Low-Maintenance Investing with Index Funds and ETFs
My apologies for the unusual Wednesday post. I just wanted to give readers a brief reminder that today is the last day to download a Kindle copy of the new book, Microeconomics Made Simple, for just $0.99.
Also, if you’d like to tell any friends about the book (e.g., via forums, Facebook, or Twitter), today would be the day to do it, so that they can get the lower price as well.
Thanks!
We’ll return to our regularly scheduled investing-related material on Friday.
Of my books, the one that sells the most copies each month is the one that has the least to do with personal finance: Accounting Made Simple. I wrote the book with small business owners in mind, but it has turned out to be very popular with business students who are struggling in their accounting courses.
Over the last few years, many readers of that book have asked whether I would consider writing a similar book about microeconomics. While that seemed like a great idea, there was one obvious problem: I’m not an economist. My training in economics consists of just a handful of undergraduate classes.
So, last year, I turned to somebody I know who is an economist (and an excellent writer) — Austin Frakt — to see if he would be interested in partnering up on such a book. For those of you who aren’t familiar with him, Austin is the founder of the health policy blog The Incidental Economist, as well as a regular contributor to The New York Times. (He’s also a Boglehead.)
Today, after many months of work, the book is finally available:
Austin and I would encourage you to pick up a copy of the book if:
As I’ve done with prior book releases, this book will be temporarily discounted for the first few days of publication. Specifically, from today through Wednesday (June 4th), the Kindle price will be discounted from $4.99 to just $0.99. As a reminder, Kindle books can be read on a plain-old PC or Mac — no need for an actual Kindle device. You can download the free Kindle software here:
Also, for anybody interested, the Kindle version of Accounting Made Simple will be discounted as well during that same period.
This book is in two parts. In Part One, we discuss several of the most basic concepts of economics, such as utility, supply, demand, market equilibrium, and some ways in which governments intervene in markets. In Part Two, we focus on the degree of competition in different types of markets, as well as the outcome of that competition. Market structures considered include: perfect competition, monopolies, oligopolies, and monopolistic competition.
A detailed chapter-by-chapter table of contents is available on Amazon.
For those curious to see what the book is like, Austin and I have published a few brief excerpts:
To give a good sampling, these excerpts come from both earlier and later sections in the book. Naturally, the topics are somewhat easier to understand within the full context of the book.
So, please go check it out and pick up a copy if you have an interest in the subject matter:
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Microeconomics Made Simple: Basic Microeconomic Principles Explained in 100 Pages or Less
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PS: Special thanks go to Wade Pfau and Julian Jamison for contributing their time and expertise for technical editing.
Just two brief announcements for today:
First, the 2013 edition of my book Can I Retire? is now available, and from now through Wednesday, the Kindle version is available free of charge, and the print version is just $5 on Amazon.
In addition, fellow blogger Darrow Kirkpatrick’s new book Retiring Sooner is available free as a Kindle book (and $5 as a print book) through Wednesday.
For those of you who haven’t yet come to recognize the name from my weekly roundups, Darrow Kirkpatrick is one of my favorite personal finance bloggers. He’s not a financial professional. Rather, he’s simply a normal guy who did all the right things to retire early (at age 50).
Darrow’s new book is a very nuts-and-bolts guide for how to follow in his footsteps and retire well ahead of the typical schedule.
Click here to see Darrow’s book on Amazon and download the free Kindle version.
The changes to Can I Retire? include:
Click here to see the new edition of Can I Retire? on Amazon and download the free Kindle version.
I don’t own a Kindle. Can I still read the Kindle edition somehow?
Yes. There’s no need to own a Kindle to read a Kindle book. They can be read using free software on a regular PC or Mac.
I’ve already read the prior edition. Should I buy this one too?
Overall, it’s the same book with the same message, so there’s probably no need to buy it again. (On the other hand, for a price of zero, there’s little reason not to pick up the Kindle version.)
Can I tell other people about the promotion?
Please do.
I already have the old edition on my Kindle. How do I update it to the new edition?
