Lazy Man and Money

Rebalance Time? Some Thoughts on Where to Invest Now.

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balance

Each day I look at how the stock market and my portfolio is doing in my Google Finance Spreadsheet. I know it’s not a healthy behavior, but I can’t resist. For a few minutes the amount of green or red does change my mood. Ugh!

However, sometimes I notice trends in the stocks and index funds that I follow. That is extremely helpful a few times a year.

One of the recent times I noticed a trend was a week or two ago. I noticed that my SodaStream stock had gone through the roof. I did a quick look at the news and it turns out that Pepsi is buying the company at a great premium. Yay!

I’m not interested in owning Pepsi stock. Fortunately, since my SodaStream investment was in a retirement account, I could sell it without tax ramifications. That’s just what I did.

If it had happened a month or two ago, I wouldn’t know what to do with the money. I would have left it as cash and wait for the next buying opportunity. It’s not a couple of months ago, and I currently had a few buying opportunity ideas already on my mind.

Before I get into those ideas, I want to address the obvious. Odds are, you didn’t invest in SodaStream. However, you may still also have some cash to invest.

Perhaps more likely, you have investments in some US stock indexes such as the S&P 500 or the Wilshire 5000. I’ve noticed that the stocks keep hitting new highs day after day. That’s great… Go USA! However, I’ve always been worried that my money is too reliant on the United States. We already have a very large real estate investment here. To make it worse, the United States is central to our main sources of income.

The single biggest point of failure in our diversification is the United States. I like the idea of having money spread all over the world. The best way I know how to do that is to buy more foreign stocks. If you have a similar belief, you might find that you need to rebalance your positions as the foreign stocks are now likely significantly less than the US stocks.

With that as a stepping stone, let’s get started on:

Some Investment Ideas for Right Now

Remember the investing mantra of “Buy low, sell high?” If the United States indexes (or in my case, some event like SodaStream) is high, I look for things that I can buy low. I prefer index funds as they are less likely to have some kind of Enron-like scandal that few people saw coming. (Yet, I still invest in some individual companies, like SodaStream. I never promised that I made sense.) I’ve got three ideas that fit the bill. (I generally prefer ETFs and Vanguard funds when possible due to low expense ratios. Full disclosure: I own all three of these index funds.)

  1. Emerging Markets (Ticker: VWO) – You may have noticed that emerging markets have been on fire lately… unfortunately it’s been a dumpster fire. It feels like they are down 5-6% in just the last week. It’s trading at just around its 52-week low and off 20% from its 52-week high. There’s a lot going around the world that explains it, which I won’t get into here. Things may get worse before they get better. However, over the long haul, I believe that these countries have a greater opportunity to grow as the world becomes more connected. I poured all the money from the SodaStream sale into this index.
  2. Frontier Markets (Ticker: FM) – You almost never see anything written about frontier funds, except for my article on them of course. The countries in frontier funds are very small, so small that they don’t even qualify to be emerging. Here are some example countries: Kuwait, Vietnam, Romania, Nigeria, and Qatar. One of the top 10 holdings seems to be the Bank of Transilvania. As we all know if you default on a loan to the Bank of Transilvania, they send Dracula after you.

    Some people will probably call frontier markets gambling, but again, it’s fairly diversified. I wouldn’t make it a big part of a portfolio, but it is worth considering. Like emerging markets, FM is trading near its 52-week low, but off nearly 25% from it’s 52-week high.

  3. Solar Power (Ticker: TAN) – Who loves cancer-causing tanning beds? Not me. Fortunately, this TAN is about investing in solar power companies. I don’t know if too many people doubt that solar is the future. I’m starting to see it everywhere… even on my own home’s roof. It’s trading close to its 52-week low, and off more than 20% from its 52-week high.

Finally, I had one final investment idea that I hesitated to share. I really haven’t looked into the company in great detail, so you’d definitely need to do your own research. It looks like SnapChat (SNAP) is below $10 for the first time in its existence. I do know that they’ve had some horrible earnings in the past, so maybe it is well deserved. However, I know all the kids love the company, and maybe a 12.5 billion valuation is low. I’m really on the fence about this one though, so take caution. I could see Snapchat going away before something like solar power or Transilvania. Full disclosure: I got a few free shares from Robinhood’s free stock promotion.

