1001. The average investment newsletter returned less than half of the risk-adjusted Wilshire and S&P 500, with a risk adjusted return of only 49 percent that of the Wilshire;
1002. Studies show that people overrate their abilities in all walks of life. Interestingly, the only professions where psychologists thus far have found that workers realistically assess their own skill are meteorology and horse handicapping. Because investors are overconfident, they tend to trade too much, seeking to take advantage of their imagined abilities;
1003. People are naturally optimistic. Optimism keeps us going when we hit hard times. It keeps us motivated. Unfortunately, it also leads us to keep making the same mistakes because we believe that things will quickly turn around. The combination of overconfidence and optimism is a potent brew, which causes people to overestimate their knowledge, underestimate risks and exaggerate their ability to control events. Because investors are generally optimistic, they tend to believe that a strategy that has brought them losses in the past may yet bring them gains;
1004. According to “prospect theory,” investors are much more distressed by losses than pleased by gains. The theory is confirmed by empirical research finding that a loss of $1 is approximately twice as painful to investors as a gain of $1 is pleasant. In order to avoid recognizing that they have made a bad investment, investors will tend to hold losers. In order to realize the psychic gains of making a good investment, they will sell winners. Because investors dislike recognizing losses, they tend to sell winning stocks rather than losing stocks, thereby deferring the need to recognize losses;
1005. Most superior performance from mutual funds is random and thus transitory. Only a few exceed the broader market over the longer term, and then only by small amounts. Nonetheless, investors continue to pour money into “hot” funds with great short-term performance, expecting that performance to continue. The tendency to see patterns even among random events is a natural human trait. The tendency to see patterns becomes dangerous when it is combined with overconfidence. Not only do investors tend to see patterns where none exist, they tend to believe that they are the only ones who can see them. Because investors see patterns where none exist, they are attracted to “hot” funds and stocks. Thus, investors tend to make risky investments and trade excessively;
1006. In investing, when picking an index to track: 1. The index should track the broad market. In order to gain all of the risk-reduction benefits of a diversified portfolio, you need to own many stocks from all segments of the market. While buying that many stocks on your own would be prohibitively expensive, you lose nothing by choosing an index fund that tracks a very broad index. 2. The index should be value neutral. A value-neutral index takes no point of view about the future direction of the market or any of its numerous sectors. Such an index–generally referred to as a total-market index–invests in all types of stocks in all sectors of the economy. 3. The index should be market-capitalization weighted. Market weighting simply means that an index holds an amount of each stock that is proportional to that stock’s share of the total market capitalization of the index. A market-weighted index reduces transaction costs for the index funds tracking it. These funds do not have to buy or sell shares due to price movements, as holdings automatically rebalance. Good news: most major indexes are market-weighted. 4. The index must be investable. By “investable,” we mean that the stocks in the index must be available in sufficient quantity for an index fund to purchase them at reasonable bid/ask spreads. In the U.S. market, investability is not a significant concern. For international indexes, though, investability can be a bigger issue. 5. Ideally, the index should be float adjusted. Market-weighted indexes must define the market capitalization of each stock and the index as a whole. A common way is simply to include all outstanding shares of each company at its current market price. A better way is to exclude shares held by insiders and count only those shares that can be bought and sold in the market. This is known as float adjustment. It saves money for funds tracking the index, as they don’t have to buy as many shares of companies that are largely privately held;
1007. When picking an index fund to invest in: 1. Select an index, preferably a total market index with at least as much coverage of the market as the S&P 500. 2. Identify funds that track that index. 3. Choose a fund with low fees and no load, and which minimizes trading costs and remains continually invested in stocks. The easiest way to identify such a fund is to compare its annual returns to the returns of the underlying index over at least a five-year period. A fund that tracks its index closely probably fits the bill;
1008. Generally speaking, if you have more than $5,000 to $10,000 to invest in a taxable account, you should be giving ETFs a very good look;