Before buying the new one, you’ll have to delete the old edition from your Kindle and from your Kindle account on Amazon. To delete an item from your Kindle account:
I hope you find the books helpful! Here are the links one more time:
As regular readers have probably noticed, Darrow Kirkpatrick of Can I Retire Yet is one of the writers most frequently included in my weekly roundups. I’ve been enjoying his writing since I first encountered it, so when I met Darrow in person at the Financial Blogger Conference this year, I invited him to author a guest article for this site. I hope you enjoy it.
Balanced funds are mutual funds that combine stocks and bonds into a single investment. Generally they stick to a fixed asset allocation, within certain ranges. Balanced funds have traditionally been favored by conservative investors looking for safety, income, and modest growth. In a word, they’re boring!
For most of my journey to early retirement, I had no interest in balanced funds. I dabbled in individual stocks, then gradually shifted to passive index funds during my heavy accumulation years. Towards the end of that time, as I focused more on safety and retirement income, balanced funds appeared on my radar.
At some point I took a small position in Vanguard Wellesley Income. Then something curious happened. Whenever I had free cash to invest, I’d scrutinize my existing holdings plus my investing “wish list.” After some research, number crunching, and pondering, I’d often just put the money in Wellesley Income! Over time, that one fund has grown to constitute about one-third of my portfolio.
Why did I keep choosing this one balanced fund? Because, regardless of the economic cycle, market cycle, or my own personal life cycle, it was nearly always an appealing investment.
The bond component of a balanced fund tends to dampen out the volatility of the stock market. A balanced fund won’t rise quite as high in the good times, but it will fall far less in the bad times, and you’ll generally make back those dips in reasonable order. So, over time, a balanced fund can limit the stock market’s swings, while delivering much of its returns.
And, while it’s not guaranteed, the stock component of a balanced fund makes the fund more likely to keep up with inflation than a bank CD, a bond, or a bond fund.
Another research-documented reason to like balanced funds: They help you to avoid common behavior that leads to investing mistakes.
To appreciate the evidence for this, you first need to understand the concept of investor returns as distinguished from fund returns. We’re all familiar with the annual returns that mutual funds report in their glossy ads. But investor returns are what the average investor actually earns from the fund.
Why would those numbers be different? Consider a fund that has a great quarter and goes up 5% early in the year. That’s approximately a 20% annual return. Investors see that great return and pile in. Then the fund flat lines for the rest of the year. So it winds up the year by earning 5%, while most of its investors earned nothing. That’s investor returns.
In 2011 Morningstar completed a study on the gap in investor returns — how individual investors do compared to their funds’ overall returns. Here’s a snapshot of what they found: In 2010, the average domestic stock fund earned a return of 18.7% compared with only 16.7% for the average fund investor — a 2% difference. For the trailing three years, that gap was 1.28%.
However it was a different story for balanced funds: The gap between investor and fund performance in 2010 was only 0.14%, and just 0.08% for the trailing three years. Results were even better for the trailing 10 years. And results were similar for target-date funds and moderate- and conservative-allocation funds — close kin to balanced funds. As anybody who has crunched retirement numbers knows, a 1-2% difference in annual return over long periods can easily add up to tens of thousands of dollars!
Why do individual investors do better when they are buying and holding balanced funds? It’s probably because balanced funds don’t tend to incite fear or greed — two emotions that can be lethal to investment performance. Balanced funds are easier to live with.
It’s like the difference between a family sedan and a race car. The race car might have awesome performance, in the right hands. But, for those of us who aren’t full-time professional drivers, there are much better vehicles for driving around a city. It’s the same with investing: For most people, a vehicle with predictable behavior, that they can handle, will produce better results. [Mike’s note: That’s my bolding.]
Should a balanced fund (or a target-date or allocation fund) make up your entire portfolio? That’s a viable option for many. But it may not be possible, given the investment choices in your retirement plan. Or you might want the level of control offered by individual index funds or ETFs. But a balanced fund could still play a useful anchoring role in your portfolio, while serving as a mechanism to diversify or automate part of your rebalancing strategy. That’s how Wellesley Income functions in my portfolio.