At the end of day, it’s up to you to manage your money as you see fit. I’m hoping that over the 20-30 years that I plan to keep this money invested, there’s going to be better than average growth than if I just stuck with the United States. If not, I do sleep a little better knowing that my investments are diversified (and backed by Dracula).

So You Want to be a 401(k) Millionaire?

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The other day something on Twitter caught my attention. (Yes, I’m that easily distracted.) It was Live Your Wage with this Tweet:

Update: Live Your Wage breaks down the article here:

It turns out that the article in question was this Fortune Magazine article by Stephen Gandel: How easy is it to become a 401(k) millionaire? Here’s the truth.

(I reached to Live Your Wage about the big difference between a million in net worth and 401k and he admitted his memory in quoting on Twitter wasn’t accurate. However, this article is well worth discussing on its own (lack of) merits.)

The only thing I didn’t realize when reading the Tweet was that the article was written in 2015. That doesn’t matter given that the idea of becoming a 401(k) millionaire is, by its nature, a long journey. When you limited to putting less than $20,000 a year to work, getting to $1 million isn’t going to happen in 3 years. So let’s not label it as being outdated.

This article is going to be a two-fer. I’m going to dispute the Fortune article and then give you some advice that may encourage you.

Where Fortune got it Wrong

We have to start with a couple of base assumptions before we can dig in:

The base assumption is something I mentioned above… getting to $1 million when you are limited to less than $20,000 a year is not supposed to be “easy.” Simple math (without compounding) tells you it will take more than 50 years. How would you react to an article titled, “How easy is it to climb Mt. Everest? Here’s the truth”?

So let’s start with that common sense.

Next, we need to understand this getting to be like Inception. I’m critiquing (this article) a critique (Fortune article) that was critiquing some Fidelity research that was triggered by a Twitter critique.

What’s Wrong with the Fortune Article?

1. Fortune starts with the wrong implication.

The Fortune article starts off with by saying Fidelity’s studies leads to “The implication was that there is an easy prescription to becoming a 401(k) millionaire.” The article that they cite doesn’t appear to do that. It simply states what you need to get there. It was only two steps: start early and save a lot.

I guess you could say that’s a simple prescription, but it’s not easily followed.

2. Author points to his own article about how 401ks failed.

I have no problem with pointing to your previous work, but in 2015 he points to his Oct 2009 article Why It’s Time to Retire the 401(k). The problem with that is the article is based on the stock market crash that relatively quickly rebounded… and by 2015 looks a little silly. In fairness, I could only read the preview as I don’t have a subscription. In any case, pointing to a 2009 market crash as reasoning why 401ks are a failure in 2015 is pretty silly.

I’m not even trying to make a point that 401ks are great. It’s just a terrible justification for why they are bad. It looks even worse in 2018, but I can only judge from 2015.

3. Author looks at Fidelity’s 5 tips.

He didn’t seem to link to Fidelity’s 5 tips. Instead he linked to the NBC News that gave the two tips mentioned in #1. I had to go out and do the work myself. Here’s are Fidelity’s original tips.

4. Tip #1: “Fidelity found that, on average, 401(k) millionaires had worked for the same company for 34 years. And that’s the average!”

The author points out that is very unlikely in today’s world and I agree. However, it’s a backwards-looking stat that may reflect that people used to work at the same job. More importantly, I can tell you that I have a ZERO DOLLAR 401k. Why? Because went I moved jobs, I moved it to a Rollover IRA where I could invest with lower fees. I’m sure some tax experts may disagree due to nuances, but for all practical purposes my Rollover IRA is a 401k.

Technically though, I was eliminated from the 401k millionaire quest because I did the smart thing. I imagine many other people who are saving up large amounts in their 401k do the same thing and are eliminated as well. Thus we are stuck with people who tend to stay at their job and don’t have the option of doing the smart Rollover IRA.

The worst part about the author’s point on this tip is that when you review the real Fidelity article, the tip was really, “Start saving early” and included nothing about needing to stay at the company for 34 years. A previous note in the introduction provided that statistical fact, but no weight was given to it being relevant.

