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Investing Blog Roundup: Cash Makes People Happy

The conventional wisdom of finance indicates that the ideal amount of cash (i.e., checking/savings balances and other very safe, low-return investments) to keep on hand is the minimum amount that is necessary to avoid exposing yourself to undue risk. Anything above that amount should be invested in order to earn a higher return.

This week, however, Michael Kitces draws our attention to a study (pdf here) showing that cash on hand (in the form of checking/savings account balances) has a much stronger correlation to both sense of financial well-being and overall life satisfaction than many other financial measures, including total investments, monthly income, or indebtedness.

In short, holding cash tends to make people happy, even when they have significant other assets and don’t really have a true financial need for a large cash balance.

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Investing Blog Roundup: Do Stocks Outperform Treasury Bills?

Because of the fact that a handful of stocks earn very high returns, most stocks earn returns that are below the average return of the overall stock market. This is not news. (For instance, I wrote a couple of articles about the concept back in early 2009, and it wasn’t a remotely new observation even then.)

A recent study by Hendrik Bessembinder of Arizona State University, however, shows that not only do most stocks earn less than the market’s average return, most stocks even underperform 1-month Treasury bills over the course of their existence. Specifically, Bessembinder looked at the Center for Research in Security Prices (CRSP) database and found that, over the course of their respective lifetimes in the database, 58% of stocks had lower returns than 1-month Treasury bills.

In other words, most stocks are not only risky, they also have pretty poor returns. As Bessembinder puts it, “The fact that the broad stock market does outperform Treasuries over longer time periods is fully attributable to […] the relatively few stocks that generate large returns, not to the performance of typical stocks.”

Personally, I see this as an argument in favor of using index funds to make sure I don’t miss out on the handful of good stocks. Of course, the counterpoint is that if you allocate your entire portfolio to just a few stocks and one of them does happen to be one of those superstar performers, you’re in for a heck of a ride. Still, I’d rather not risk having an “all the risk of stocks, all the return of Treasury bills” outcome.

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Investing Blog Roundup: What to Do About an Overvalued Market

A concern I’m hearing more and more often is whether the stock market is “overvalued” and, if so, what to do about it. This week, Bob French provides a helpful discussion of the topic:

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Investing Blog Roundup: Selecting an Asset Allocation

After choosing to save and invest in the first place, the next most important investment decision is the asset allocation you choose for your portfolio. This week, Darrow Kirkpatrick and Jim Dahle each provide some suggestions for how to go about selecting an asset allocation.

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Investing Blog Roundup: Keeping Your Finances Organized

One thing I’ve learned over and over through writing this blog is that I’m not alone in wanting my finances to be simple. That’s something that many people really crave.

This week, Christine Benz of Morningstar has some great tips on simplifying the administrative side of personal finance.

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Investing Blog Roundup: Retirement Income Planning

The goal of investing during the accumulation stage is simple: get your portfolio to grow as fast as possible, without exceeding your risk tolerance along the way. And there’s now pretty strong evidence that for most people, the best tools for that job are simple, low-cost index funds or ETFs.

Turning a portfolio into a source of income that will last throughout your retirement is a more complex task, because there are risks that aren’t relevant during your accumulation stage, and because there are additional tools that merit your consideration. This week, Andrea Coombes, Wade Pfau, and Michael Kitces each take a look at different aspects of converting a portfolio into income.

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