Which balanced fund might be best for you? Vanguard Wellington and Wellesley Income have long and enviable track records, and have worked well for me. But note these are actively managed funds. While they have extremely low expenses — 0.25% for Wellesley Income investor shares and 0.18% for Admiral shares, for example — their managers do trade positions in an attempt to enhance performance. Mike makes a good case for the passive index-based Vanguard LifeStrategy Moderate Growth Fund, largely because of the increased international exposure. And if I had it to do over, I’d probably choose one of the LifeStrategy funds too.
In the end, only you can choose what’s right for you. But, whatever you decide, remember this principle: your long-term investing behavior is far more important to success than the exact investments you pick, the exact asset allocation you choose, or the rebalancing strategy you implement. As it turns out, balanced funds just make it easier for you to behave well!
Darrow Kirkpatrick is an author, software engineer, and investor who retired at age 50. He now writes regularly about saving, investing, and retiring at Can I Retire Yet? He is married to a schoolteacher, has a son in college, and is an experienced rock climber and enthusiastic mountain biker.
In November of 2008, I quit my job to go full-time with running my business. Of course, being the financially conservative fellow that I am, there was absolutely no way that I was going to quit until I had a new health insurance policy already in place.
Like any self-respecting member of Generation Y would do, I began my research by Googling “self-employed health insurance.” After clicking around and looking at a few different sites, I came upon eHealthInsurance.
Apparently, health insurance pricing is regulated by law so that all the different places that sell a given policy must charge the same price as each other. So, for example, a $1,250 deductible policy through Blue Cross Blue Shield will cost the same regardless of how you buy it.
Truth be told, I was completely unaware of that fact until I read it on eHealthInsurance’s site. With that knowledge in hand, I figured there would be no point in shopping around.
Of course, you’ll still want to do your research in terms of making sure that you get the policy that’s best for you and your family.
eHealthInsurance was very helpful here. They provide access to a large number of insurance providers, so you can choose between several different plans regardless of your price range.
I’ve only had 2 interactions so far with their customer service, but it was excellent both times.
Most recent example: In February, Kali–my wife–got her first full-time job with benefits (hurray!). Her employer provided very low-cost insurance for her, but did what appeared to be nothing in the way of subsidizing insurance for spouses.
So I called up eHealthInsurance to ask if we could keep the policy active but remove Kali from it. Not a problem at all, apparently. All we had to do was fax over a letter indicating that we wanted to remove her from the plan, and it was taken care of.
Given our experience so far? Absolutely. They made it easy to shop for plans, provided plenty of different options for policies, and have had great customer service. (And, apparently, nobody’s going to have better prices than they do anyhow…)
I don’t write much on this blog about entrepreneurship, but since I know many of my readers are self-employed, I thought it would be worthwhile to share my thoughts (and experiences) on the topic of business formation.
If you’ve decided that you want to form an LLC or corporation for your business, it’s probably a good idea to get help. Aside from using a local attorney, the two biggest names in the industry are LegalZoom and MyCorporation (which is owned by Intuit).
I used LegalZoom to form my own LLC, and I was quite happy with the service. Everything went smoothly:
Just under 3 weeks, start to finish. No hassle at all, and they kept me up to date the entire time. I couldn’t be more pleased.
I haven’t used MyCorporation to form an LLC, but I did use them once for a DBA filing. The experience wasn’t so great.
At first, it appeared that everything went smoothly. But, to my surprise, three months after MyCorporation told me the entire process was finished, I received a letter from Cook County stating that all of the paperwork was not in fact filed, and that the entire filing had become null and void due to 90 days having passed since the process was started.
In the end, I got my money back, but the entire thing was a waste of time, as MyCorporation never did manage to complete the DBA filing.
Click here to learn more about LegalZoom’s business formation services.
Hi. I'm Mike Piper, the author of this blog. I'm a CPA and the author of several personal finance books. The point of this blog is to show that investing doesn't have to be complicated. Click here to read more, or enter your email address in the blue form to the left to receive free updates.
Investing Made Simple: Investing in Index Funds Explained in 100 Pages or Less
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More than Enough: A Brief Guide to the Questions That Arise After Realizing You Have More Than You Need
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