5. Tip #2: “Save a lot. Fidelity says that 401(k) millionaires, on average, put 14% of their paychecks into their 401(k).”
The author: “Most studies put the contribution rate of the average worker at around 6%. And financial planning experts usually say you need to contribute about 10% of your salary to be safe. But that, it turns out, is not even enough.”

I read that walking up 5-6 flights of stairs is average. I’ve seen a study say that walking up 8-10 flights of stairs a day is recommeneded. It turns out, that if I want to climb Mt. Everest, even those 10 flights a day are not enough. The madness!

I follow bloggers who routinely save 40-50% of their money. You want a million dollar 401k and you are going to balk at a few percent of pre-tax money?

6. Tip #3: “Fidelity said one of the characteristics of 401(k) millionaires is that they worked for employers that matched their contributions.”

The author is right on this one. You can’t control it. However, Fidelity points out that 96% of 401k plans (at the time) offer some match and simply suggested that people be aware of making sure that they get the free money. It’s good advice!

This may be a good time to point out that these 401k millionaires today were limited to $15,000 contributions per year for many years. Today, you can contribute $18,500, which gets you to a million dollars much faster.

7. Tip #4: “Be Warren Buffett. In fact, you might have to be a little bit better than him.”

“According to the Fidelity study, the average investment return of the people who ended up with $1 million in their 401(k)s from the middle of 2000 to the middle of 2012 was 4.8%… Over the same period, the average return of the stock market was 1.3%. So, to become a 401(k) millionaire, you had to do three times better than the stock market over the same time period.”

The Fidelity article didn’t seem to say mid-2000 to mid-2012. From January, 2000 to December, 2012 the market returned 1.84% (using this calculator. However, we aren’t comparing money dumped in on January 2000. We are presuming a lot of dollar cost averaging with more money being invested in low points like the crash and ending on a high period.

It’s very much the reverse of the sequence of returns risk that retirees face.

The irony is that Buffett says you should use index funds, which is almost always the very best option in the limited choices available in a 401k. The people in the study didn’t stock pick their way a million dollars and Fidelity makes the point that this step was about asset allocation… something that the author ignores.

Finally, all we need to manage is 4.8% over the long term?!?! Let’s rejoice, because the S&P 500 has returned 9% (dividends reinvested) from 1/1871 to 6/2018 (same calculator as above). Looks like these were very “unlucky” 401K millionaires and it can be reasonably argued that it’s possible to do twice as well as what the author believes is Buffett-like.

8. Tip #5: “Fidelity says not to borrow from your 401(k) or cash it out. That may sound easy enough, but it’s not for many people.”

This step is literally to not do something negative that takes a lot of work to figure out in the first place. It’s almost like saying, “Don’t go rob a bank.” That’s the easiest thing to accomplish and nearly everyone accomplishes it without even thinking about it. You have to go pretty far out of your way to rob a bank and I think we can agree it isn’t something that happens by accident.

Fortune’s Conclusion

Let’s get to Stephen Gandel’s conclusion:

“So that’s it. If you want to end up with $1 million dollars in your 401(k), all you have to do is work for the same employer for more than three decades, save about 40% more than most financial planners dare to recommend, land a job at of the rare companies generous enough to match 5% of your contributions, and totally crush the market, while you go about your normal day job, avoiding all the sudden financial traumas that lead people to borrow against their retirement funds.”

A more realistic conclusion would be:

“So that’s it. If you want to be one of the few who can amass an amazing $1 million dollars in your 401(k), and not other retirement accounts, all you have to do start early, save 4% more in pre-tax dollars than most financial planners consider safe, take advantage of the 401k match, and invest in stock index funds, while being a little lucky to avoid the big financial traumas by possibly having an adequate emergency fund due to living below your means.”

Finally, at the very end of the article Gandel tells us what we already know, but with a bunch of sarcasm:

“It’s easy. So easy that of the roughly 13 million 401(k) accounts that Fidelity administers, a total of 72,379, or just 0.6% of them, have a balance of more than $1 million.”

Once again, Fidelity never said or implied it would be easy. You can search the whole article, it’s just a strawman fallacy that the author invented so he could take a bunch of stuff out of context and spread sour grapes and discouragement.

