Managing personal finance successfully is becoming one of the most important area in life, and less sophisticated investors are in need of good financial advice to deal with the complexities of personal finance. But new research finds that the financial advising industry preys on the elderly and poorly educated. Often advisers don’t act in the best interest of the customers and they steer clients to inappropriate products. Bad financial advice can cost unsophisticated investors tens of thousands of dollars in loss. The study shows that “the median settlement for misconduct is $40,000, and a quarter of damages exceed $120,000.” Also, the research finds the disturbing trend that “advisers who engage in misconduct aren’t necessarily forced out of the industry. Instead, after being fired from their previous firm, they are often able to find jobs at new firms that make it a habit of hiring ethically challenged advisers.” The best way to protect against bad advise is to educate yourself about personal finance.
According to BlackRock’s 2015 Global Investor Pulse Survey, 49% of American have negative feeling toward investing and 72% of Americans don’t even think of investing in the markets as a way to save for their long-term goals. Our emotion brains are not designed for investing in the long run and there are 3 psychological biases that can impact how you invest: Negativity bias, recency bias and status quo bias. It’s important, therefore, to recognize and acknowledge these common cognitive biases. Doing so can help us invest smartly and ultimately achieve the goals we really need. (learnvest.com)
A three-fund portfolio is a great way for investors to keep their investments simple, low cost and diversified across both domestic and international markets. While it’s important to make sure that you match your risk tolerance to your percentages of stocks and bonds according to your allocation, having a simplified portfolio in major index funds will ensure that your costs are low and your returns are maximized in the long run.
Introduction to a Three-Fund Portfolio
A three-fund portfolio is basically a portfolio often recommended for and by Bogleheads where you use three asset classes for your investment: US stock index fund, international stock index fund, and bond index fund. By following three-fund portfolios, it makes investment simple and less time-consuming so you can focus more on important stuff in life and spend more time with your loved ones.
A three-fund portfolio is a portfolio that uses only basic asset classes — usually a domestic stock “total market” index fund, an international stock “total market” index fund and a bond “total market” index fund. It is often recommended for and by Bogleheads attracted by “the majesty of simplicity”, and for those who want finer control and better tax-efficiency than they would get in an all-in-one fund like a target retirement fund.
How to Implement a Three-Fund Portfolio
First you decide how much of the three basic assets to hold in your portfolio — domestic stocks, international stocks, and bonds. Second, choose where to hold each of these asset classes such as in your 401(k), roth IRA or taxable brokerage accounts. Finally, choose the corresponding mutual fund to use for each asset class.
Here are Vanguard funds that are best for a three-fund portfolio:
- Vanguard Total Stock Market Index Fund (VTSMX)
- Vanguard Total International Stock Index Fund (VGTSX)
- Vanguard Total Bond Market Fund (VBMFX)
Personally, we follow the three-fund portfolio for our investments. Currently we have 70% in stocks and 30% in bonds. Our stocks are split between US and International. We will review our allocations once per year and we will make adjustments by adding new money to adjust percentages back to targets. Our plan allows for reduction in equity allocation as retirement gets closer and risk tolerance decreases. Rebalance will be done during monthly contributions with net cash inflows to be used to meet the target allocation.
The most popular way to save for college is the Section 529 College Savings Plan. But financial planner Michael Smith makes the case for why 529 plan might not be the best choice. The reasons are that 529 plans lack flexibility, have higher expense ratio fees and is vied as child’s asset by some schools when obtaining the financial aid package. Alternatively, you can invest the college fund in an outside low cost index fund that’s considered as parent’s asset or discuss with your child about choosing a lower cost school. (forbes.com)
Investment advisor Mickey Kim summarized the concept of mapping financial freedom on an index card that first pioneered by Harold Pollack. Follow these 8 simple rules to achieve your financial freedom:
- Strive to save 10 percent to 20 percent of your income
- Pay your credit card balance in full every month
- Max out your 401(k) and other tax-advantaged savings accounts
- Never buy or sell individual stocks
- Buy inexpensive index funds
- Make your financial adviser commit to the fiduciary standard
- Buy a home only when financially ready
- Insurance—make sure you’re protected
New generation in America today are the luckiest crop in history. As usual Warren Buffet released his annual letters to Berkshire Hathaway Inc. shareholders and he has a message to a broad audience to reject the economic pessimism that candidates espouse during election year: “As a result of this negative drumbeat, many Americans now believe that their children will not live as well as they themselves do. That view is dead wrong: The babies being born in America today are the luckiest crop in history. American GDP per capita is now about $56,000.” Berkshire and America in general will continue to benefit from the “all-powerful trend” toward more productivity that has made the country great. Buffet wrote that over the course of his lifetime the nation’s economic output has risen six-fold per capita, “a leap far beyond the wildest dreams of my parents or their contemporaries.” (berkshirehathaway.com)
