, before taxes, was 9.4%.   Her investment performed well because she found value in her home and owned it for four decades.   She probably could have sold it many times before and made a decent profit.  However, generational thinking is needed to make a substantial profit.

What if she invested her money in the stock market instead of buying the beach house?  Let’s take a look at a few investment alternatives.

A $55,300 investment in the S&P 500 index in 1969 made an average annual return of 9.8% giving her $4.47 million today[1].   This index purchase put an extra $570,000 into her pocket.

The same dollar investment in the Investment Company of America (AIVSX) mutual fund 47 years ago is now worth $6.9 million for an average annual return of 10.79%.[2]  This mutual fund purchase would have given her an extra $3 million.

A similar purchase in the Fidelity Magellan Fund (FMAGX) is now worth $15.63 million for an average annual return of 12.73%![3]    This investment delivered an extra $11.73 million!  That’s a lot of sand dollars.

What can we learn from Ms. Plumb’s purchase?

  1. She did well with her real estate purchase and found value in her investment.  If you find value in your investments, you’re more likely to hold them for a long time.
  2. She probably purchased the home because of its location and the enjoyment it would bring to her family.  I am positive she didn’t purchase the property at age eleven thinking in four decades she would sell it for a nice profit.
  3. Time wins.   The best way to create wealth is to look to the horizon.  Think long term and do not get spooked or side tracked by short term thinking.   A short term, trader’s mentality will leave your bank account with fewer dollars.
  4. Real estate does well because most people don’t flip homes like they do stocks.  Real estate holders do well because of their long term thinking. Stock investors should follow the lead of Ms. Plumb and other successful real estate investors.
  5. Stocks win in the end.  The long term performance of great companies is hard to beat.  If you want the opportunity to grow your wealth, add stocks to your portfolio.

For the record, I probably would have made the same investment choice as Ms. Plumb.  What eleven-year-old wants a portfolio of stocks?

When it was time to leave, we left and continued on our way. All of them, including wives and children, accompanied us out of the city, and there on the beach we knelt to pray.  Acts 21:5

[1] Dimensional Fund Advisors Matrix Book 2016, page 14.

[2] Morningstar Office Hypothetical Tool.

[3] Ibid.

Ten Thousand Men of Harvard.

Harvard is a bastion of knowledge.  A pillar to higher education.  A fortress for the educational elite.   John Adams, FDR, JFK and George W. Bush have walked the Old Yard.  Bill Gates, Tommy Lee Jones and Ralph Waldo Emerson may have slept in Hollis, Grays or Weld Hall.  Harvard consistently ranks number one in most, if not all, educational categories.

The Harvard endowment managed by the Harvard Management Company is no slouch.  The endowment fund is a behemoth with assets north of $35 billion.   The performance has done well over time and according to the Harvard Management Company the endowment fund has averaged a 10% average annual return over the past twenty years. [1]  However, their last fiscal year did not go well.  The fund endured a loss of 2% underperforming their benchmark by 300 basis points or 3%.[2]   Their posted five-year average annual return ending in June of this year was .5%.[3]  Harvard is blessed with educational fire power and financial resources so you’d think they’d be able to outperform all markets on a regular basis.

Harvard is not alone in this camp.   Long Term Capital almost brought the financial world to its knees in 1998.   Long Term Capital only had a couple of Harvard alumni on their roster.  To be fair to Harvard, the Long Term Capital team also included alumni from MIT, Stanford and the University of Chicago.  In addition to these storied schools LTC also employed two Nobel Laureate’s.   In 2016 Perry Capital is closing their doors after losing 12% last year.   Perry Capital is a hedge fund with over $4 billion in assets.   Perry Capital had been in business for 28 years.[4]

The resources of Goldman Sachs, Morgan Stanley, Bridgewater Associates, Blackrock and Citadel are unparalleled.  Besides managing trillions of dollars they hire the finest minds the Ivy League has to offer.  The employees, many with Ph.D.’s, constantly search for the needle in the haystack.  The algorithms and quant models run 24/7 looking for an investment edge a luxury not afforded to Farmer John.

The underperformance of active money managers is contagious.  According to Morningstar’s Active/Passive Barometer Mid-Year 2016 Report 93% of large cap money managers failed to survive ten years and outperform their passive benchmark.[5]

What if, instead, you owned the whole haystack?  Who cares if you never find the needle?  I’d rather have a bale of hay anyways.    The haystack in financial terms is the stock market.   Let’s say you owned the following five Vanguard Exchange Traded Funds – S&P 500 (VOO), Mid Cap (VO), International (VXUS), Real Estate (VNQ) and Bonds (BND).  This equally weighted portfolio delivered a one-year return of 11.15%.[6]  The five-year average annual return for this haystack portfolio averaged 10.25%!   In addition to superior returns your fees would’ve been microscopic coming in at .09%.[7]

As you look to invest your hard earn cash my suggestion is for you to send your kid to Harvard and your money to an index fund!