The sad part is that it seems like people paid money to actually read it.

So You Really Want an Million Dollar 401k?

The first step is throw away the idea that it has to be in 401k. There’s nothing magical about the characters, “401k.” What you probably really want is a million dollars in retirement accounts.

This allows us to include Roth IRAs that, in many ways, are even better than 401ks. It can be withdrawn tax-free (as the taxes have already been paid on it) which is the most obvious advantage. If someone were to offer you a million dollar 401k or Roth IRA, you’d jump at the Roth IRA.

We include Rollover IRAs which I mentioned above is practically the same thing, but with fewer fees. This also allows us to include people who are self-employed. Yes, there’s the solo 401k for that, but it isn’t a 401k in the way that most people think of them.

The next step is to actually follow Fidelity’s study. Start early and contribute a lot. As someone once said, “There’s no trick to it, it’s just a simple trick:”

A couple of years ago, I did the math and found that if you were able to invest $23,000 each year for 20 years you’d have a million dollars. That’s magically turns out to be maximizing your 401k and Roth IRA… assuming you are eligible for both. It also assumes that 7% investment growth.

When I ran the numbers, the interesting thing is that the growth from investment gains was more than the money invested. As you get close to the 20 years your money works much harder for you than you do for your money.

Of course saving $23,000 a year isn’t easy. If anyone ever said having a million dollar retirement is easy or that anyone could do it, they were lying to you.

One thing to keep in mind is that this assumes only 20 years of saving and investing. It’s geared to people who either start late or want to retire early. If you can’t save $23,000, you can still get to a million dollars, it will just take longer.

The math is the math. It doesn’t require you to stay at the same job, get a company match, or invest better than Warren Buffett.

Dollar Cost Averaging is Still a Big Win

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I’m getting worse and worse at writing titles. My upcoming title ideas include, “Paint still dries” and “The Sun Also Rises.” I hope no one takes that last one, because I think it could be big someday.

When something is expected it doesn’t catch the eye. So while this may seem like a boring article on the surface, I’m going to go into detail about two times I went to (relative) extremes with dollar cost averaging. Did it work out? The title may give you a hint, but you’ll have to read on to find out.

This is a difficult for me to write. I have two conflicting thoughts when it comes to investing.

The first is that I want you to focus on what I think you should do, which is very, very different than the second… what I actually did.

So what you should do is read and follow this investing article: Investing is Boring. We’ve already established that the boring title of this article didn’t scare you away, so you shouldn’t have a problem with that article, which is quite entertaining. Go Curry Cracker has a one step plan for investing. You don’t need to do much or learn much and it’s the kind of thing I often wrote about when I created this website long ago:

You should be Lazy with your money.

Alas… sometimes I don’t do what I should do.

I live a boring enough life and sometimes I spice it up with nerdy, money, investing stuff. That means that I don’t do the boring investing stuff… at least not all the time.

I have a section of my portfolio that I trade in *gasp* individual stocks. This is all retirement money that we have no plans to touch for years. It’s just a section and the rest is in boring index funds. My wife is in all index funds.

With most of the individual stocks, I also do boring things like buying and holding big companies. For example, I have held onto Google, WalMart, and IBM for years now. I’ve recently gotten into GE and P&G.

However, today I’d like to tell you about a couple of stocks that aren’t like the others. They haven’t been boring at all.

In each of them, I lost half my money on the initial investment. In each of them, I “doubled down” and bought a lot more and more as they hit lower and lower prices.

And while dollar cost averaging may be about buying more on a consistent basis, it amounted to about the same thing.

Stock 1: United States Oil (Ticker: USO)

I bought this before I knew of oil futures, backwardation, or contango. (It turns out that contango isn’t when you ask someone to do a ballroom dance in Spanish. Who knew?) I didn’t even know that the US was making a lot of oil through shale.

I wasn’t very informed and didn’t make a smart decision. However, over time, I learned about these things and while it gets complex, I became convinced of two things:

  • Oil isn’t going away (just yet.) We aren’t quite there with self driving electric cars, solar, and other things. Maybe in 10-20 years, I’ll think differently
  • Oil got extremely cheap. There was just so much supply from the shale and the world wasn’t using it enough. I think there was concern that it would cost more to store than it was worth. It crashed below $27 a barrel two years ago.

