In most areas of life, the more you spend on a product the better it is. Take cars, for example: A $90,000 Tesla is undeniably nicer than a $30,000 Toyota. 

Many people apply the same logic to investing: the more you pay for an investment manager, the better they must be. 

But with investments, that rule does not apply. In fact, the funds that charge the most tend to perform the worst. (source)

Investing Choices
When choosing to invest you have two high-level options:

Actively Managed Funds: These rely on the skill and expertise of a team of investment professionals to choose which companies to own in order to generate superior returns (i.e., beat the market).

Actively managed funds cost ~1% per year (source), a fee known as the “expense ratio.” But, the thinking goes, the managers’ stock-picking skills will provide outperformance, thus justifying the cost.

Passively Managed Funds: Instead of trying to beat the index (for example, the S&P 500), these funds simply own all the stocks that make up the S&P 500, mirroring its performance.

Since no managers are employed to research which stocks to own, these funds cost less. The typical expense ratio is ~0.20% but can be as low as 0.02% (source)

What’s The Evidence?
The vast majority of actively managed funds do not beat their benchmark:

Across the US, over the past 20 years 86% of active funds have failed to beat their benchmark. (source)

The same pattern is also evident within international stock markets and the bond market. (source)

What Should Investors Do?
Instead of picking funds that aim to outperform (but typically do not), investors should utilize passive funds. This advice is not only supported by empirical evidence but also many well-known investors:

• Warren Buffett, CEO, Berkshire Hathaway
• Jack Bogle, Founder, Vanguard
• Charles Schwab, Founder, Schwab 
• Ray Dalio, Co-Chief Investment Officer, Bridgewater Associates (the largest hedge fund in the world)
• Eugene Fama, Nobel Prize Winner and Finance Professor at the University of Chicago

Purchasing an investment is not like buying a car. 

“In investing, you get what you don’t pay for. Costs matter…intelligent investors will use low-cost index funds to build a diversified portfolio of stocks and bonds.”

– Jack Bogle

The information, analysis, and opinions expressed herein are for general and educational purposes only. Nothing contained in this commentary is intended to constitute legal, tax, accounting, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. The material has been gathered from sources believed to be reliable, however Think Different Financial Planning cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. All opinions and views constitute our judgments as of the date of writing and are subject to change at any time without notice.

I hope you’re doing well and having a great week.

Please see this week’s content below. I’ve also included a bonus article I wrote about Yale’s former endowment manager, who had a profound impact on the investment world and recently passed away.

3 Articles

7 Money Personality Types, and The Pitfalls of Each
Ken Honda, CNBC

From the “Compulsive Spender” to “The Worrier,” we each have our money personality. This article highlights each one, along with its downside.

Inflation is Here. But is it Here to Stay?
Michael Batnick, The Irrelevant Investor

The largest price increases are happening in areas that were directly impacted by the pandemic. But it also helps to “look under the hood,” because the headline number doesn’t tell the whole story.

Five Investing Powers
Morgan House, Collaborative Fund

Helpful investing “powers” that will benefit you: low susceptibility to FOMO, recognizing the difference between patience and stubbornness, and more.

1 Chart

Real estate prices around the world are on the rise. 

Source: House Prices in the Rich World Are Booming, The Economist

1 Quote

“If you look at life through the framework of money you’ll miss most of the picture.”

– Dave Chapelle 

Bonus Content | Articles by Will This Week

• Investment Lessons From Yale’s Endowment Manager
• Financial Priorities in your 30’s and 40’s

Disclosure: The information being provided is strictly as a courtesy/convenience. When you link to any of the web sites provided here, you are leaving this website. We make no representation as to the completeness or accuracy of information provided at these websites.

Think Different Financial Planning is not liable for any direct or indirect technical or system issues or any consequences arising out of your access to or your use of third-party technology, web sites, information and programs made available through this website.

When you access one of these web sites, you are leaving this web site and assume total responsibility and risk for use of the web sites you are visiting.

Think Different Financial Planning does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to Think Different Financial Planning’s web site or incorporated herein, and takes no responsibility thereof.

Your 30’s and 40’s tend to be the years when you start earning real money. If you’re in that age range here are the top financial priorities:

Pay Off Debt
Paying off non-mortgage related debt should be a top priority. Whether it stems from college loans, credit cards, or elsewhere, the higher the interest rate the higher the priority it should be. If you can afford to pay more than the required monthly amount, do it. You’ll pay off the loan sooner and save on interest.

Have an Emergency Savings Account
Cash reserves help cover expected and unexpected costs. If your car breaks down, your roof leaks, or you have a surprise medical cost, you’ll need cash.

How much cash? That’s a personal decision and there’s no “right” number, but I suggest at least 4 – 6 months of your post-tax salary. That number, however, depends on a few factors:

• How stable is your job? If it’s stable, you could argue for holding less cash. If it’s unsteady, such as a commission-based job, a larger allocation is sensible.
• For some people, having a lot in cash simply helps them sleep better at night. There’s nothing wrong with that.
• If your spouse works, can you afford to live off one income if either of you unexpectedly loses your job?

