Friday, March 26, 2010

Simple Math to Compounded Interest...

The book of the week was The Little Book of Common Sense Investing by John C. Bogle. Bogle is the founder and former CEO of the Vanguard Mutual Fund Group. He is the inventor of the very first index fund, so the information in the book encouraging index investing is biased. However, Bogle backs up every opinion with facts and basic arithmetic. The end of each chapter has a box that reinforces the ideas of the chapter by giving quotes or writings from some of the world's most renowned financial experts including: Benjamin Graham, Peter Lynch, William Bernstein, Warren Buffet and many more.

If you are familiar with my investing philosophies you already know that I am a big fan of Index Funds. This book illustrates even more reasons to avoid financial advisors and, definitely, actively managed mutual funds. The costs associated with using these mediums of investing is way too high and has very little to zero benefit.

The reason someone would sign up to pay more money for an actively managed mutual fund is the promise of higher returns. But this is an empty promise for 90% of mutual funds. The majority of actively managed mutual funds cannot perform better than the market average in the long-term. However, if, hypothetically, you did choose a mutual fund that outperforms the market average, the most you will beat the market by is about 1.5% (and that is the high).  But since you chose a mutual fund you will have higher expense fees by about 1.3%... so you'll think that you still made a good decision because you made .2% more than the market average. This is also FALSE. Your mutual fund also comes with transaction costs that are about .7% higher than a index fund and tax inefficiencies that equate to about 1% higher. So the mutual fund that you chose, that had only a 10% chance of being higher an index fund, gave you 1.5% less on your money than an index fund would have given you.

To put it in even simpler terms... If you invested $10,000 and let it accrue interest for 20 years and you managed to pick that diamond-in-the-rough mutual fund with higher returns, you would still only make $44,087. Opposed to an index fund during the same amount of time that would grow to $58,137... That amounts to a disadvantage of $14,050. That difference could be a down-payment on a house!

Bogle is big on using simple arithmetic to determine what investment is best. As you can see from the numbers, it doesn't take a rocket scientist to analyze the numbers. And if you prefer to let a computer run the numbers go here

One thing I hadn't thought of before reading this book relates to tax inefficiencies. When you have an actively managed fund, you'll have an "expert" that thinks that they can outperform the market. So that person buys and sells when they think the time is right, but it's your money they are using the whole time. That means that if they do get you the market average at the end of the year, you'll be charged for the gains you received every time they sold. And if there is anything I disdain, it's TAXES. You've been happy all year long because you think you did well with your investments and you may have even sent your Money Manager a Christmas card and then you ring in the new year with a 1099B... more gains to pay taxes on!

If you are serious about investing in Index Funds go to Vanguard  and use this diversification:

35% VTSMX- This is a domestic stock fund
35% VGTSX- This is a international stock fund
30% VBMFX- This is a bond fund

It's a rocky climate right now for investing and I am not positive what is going to happen. I have my predictions (I lean toward more international index investing than I normally would right now), but for the time being I would like people to be able to make good decision when comparing actively managed mutual funds and index funds. If you have any questions on the book don't hesitate to ask. I would be more than happy to help anyone that wants it.

Saturday, March 20, 2010

No Point in Worrying... Stop to Succeed

The book of the week was How to Stop Worrying and Start Living by Dale Carnegie. I think Carnegie is a genius and if you have read his work, there is a good chance you agree. This book is completely different from his other book I have reviewed How to Win Friends and Influence People, but still incredibly useful. I really like Carnegie's stories because since he was just a simple Missouri boy, all his stories originate from familiar places like St. Joseph, Omaha, or Minneapolis. And they are all great stories too! Let's begin with a simple prayer many of us have probably heard.

"God grant me the serenity to accept the things I cannot change, the courage to change the things I can, and the wisdom to know the difference."

This little prayer contains all the ingredients to help you stop worrying and... start living. Worry is a dangerous part of life. It inhibits so much growth. Growth in our emotions, growth in our relationships, and even inhibits us from growing physically healthy. There is nothing admirable about worrying.. Worry is, for the most part, irrational and everyone should be looking for ways to get rid of it.

Worrying comes about for many different reasons. People worry about everything from not having enough money to not getting enough sleep. No matter what the cause of you worry is, to eliminate it you need to identify specifically what it is you are worrying about. Are you concerned about financial issues because you have heard there are lay-offs happening at work- if that's the case, since there isn't anything you can do about it, there is no need to continue thinking about it. A situation that used to worry me is sleep.. This example was given in the book too about someone else... I lay down and no matter what I cannot get myself to sleep. I laid there for hours and the rest wouldn't come and I am just thinking "I am only going to get 6 hours of sleep now, 5 hours, 4 hours... One night I decided to cast away all the worry and I convinced myself that nature would take its course and as long as I laid there with my eyes closed that I was getting rest. After I gave up worrying about the situation, there was no situation. Worrying about my lack of sleep was causing me unhealthy stress and once I decided not to let myself worry the problem went away. Identify the situation that is causing the worry... then decide whether you can do something about it or not (most cases you cannot do anything about it)... then act on the situation or forget about it.

Ever so often your worry is manifested by a real situation that has real potential. If this happens just ask yourself the question of Willis H. Carrier "What's the worst that could happen?" Then mentally prepare yourself to accept the worst and be done with that worry. Usually the worst that could happen isn't nearly as hard on you as all the stress you inflict on your life and those around you by worrying.

