Oblivious Investor http://www.obliviousinvestor.com Low-Maintenance Investing with Index Funds and ETFs Mon, 15 Dec 2014 13:00:22 +0000 en-US hourly 1 http://wordpress.org/?v=3.9.3 Is It Time to Overweight Energy Stocks? http://www.obliviousinvestor.com/is-it-time-to-overweight-energy-stocks/ http://www.obliviousinvestor.com/is-it-time-to-overweight-energy-stocks/#comments Mon, 15 Dec 2014 13:00:22 +0000 http://www.obliviousinvestor.com/?p=7357 A reader writes in, asking:

“What do you think of an Energy Mutual Fund such as Vanguard’s Energy Fund for a 3-5% position within one’s stock portfolio at this time?

Some investors such as Buffet have suggested that the time to invest in markets when there is “blood in the streets”, and there is crying from obvious pain.  Do you think the rapid price decline of oil and related energy stocks is a good investment through an energy fund, or should one be satisfied with the percentage of energy and related stocks through an S&P 500 fund or total market index fund?  Is there enough pain and blood in this sector to warrant at least a look at an energy fund for a longer term hold of at least one to three years?”

As of 12/12/14, the Vanguard Energy Fund is down just over 30% from the peak it reached in June of this year.

For an investor considering a temporary overweighting of this industry (relative, that is, to the portion of the overall market that it makes up), the question that must be answered is whether this 30% decline is an overreaction, an appropriate reaction, or an underreaction to the decline in oil prices. It would only make sense to overweight this industry if you were convinced that the recent price decline is an overreaction to the news (i.e., share prices have gone down more than they really should have, making today an opportunity to buy at bargain prices).

So, how would you determine whether the price change is an overreaction?

In short, you’d have to do some math (and a lot of research).

Specifically, you’d have to calculate your expectation for the industry’s future earnings given the new lower oil price (which would necessitate, among other things, an estimate of how long the price of oil will stay where it now is). And then you’d have to calculate what you consider to be a fair value of the industry, given those new earnings expectations.

As for me personally, such calculations and estimates would be well beyond the sort of thing I could do with any significant degree of confidence.

But if you don’t actually take the time to do the research and math, all you’re really doing is guessing.

You could make the case that, yes, it’s a guess, but if you make many guesses of this nature over the course of your investing career, you’ll be right more often than not given that investors tend to overreact to news. But there are, in my view, at least three compelling points against such a strategy:

  • Monitoring the news and moving in and out of various funds is quite a bit of work, relative to a simple buy-hold-and-rebalance strategy,
  • It involves higher costs, due to transaction costs and/or owning funds with higher costs than broad-market index funds, and
  • There’s evidence of a “momentum effect” in most equity markets, which might suggest that investors actually tend to underreact to news at first.

Interested in economics? Pick up a copy of my latest book:

Microeconomics Made Simple: Basic Microeconomic Principles Explained in 100 Pages or Less

Disclaimer: Your subscription to this blog does not create a CPA-client or other professional services relationship between you and Mike Piper or between you and Simple Subjects, LLC. By subscribing, you explicitly agree not to hold Mike Piper or Simple Subjects, LLC liable in any way for damages arising from decisions you make based on the information available herein. Neither Mike Piper nor Simple Subjects, LLC makes any warranty as to the accuracy of any information contained in this communication. I am not a financial or investment advisor, and the information contained herein is for informational and entertainment purposes only and does not constitute financial advice. On financial matters for which assistance is needed, I strongly urge you to meet with a professional advisor who (unlike me) has a professional relationship with you and who (again, unlike me) knows the relevant details of your situation.

You may unsubscribe at any time by clicking the link at the bottom of this email (or by removing this RSS feed from your feed reader if you have subscribed via a feed reader).

