Lean Investing

Building a Financial Bridge Over Stormy Seas

As I’m writing this the S&P 500 just passed the 3000 mark. It only took five years for the index to reach this new high from the 2000 point milestone in 2014. In contrast, the rise from 1000 to 2000 required more than 16 years.

I like to think of myself as an optimist. So, I’m always confident that the market will go up over time. I just get a bit concerned when I see politicians taking credit for market gains and large companies using federal tax giveaways to buy back shares, propping up share prices.

All this while the US deficit is moving up in hockey stick fashion. Trade wars also pushed market volatility to new highs in 2018. It’s always easy to find bad news from good sources if you’re looking for it.

The case for optimism

On the other hand, experts have been predicting the next market crash since about 2012. Currently, we are 10 years into a record long bull run in the US stock markets. The point here is that no one can predict the direction of the markets. As much as governments may try, they even have trouble disrupting forward progress. Time marches on, things do eventually get better over time. Stay optimistic. When the next bear market or correction comes along, hang on tight and tell yourself this too shall pass.

Expect the best, plan for the worst

Optimism definitely has its place. For those of us that retired early, are financially independent, nearing retirement, or just hanging out on a beach somewhere, now is the perfect time to be a bit of a pessimist. Over the past two years, as this bull current bull market has gotten a bit long in the tooth, I’ve found myself looking at how specific investments performed during the 2001 and 2008 bear markets and recessions.

If we were to have another major bear market, how would my portfolio perform and what should my asset allocation be before it comes? I look at this as sort of conducting your own financial stress test, similar to what the Fed asks banks to do.

If you’re retired or financially independent and source part of your income from dividends and capital gains, ask this question: What could you do now that would enable you to get through the next recession and bull market without having to sell dividend producing stocks or stock market index funds while prices are dropping?

[Read more…]

Why you should stop checking your stocks every day.

11/18 by The Frug 1 Comment

By Brad Beckstrom

I purchased my first mutual fund about 6 months before Black Monday in 1987. We didn’t have the internet or online investing. Not even email! That was so sweet. Imagine going through your workday largely uninterrupted. When I was a field employee in my first real job, pretty much everything came through the US mail. Our 401(k) statements came quarterly. Savings Bonds were in a drawer, and mutual fund statements came monthly, but only after I had consolidated a few of them into a brokerage account.

Then everything changed.

First came 24/7 cable news with tickers, then in the 90s things really took off with the introduction of websites like Yahoo Finance. In the late 90s everyone was talking about or buying some sort of tech stock. Then they would watch the stocks along with their company stocks or mutual funds in online portfolio trackers. Most didn’t actually link to your investment account yet, but you could manually enter your shares and ticker symbols. [Read more…] about Why you should stop checking your stocks every day.

Knowing Things Instead of Buying Things.

08/18 by The Frug 1 Comment

By Brad Beckstrom

What if every time you thought of buying something, you decided to know something instead? You’d probably build up a pretty good “store” of knowledge. You’d constantly be refreshing that knowledge whether you’re in a grocery store, online or shopping for a large purchase. I’ve used this strategy on large and small purchases. Something simple like “that health bar has more calories than 2 whole eggplants.” Now whenever you look at those 240 calorie health bars you’ll think about the equivalent of eating two entire eggplants.

Knowing things can impact larger purchases.

I’ve been putting off replacing our old car. We probably should’ve sold it a year ago but that time has not been wasted. Since then we’ve been learning about:

Making 30% more by selling a used car on craigslist instead of to a dealer.
How new cars lose 20% of their value just 6 months after you drive them off the lot.
You can find some really great cars using an app like Carvana once you know what you’re looking for.
Whether an electric car or a hybrid car is a better fit for our daily driving.
All of the benefits of having a car that’s paid for and skipping the commute.

You can even apply this thinking to investments. When you pay high annual fees on your investments, your spending money. Years ago I used to sell off underperforming mutual funds and search for up and comers. I stopped doing this and took a few years to completely revamp my investing strategy. I learned that many funds I had been buying had high fees of around 1% per year. I also came across a study that Fidelity had done about the most successful individual investment accounts. The winners were investors who were dead or had not touched their retirement accounts for years. After some research I decided to buy and hold ultra low-cost index funds with fees less than 0.060% and exchange them only when I needed to rebalance my portfolio. This one change has saved me thousands of dollars every year, and will continue as long as I hold these index funds.