Another idea I liked in the book is living in "Day-tight Compartments." Only focus on what is happening today. Don't think about what could happen tomorrow. Just seize the day you are on and make something of it. Thinking about "what-ifs" doesn't get you anywhere. Live each day to the fullest until bed-time and then do the same thing with tomorrow's today. Carnegie even suggests putting the word Today in your car or on your bathroom mirror.

Some people concern themselves with ingratitude. They get really upset that they did someone else a favor and they weren't thanked for doing it. I have seen these situations play out and they always end up with someone stressed beyond belief about something that should be perceived as very trivial. Carnegie mentions a story from the Bible to put perspective on this. In Luke, Jesus heals 10 lepers in one night and only one leper sticks around to thank Jesus for what he had done. Carnegie says if Jesus isn't thanked by everyone for what he did, then anything Carnegie isn't thanked for is not even worth thinking about.

Everyone has the potential to worry, however, the best of the best have found ways to avoid worrying about things. Some people may remind themselves of a simple prayer like the one I used to start this blog and others may use a trick like taking a nap in the middle of their work day. Several people have made themselves more efficient and worry less by taking naps... John D. Rockefeller and Thomas Edison and Eleanor Roosevelt. They all turned out pretty successful. It's amazing how much reconstruction the body and mind can do with even a 15 minute power nap. Give this a shot and see how much more effective it makes you. The most important things to realize is that worry is real and it's not necessary.

I think the most powerful way to conquer worry is to control your thoughts and to consciously think about not worrying about things. Sounds easy, but it can be. A man that I consider one of the world's greatest leaders, Marcus Aurelius, is quoted saying "Our life is what our thoughts make it." I wrote about the power of positive thinking last week, but I want to reiterate how powerful it is. You can be anything you want to be and do anything you want to do. I don't think that it's "just a coincidence" that the greatest leaders in the world agree with my perspective. Use the power of your brain to achieve everything you want... start with casting away any worries and then see what else you can do.

This is an amazing book and the stories are really interesting. It would clearly be identified as a "self-help" book, but forget all the negative attention that goes toward such books and think of it as "helping your self." Take care of Number One (You) and turn around with that information and help anyone you think might need it. If you have any questions on the book don't hesitate to ask. I would be more than happy to help anyone that wants it.

Saturday, March 13, 2010

As Man Thinketh... The Power of Positive Thinking

The book of the week was As Man Thinketh by James Allen. It’s a good little book. It is written very artistically has a very important main point. The concept emphasized throughout the book is the power of positive thinking. The book has been read for many generations and most recently it inspired the writing of The Secret by Rhonda Byrne.

The power of positive thinking is incredible. I marvel at how powerful the brain is all the time! There is very few things that you have complete and total control over in life and one of those things is how you think about things and what you think about. You can think about things positively or negatively. If you think positively about things you will be happier, healthier, and all around more successful, and if you think negatively… well your life will suck.

Your happiness can greatly be affected by thinking positively. If you wake up in the morning and tell yourself “This is going to be an awesome day!” then it will, in fact, be an awesome day. You mind subconsciously pulls out all the stimuli around you that makes that day awesome. Your mind thinks… it’s warmer than it was yesterday, I feel rested, I have a wonderful family, I look great today, and so on, in a subconscious effort to make your day "awesome"… and again… with negative thinking you’ll only pull the negative stimuli. Stick to the positive thinking, why not focus on the good stuff in life?

And health… you will be healthier with positive thinking. Many common health problems are stress induced and a lot of stress will manifest from negative thinking. What health problems? Migraines, Ulcers, Heart Disease, High Blood Pressure, Muscle Tension, and the list goes on… Doctors say that thinking positively about an existing illness will even make you heal faster.

Overall, success is widely dependent on your attitude. If you are positive about your surroundings and you visualize your goals, you will be more successful in what you do. If you are into the classics you might want to check this book out, but the writing is pretty old school and it's not for everyone. If you have any questions on the book don't hesitate to ask. I would be more than happy to help anyone that wants it.

Saturday, March 6, 2010

Death.... from Taxes

The book of the week was End the Fed by Ron Paul. I can't talk about this book very much. Don't get me wrong, it's a wonderful book completely filled with historical evidence and incredible content. I just cannot bring myself to go into much detail because my head will explode while standing on my soapbox.

Paul writes in his book about all the reasons the Fed should be abolished. I agree for several reasons. I think the Fed needs to be done away with because it is much too secret of an organization that has no accountability and ends up taxing the people it serves, without them having any representation. I don't think that an organization in our government should be a private entity that doesn't have to pass any operational information pass Congress. I also don't think that they should be able to make trillions and trillions of dollars without any input from the people. When the government comes up with new taxes at least they let us think we have a vote on it through our government representatives. The Fed increasing the money supply is taxing us and at the rate they are creating money they will inflate our dollars to a value of nothing... way more tax than I am prepared to pay.

So here are a couple of videos I have seen within the last few years that really explain what is going on. I find them quite comical too. To see Bernake sit in front of Congress and have zero answers is a total joke. Just watch these videos and see how The Fed really works....

I'm not into politics... I'm into money. I want to keep the money I earn and reduce or even sustain the amount of taxes I currently pay. I don't want to be triple and quadruple taxed... income tax, sales tax, increasing the money supply, etc.... Again, I don't have a lot to discuss on the matter. Just inform yourself and do what you can to change the way things work. Read Ron Paul's book. It's an eye opener... If you have any questions on the book don't hesitate to ask. I would be more than happy to help anyone that wants it.