Investing

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)

Final Thought

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)

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)

 

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)

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.

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)

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)

The best-performing U.S. stock over the past 30 years isn’t a household name and you probably never heard. Balchem Corp. is the best stock over the last 30 years, making it the leader of the superstocks that include Apple and Nike. Balchem Corp. returns over 10,000 percent over the past three decades. The article’s aurthor Jason Zweig advises to not immediately jump in to buy Balchem or its superperforming peers. The lesson here is the value of index funds. These superstocks have gone through a “near-death experience.” For instance, Balchem and Apple both lost more than 50 percent of their value in the 1990s. Most professional stock pickers would unload their investments at that point, but index funds stay the course even in the worst downturn. So when a stock becomes a superstock, index investors are there for the upswing. (wsj.com)