]]>
http://www.obliviousinvestor.com/is-it-time-to-overweight-energy-stocks/feed/ 0
Investing Blog Roundup: Vanguard Personal Advisor Services http://www.obliviousinvestor.com/investing-blog-roundup-vanguard-personal-advisor-services/ http://www.obliviousinvestor.com/investing-blog-roundup-vanguard-personal-advisor-services/#comments Fri, 12 Dec 2014 13:00:53 +0000 http://www.obliviousinvestor.com/?p=7356 I read this week that Vanguard’s new “Personal Advisor Services” program (which provides asset management, a basic financial plan, and the ability to contact a CFP with any questions for a cost of 0.3% per year) has been gathering assets more quickly than the start-up companies in the robo-advisor space. Perhaps that shouldn’t be a surprise, given Vanguard’s massive size. But it will be interesting to see how quickly the program grows once Vanguard officially takes it out of the test phase and begins marketing it more broadly.

Investing Articles

Other Money-Related Articles

Thanks for reading!

Interested in economics? Pick up a copy of my latest book:

Microeconomics Made Simple: Basic Microeconomic Principles Explained in 100 Pages or Less

Disclaimer: Your subscription to this blog does not create a CPA-client or other professional services relationship between you and Mike Piper or between you and Simple Subjects, LLC. By subscribing, you explicitly agree not to hold Mike Piper or Simple Subjects, LLC liable in any way for damages arising from decisions you make based on the information available herein. Neither Mike Piper nor Simple Subjects, LLC makes any warranty as to the accuracy of any information contained in this communication. I am not a financial or investment advisor, and the information contained herein is for informational and entertainment purposes only and does not constitute financial advice. On financial matters for which assistance is needed, I strongly urge you to meet with a professional advisor who (unlike me) has a professional relationship with you and who (again, unlike me) knows the relevant details of your situation.

You may unsubscribe at any time by clicking the link at the bottom of this email (or by removing this RSS feed from your feed reader if you have subscribed via a feed reader).

]]>
http://www.obliviousinvestor.com/investing-blog-roundup-vanguard-personal-advisor-services/feed/ 0
Why Does Everybody Recommend Complex Portfolios? http://www.obliviousinvestor.com/why-does-everybody-recommend-complex-portfolios/ http://www.obliviousinvestor.com/why-does-everybody-recommend-complex-portfolios/#comments Mon, 08 Dec 2014 13:00:05 +0000 http://www.obliviousinvestor.com/?p=7353 A reader writes in, asking

“On the Bogleheads forum I see people recommending the ‘three fund portfolio’ with Total Stock Market, Total International Stock, and Total Bond Market funds. But I never see something this basic anywhere else. Elsewhere, I see portfolios recommended that include many more funds or articles recommending the new and improved types of index funds. What’s wrong with a normal index fund portfolio? Why doesn’t the three fund portfolio or anything similar get talked about anywhere else?”

To understand this phenomenon, I think it’s helpful to step back and look at an industry trend: Over the last several years, the idea that passive investing is generally preferable to active investing has become the conventional wisdom. Evidence of this trend is all over the place — the massive size of Vanguardthe explosive growth of assets invested in ETFs, or the steadily-rising percentage of equity mutual fund assets that are invested in index funds.

But that new conventional wisdom presents a challenge for many parties: How do we make money?

Mutual fund companies are unlikely to beat Vanguard at their own game. (And most fund companies wouldn’t even want to — there’s not a lot of money to be made by being the rock-bottom-cost provider of a commodity service.) So they need something to sell you other than your basic market-weighted index fund. But they still want to fall under the “passive” umbrella so that they can get all the marketing benefits of being associated with the passive-beats-active conventional wisdom. So now rather than fund companies pushing their actively managed funds, we see many pushing a new breed of fancy-passive funds: smart beta, equal-weight index funds, fundamental index funds, and so on.

And advisors who practice only portfolio management (rather than broader financial planning) have a similar predicament. Passive portfolio management is already available at a very low cost via all-in-one funds (e.g., Vanguard Target Retirement Funds) or via a “robo-advisor” such as Betterment or Wealthfront. Advisors can’t beat those services on cost, so they have to show that they can do something better. In most cases, that means trying to convince you that the portfolio that they will craft for you is better than the portfolio you’d get via one of those less expensive options. And it’s easier to convince you of that if they recommend something that looks very sophisticated.

