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Financial IQ
| What is the Cost of your Investments |
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It's no secret that it costs money to invest in mutual funds. What many people don't know is that expenses can vary greatly among funds, even when the funds are generally similar. High costs can eat away at your net investment returns over time—and that means it pays to shop around. You should choose a fund based on your financial goals, time horizon, and tolerance for risk. It's equally important to keep an eye on expenses. Princeton University economics professor and former Vanguard® board member Burton Malkiel recommends that investors look for funds with:
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Editor's Choice
| The anatomy of Distress Selling |
Bank for International Settlements ("BIS") has a working paper on Distress selling and asset market feedback by Ilhyock Shim and Goetz von PeterThis paper examines the process of distress selling and asset market feedback. It splits this process into several stages, in order to analyse what triggers distress selling, why asset prices fall, and how falling prices generate additional rounds of selling. |
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| Dilbert should win a Noble Prize for this unified theory |
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MarketWatch.com has an article by Paul Farrell on why Dilbert should win the Noble Prize for his simple but unified theory of everything financial. OK, so Dilbert didn't win the Nobel Prize in economics this year. There's always next year, right? Or perhaps a parallel universe? You may wonder whether Dilbert and his creator, cartoonist Scott Adams, have any chance, but since the Nobel committee's records are sealed for 50 years our imagination runs free. In fact, we saw proof last week as Nobel prizes were awarded for simple dreams unlocking great truths: in physics, revelations about cosmic radiation before the Big Bang; in medicine, the genetic flow of information; in chemistry, cell production of proteins. This year, we were rooting for Adams. His simple formula reminds us of how, after being awarded the Nobel Prize, Albert Einstein spent his entire life searching for the "Unified Theory of Everything." It eluded him. Adams, on the other hand, did discover a "Unified Theory of Everything Financial," which deserves a prize. Adams' formula was originally published in "Dilbert and the Way of the Weasels" at virtually the same time Princeton psychologist Daniel Kahneman was awarded the 2002 Nobel Prize. You will recall that Kahneman destroyed Wall Street's historic theory of the "rational investor." Dilbert made a complementary discovery, defining a weasel as "anyone trying to get away with something," thus explaining two centuries of psychological behavior on Wall Street where weasels have been misleading Americans with the false theory that investors are rational. 'Unified Theory of Everything Financial' Quietly hidden in Adams' groundbreaking work is a financial formula so simple it rivals Einstein's E=mc2. In its original form Adams' formula was apparently so heretical and so explosive that no major house would touch it when he proposed publishing it as a one-page book. After initial rejections, he announced sadly that "if God materialized on earth and wrote the secret of the universe on one page, he wouldn't be able to find a publisher" either. Fortunately for America's 95 million investors, Adams' secret nine-point formula was finally revealed in "Dilbert and the Way of the Weasels." Notice its simple brilliance in the exact reproduction of his formula: 1. Make a will 2. Pay off your credit cards 3. Get term life insurance if you have a family to support 4. Fund your 401k to the maximum 5. Fund your IRA to the maximum 6. Buy a house if you want to live in a house and can afford it 7. Put six months worth of expenses in a money-market account 8. Take whatever money is left over and invest 70% in a stock index fund and 30% in a bond fund through any discount broker and never touch it until retirement 9. If any of this confuses you, or you have something special going on (retirement, college planning, tax issues), hire a fee-based financial planner, not one who charges a percentage of your portfolio Adams boldly states that this is "everything you need to know about personal investing." In just 129 words, nine simple points, one page you have the unabridged "Unified Theory of Everything Financial." That's it. Everything! Thanks to Adams' formula, the average irrational investor can ignore Wall Street: "Everything else you may want to do with your money is a bad idea compared to what's on my one-page summary. You want an annuity? It's worse. You want a whole life insurance policy? It's worse. You want to invest in individual stocks? It's worse. You want a managed mutual fund instead of an index fund? It's worse. I could go on, but you get the point." Check the bottom line: A portfolio with an asset allocation of 70% in Vanguard's Total Stock Market Index and 30% in the Total Bond Market Fund is doing just fine, performing remarkably close to the S&P 500 index. Moreover, that simple two-fund portfolio is perfect for the vast majority of America's 95 million investors who are passive much as Adam's Dilbert character. The truth is, most investors have little or no interest in Wall Street's casino action; all the time-consuming research, the sophisticated stock-picking tricks, the costly trading necessary to play in a market drowning in 10,000 stocks, 18,000 funds and more than 100,000 bonds. Most investors have jobs and kids as their top priority. Moreover, Dilbert's simple two-fund portfolio compares favorably with our other lazy portfolios. |