Fund your 401(k) or 403(b)
At minimum, contribute enough so you receive the full company match, if that’s offered.

If you’re contributing to a pre-tax 401(k) those contributions will lower your taxable income, meaning you’ll save on taxes.

Try to save at least 10% of your income.

Set Up Life and Disability Insurance
If you have a spouse and children, consider what would happen to your family’s finances if you or your spouse passed away or became disabled and were unable to work. Insurance protects against these rare but catastrophic events. While it’s not fun to think about, having the appropriate level of insurance in place is important.

Determine the Right Investment Allocation
For your investment accounts, determine if you’re comfortable with, say, an 80% stock allocation and 20% in bonds versus something more conservative or aggressive.

It’s helpful to understand the past upside and downside performance during various periods.

Once an allocation decision is made, stick with it unless your risk tolerance, timeframe, or other changes arise.

The information, analysis, and opinions expressed herein are for general and educational purposes only. Nothing contained in this commentary is intended to constitute legal, tax, accounting, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. The material has been gathered from sources believed to be reliable, however Think Different Financial Planning cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. All opinions and views constitute our judgments as of the date of writing and are subject to change at any time without notice.

David Swensen, manager of the Yale endowment and titan of the investing world, passed away last week. While he was unknown to most, he had a profoundly positive impact on the investments of institutions and individuals around the world.

His remarkable career is both interesting and informative for our own investment approach.

Career

At age 31, David Swensen began leading Yale’s endowment. At that time its value was $1.3 billion. At the end of his 35-year career managing the endowment it had grown to $31.2 billion, returning 13.1% per year (through June 30, 2020).

He is most well known for popularizing the “Yale Model,” which is how he managed the college’s endowment. What made this approach unique was that it allocated only a small amount to traditional U.S. stocks and bonds and more to “alternative” investments. “Alternatives” is a broad term that can include venture capital, private equity, hedge funds, private real estate, and other complex strategies. The thought was that the endowment should favor  “alternative” assets that might provide additional return because they can’t be readily traded like stocks and bonds.

The investment approach optimizes around Yale’s natural advantages: a huge amount of capital to invest, connections to the upper echelons of the investment community, an amazing reputation as a patient investor, and an infinite timeline.

While this portfolio approach works well for Yale, the average individual does not have these advantages. To address that, David Swensen wrote Unconventional Success to outline how individuals, not endowments, should invest.

Lessons

Don’t Try to Copy Yale
Despite relying heavily on alternative investments, David Swensen discouraged individuals from trying to replicate his approach. He recommended low-cost passive investment funds, believing that the stock market is too efficient to benefit from active management.

Time Is Your Friend
One of Yale’s comparative advantages was their indefinite timeframe. While individuals don’t quite have an investment horizon to match Yale, they at least have a few decades. With that in mind, focus on long-term time horizons of at least 5+ years. The longer your investment timeframe, the higher the chance the investment will have a positive return.

Diversify
Despite having connections to some of the most exclusive investors in the world, Yale’s diversified across many investment managers and strategies. We should spread our bets too.

The information, analysis, and opinions expressed herein are for general and educational purposes only. Nothing contained in this commentary is intended to constitute legal, tax, accounting, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. The material has been gathered from sources believed to be reliable, however Think Different Financial Planning cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. All opinions and views constitute our judgments as of the date of writing and are subject to change at any time without notice.

I hope you’re doing well and having a great week.

Please see this week’s articles, chart, and quote below, along with a bonus article I wrote about the difficulty of saving for college.

 3 Articles

7 Common Money Arguments in Marriage
Jeremy Brown, Fatherly

Common money arguments and how to address them.

My View On: ESG Investing
Cullen Roche, Pragmatic Capitalism

ESG investing (environmental, social, and corporate governance) is a hot new space in the investment world. The basic goal is to construct portfolios that are more morally acceptable. While this sounds great in theory, this article discusses the downsides.

12 Personal Finance Numbers You Should Know
Thomas Kopelman, The Long Game

When thinking about your financial future and creating a financial plan, there are some numbers that you really should know.

1 Chart

An interesting way to bucket investment returns for the past 95 years:

Source: Stock Market Returns Are Anything But Average

A few takeaways:

• 74% of years were positive.
• 36% of the years were gains of 20% or more.
• 6% of the years were losses of 20% or worse.

1 Quote

“The question isn’t at what age I want to retire, it’s at what income.”

– George Foreman 

Written by Will This Week

• The Difficulty of Saving for College

Disclosure: The information being provided is strictly as a courtesy/convenience. When you link to any of the web sites provided here, you are leaving this website. We make no representation as to the completeness or accuracy of information provided at these websites.

Think Different Financial Planning is not liable for any direct or indirect technical or system issues or any consequences arising out of your access to or your use of third-party technology, web sites, information and programs made available through this website.

When you access one of these web sites, you are leaving this web site and assume total responsibility and risk for use of the web sites you are visiting.

Think Different Financial Planning does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to Think Different Financial Planning’s web site or incorporated herein, and takes no responsibility thereof.