Now, to be clear, writers (myself included) are faced with the same dilemma. There isn’t that much to say about a boring market-weighted portfolio made of just a few index funds. And there’s even less to say about a portfolio consisting of nothing but an all-in-one fund. And yet we need topics for articles. So you’ll find us writing about a whole list of other investment strategies.

In other words, at least a part of the reason why simple portfolios using traditional index funds don’t get a great deal of discussion is that, in many cases, it’s more profitable to talk about something else.

Interested in economics? Pick up a copy of my latest book:

Microeconomics Made Simple: Basic Microeconomic Principles Explained in 100 Pages or Less

Disclaimer: Your subscription to this blog does not create a CPA-client or other professional services relationship between you and Mike Piper or between you and Simple Subjects, LLC. By subscribing, you explicitly agree not to hold Mike Piper or Simple Subjects, LLC liable in any way for damages arising from decisions you make based on the information available herein. Neither Mike Piper nor Simple Subjects, LLC makes any warranty as to the accuracy of any information contained in this communication. I am not a financial or investment advisor, and the information contained herein is for informational and entertainment purposes only and does not constitute financial advice. On financial matters for which assistance is needed, I strongly urge you to meet with a professional advisor who (unlike me) has a professional relationship with you and who (again, unlike me) knows the relevant details of your situation.

You may unsubscribe at any time by clicking the link at the bottom of this email (or by removing this RSS feed from your feed reader if you have subscribed via a feed reader).

]]>
http://www.obliviousinvestor.com/why-does-everybody-recommend-complex-portfolios/feed/ 0
Investing Blog Roundup: Tips for Taking RMDs http://www.obliviousinvestor.com/investing-blog-roundup-tips-for-taking-rmds/ http://www.obliviousinvestor.com/investing-blog-roundup-tips-for-taking-rmds/#comments Fri, 05 Dec 2014 13:00:47 +0000 http://www.obliviousinvestor.com/?p=7350 With the end of the year closing in, I enjoyed seeing an article on Vanguard’s website from Maria Bruno (a CFP in their Investment Counseling & Research group) giving several good tips relating to required minimum distributions (RMDs).

Investing Articles

Other Money-Related Articles

Thanks for reading!

Interested in economics? Pick up a copy of my latest book:

Microeconomics Made Simple: Basic Microeconomic Principles Explained in 100 Pages or Less

Disclaimer: Your subscription to this blog does not create a CPA-client or other professional services relationship between you and Mike Piper or between you and Simple Subjects, LLC. By subscribing, you explicitly agree not to hold Mike Piper or Simple Subjects, LLC liable in any way for damages arising from decisions you make based on the information available herein. Neither Mike Piper nor Simple Subjects, LLC makes any warranty as to the accuracy of any information contained in this communication. I am not a financial or investment advisor, and the information contained herein is for informational and entertainment purposes only and does not constitute financial advice. On financial matters for which assistance is needed, I strongly urge you to meet with a professional advisor who (unlike me) has a professional relationship with you and who (again, unlike me) knows the relevant details of your situation.

You may unsubscribe at any time by clicking the link at the bottom of this email (or by removing this RSS feed from your feed reader if you have subscribed via a feed reader).

]]>
http://www.obliviousinvestor.com/investing-blog-roundup-tips-for-taking-rmds/feed/ 0
2015 Tax Brackets, Standard Deduction, and Other Updates http://www.obliviousinvestor.com/2015-tax-brackets/ http://www.obliviousinvestor.com/2015-tax-brackets/#comments Mon, 01 Dec 2014 13:00:29 +0000 http://www.obliviousinvestor.com/?p=7347 Typically, I do a tax update near the end of the year to discuss any significant changes that will be applicable for the following year. For 2015, the big news is that there is no news. Whereas 2014 had the new Premium Tax Credit and 2013 had several new provisions (e.g., the new 39.6% tax bracket, the 20% tax rate on qualified dividends and long-term capital gains for people in that new tax bracket, and the new 3.8% tax on net investment income), 2015 doesn’t have much that’s entirely new. For the most part, it’s just inflation adjustments.

