New Here? Get the Free Newsletter

Oblivious Investor offers a free newsletter providing tips on low-maintenance investing, taxes, and retirement planning. Join over 14,000 email subscribers:

Articles are published Monday and Friday. You can unsubscribe at any time.

Investing Blog Roundup: Responding to Stock Market Volatility

On Monday, I shared my thoughts on how to respond to a bad day or week in the stock market. Naturally, countless other financial publications have written about similar topics over the last couple of weeks. Here are a few of my favorite such articles:

Investing Articles

Other Money-Related Articles

Thanks for reading!

What to Do about a Bad Day (or Week) in the Stock Market

On Thursday the U.S. stock market (as measured by Vanguard’s Total Stock Market ETF) went down by 2.17%. And on Friday it went down by 2.88%. The week’s market performance (down approximately 5.5% in total) has received quite a bit of news coverage, and if my email inbox and Facebook feed are any indication, many people are nervous — or even downright scared.

This Could Be No Big Deal

According to Yahoo Finance, in the last 5 years (i.e., during a roaring bull market) there have been 8 other days worse than Friday and 28 days worse than Thursday.

You might say, but this was two bad days in a row, surely this is a problem! Well, those 8 days worse than Friday? Two of them were in a row as well (9/21/11 and 9/22/11). In fact, all 8 of the days that were worse than Friday occurred within the August-November window of 2011. Perhaps, like me, you have already forgotten about that brief little period of not-so-great returns. Until looking at the data just now, I had forgotten about that period because it turned out to be no big deal. The market continued to climb for another (so far) nearly 4 years after that.

In other words, this sort of thing is normal, and it can even happen right in the middle of a period of great market returns. It doesn’t necessarily mean the bull market is over.

But Maybe We Are in for a Crash

On the other hand, maybe this is the beginning of the next bear market. We could be in for a much greater decline. In the 2007-2009 decline, for instance, the market fell by more than 50%.

If last week’s not-that-big-of-a-deal performance has you in near panic mode already, you have learned an important lesson. Specifically, you have learned that you overestimated your risk tolerance and chose a portfolio that is probably too risky for you. If a decline of less than 10% has you scared, imagine how you’d feel if the market fell another 40%.

The point of strategic asset allocation is to give up on guessing where the market is going next and instead craft a portfolio that will allow you to sleep well at night, regardless of whether we’re in for another 4 years of great returns (as we were after that little blip in late 2011) or a further decline of 40% or more.

What to Do Now?

Evaluate. How are you feeling about your portfolio and its risk level right now?

If you’re feeling perfectly comfortable, this week could be a great time to rebalance your portfolio back to its target allocation, which likely means buying more stocks. (It may also be an opportunity to tax-loss harvest.)

On the other hand, if you’ve been stressing about this modest decline, you may want to scale back your stock allocation somewhat. Yes, that means selling immediately after a decline, which isn’t ideal. But chalk it up as a lesson — one that could have been much more expensive.

And take note of the stress you’ve been feeling. Literally. Make a note of it. Record how you are feeling right now. Then sign and date that document. You want something that you can refer back to the next time things are looking rosy and you are tempted to bump up the risk level of your portfolio (to a level that you have already proven is too risky for you).

Investing Blog Roundup: Fund Investors Are Making Better Decisions

This week, I particularly enjoyed a piece from Morningstar’s John Rektenthaler discussing some positive, investor-driven changes that have occurred in the mutual fund industry over the last few decades.

Investing Articles

Other Money-Related Articles

Thanks for reading!

Why Use Actively Managed Bond Funds?

A reader writes in, asking:

“I saw an article on your blog about passive funds beating active ones. But then why do Jack Bogle and Rick Ferri use the actively managed Vanguard funds? For example, wouldn’t a muni ETF be a better option if it beats the active manager 95% of the time? I’m a full time indexer but I don’t understand why these legends use active bond funds. Can the same be said for corporate bond funds?”

The key point about indexing isn’t that there’s anything magical about the indexing itself but rather that it is a very low-cost way to run a diversified mutual fund. Or, to look at it from the other direction, most actively managed funds have a very difficult time overcoming their much higher costs.

In some cases, however, the actively managed funds have costs that are approximately as low as (or sometimes even lower than) the costs of index funds (or ETFs) in the same category. This is especially common with Vanguard’s bond funds. Many of them are not technically index funds, because they do not specifically track an index. But they have low expense ratios because the fund’s investment strategy is still very passive. That is, the fund isn’t trying to do any of the (expensive) things that many actively managed funds do in their attempts to outperform their benchmarks.

For example, Vanguard’s Intermediate-Term Investment-Grade Fund is technically actively managed. But the Vanguard website describes the fund’s investment strategy as follows: “This fund provides diversified exposure to medium- and high-quality investment-grade bonds with an average maturity of five to ten years.” Nothing about trying to pick bonds with unusually high performance. Nothing about trying to predict interest rate movements. It’s basically just, “We’re going to buy a bunch of bonds with investment-grade credit ratings and maturities of 5-10 years.” Very boring and, importantly, inexpensive to implement.

Similarly, in the muni bond category, Vanguard’s funds are technically actively managed. And their expense ratios range from 0.12% (for Admiral shares) to 0.2%. By way of comparison, if you take a look at a list of muni bond ETFs (here or here, for example), you’ll notice than none are less expensive than Admiral shares of Vanguard’s non-index muni funds.

The triumph of index funds is really a triumph of inexpensive funds over expensive funds. When an actively managed fund has very low costs (and there’s no reason to think that the manager is going to do something stupid with your money), such a fund can be a perfectly good option for inclusion in a low-cost, diversified portfolio.