Red, I should have been a farmer. ~ Pop Fisher, The Natural.


[1], accessed 9/28/16.


[3] Ibid.

[4], Business Insider, Rachel Levy, 9/26/16.

[5] Morningstar Active/Passive Barometer, August 2016, Ben Johnson and Alex Bryan.

[6] Morningstar Office Hypothetical Tool – 8/31/2015 to 8/31/2016.

[7] Morningstar Office Hypothetical Tool – 8/31/2011 to 8/31/2016.

It Will Rain on May 23rd, 2025. At Noon.

Will it rain on May 23rd, 2025?  I have no idea.  It may.  Who knows.  If it does rain, I’ll look smart.  I have a 50/50 chance.  It will either rain or it won’t.   A major-league baseball player who hits safely 50% of the time and ends up with a batting average of .500 would be considered the greatest athlete of all time.   An NFL place kicker who makes 50% of his field goal attempts will be fired.

Investors and media folk put their faith in stock analyst and treat their picks and price targets as Gospel even though they’re right only about 50% of the time.  In a 2012 report from Nerd Wallet they found analyst who followed the thirty stocks in the Dow Jones Industrial Average were right in their stock picks 51% of their time.[1]  In a deeper study from researchers at the University of Waterloo and Boston College they found analyst missed their price targets about 70% of the time.[2]  Regardless, analyst continue to make bold stock predictions and investors continue to hang their hat on these guesses.

One way to beat the analyst and Wall Street at their own game is to own a basket of index funds.  With an all index portfolio, you don’t have to worry about stock picks or price targets.  With an index portfolio, you’ll have the opportunity to own companies all over the world with access to all the investment sectors.

There may be a conflict of interest for an analyst to recommend a stock they own but it has always surprised me when they don’t own one share of the company they’re flaunting.  If an analyst was so sure a stock was going to climb 20% or more why not own a few shares themselves?

In a recent Wall Street Journal article about market predictions, analyst have prophesied about positive market returns every year since 2000 even though the stock market has fallen about a third of the time.  The 2008 forecast from Wall Street strategists were pointing towards a positive year.  In 2009, their outlook was dire.[3]

Can you succeed as an investor without analysts or Wall Street?  I believe you can. A simple strategy is to own a diversified basket of low cost index funds.

The following portfolio generated an average annual return of 8.25% over the past twelve years.  This year, through November, the portfolio is up 9.95%.   Here is the all-equity portfolio[4].

  • IVV – iShares S&P 500 Index.
  • VO – Vanguard Mid-Cap Index.
  • IJR – iShares S&P 600 Index.
  • VNQ – Vanguard Real Estate Index.
  • EFA – iShares MSCI EAFE International Index.
  • EEM – iShares MSCE Emerging Markets Index.

However, this portfolio did miss the mark on occasion.   During the twelve-year run, it had three losing years with a drop of 40.8% in 2008.   It did rebound a year later with a return of 38.8% followed by a 19.4% jump in 2010.

As we move towards 2017 it may be time for you to adjust your New Year’s resolutions to focus on a low cost, diversified index portfolio.  My prediction is that you’ll find it beneficial towards your long term financial health.

Never make predictions, especially about the future. Casey Stengel

[1]; Nerd Wallet, April 16, 2013.

[2]; David Pett, March 7, 2013.

[3] Wall Street Journal, December 9, 2016; James Mackintosh

[4] Morningstar Hypothetical Tool.  November 2011 to November 2016.

12c Things I Learned from my Calculator.

In a world of chats, posts, opinions and rhetoric it’s nice to have a trusted advisor who can perform without emotion or fear.   My advisor tells me what I need to hear not what I want to hear.   I get the facts and only the facts.   My trusted source is available 24/7.  What is this magical source of information?  It’s my Hewlett Packard 12c calculator.   The HP12c is a RPN juggernaut.  While I watch the news, my reliable partner keeps me grounded.  It helps me separate the wheat from the chaff.   My little HP12c has been with me through rising and falling markets, rate hikes and rate cuts.

Here are twelve things I’ve learned in my years crunching numbers on the 12c.