The tax brackets for 2015 are as follows:

Single 2015 Tax Brackets

Taxable Income
Tax Bracket:
$0-$9,225 10%
$9,226-$37,450 15%
$37,451-$90,750 25%
$90,751-$189,300 28%
$189,301-$411,500 33%
$411,501-$413,200 35%
$413,201+ 39.6%

 

Married Filing Jointly 2015 Tax Brackets

Taxable Income
Tax Bracket:
$0-$18,450 10%
$18,451-$74,900 15%
$74,901-$151,200 25%
$151,201-$230,450 28%
$230,451-$411,500 33%
$411,501-$464,850 35%
$464,851+ 39.6%

 

Head of Household 2015 Tax Brackets

Taxable Income
Tax Bracket:
$0-$13,150 10%
$13,151-$50,200 15%
$50,201-$129,600 25%
$129,601-$209,850 28%
$209,851-$411,500 33%
$411,501-$439,000 35%
$439,001+ 39.6%

 

Married Filing Separately 2015 Tax Brackets

Taxable Income
Marginal Tax Rate:
$0-$9,225 10%
$9,226-$37,450 15%
$37,451-$75,600 25%
$75,601-$115,225 28%
$115,226-$205,750 33%
$205,751-$232,425 35%
$232,426+ 39.6%

 

Standard Deduction Amounts

Due to inflation adjustments, the 2015 standard deduction amounts will be as follows:

  • Single or married filing separately: $6,300
  • Married filing jointly: $12,600
  • Head of household: $9,250

The additional standard deduction for people who have reached age 65 (or who are blind) is $1,250 for married taxpayers or $1,550 for unmarried taxpayers.

Personal Exemption Amount and Phaseout

The personal exemption amount for 2015 is a nice round $4,000.

However, the total personal exemptions to which you’re entitled will be phased out (i.e., reduced and eventually eliminated) as your adjusted gross income (i.e., the last line of the first page of your Form 1040) moves through a certain range.

  • For single taxpayers, personal exemptions begin to be phased out at $258,250 and are fully phased out by $380,750.
  • For married taxpayers filing jointly, personal exemptions begin to be phased out at $309,900 and are fully phased out by $432,400.
  • For taxpayers filing as head of household, personal exemptions begin to be phased out at $284,050 and are fully phased out by $406,550.
  • For married taxpayers filing separately, personal exemptions begin to be phased out at $154,950 and are fully phased out by $216,200.

Limitation on Itemized Deductions

As in 2013 and 2014, the amount of itemized deductions which you are allowed to claim is reduced by 3% of the amount by which your adjusted gross income exceeds certain threshold amounts. These threshold amounts are the same as the lower threshold amounts listed above for the personal exemption phaseout (e.g., $258,250 for single taxpayers). However:

  1. Your itemized deductions cannot be reduced by more than 80% as a result of this limitation, and
  2. Your itemized deductions for medical expenses, investment interest expense, casualty/theft losses, and gambling losses are not reduced as a result of this limitation.

IRA and 401(k) Contribution Limits

For 2015, the contribution limit to Roth and traditional IRAs is unchanged at $5,500, with an additional catch-up contribution of $1,000 for people age 50 or older.

The contribution limit for 401(k), 403(b), and most 457 plans, however, is increased to $18,000, with an additional catch-up contribution of $6,000 for people age 50 or older.

The maximum possible contribution for defined contribution plans (e.g., for a self-employed person with a sufficiently high income contributing to a SEP IRA) is increased from $52,000 to $53,000.

AMT Exemption Amount

After adjusting for inflation, the following are the AMT exemptions for 2015:

  • $53,600 for single taxpayers,
  • $83,400 for married taxpayers filing jointly, and
  • $41,700 for married taxpayers filing separately.

“Shared Responsibility Payment” (Penalty for No Health Insurance)

Perhaps the biggest change for individual income tax is that the calculation of the penalty for having no health insurance is changing (according to schedule) for 2015. In short, the penalty is bigger than it would have been in 2014. (And it will be bigger still in 2016 and beyond.) Healthcare.gov has the details of the calculation here.