Often when I’m interested in something, I decide to research it and by doing that I delay the purchase. I believe that delaying purchases is one of the best ways to cut your spending. Even a delay of one or two days to do a bit more research (learn something) can make you rethink that impulse purchase. I also have a simple rule of not replacing something until it is completely worn out or, in the case of perishables, gone. When you run out of something and stay out of it for a few days sometimes you realize you don’t really need it. If it was really amazing you’ll remember to replace it. (sorry kale snacks)

Here are some tried-and-true ways of knowing things instead of buying things. [Read more…] about Knowing Things Instead of Buying Things.

Tax-Free Investing. The True Secret Behind Health Savings Accounts.

02/17 by The Frug Leave a Comment

By Brad Beckstrom

Why would I waste a perfectly good Thursday morning writing about health insurance and health savings accounts? Well, politics has made paying for healthcare a national obsession.

There’s been a lot in the news recently about the spiraling costs of healthcare and Republican promises to cut the costs of health insurance for individuals and families. While no formal plan has been presented, one key component mentioned by both Republicans and Democrats is the Health Savings Account or HSA. The fact is, tax-advantaged HSAs have been around for years. In many ways they are also one of the best ways to save for retirement. I’ll explain why.

What is an HSA?

An HSA used in conjunction with a high deductible health insurance policy allows users to save and spend money tax-free to use for medical expenses. Contributions to an HSA can be made pre-tax directly from your paycheck or you can make contributions on your own that are 100% tax-deductible, up to $3300 for individuals and $6550 for families and, if you’re over 55, you can contribute $7550 per year. For example, a family in the 25% marginal tax bracket could save you over $1600 a year in taxes.

How does it work?

Once you have money in your account, you can then use it to pay for all types of medical expenses, including things like new glasses, prescription drugs, medical and dental visits, and any medical expenses not covered by your high deductible health plan. To be eligible, you need to have a health plan that qualifies as a high deductible plan. (Example a minimum deductible of $1300 for singles or $2600 for families). A high deductible plan means you will pay more out of pocket before meeting your deductible. The advantage is that the premiums on these plans are lower. Due to the high cost of health care, many employers are now offering only high deductible plans, or versions of it, as an option. For entrepreneurs, these plans are also available through healthcare.gov and labeled as HSA or through most health insurance brokers at comparable rates. [Read more…] about Tax-Free Investing. The True Secret Behind Health Savings Accounts.

A Short Guide to Lean Investing.

09/16 by The Frug Leave a Comment

By Brad Beckstrom

Have things gotten too complex?

Today we have more savings and investment options than ever before. Online tools and investment options that give us access to over 10,000 mutual funds and exchange traded funds, with another 40,000+ publicly traded stocks worldwide. Most of these investments are accessible without setting foot in a brokerage firm or bank. Online banking, trading, and mutual fund supermarkets give us access to sophisticated investment tools available only to professionals just a decade ago.

Yet, despite so many options, the US personal savings rate is hovering between 5% and 6% and has been in steady decline since the 50s. The retirement savings picture is even worse, one in three American adults has zero saved for retirement and 62% have less than $1000 saved. Many Americans like to blame the government for this predicament but in fact many countries with significantly higher taxes have savings rates that are 2 to 3 times ours. On top of our tax advantages, we have a wide selection of pre-tax and post-tax savings options many other countries don’t have, including 401(k)s, IRAs, SEPs, Roth IRAs, Health Savings Accounts, 529 college savings plans, and about 10 more with various combinations of numbers and acronyms in the name. All of them are underutilized by any standard of measurement.

Part of the problem is complexity. We’ve made it easier to go out and get a loan for a new SUV or a 5,000 square foot house than to start saving or put that money away for retirement. We’ve been incentivizing people to take out student loan debt instead of starting college savings accounts.

To solve the complexity problem we need to make it easier to save and invest. We need to create a simpler path to wealth through regular and efficient investing. I like to call this Lean Investing. [Read more…] about A Short Guide to Lean Investing.

Lean Investing. Doing Less to Earn More.

03/14 by The Frug Leave a Comment

by Brad Beckstrom

With most things in life, simpler is better. I’ve learned this is especially true in investing. It started out simple enough, it was the 80s and I was working at my first job out of college. I had a few dollars to invest so I purchased a mutual fund. It was the hottest fund at the time, The Fidelity Magellan fund managed by the infamous Peter Lynch. It was a few days before Black Monday one of the largest single day drops in US stock market history. I was off to a fabulous start.