I first started buying USO stock at $21. I subsequently bought it 11 more times as the price moved down and down. Eight of those times I bought under $15, and three times I bought significant amounts under $10. When all was said and done, my average price was $12.69 a share.

That looked terrible when oil was trading at $8.82. However, on Friday it traded a little above $15. I could sell the whole batch, and end up with a nice little gain. Perhaps I should have. Maybe I’m getting greedy.

Instead I have sold off bits and pieces while I was in the black. I sold some on Friday at that $15 price. If it continues to go up, I’ll just keep selling shares and taking profits. If it goes down, I may want to wait a little longer.

Stock 2: Twitter (Ticker: TWTR)

I’ve always been a big believer in Twitter as a company. (Read what I wrote about the IPO in 2013.) It’s got so many celebrities using it for free! It’s got television hashtags so people can talk along. It’s completely changed the way I watch football and as my wife can tell you, that’s nearly impossible.

And that was just the Twitter stuff that was happening back when I started buying it a couple of years ago. There’s politics and equality movements going on. I’ve even learned that there are personal finance bloggers who are willing to share their stories and opinions about MLM scams. I feel like I found my community. (That may seem weird because Twitter is also known for making it easy for others to bully and just spout out lies to change perception.)

I bought Twitter stock for the first time at $47 a share. I then bought some more in the $30s range. I then bought a little more in the $20s range. Overall, I bought 11 times. Fortunately, 4 of those 11 where around $16-17. My dollars went a lot further buying down there than did at $47 a share.

By the time I was done, my average price was around $23 a share. Like oil above, it looks terrible when the stock is still trading at $17 a share.

On Friday, Twitter stock was trading above $43. It has recently been as high as $48.

It’s not an understatement to call it the turnaround stock of the year… and some of that goes back to last year. Like with oil, I’m starting to sell a little of it at various milestones. However, I still believe that Twitter could be one of the next tech giants, which could give it legs to double or triple even from its already relative high level. I don’t see oil tripling to top $200 a barrel soon.

Conclusions

These two stocks had something in common… I didn’t see them going away. They were too big to fail. (You could say that Twitter could have failed, but they had the cash to run for 412 years.) And while there is a saying that the market can be irrational longer than anyone can stay solvent, I was okay with waiting a decade or two on them.

They had something else in common, I ended up owning much more of them than I had wanted to. However, I didn’t feel that the business of them fundamentally changed (well maybe I did with oil due to the shale stuff). Still, both holdings were getting to be such large parts of this “play” section of my portfolio that it dwarfed anything else.

As I sell off shares of them now, I’m able to lock in some gains. For now most of the money is staying in cash or bonds because I’m a fearful of how expensive the market has gotten in terms of it’s Shiller P/E.

One could make a case that Twitter and USO were “cherry picked.” I’m still waiting for IBM’s day to shine. It’s at its low and I’m thinking about buying more, but it’s still only down around 10% for me and it’s paid very good dividends over that time. It feels like a different story as it didn’t drop in half and I haven’t bought in nearly a dozen times.

Also, there’s the case that sometimes a company doesn’t go back up. More than a decade ago my shares of Palm, Lucent, and Worldcom didn’t recover. (Actually I’m not sure what happened with Lucent.) It’s looking like my GE investment is going to be where it is for quite some time as they restructure their businesses. That’s the risk I suppose

Finally, one could look at this whole thing and realize that while my money was tied up in oil and Twitter, the mix of my boring US and International stocks had been going up all along. I haven’t looked back to see what the 3-year returns on Twitter and oil, but I’m guessing through the highs and the lows a boring portfolio of index funds did about as well as they did combined.

Sky-high Market? Seven Value Stocks to Consider

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sliding stock

We’re into week two of our “summer hole”, the 2-week void where the kids’ school is over and summer camps haven’t started yet. In the last 2.5 days, I’ve had a kids’ hospital appointment in a different state, 3 meal/parties at my college 20th reunion, a visit with my mom, helped my wife host her work friends for 2 more meals, fought off a cold, played competitive tag against a dozen 5-year olds, and packed for our next trip that starts in a few hours.