Interested in economics? Pick up a copy of my latest book:

Microeconomics Made Simple: Basic Microeconomic Principles Explained in 100 Pages or Less

Disclaimer: Your subscription to this blog does not create a CPA-client or other professional services relationship between you and Mike Piper or between you and Simple Subjects, LLC. By subscribing, you explicitly agree not to hold Mike Piper or Simple Subjects, LLC liable in any way for damages arising from decisions you make based on the information available herein. Neither Mike Piper nor Simple Subjects, LLC makes any warranty as to the accuracy of any information contained in this communication. I am not a financial or investment advisor, and the information contained herein is for informational and entertainment purposes only and does not constitute financial advice. On financial matters for which assistance is needed, I strongly urge you to meet with a professional advisor who (unlike me) has a professional relationship with you and who (again, unlike me) knows the relevant details of your situation.

You may unsubscribe at any time by clicking the link at the bottom of this email (or by removing this RSS feed from your feed reader if you have subscribed via a feed reader).

]]>
http://www.obliviousinvestor.com/2015-tax-brackets/feed/ 0
Investing Blog Roundup: Happy Thanksgiving http://www.obliviousinvestor.com/investing-blog-roundup-happy-thanksgiving-3/ http://www.obliviousinvestor.com/investing-blog-roundup-happy-thanksgiving-3/#comments Fri, 28 Nov 2014 13:00:10 +0000 http://www.obliviousinvestor.com/?p=7349 I hope you all enjoyed Thanksgiving festivities with your loved ones yesterday.

As I’ve done in the past, I just want to explicitly say “thank you” to you folks. Being able to do this (that is, write about investing/taxes/retirement) for a living is, quite literally, a dream come true for me. And you all are the only reason it’s possible.

Investing Articles

Other Money-Related Articles

Thanks for reading!

Interested in economics? Pick up a copy of my latest book:

Microeconomics Made Simple: Basic Microeconomic Principles Explained in 100 Pages or Less

Disclaimer: Your subscription to this blog does not create a CPA-client or other professional services relationship between you and Mike Piper or between you and Simple Subjects, LLC. By subscribing, you explicitly agree not to hold Mike Piper or Simple Subjects, LLC liable in any way for damages arising from decisions you make based on the information available herein. Neither Mike Piper nor Simple Subjects, LLC makes any warranty as to the accuracy of any information contained in this communication. I am not a financial or investment advisor, and the information contained herein is for informational and entertainment purposes only and does not constitute financial advice. On financial matters for which assistance is needed, I strongly urge you to meet with a professional advisor who (unlike me) has a professional relationship with you and who (again, unlike me) knows the relevant details of your situation.

You may unsubscribe at any time by clicking the link at the bottom of this email (or by removing this RSS feed from your feed reader if you have subscribed via a feed reader).

]]>
http://www.obliviousinvestor.com/investing-blog-roundup-happy-thanksgiving-3/feed/ 0
Which Accounts Should I Spend from Each Year in Retirement? http://www.obliviousinvestor.com/which-accounts-should-i-spend-from-each-year-in-retirement/ http://www.obliviousinvestor.com/which-accounts-should-i-spend-from-each-year-in-retirement/#comments Mon, 24 Nov 2014 13:00:37 +0000 http://www.obliviousinvestor.com/?p=7340 A reader writes in, asking:

“Sometime in one of your posts, would you expound upon the pros and cons of prioritizing your spending from taxable vs. tax-deferred accounts during retirement, factoring in how one’s heirs will fare inheriting whatever is left over from either type of account?”

With regard to general planning about which account(s) to spend from per year, it’s easiest to start with a simplified analysis in which we assume that:

  • You’ll be spending all of the money during your lifetime, and
  • You have only Roth and tax-deferred accounts.

If all you have are tax-deferred and Roth accounts, the question for each dollar you need to spend is: how does my current marginal tax rate (i.e., the tax rate I would pay on this dollar, if I took it from tax-deferred) compare to the marginal tax rate I expect to face later in retirement?

  • If your current marginal tax rate is lower than the one you expect in the future, this dollar should come from tax-deferred.
  • If your current marginal tax rate is higher than the marginal tax rate you expect to face in the future, this dollar should come from Roth.