Some people may earn a high income, but that doesn’t necessarily make them wealthy. Economist Jay Zagorsky found that people with high IQ scores missed payments and maxed out their credit cards more often than those with slightly above average intelligence. The problem stem from the faulty mindsets. To increase your wealth you need to change the way you think first. As personal finance blogger Michael on Financially Alert explains: “Finding financial freedom really comes down to 80% psychology and 20% mechanics. So, guess where you should focus your efforts? By raising your standards, you immediately begin to impact the quality of your thoughts (psychology). In fact, if you only concentrated on becoming financially alert, you will find yourself naturally adjusting your mechanics automatically.” (financiallyalert.com)
Forbes Contributor Mike Patton explains that the reasons behind do-it-yourself investors routinely sabotage their investment success are due to two common biases. “Two of the most powerful emotions we experience are fear and greed. When an individual invests in the stock market and stock prices decline, at some point the pain becomes too much to bear and fear begins to dominate. This investor may believe that things will only get worse and that the near term will resemble what has happened most recently. In short, they become convinced that stocks will continue to decline and decide to sell everything, thus escaping further pain. This is called the ‘recency bias’ and is quite common… The second bias is the ‘bandwagon effect.’ Many investors have a subconscious, but strong tendency to follow the crowd. If everyone is doing it, it must be right.” Hopefully Investors who manage their own portfolio can learn these two common biases and avoid making the costly mistake. (forbes.com)
Computerized Investing editors list and review the best investment and financial websites. Here are the top 11 sites that they recommended.
A recent Standard & Poor’s study found that two out of three adults worldwide don’t have a clue about personal finance. While the U.S. ranks 14th worldwide in financial literacy, there’s more catching up to do. Here’s some of the best ways to save money. Check on CardHub.com for over 1,000 offerings in many different credit cards. For resource on auto financing, check WalletHub.com. Use Mint to track your money and help you establish a household budget, and define reasonable savings goals. For investing, make use of microinvesting service Acorns and Betterment.com. For deeper-pocketed, online investors, securities sites like Marketriders.com, Wealthfront.com, and PersonalCapital.com can help.
You might heard that stock market investors have lost $1.78 trillion, but keep in mind that the stock market has yielded an average 8%-10% return annually over the last 114 years. Since the start of this year, the market drops 5% to 15% globally, it’s easy for investors to give up and panic. Kiplinger lists seven biggest mistakes investors can make. Avoid these mistakes would help you tremendously in your financial life.
- Panic and sell
- Quit buying
- Get sucked into the 24-hour market news cycle
- Have too much in one asset
- Fail to rebalance
- Splurge needlessly
- Stop contributions
Drawing from the past investing mistakes, Tim Lemke writes on Wise Bread in an effort to help younger readers about 11 investing tips younger investors can learn. These advice include: “Understand the value of compound returns, familiarize yourself with retirement accounts, stop checking your investments everyday, don’t try to pick stocks, and take all the company match.” Learn from these tips and hopefully you won’t have to tell your younger self the same mistakes. (wisebread.com)
On CNBC Kelli Grant writes: “Getting divorced has a significant impact on your finances — and some missteps can make it even more costly.” There’s some advice to protect assets in divorce. To limit the monetary pain of a divorce, move through the process deliberately with help from a financial adviser, accountant and an attorney. Make sure to account for everything, not just current funds and non-cash assets. That includes income earned before the divorce that will be distributed later, like bonuses and retirement contributions. Have any property professionally appraised to take emotion out of the equation. Also take steps early to close any joint accounts and update beneficiary designations. If an ex-spouse remains designated as a beneficiary on a 401(k), it can trump what’s written in a will. Lastly, don’t cash out retirement accounts to pay off joint debt or legal bills. The tax penalty is too steep. (cnbc.com)
Fortune reports that: “The S&P 500 Index has plunged 10.5% since the first trading day of 2016, erasing $1.78 trillion in value for investors, says S&P’s Richard Peterson, a senior director of Global Markets Intelligence. On average, investors have lost a collective $57 billion per trading day this year. Ouch. That’s roughly equal to the GDP of Canada in 2014.” For investors that stay the course or in accumulation stage, this is a happy news as stocks are now cheaper to buy. If you think long, stocks aren’t as risky as you think so stick with your investment policy statement. (fortune.com)
Individual retirement accounts (IRAs) are important retirement accounts that everyone must have. An article on Wise Bread shows that even smart people make mistakes when contributing to IRAs. Here are the common mistakes: Not contributing enough, not consider IRAs as part of the entire retirement plan, forgetting the required minimum distributions, not following rollover rule, and having the wrong beneficiary. (wisebread.com)