Investing Blog Roundup: How Different Full Retirement Ages Affects Social Security Strategies

With regard to Monday’s article (about Social Security strategies for couples with very similar primary insurance amounts), an astute reader pointed out that I made a mistake. Specifically, I neglected to take into account how the analysis changes when the two spouses have different full retirement ages due to being born in different years. (You can see a chart with full retirement age by birth year here.)

In short, the analysis is different because, if you have an older full retirement age, your maximum possible retirement benefit is reduced relative to somebody with the same primary insurance amount and a younger full retirement age. For example, if a person with a full retirement age of 66 has a primary insurance amount of $1,000, his retirement benefit if he waits until age 70 would be $1,320 per month — because he delayed for 4 years beyond his FRA, with each year granting an increase equal to 8% of his PIA. But for a person with a $1,000 PIA and a full retirement age of 67, his retirement benefit at age 70 would be just $1,240 per month — because by age 70 he has only delayed for 3 years beyond his full retirement age.

This is actually a relevant point in the analysis for any married couple. I often write about how it is advantageous for the spouse with the higher PIA to be the one to delay (because doing so results in a higher retirement benefit as long as either spouse is still alive). It would be more precise, however, to write that it is advantageous for the spouse with the higher age-70 benefit to be the one to delay. (In most cases, this is the spouse with the higher PIA, but it could be a spouse with a slightly lower PIA and a younger full retirement age.)

Investing Articles

Other Money-Related Articles

Thanks for reading!

With Similar Earnings History, Which Spouse Should Delay Social Security?

A reader writes in, asking:

“My husband and I plan for one of us to file for Social Security at age 70 and for the other to file early, probably at age 62. You have stated that the spouse with the higher benefit should be the one to wait, in order to maximize survivor benefits, but what should we do if we have nearly identical benefits? Is there rhyme or reason for one of us as opposed to the other being the one who should wait?”

In cases in which:

  1. Both spouses have very similar primary insurance amounts,
  2. Neither spouse expects his/her primary insurance amount to grow meaningfully as a result of future earnings (i.e., neither PIA is expected to become meaningfully larger than the other in the future), and
  3. The couple plans for only one spouse to wait to claim retirement benefits

…the question of who should wait is often a function of age.

Specifically, if one spouse is more than 4 years older than the other spouse, that older spouse is the one who should file early. The reason for this recommendation is that this is the strategy that will allow for the most total years of “free” spousal benefits.

How About an Example?

Mario is 62 years old, and his wife Christina is 56. Their PIAs are approximately identical.

Scenario A: The couple decides for Mario (the older spouse) to file at age 62 and for Christina (the younger spouse) to wait until age 70. With this strategy, once Christina reaches her full retirement age, she can file a “restricted application” to receive just spousal benefits. This way, she can receive 4 years of drawback-free spousal benefits while allowing her own retirement benefit to continue growing until age 70.

Scenario B: The couple decides for Christina (the younger spouse) to file at age 62 and for Mario (the older spouse) to wait until age 70. This strategy is not as good, because Mario won’t be able to file a restricted application for spousal benefits until Christina has reached age 62 and filed for her own retirement benefit — by which point Mario will be age 68, meaning the couple only gets 2 years of “free” spousal benefits rather than 4 years.

What If There’s Less than 4 Years Difference in Age?

If there’s less than 4 years difference in ages, then the couple will be able to receive drawback-free spousal benefits for the same number of months regardless of which spouse waits and which spouse files early. (Reason being that, if there’s less than 4 years difference, by the time the waiting spouse –regardless of which spouse that is — reaches full retirement age, the non-waiting spouse will already be age 62 and will have started receiving retirement benefits.) As a result, in these cases, whoever’s PIA is even slightly larger should generally be the person who waits.

Important Exception

There is one especially important exception to the above recommendations. Specifically, if one spouse is in particularly poor health such that he/she isn’t expected to make it to age 70, that spouse should not be the one who waits.

Example: Wallace and Gina are both age 61 and retired. Wallace’s primary insurance amount is slightly larger than Gina’s. Wallace, however, has a serious heart condition, which, his doctors have told him, makes it likely that he only has another 3-7 years left to live.

If the couple decide that Wallace will wait until age 70 for his retirement benefit and Gina will claim early, but then Wallace dies at, say, age 68, Gina will be left with an age-68 benefit for the rest of her life, as opposed to the age-70 benefit that she could have gotten if she (i.e., the healthy spouse) had been the one to wait.

Want to Learn More about Social Security? Pick Up a Copy of My Book:

Social Security Made Simple: Social Security Retirement Benefits and Related Planning Topics Explained in 100 Pages or Less
Topics Covered in the Book:
  • How retirement benefits, spousal benefits, and widow(er) benefits are calculated,
  • How to decide the best age to claim your benefit,
  • How Social Security benefits are taxed and how that affects tax planning,
  • Click here to see the full list.

A Testimonial from a Reader on Amazon:

"An excellent review of various facts and decision-making components associated with the Social Security benefits. The book provides a lot of very useful information within small space."
Disclaimer: By using this site, you explicitly agree to its Terms of Use and agree not to hold Simple Subjects, LLC or any of its members liable in any way for damages arising from decisions you make based on the information made available on this site. I am not a financial or investment advisor, and the information on this site is for informational and entertainment purposes only and does not constitute financial advice.

Copyright 2015 Simple Subjects, LLC - All rights reserved. To be clear: This means that, aside from small quotations, the material on this site may not be republished elsewhere without my express permission. Terms of Use and Privacy Policy