One key point here is that marginal tax rate is not necessarily the same thing as tax bracket. It’s quite common for retirees to have a marginal tax rate that’s higher than their tax bracket, because their income is at a point where additional income not only causes the normal amount of income tax, it also causes their eligibility for some particular tax break to decline. (Most commonly: It causes more of their Social Security benefits to be taxable.)

For many people, this means spending largely from tax-deferred accounts in the early years of retirement before Social Security kicks in, then spending from a mix of Roth and tax-deferred each year after that. (A common exception: Early retirees purchasing insurance on one of the ACA-established exchanges may want to prioritize Roth spending in the early years — to maximize subsidies — until they qualify for Medicare.)

What If You’ll Be Leaving Money to Heirs?

If you’re confident that you won’t be spending all of your money during your lifetime, the question changes. Instead of asking how your current marginal tax rate compares to your future marginal tax rate, we want to look at how your marginal tax rate compares to the marginal tax rate your heirs would have when they are taking the money out of the account (which, in most cases for IRAs, would start as soon as they inherit it, because they’d have to take RMDs over their lifetime).

In many cases, this suggests that prioritizing spending from tax-deferred makes sense, because it’s common for your marginal tax rate while retired to be lower than the marginal tax rate your heirs would have when they inherit the money, which would likely be while they’re in the late (i.e., peak earning) stages of their careers. But, as with anything related to tax planning, this varies from one family to another. Some families may find that the heirs would be better off inheriting a larger tax-deferred account than a smaller Roth account because the heirs have chosen a lower-paying career (thereby making their marginal tax rate lower).

What If You Have Taxable Accounts?

If you have significant assets in taxable accounts, the situation again depends on how much you expect to be leaving to heirs. In the case in which you expect to spend most or all of your assets, spending first from taxable accounts often makes sense in order to preserve your tax-advantaged retirement accounts. If, however, you expect to leave a large portion of the portfolio to heirs, and you have assets with large unrealized capital gains, it often makes sense to avoid liquidating those assets, so that your heirs can inherit them with a stepped-up cost basis — thereby allowing your family to avoid taxation on the gain completely.

Two Caveats

Caveat number one: I’m assuming with all of the above that the estate tax is not a concern. If estate taxes are a concern, the analysis changes somewhat, as it becomes relatively more advantageous to spend from tax-deferred accounts to minimize the size of the taxable estate. Of course, with the exemption where it is these days ($5.34 million in 2014 for single taxpayers, twice that for married couples), most people don’t have to worry about this.

Caveat number two: The approach presented above is very generalized. That is, any given person is likely to have factors affecting the decision in addition to the factors mentioned above. So, if you want the best analysis, meeting with a tax professional who can look at your personal situation is the best bet.

Interested in economics? Pick up a copy of my latest book:

Microeconomics Made Simple: Basic Microeconomic Principles Explained in 100 Pages or Less

Disclaimer: Your subscription to this blog does not create a CPA-client or other professional services relationship between you and Mike Piper or between you and Simple Subjects, LLC. By subscribing, you explicitly agree not to hold Mike Piper or Simple Subjects, LLC liable in any way for damages arising from decisions you make based on the information available herein. Neither Mike Piper nor Simple Subjects, LLC makes any warranty as to the accuracy of any information contained in this communication. I am not a financial or investment advisor, and the information contained herein is for informational and entertainment purposes only and does not constitute financial advice. On financial matters for which assistance is needed, I strongly urge you to meet with a professional advisor who (unlike me) has a professional relationship with you and who (again, unlike me) knows the relevant details of your situation.

You may unsubscribe at any time by clicking the link at the bottom of this email (or by removing this RSS feed from your feed reader if you have subscribed via a feed reader).