1009. While ETFs can be a wonderful tool for investors investing a lump sum and facing taxation, they are a poor alternative to index funds for investors who are saving a little bit each month. Buying or selling ETFs means paying a brokerage commission and bid/ask spread. You pay no similar cost with a no-load index fund. For someone putting away a few hundred dollars a month, these costs disqualify ETFs as a sensible investment. For this reason, we believe that even the most enthusiastic ETF investor will want to hold an index fund as well, in order to invest smaller amounts from time to time;
1010. The point at which discount portfolio companies’ fees become cheaper than those of an index fund or ETF is $165,000 to $300,000;
1011. Freedom’s just another word for nothing left to lose;
1012. Asset allocation should be a conscious choice, not a happenstance. You should consciously decide how to allocate your assets. Don’t just let allocation happen according to what looks good at the time or be due to the vagaries of your own returns or cash situation;
1013. One rule of thumb with which most financial advisors start is that your stock investments should be a percentage of your assets equal to 100 or 110 minus your age;
1014. Never pay anyone a percentage of your assets to advise you on asset allocation;
1015. Never confuse asset allocation with market timing;
1016. Do not buy any mutual fund that lists asset allocation as one of its objectives. These funds generally are not shifting asset allocations based on your time horizon, but rather are engaged in market timing;
1017. Don’t forget about asset allocation when making decisions about your retirement accounts. Your 401(k) plan or IRA is likely to be a significant part of your savings. Include these funds in your decisions. Also, be cautious regarding company stock in these funds. Where company stock is allowed in the plan, studies show that the average 401(k) participant holds one third of her retirement assets in that stock. This is like doubling down at Vegas. If your company does poorly, not only does the stock go down, but your salary or job is also on the line. Diversify the risk by selling the company stock as soon as possible;
1018. Periodically–but not frequently–reconsider your asset allocation strategy. Not more than once a year, you should examine your asset allocation and make certain that it is still consistent with your time horizons and risk tolerance. You should not base this reexamination on how the various asset classes have performed over the previous year;
1019. U.S. Treasury securities have no practical risk of default and interest is exempt from state and local taxes. They generally pay a lower interest rate, however, than other types of bonds. Treasury securities vary in maturity from Treasury bills (maturing in less than one year), Treasury notes (maturing in two to ten years), and Treasury bonds (maturing in more than ten years);
1020. Municipal bonds have an extremely low risk of default, and interest is exempt from all federal taxation. Interest is also exempt from state and local taxes when the bond is issued by your state of residence or a city within that state. When considered on an after-tax basis, they earn higher returns than Treasury securities of comparable maturities;
1021. Investment-grade corporate bonds and bonds issued by government-sponsored enterprises carry a modest risk of default and generally offer less liquidity than Treasury securities. Accordingly, they pay a higher interest rate than Treasuries. Interest and other earnings on these bonds, however, are fully taxed;
1022. High-yield bonds (also known as junk bonds) are issued by companies with higher risks of default and therefore offer higher potential interest rates. They carry no tax advantages. The risks and returns of high-yield bonds are akin to those of stocks. Individual investors willing to shoulder this level of risk should probably hold stocks instead;
1023. Bond funds bring you only modest diversification benefits. Only a handful of high-quality bonds is necessary to achieve diversification, since bonds are much less volatile than stocks. Also, the default rate on high-grade corporate and agency bonds is small; municipal bonds carry even less default risk; and Treasury securities are riskless. Thus, whereas we would advise against your holding a handful of stocks, we see nothing wrong with holding a handful of high-quality bonds;
1024. Individuals can purchase securities directly from the Treasury Department at the same cost as Wall Street dealers in these securities. Treasury Direct (TreasuryDirect.gov) offers investors with as little as $1,000 the opportunity to invest in Treasury securities over the Internet or the telephone. You can buy savings bonds in even smaller amounts. For those interested in protecting against inflation risk, you also can buy Treasury Inflation-Protected securities or savings bonds;
1025. The case for direct purchase of bonds is much stronger than it is for stocks. The conventional advice is that you should have at least $10,000 to $25,000 to invest in bonds before forgoing a fund;
1026. We have two caveats with respect to holding your own bonds. First, you must have a plan for the interest payments. Allowing that money to lie idle in a money market or checking account isn’t the best thing. The easiest way to go is simply to reinvest those earnings in one of your index stock funds every month or quarter. Second, if you plan to move states in the foreseeable future, you may wish to defer direct purchases of municipal bonds;