  1. If I save $1,000 per month for thirty years at 10%, I’ll have a nest egg worth $2.26 million dollars! This calculation works regardless if the stock market is rising or falling.   The best opportunity to generate this return is to own stocks through good times and bad.
  2. It tells me if I procrastinate I’ll have less money. If I save $1,000 per month for 15 years at 10%, I’ll end up with $414,000 a difference of $1.84 million!
  3. It helps me factor inflation into my original calculation. A 3% inflation rate will reduce my $2.6 million to $1.1 million.
  4. It tells me if I invest in long term government bonds, I’ll end up with less money than if I invest in stocks. The long term historical returns for bonds has been 5.6%.  A monthly investment of $1,000 for thirty years will be worth $930,000 after thirty years.
  5. When I add a 3% inflation rate to my historical bond return, the value drops to $537,000 after thirty years.
  6. It helps me calculate the percentage gain or loss on bonds I buy. A thirty-year bond paying 3%, will gain 22% if interest rates drop by 1%.  If interest rates rise by 1%, my bond will lose 17%.
  7. It tells me if I want to reduce my exposure to bond losses, I should buy a five-year bond. A five-year bond will lose 4.5% if interest rates rise by 1%.  If I’m concerned about rising interest rates, I will need to shorten my bond maturity dates.  Of course, a five-year bond will also gain less if interest rates should fall.  A 1% rate drop on a five-year bond will generate a return of 4.7%.
  8. It helps me keep my debts in check. My total monthly debt payments should be less than 38% of my gross income.  If I make $10,000 per month, my total debt payments should be less than $3,800 per month.
  9. It helps me calculate a mortgage payment to see if I can qualify for the home of my dreams. A home purchase of $500,000 with a 20% down payment and a 4% interest rate will give me a monthly mortgage payment of $1,909.
  10. It will calculate my mortgage payoff date as well. If I add an extra $500 per month to my mortgage payment, my payoff date will be twenty years rather than the original thirty. I can shave ten years from my original mortgage term.  This ten-year reduction will save me over $100,000 in interest.
  11. The average new car purchase is $33,560. A five-year loan at a rate of 4.3% will calculate a monthly payment of $622!  Is $622 worth the new car smell?
  12. My calculator keeps my budget in line. I can calculate all my payments on my trusted device and it helps me make better financial decisions.

At the root of my calculations on my consistent 12c I know if I save money, investment for the long term and keep expenses low, good things will happen.

“A businessman is a hybrid of a dancer and a calculator.” ~ Paul Valery

Everybody Loves a Parade!

The 128th Rose Parade will ring in the new year.  The Tournament of Roses parade is a rite of passage for many a family.  I grew up watching the Rose Parade on TV and in person.  My friends and I slept on the rose parade route to get front row seats.   We arrived at the parade route around 4:00 or 5:00 the night before to stake our claim.  We spent the next twelve to sixteen hours enjoying the craziness of Colorado Boulevard.

It wasn’t until years later when I realized the Rose Parade just doesn’t happen.  It never occurred to me as a young visitor that people plan the parade.  It takes years for a parade to come together.   Themes are chosen, bands are picked and duties assigned years in advance.  I’m sure someone on the Tournament of Roses Parade Committee is already planning the 2018 Rose Parade.

Life is like a parade.  Life has a beginning and an end with a whole lot of stuff happening in between.  In life, you’re the grand marshal, drum major, equestrian, float builder, float driver and so on.  You get to create your own parade.  How can you design your perfect parade?

As we march toward the new year here are a few ideas for your successful route.

  • Plan. All successful parades start with a plan.  A good plan is what separates a successful parade from a poor one.   In January, you’ll have the opportunity to start fresh, out with the old and in with the new.  Will this be the year you complete your financial plan?
  • Help. The parade doesn’t run itself. The Tournament of Roses has thirty-one committees doing countless activities. The committee members focus on their explicit duty while keeping an eye on the result.  The committee members contributed over 80,000 hours of their time for this year’s parade.[1]  Can you use some help with your investments? Planning? Taxes?
  • Diversify. Bands, floats and horses make for an entertaining parade.  The diversification of the parade is what makes it enjoyable.  A parade has something for everyone.  Your investment portfolio should be diversified as well.  Diversification will allow you to participate in all markets.
  • Time. The parade covers five and a half miles and meanders down Colorado Boulevard.  The leisurely stroll allows spectators to get a long look at the participants.   Your investment horizon should take time as well.  A patient, long term investor will be rewarded.
  • Vision. The first Rose Parade was held in 1890.  The original founders had vision.  Their vision has benefited generations of parade goers.  Will your investment portfolio benefit generations?

I almost forgot.  In addition to the parade there is also a football game.

Happy New Year!

A rose by any other name would smell as sweet. ~ Shakespeare.


[1], accessed 12/29/16.