]]>
http://www.obliviousinvestor.com/which-accounts-should-i-spend-from-each-year-in-retirement/feed/ 0
Investing Blog Roundup: Safety-First Retirement Planning http://www.obliviousinvestor.com/investing-blog-roundup-safety-first-retirement-planning/ http://www.obliviousinvestor.com/investing-blog-roundup-safety-first-retirement-planning/#comments Fri, 21 Nov 2014 13:00:23 +0000 http://www.obliviousinvestor.com/?p=7342 When it comes to retirement planning, there are two broad schools of thought about how to cover your expenses. One method is to continue using a portfolio that looks much like the portfolio somebody would use during their accumulation stage (i.e., stocks, bonds, and mutual funds), albeit with a more conservative allocation. The other school of thought – the “safety first” method — relies on a different set of tools, such as bond ladders and annuities.

Elizabeth O’Brien of MarketWatch has more on the topic:

Other Money-Related Articles

Thanks for reading!

Interested in economics? Pick up a copy of my latest book:

Microeconomics Made Simple: Basic Microeconomic Principles Explained in 100 Pages or Less

Disclaimer: Your subscription to this blog does not create a CPA-client or other professional services relationship between you and Mike Piper or between you and Simple Subjects, LLC. By subscribing, you explicitly agree not to hold Mike Piper or Simple Subjects, LLC liable in any way for damages arising from decisions you make based on the information available herein. Neither Mike Piper nor Simple Subjects, LLC makes any warranty as to the accuracy of any information contained in this communication. I am not a financial or investment advisor, and the information contained herein is for informational and entertainment purposes only and does not constitute financial advice. On financial matters for which assistance is needed, I strongly urge you to meet with a professional advisor who (unlike me) has a professional relationship with you and who (again, unlike me) knows the relevant details of your situation.

You may unsubscribe at any time by clicking the link at the bottom of this email (or by removing this RSS feed from your feed reader if you have subscribed via a feed reader).

]]>
http://www.obliviousinvestor.com/investing-blog-roundup-safety-first-retirement-planning/feed/ 0
Are Dividends More Important Than Price Appreciation? http://www.obliviousinvestor.com/are-dividends-more-important-than-price-appreciation/ http://www.obliviousinvestor.com/are-dividends-more-important-than-price-appreciation/#comments Mon, 17 Nov 2014 13:00:09 +0000 http://www.obliviousinvestor.com/?p=7338 A reader writes in, asking:

“I’ve read that dividends account for the vast majority of the return of the stock market over history. I’m confused by the article you linked to last week about not being a dividend investor, given that dividends are so much more powerful than price growth.”

It’s true that, without dividends, you’d experience only a small portion of the market’s overall return over an extended period. But the idea that dividends are more powerful than price appreciation is a significant misunderstanding. (Unfortunately, I’ve seen this misunderstanding intentionally encouraged in the effort to sell products – dividend investing books, newsletters, etc.)

To explain, let’s look at an example of compound growth.

  • $1,000 compounded at 4% for 30 years gives you an ending value of $3,243.
  • $1,000 compounded at 5% for 30 years gives you an ending value of $4,322 (i.e., $1,079 more than you’d have with a 4% growth rate).
  • $1,000 compounded at 6% for 30 years gives you an ending value of $5,743 (i.e., $1,421 more than you’d have with a 5% growth rate).
  • $1,000 compounded at 7% for 30 years gives you an ending value of $7,612 (i.e., $1,869 more than you’d have with a 6% growth rate).
  • $1,000 compounded at 8% for 30 years gives you an ending value of $10,063 (i.e., $2,451 more than you’d have with a 7% growth rate).

The key pattern to notice here is that each additional 1% of return adds more to the ending value than was added by the previous 1% of return. This is just how the math works. Another important observation — which is simply another result of the same mathematical concept — is that, if you cut the return in half (e.g., compounding at 4% rather than 8%), you’ll experience less than half of the growth in value.

So, that last percentage of return — the eighth percentage point – added the most to ending value. But there’s nothing particularly unique about that eighth percent of return. That is, if we removed whatever it was that caused that eighth percent of return (such that you’d be left with a 7% growth rate), that would would have exactly the same effect as removing the cause of, say, the second percent of return. In either case, you end up with a 7% annual growth rate, and you end up with the same $7,612 ending value.

How This Applies to Dividends

The effects we’ve noticed above are amplified when we look at longer periods of time. And this is how people will sometimes come up with impressive-sounding factoids to convince you that dividends are more important than price appreciation.