But I stuck with it. I added a small amount to the fund each month. Over time, I purchased other funds, international funds, bond funds, small-cap funds, mid-cap funds, over-the-counter funds. At some point I consolidated all these funds into a Fidelity Brokerage account.

The brokerage account was very appealing to me. I could make stock purchases online and rollover retirement accounts into one place. I could shop in a mutual fund supermarket (Fidelity was one of the first brokerages to offer access to competitive mutual funds via a fund supermarket.) This made it easier to add even more variety to my portfolio funds with names like Pacific Tiger, The Clipper Fund, California Muni. I would look for funds highly rated by Morningstar. What could go wrong with a four-star rated fund? I was pretty much an investing genius. It was 1999.

The bubble bursting in 2000 was a wake up call. I would continue to stick with investing, but I would need an even more diversified portfolio, loading up on more bond funds and international funds, as well as individual value stocks. I would follow a bulletproof portfolio philosophy and be highly diversified, adding real estate investment trusts, emerging markets and global bond funds. Online trading made tracking and adding all of these investments much easier.

At one point, I owned over 30 different stocks and funds spread out across retirement and investment accounts. They were all with one broker, but it was a mess, hard to balance and even harder to fix. Not long before the global financial crisis in 2008, I also realized that many of these funds moved in the exact same direction, especially during a downturn.

Through all my efforts, I had basically created a giant global index fund with one key point of difference — I was wasting thousands of dollars in annual mutual fund fees. As with everything else in my life, I needed to simplify.

Around this time, I discovered The Stock Series by James Collins. I can sum up James’s investing philosophy with three bullet points:

You can’t beat the market long-term.
Buy no more than three low-cost index funds to cover the entire market
Low cost means funds with expense ratios of under 0.10%.

I can promise you once you read his stock series, you will be sold on this approach. If you need more convincing, visit personalcapital.com and try out their free 401K fee analyzer. You will find. as I did, that some of the mutual funds in your account have fees that are 10,15 or 30 times what James Collins is recommending.

How do high fees impact investments? Here is a sample for a 30-year-old active investor with a variety of widely traded mutual funds with fees ranging from 1.35% to 2.75%. Here’s the shocker, this investor will lose 44% of his earnings to fees from now to his retirement age at 65.

Image: Personal Capital 401K Analyzer Example

The funds listed in this example are actual funds and their fees are fairly typical. In my own research, I found that many of the funds I owned were charging fees ranging from 0.67% to 1.75%. Again, 10 or 20+ times the fees Vanguard charges for one of the funds that James recommends. Vanguard total Stock market Index fund VTSAX. Expense Ratio 0.05%. For those who don’t have access to Vanguard Funds you can research similar total stock market index funds. I was able to find Fidelity Spartan Total Market Index Fund with an expense ratio of 0.06%. FSTVX

If you want to do a quick check of your funds fees, you can also use Google Finance. Just type in the symbol of any mutual fund you own and scroll down to key statistics you will see both expense ratios and management fees.

If you’re a 30-year-old investor, you can thank me later after you’ve saved hundreds of thousands on fees over the course of your investing life. I found one of the added benefits to be less worry about picking a dog stock or a dog fund, and more free time through simplification.

So here’s my quick recommendation for simplifying your investing life.

Read the The Stock Series by James Collins. You can just start with the first five posts and get most of what I’ve discussed here.
Get a handle on what you’re paying in fees. You can use the free automated tool at personalcapital.com or go the manual route using Google finance to look up individual funds.
Make a quick spreadsheet of all of your funds called portfolio makeover include funds from your company 401(k) or 401(k) rollover accounts. You can also include fund investments in non-401(k) accounts
Make a plan to move money out of the funds in 401K accounts with the highest fees first.
Set a goal to consolidate all of the funds into two or three total stock or bond low-cost index funds representing the total stock market with expense ratios of than 0.25%
Buy and hold, avoid trying to time the market.

Not sold on this approach. I’ll drop in one simple chart from John Bogle.

I’d love to hear your experience in simplifying your investments. A quick disclaimer — Any concepts presented on this blog are simply opinions and should not be considered as professional investment advice. As with most other things in life, you are solely responsible for your own choices, make them thoughtfully.

The Frug