If you can believe it, the time to start thinking about the 2019-2020 school year is now. The 2019 Free Application for Federal Student Aid (FAFSA) was released at the beginning of the month. Don’t waste time filling out the form, some student aid programs have limited funds available. The early bird gets the worm!

Hopefully, if paying for higher education is or was one of your financial goals, you started a 529 education plan along the way. There are a variety of programs out there to help you finance the cost but Vanguard discusses the importance of leveraging index funds in your college savings plan. With their low costs, diversification, and greater performance predictability, index funds are one of the most reliable ways to save for the future costs of education.

In our last newsletter, we highlighted Dimensional Fund Advisors’ The ABCs of Education Investing, a strong argument on why you should invest in assets that are expected to outpace inflation.

Hopefully, none of this information is new to you and you find yourself ahead of the savings game. If not, we should talk – give me a call, I’d be happy to give you a second opinion on your financial plan.

 

 


Why do investors perceive heightened volatility as such a bad thing, and why are they prone to liquidating stocks during steep market sell-offs? From January through mid-March of this year, retail investors pulled out a net $40 billion dollars from global equity funds. Read what I think you should do to try and achieve a 6 percent or even 5 percent portfolio return over the next 30 years.


I published The Coffeehouse Investor book in 1998 after spending 13 years working for a major Wall Street firm. It became obvious to me that an investment story very different from Wall Street’s traditional story needed to be told.

Ten years ago, I revised and expanded the book and included this in the preface, “Now, ten years later, after reflecting on the profound impact The Coffeehouse Investor has had on people’s lives during a period of immense global turmoil and market volatility, it is time to reestablish these lifelong principles as fundamental to building wealth, ignoring Wall Street, and getting on with your life.”

Twenty years later, the portfolio is still helping investors build wealth, ignore Wall Street, and get on with their lives. Proud to be part of Forbes portfolio list resonating with folks across the country.


A quick read-through of any financial journal serves as a reminder of the unfolding of business at breakneck speed around the world.

Artificial intelligence, Blockchain technology, Cloud computing, Remote delivery services; for many investors, it is a daunting challenge to keep up with this dynamism, and then to integrate it within portfolios throughout a lifetime of investing. And so, they turn to experts – Wall Street authorities whose job it is to guide investors into the top-performing stocks, industries, and trends.

But do “experts” really exist, and if so, how should we rely on them for portfolio advice?

This question is especially timely considering the current portfolio performance of legendary bond “expert” Bill Gross.

For many years, Mr. Gross was Wall Street’s acknowledged bond “expert” heading up Pimco’s Total Return Bond Fund, the world’s largest fixed-income fund.

Following a contentious split with Pimco, Mr. Gross switched firms to manage Janus’ Unconstrained Bond Fund (JUCIX). Recently, Mr. Gross positioned this fund to take advantage of the almost certain rate increase in German bonds, especially in comparison to the already higher rates paid by Italian fixed income investments.

Unfortunately, with chaos unfolding throughout the Italian political system, investors began fleeing Italian bonds in favor of the more secure German funds. The result? Janus Unconstrained bond fund plummeted over 3% in one day and is now dead last in year-to-date performance for its Morningstar category.

Mr. Gross’ bad luck reminds us of another “expert” whose stellar market calls experienced a similar fate.

Infamous Bill Miller

For much of the previous decade, Wall Street’s favorite stock-picking guru was Bill Miller. His Legg Mason Value Trust’s (LGVAX) beat the S&P 500 index for 15 consecutive years from 1991 through 2005. But his streak ended abruptly in 2006, and over the next five and a half years, the fund he managed lost 36% while the S&P 500 gained 13%.

Investors holding positions in LGVAX were faced with the question, “Do I stay the course with what I own, or do I switch into another fund with hopes for a better outcome down the road?”

The problem with searching out “experts” and then attaching a portfolio’s performance to their insights, is that one starts to rely on tenuous external forces to reach lifetime goals, instead of turning within and focusing on financial planning decisions that actually matter in the larger context of reaching one’s goals.


If you missed our latest newsletter, here are a few highlights …

Are You Adequately Insured? – Is it time to review your own insurance policies? Soundmark Advisor, James Nevers discusses the gaps and misconceptions of homeowners and umbrella insurance policies in his blog.

Connections Matter – It’s always a good time to reassess lifestyle habits. We all know we should eat more vegetables and move more, but the connections and relationships we share with others may be our most beneficial health move yet. Review this midlife tune-up list for inspiration.

