Lazy Man and Money

How To Teach Kids About the Stock Market?

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I’m going to go with a quick post today. I’ve been working on the last update of 2020, but this question came up and gave me some pause. We’ll push that update to Wednesday.

For the last five years, I have been investing our kids’ money. They were ages 2 and 3 when I started. It was enough money from grandparents and such to get started, but also not any money that they’d miss. That’s a great thing about investing money when the kids are so young… they don’t need the money.

Now they are 7 and 8 and thanks to investment gains have a nice portfolio. They also don’t know about this money as it was all managed behind the scenes by me. They know about savings accounts and are super proud to be hundredaires. They don’t know that they are multi-thousandaires.

It occurred to me that they are old enough to keep some money in their savings and perhaps save for things they want. They seem to have nearly everything, but when you are an 8-year-old having 21 stuffed Pokemon is better than 20. They might also notice if I keep sweeping money out of their savings into the Robinhood account where I invest their money. This led me to ask my wife about how much we should keep around in savings. This led to her saying, “Why don’t you tell them what you are doing?”

It all makes perfect, but now I’m left with the puzzle of explaining the stock market and index funds to a 7 and 8-year-old. I think I can walk them through it, but hopefully, I can find a good video on YouTube. Of course, if you are reading this, please make use of the comments to let me know if you’ve found yourself in a similar situation.

I’m hoping it goes well and they can see how much free money they’ve made. I’m afraid that they’ll want to take it all out and spend it on Pokemon cards. It will be tempting for them I’m sure. At least at this time, they still have enough Christmas presents that they haven’t even opened up yet.

Do you have young kids at home? Do you sweep some of their savings into a brokerage account? If so, how much money to keep in savings and how do explain what you are doing, so they realize that is going to be very helpful down the line?

How I’m Managing Stock Market Risk in 2020

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I hope your 2020 is off to a good start. Are you still keeping up with those New Years resolutions? I hope so! If not, it’s never too late. I didn’t make my 2019 resolutions until late February.

So far my 2020 is going well, especially in terms of investment gains in the stock market. The market seems to be continuing making big gains like it did in 2019. I never thought that the S&P 500 would return nearly 30% after an exceptional 9 year bull run.

I’ve been expecting the market to run out of steam for a few years now. Every time I think it might go south, it gets propped up by something. In 2019, I think it was the tax cuts that allowed businesses to buy back their shares. That’s great for investors, but bad for the national debt and United States infrastructure that requires tax money.

I’ve always been a big believer in aggressive stock market investing. I would invest 100% in stocks, which most of it being in technology. That’s because I’ve been young with a timeline of 50 years. So far it’s been a winning forumla. However, I’m nearly 15 years older than when I started my blog. My life expectancy may give me closer to 40 years of time now.

That’s still a lot of time to make up for any reasonable stock market crash. However, I find myself looking to reduce stock market risk. I think it’s just a natural reaction when the stock market feels like a bubble. It’s rare for a bull market to continue for 10 years. It’s also rare for nearly 30% returns. The combination feels like it must be unprecedented.

Of course, I’ve been feeling like there’s a bubble for some time. Back in 2017, I felt that it may be worth trying to the market using historic Shiller price/earnings numbers. Of course, I didn’t pull my money out of the market. I just slowly started to sell stocks and buy bonds. It was around 3% back then. By 2019 I had about 6% in bonds. These were minor changes, but it made me feel better that if the market dropped 10% quickly, I could deploy some of the money in bonds.

Managing Stock Market Risk in 2020

The big gains of 2019 made me fundamentally review how we’re investing. Our net worth has quadrupled over the decade – almost all through stock market and real estate gains. I learned long ago, that when I was up big at the craps table, it’s best to pocket some profits and play with the house’s money. That’s a little of how I’m approaching 2020.

The biggest thing I’m doing is STAYING INVESTED. Some people would sell, but I don’t believe in that. There’s a case to hold cash, but I’m still an aggressive investor with a long timeline. Holding cash doesn’t feel like the right thing for me.

Cue…

Asset Allocations for 2020

Before I get into my new ideas for asset allocation, I think it’s best to review my previous allocation and reasoning behind it:

Old “Rough” Allocation

I have to add “rough” in quotes, because I didn’t adhere to a strong philosophy on it. I know I should have a strict allocation, but I don’t. I defer to the idea that I’m young and being invested in (mostly) diversified stocks is more important than the actual numbers.

I roughly had a 50/50 mix of international stocks (30% emerging, 20% developed) and US stocks – almost all in VTI, a Wilshire 5000 index that aims to cover the “total” US stock market.