While the family will slow down on that trip, we are booked fairly solid until the 18th. That’s a very long of way of saying that I’m going to try to best to get some blog posts in, but the odds are against it.

Enough about me, let’s talk money!

It looks like the Vanguard Total Stock Market Index (VTI) is nearing a new all-time high. My retirement accounts have never been higher. (Sorry “me talk” again.) It’s completely possible that the market continues to go up, but this bull market can’t last forever, right?

Just like everyone else, I don’t know when it’s going to end, but I’ve started to be more cautious in my investments. For most of my life I’ve been 100% invested in aggressive growth equities. I’m holding more cash and bonds than I ever had. That’s still only 10% of my portfolio, but I might grow that. I’m also overweighted on international stocks that haven’t had exactly the same run-up as the US stock market. Vanguard’s Emerging Market’s ETF (VWO) is 12% off its highs, which could be considered a bargain in this market.

Consider VWO a bonus to the eight stocks, I’m going to mention below. I’ve had them all on my Google Spreadsheet watch list for some reason or another. It’s not like I ran a stock screener to find these stocks (but that might be a good way to start). Most of them in that “off 15-20%” from their highs. That, in my opinion, indicates there’s some room for these to go up. They are also somewhat near their lows, which may be a sign of them being cheap.

  • General Electric (GE)
    This stock if down big from it’s 52-week high of nearly $30. There’s a lot of bad news around GE. There’s a lot of talk of people who think that all the terrible stuff is priced into the stock and it can only go up. There’s also some talk that there’s still some bad news left to come, but I have seen less of this. I like that it still has a dividend of around 3.5%.

    Disclosure: I am long this stock, having bought around these prices.

  • Colgate-Palmolive (CL)
    CL is nearly 20% off its 52-week high and only 3% above its 52-week low. It has a 23.72 P/E, which isn’t super cheap, but it is reasonable. With a dividend of 2.65%, you’ll get some cash while you wait for it to recover to its highs.
  • Johnson and Johnson (JNJ)
    JNJ is off more than 15% off its 52-week high and about 4% above its 52-week low. Its dividend is nearly 2.9%, so like the previous stocks, its going to pay you some cash in the meantime.

    You should be starting to see a trend here. I think these big, boring companies. For retirees looking to use the rule of 4% to live off a nest egg, these dividends get you close without even selling any stock.

  • Proctor & Gamble (PG)
    This is yet another big company that is nearly 20% off its highs. However, its a 8% off its 52-week lows. I was able to buy in a little lower, so I’m up 6% on this investment. Of all the stocks I’ve mentioned thus far, this has the highest dividend at 3.72%. It also has a cheapish P/E of 18.31.

    Disclosure: I am still long this stock.

  • International Business Machines (IBM)
    IBM is my favorite investment on paper. Its price has dropped 6.5% since I have been buying it over the last several years. I should hate this stock, but I don’t. Where else can you find a tech stock with a 4.3% dividend yield, a 12.30 price/earnings, and trading near its lows?

    If IBM can get back to growing the company, it should shoot up. However, as long as the earnings keep as steady as they have been, it shouldn’t fall much and investors will collect a healthy dividend.

    Disclosure: I am still long this stock.

  • AT&T (T)
    I just started recently following AT&T. I’ve been a customer of its cellphone service for some time. It fits the familiar pattern of being off the highs by 15%, but only 7% off its lows. What’s unique is that it pays nearly a 6% dividend. It’s had some bad news with mergers and such, but it still seems like a well-positioned tech stock.
  • Disney (DIS)
    I almost invested in this a month or two ago and I wish I did. I’m not sure if I’ll see sub-100 prices on Disney again. We know how well the Marvel, Star Wars, and Pixar line of movies are doing, but Disney has so much more such as the theme parks. Not everyone can hack Disney like our family and many are happy to pay full price.

    Their upcoming Netflix-like subscription service should be a big winner for the company. It’s trading at a relatively low 16.24 P/E, but it only pays a dividend of 1.62%.

With the exception of Colgate’s $55 billion market capitalization, these stocks are all household names with $120 billion market caps or more. They all have a long history of real earnings and weathering numerous recessions.