The Problem with Excuses – The 2018 SPIVA Scorecard results continue to show the failures in active management. Larry Swedroe discusses the flaws in underperformance excuses and the real reason active funds can’t beat the benchmark.


Read a piece recently from Adam M. Grossman in Humble Dollar and two thoughts come to mind.

Compounding is the magic sauce to aging. Most of us aren’t excited about turning another year older, but as we age, our investments are provided more time to compound. The more compounding experienced, the more our money grows. Adam shares the story of four individuals who lived well into their 90’s and left substantial financial legacies, despite living frugal lifestyles. If they started saving early, they had a lot of time to experience compounding. I think we often forget the simple principle when we start chasing down the hottest stocks.

Secondly, once you remove yourself from Wall Street’s obsession with trying to beat the stock market average and accept the fact that equaling the stock market average is a rather sophisticated approach to the whole thing, life gets a whole lot simpler. This method can also help predict future returns in a more realistic manner. If you calculate your return on more of the conservative side, you may be pleasantly surprised by the outcome.

As humans, we often over complicate things in life. The same goes for investing, it doesn’t need to be difficult to enjoy the fruits of the process.


Planning is key to most things in life, including Social Security benefits. As automatic as the benefit is for most U.S. citizens, there are multiple factors to consider before enrolling.

Many retirees are unsure of when to start collecting the benefit and how much they may gain or lose by delaying their start date. Vanguard provides a detailed breakdown of total payments an individual will collect starting at age 62 up to full retirement age (FRA). Total benefit collection can differ by nearly $100,000!

Unfortunately, many Americans don’t fully comprehend or take the time to understand the various strategies surrounding their benefit. They also haven’t calculated how much retirement is going to cost. As explained here, there is a large discrepancy between what retirees plan to collect and what current retirees are collecting in Social Security. This expectation difference can make retirement difficult to navigate.

Manipulating different scenarios, including the expected age of death, can help ensure your retirement is financially covered. Don’t let your golden years be riddled with stress and debt accumulation.

 


We read a great piece recently from Shane Parrish on his thoughts from his trip to the Berkshire Hathaway annual shareholders meeting. This really resonated with us.

“The point is that the answers stay the same.”

We know that Coffeehouse Investors grow tired of hearing the same three principles repeated – save for a rainy day, don’t put all your eggs in one basket, and there is no such thing as a free lunch. But the game never changes, our rules never change. Our same three investment principles apply regardless how the market performs. Investors search our website for the magic formula, but we don’t believe investment success is determined by stock picks. Rather, investment success is often attributed to one’s determination to stick to a long-term plan.

So, if you find yourself out there searching, just remember … save for a rainy day, don’t put all your eggs in one basket, and there is no such thing as a free lunch.


We wanted to highlight a few bits of knowledge we’ve recently read …brain

  1. One of the most frequent questions we are asked at the Coffeehouse Investor is, “what happens if everyone starts passive investing?” Larry Swedroe discusses this and the actual impact index funds have on the market.
  1. Learn the art of saying “no” and how to take back your own driver’s seat.
  1. Why a “bunny market” and volatility could be a good thing for investors.

In my last post, I discuss what happens when the valuations of large companies are driven to unsustainable levels and end up retreating to market-level valuations, otherwise known as “reversion to the mean.” Ignoring this investment concept can often lead a beginner or even the most experienced investor, astray.

I dedicate an entire website page to this concept because I want investors to understand the relatively basic idea of what goes up is likely to come down, and that what goes down is likely to bounce back, in other words, it “reverts back to the average.”

Here’s a visual to explain the idea:

It is at this point, when C is outperforming the average and A is underperforming the average, that many investors sell A in favor of C.

Reversion to the mean causes lots of problems for lots of investors because almost everyone begins by choosing A, that is, they choose a mutual fund or a sector with a good track record.

Then, when A reverts to the mean, or goes underwater, these same investors must decide whether to hang on to the underperforming A or switch to C.

Most people invest in sectors or mutual funds that have had a good track record (after all, that’s the most logical way to choose mutual funds). Unfortunately, because of the powerful force of reversion to the mean, investors inevitably become disappointed with their selection and are on to the next hot fund or sector.

If you want to be a successful investor of common stocks, forget about conventional wisdom and focus instead on reversion to the mean.