Some people believe that investing in US stocks is as diversified as investing in foreign stocks. The theory is that companies like Coca Cola and Google operate internationally. It’s a fine theory, but I don’t believe it… foreign stock indexes often perform very different from the US ones. If someone shows me that they highly correlated, it will get my attention. Until then, I will continue to invest internationally, because I believe investing in dozens of countries over multiple continents is more diversified than invested in one country in one continent.

In that 50/50 mix, I had very few bonds and a small REIT (Real Estate Investment Trust) allocation. It was likely less than 2% of my portofolio combined. In hindsight, their performance, good or bad, might be brushed as a round-off error.

New 2020 Allocation

As I stated before, my goal is to stay invested. I always want to get a return on my money. The difficulty is always how to stay invested while feeling that the market is far, far overpriced?”

I took a few steps:

  1. The first thing I did is sell 40% of my VTI (Vanguard’s total stock market index). I used that money to buy HDV. HDV is an iShares ETF which focuses on high dividend stocks. It returned a 3%+ yield last year. It’s not very diversified, but it focuses on very boring defensive industries that pay high dividends.

    It’s very likely that this fund will pay 3% dividends even in a (reasonable) crash. That’s much better than what saving accounts pay*. Also, it’s very close to the 4% rule that (loosely) states that you can retire if 4% of your nest egg covers your expenses.

    VTI and HDV both focus on the US stock market, so a crash would impact them. However, HDV’s boring defensive industries probably won’t drop too much as people would buy the stocks for income.

  2. Sold some international stocks

    I love international stocks, but I wanted to cut down on some of that risk. I ended up selling about 5% of my VWO (emerging markets) and VEU (companies outside of the US).

  3. Bought some Bonds and Real Estate

    The small amount of bonds I’ve added over the last couple of years wasn’t very significant in my portfolio. I like to think that they were, but it was mostly for my peace of mind.

    I used the sale of the foreign stocks to buy bonds (ticker:BND) and real estate (ticker:VNQ). Bonds and real estate may crash as well, but they produce strong dividend income. In a (reasonable) stock market crash the value they would lose would be minimal. I ended up doubling both my bonds and real estate allocation.

I don’t know how it’s going to go. I might be leaving some money on the table by not being fully invested in the S&P 500. I really don’t mind, because I’m not trying to chase the best performance.

Now I’d like to hear from you. Are you managing risk with the stock market being high? If so, how are you doing it?

* Obligatory mention that banks pay guaranteed rates and dividend ETFs do not. However, I believe they will as they have always done.

Goodbye Google Finance… Hello Google Spreadsheets

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A few months ago Google made the unfortunate decision to end their Google Finance portfolio tracker. This was the main way I checked my stocks and the first website I visited every weekday after the markets open at 9:30. They replaced with… something. It’s terrible. Now I can only view 6 of my stocks at a time and only very limited information about them.

Goodbye Google Finance.

Now, I needed to find a replacement portfolio tracker. I reached out to the masses on Twitter. One person suggested using Google Spreadsheets. I love spreadsheets. (Yes, I’m weird. I know.) However, the value of a portfolio tracker is that you get updated data. It’s not helpful if I have to manually put in the price of Vanguard’s Total Market Index (VTI) each day. After a little research, it seems that Google Spreadsheets supports all kinds of (mostly) real time stock data. Yes, the quotes may be delayed 20 minutes, but for my purposes, that isn’t that big of deal.

I decided to “nerd out” and create my own portfolio tracker. Better yet, I can share it with you! Go to this link and select the File –> Make a Copy. Then edit it to suit yourself. You should only have to put your own stock tickers and cost basis in there. You also might want to look up the price of the stock from Jan 1, 2016 if you want to make use of the 2016 YTD column. Unfortunately, I had some difficulty getting Google to import historical price quotes automatically.

I’ve found this tool really helpful. I’ve consolidated information from three brokerage accounts so now I can see everything at once.

However, it’s not perfect. It’s got three disadvantages from what I had before with Google Finance.

  1. No stock charts – It was always great to click in and use Google’s great financial charts. Now, I have to go elsewhere for that information.
  2. No stock news – Whenever a stock moved 5% or more, I could fairly easily look at the news and see if they released earnings or an analyst gave them an upgrade. Now, I have to do separate research in another browser tab.
  3. It is slow – Doing all the calculations really drags down my computer. Of course, the 50 browser tabs that I already have open don’t help. And having only 4GB of memory isn’t making things better. Your experience may be better than mine. Even though it is slow, I can get most of the information very quickly and move on. It’s not something that I leave running for a long time.

The lack of stock news is kind of a killer. I’ve started using Marketwatch, and it’s okay, but not great. What do you use to track your stock portfolio and where do you get your stock news? Let me know in the comments.