I still believe in buying and holding index funds. However, I am finding that many index funds are very tech heavy with Apple, Microsoft, Google, Amazon all valued twice of the companies here. Facebook dwarfs many of the companies here as well. For the most part, they don’t pay strong dividends and they are almost all at their highs. If the bull market ends, I think these tech stocks will be the hardest hit.

I might be in the minority, but I don’t mind speculating a little bit on big names at low prices during this bull market.

Stop Comparing Investment Performance to the S&P 500

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One of the great pastimes of investing is comparing performance. The standard comparison is usually with S&P 500, or worse, the Dow Jones Industrial Average.

For example, I signed up with SigFig years ago. Now that I use Personal Capital, I rarely look at SigFig, but they do send me weekly emails. Here’s part of this weekend’s email:

SigFig Performance

I’d like you to take two things away from this chart:

  1. I’m clearly a superb stock picker… even if most of my investing is in Lazy-approved index funds.
  2. This shows the typical DJIA and S&P 500 comparisons that I’m referring to

What’s wrong with comparisons to the DJIA and the S&P 500? The DJIA consists of 30 of the largest stocks in the United States. The S&P 500 consists of 500 of the largest stocks in the United States. That means that the DJIA is a subset of the S&P 500. There’s 100% overlap in that very small data sample. The S&P 500 is better, but again, it only covers stocks of large US companies.

Here are my performance results from Personal Capital:

Personal Capital Performance

(I’m going ignore this week’s performance and pretend that didn’t happen. I’m more interested in long term averages in general.)

I like Personal Capital’s update better. They decided that one large US stock index is enough and kicked the DJIA to the curb. Good choice in picking the more diversified index.

They make another wise decision and provide two new index comparisons, foreign stocks and bonds. This is particularly useful because every diversified portfolio I’ve seen recommended includes at least one, but usually both of those. Maybe there is someone out there who advocates to just put your money in the S&P 500, but I haven’t come across him/her yet.

That’s the problem with all these comparisons: A well-constructed, diversified portfolio shouldn’t be compared to any single index.

Let’s look at the Personal Capital chart again. Did you notice the words at the bottom? My “holdings fell… underperforming the S&P 500.” That feels like shaming to me. It seems to imply that I should have just put all my money in the S&P 500 and done better. (Am I alone in feel this way?)

I’ll let you in on a secret: I don’t invest in the S&P 500. I prefer to invest in the the Wilshire 5000 because it includes midsize and small companies. The market tends to move together so it isn’t a big difference, but I don’t see a compelling reason to avoid around 4500 companies just because they are smaller. I choose index funds because they are diverse. More diversity is better.

In other words, if you are going to use US stocks as a comparison, why not choose the most inclusive index?

Let’s move on from the US stock indexes. My portfolio consists of so many things. Here are just a few examples: Europe/Asia companies, emerging markets, frontier markets, oil, monkey butlers, bonds, REITS, and cash. (We hold real estate, P2P lending, and other things as well, but those don’t fit in a normal brokerage account framework).

[Note: I’m considering selling my monkey butler holdings as Amazon ramps up their home robot business.]

Comparing my holdings to the S&P 500 is nonsensical. I’m not looking to perform like the S&P 500. If I was, I’d just invest in the S&P 500. Instead, I’d like my investments to grow over time, while not losing as much money if/when the US market goes south.

Sometimes when I’m critical of something, people ask, “So how do you suggest we change and do better?” I think an easy stopgap measure is for companies to switch to the Wilshire 5000 instead of the DJIA or the S&P 500. I’m hopeful that’s just a few lines of code for the software engineers at the company.

Longer term, I’d like to see companies ask about people’s risk tolerance and create a blend based on those preferences. One simple example could be the common 60/40 stock/bond portfolio. Imagine the Personal Capital chart above with a “Target” that gives the YTD performance of a portfolio with a 60% Wilshire 5000 index and a 40% broad bond index. In this case, the “Target” would be down around 1% for the year. (This can be more complex to include foreign stocks and monkey butler investment performance if necessary.)

That seems like an improvement, right? Let me know what you think in the comments.

We have an affiliate relationship with one or more of the companies linked in this article.

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