1027. Determine the percentage of your assets you wish to allocate to bonds. If you have a significant amount to invest, say $10,000 or more, invest directly by purchasing a few high quality corporate bonds or municipal bonds–with municipal bonds from your own state the first place to look. If you have smaller amounts to invest and won’t be able to afford a handful of individual bonds, use an index bond fund. If you wish to invest in Treasury securities, wait until you have $1,000 and use Treasury Direct;
1028. Investing between 15 to 20 percent of your stock portfolio in international stocks can bring you clear diversification benefits. Our general advice would be to put these dollars to work as you would here in the United States. Buy an ETF or index fund that represents the broad market rather than one particular region, sector, size, or style;
1029. If you have a craving for a Girl Scout “Samoa” cookie and there aren’t any readily available, a Keebler (Fudge Shoppe) “Coconut Dreams” cookie is a pretty good substitute. . . . The inside of the Keebler cookie isn’t as crisp as the Girl Scout cookie and the coconut on the outside is a little bit sweeter, but besides that, they pretty much taste the same;
1030. When you’re actually at an NCAA men’s basketball tournament game, “timeouts on the floor” (i.e., TV timeouts) make the game feel really, really long;
1031. Jamie Dixon’s (i.e., Pittsburgh’s men’s basketball head coach) dad knows Pat Riley;
1032. Even if there’s a long line behind you at the concession stand, you should check your receipt to make sure they didn’t charge you double (especially at the Verizon Center);
1033. With 529 plans you can withdraw the money tax-free when the beneficiary goes to college. In other words, you don’t just defer capital gains taxes, you eliminate them entirely;
1034. The annual limit on contributions to 529 plans is $10,000 per year, many times that of an IRA. If you have $50,000 on hand, you can even invest that immediately. You then simply need to wait five years for your next investment, rather than investing $10,000 per year. There are caps on the total amount you can invest, which represent each state’s estimate of what four years of college will cost. Contributions are not limited by your age or income, as they are with an IRA. You can make anyone you want the beneficiary of a 529 account–your children, your grandchildren, a cousin, a friend, or even yourself. The tax code simply requires that the beneficiary be living;
1035. Funds from 529 plans can be used for any college-related expense, not just tuition. That includes fees, room and board, books, supplies, and equipment;
1036. Once you have put money in a 529 plan it is considered out of your taxable estate in case you die. This is true even though you continue to own and control the account;
1037. Your 529 contributions count against the annual $10,000 gift limit for tax purposes;
1038. Your home state may offer some state tax relief in addition to the federal relief you’re already receiving. Some states, for example, allow you to deduct contributions to a 529 plan for state income tax purposes up to certain dollar limits. Thus, you may save on your state income tax by investing at home. Be careful, though, there often less there than first meets the eye. Virginia is a good example. You may deduct up to $2,000 from your income for local tax purposes. While that may save you up to $100 in taxes, it will be more than eaten up by high annual fees plus and $85 enrollment fee. Virginia’s active management will also eat at your returns through higher turnover;
1039. Some states exclude assets you hold in their own 529 plan from state financial-aid calculations. The federal calculations will be the same regardless of which state plan you use. The assets can reduce your eligibility for financial aid;
1040. Garbanzo beans are just another name for chickpeas;
1041. The Amsterdam Falafelshop (Falafelshop.com) in Adams Morgan claims it’ll accept Euros;
1042. Where in the world can you buy (cheap) shots in a squeeze bottle? The answer is: Dan’s Café in Adams Morgan . . . Bring money. It’s cash only;
1043. It’s funny how we’ve become so accustomed to having a mobile phone . . . to always being a few pushes of the button from being in contact. . . . It’s a strange feeling when we don’t have one that works. . . . You kind of feel isolated and cut off from the rest of the world;
1044. I’ve been told Grand Marnier with soda over ice is pretty good;
1045. The Mandarin Oriental in D.C. is by the L’Enfant Plaza Metrorail station;
1046. You can get a filling for your filling;
1047. (President) Woodrow Wilson was a huge football fan. . . . And he might have been the (head) football coach at Princeton University when he was going to law school at the University of Virginia;
1048. It’s bumpier flying a plane on sunny days;
1049. Gribiche sauce is basically mayonnaise with pickles, capers, parsley, chervil and tarragon added to it;
1050. Chris Cornell (the lead singer of “Soundgarden” and “Audioslave”) sings at synagogue;
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