For example, according to my 2012 edition of the Ibbotson Classic Yearbook — I haven’t purchased a copy for the last couple of years — from 1925-2011:

  • Large-cap stocks in the U.S. earned a total return (before adjusting for inflation) of 9.66%, of which
  • 5.42% came from price appreciation, and
  • 4.24% came from dividends.

Over a period this long (87 years), the difference between a 5.42% return (from price appreciation only) and a 9.66% return is staggering. If you had only experienced the price appreciation, you’d have just 3.24% of the ending wealth that you’d have if you’d gotten the total 9.66% return.

But the key point here is that if you had somehow earned just the 4.24% return from dividends (and had experienced no price appreciation), you’d have even less money.

In other words, factoids like the above can show us that it is important to reinvest dividends rather than spending them (if you’re in the accumulation stage, trying to grow your portfolio, that is). But they do not tell us that dividends are more important than price appreciation.

Interested in economics? Pick up a copy of my latest book:

Microeconomics Made Simple: Basic Microeconomic Principles Explained in 100 Pages or Less

Disclaimer: Your subscription to this blog does not create a CPA-client or other professional services relationship between you and Mike Piper or between you and Simple Subjects, LLC. By subscribing, you explicitly agree not to hold Mike Piper or Simple Subjects, LLC liable in any way for damages arising from decisions you make based on the information available herein. Neither Mike Piper nor Simple Subjects, LLC makes any warranty as to the accuracy of any information contained in this communication. I am not a financial or investment advisor, and the information contained herein is for informational and entertainment purposes only and does not constitute financial advice. On financial matters for which assistance is needed, I strongly urge you to meet with a professional advisor who (unlike me) has a professional relationship with you and who (again, unlike me) knows the relevant details of your situation.

You may unsubscribe at any time by clicking the link at the bottom of this email (or by removing this RSS feed from your feed reader if you have subscribed via a feed reader).

]]>
http://www.obliviousinvestor.com/are-dividends-more-important-than-price-appreciation/feed/ 0
Investing Blog Roundup: Is Long-Term Care Insurance Likely to Be Beneficial? http://www.obliviousinvestor.com/investing-blog-roundup-is-long-term-care-insurance-likely-to-be-beneficial/ http://www.obliviousinvestor.com/investing-blog-roundup-is-long-term-care-insurance-likely-to-be-beneficial/#comments Fri, 14 Nov 2014 13:00:07 +0000 http://www.obliviousinvestor.com/?p=7334 One of the toughest questions about retirement planning is the question of long-term care insurance. The available policies have an assortment of drawbacks, and they’re expensive. On the flip side, needing to pay for an extended period of long-term care out of pocket would decimate many people’s savings.

This week, a new paper from two professors and two researchers at the Center for Retirement Research at Boston College takes a look at what percentage of people are likely to benefit from purchasing such insurance:

Investing Articles

Other Money-Related Articles

Thanks for reading!

Interested in economics? Pick up a copy of my latest book:

Microeconomics Made Simple: Basic Microeconomic Principles Explained in 100 Pages or Less

Disclaimer: Your subscription to this blog does not create a CPA-client or other professional services relationship between you and Mike Piper or between you and Simple Subjects, LLC. By subscribing, you explicitly agree not to hold Mike Piper or Simple Subjects, LLC liable in any way for damages arising from decisions you make based on the information available herein. Neither Mike Piper nor Simple Subjects, LLC makes any warranty as to the accuracy of any information contained in this communication. I am not a financial or investment advisor, and the information contained herein is for informational and entertainment purposes only and does not constitute financial advice. On financial matters for which assistance is needed, I strongly urge you to meet with a professional advisor who (unlike me) has a professional relationship with you and who (again, unlike me) knows the relevant details of your situation.

You may unsubscribe at any time by clicking the link at the bottom of this email (or by removing this RSS feed from your feed reader if you have subscribed via a feed reader).

]]>
http://www.obliviousinvestor.com/investing-blog-roundup-is-long-term-care-insurance-likely-to-be-beneficial/feed/ 0