The Index Card

I received a review copy of The Index Card: Why Personal Finance Doesn’t Have to Be Complicated* by Helaine Olen and Harold Pollack a couple of weeks ago.

As you can probably imagine from the title, this is a little book. It’s a book that can be read in one setting, which is nice.

The book is composed of ten rules (the authors even include an index card with the 10 rules), which are:

The Index Card

As you can see, they are pretty basic rules. Most of us would agree with all of them.

One rule that I definitely agree with is no. 6: Make your financial advisor commit to the fiduciary standard. That is a must in my book. If they won’t do that, then find another advisor.

The two rules I don’t agree with are no. 4: Never buy or sell individual stocks. and no. 9: Do what you can to support the social safety net.

Although I think index funds should make up the bulk of a person’s investment portfolio, I would stop short of telling people to never buy individual stocks.

The chapter on rule no. 9 left a sour taste in my mouth. Here’s an excerpt:

“When someone decries Social Security as a Ponzi scheme, remind him or her that many elderly would lead much poorer lives without it. When you hear someone say the government should keep its mitts of Medicare, speak up and say it is a government program.

“But it’s more than that. We need to admit we are the 96%. Be honest about not just what you pay in taxes but what you receive in return. Almost all of us have been helped—or have friends or relatives who have been helped—by unemployment insurance, Medicaid, food stamps, Pell grants to attend college, or other government offerings. All too often, we take them for granted, but without them many of us would be in worse financial shape. Acting together, we can protect one another against financial and health risks that would crush anyone of us, were we forced to face them unassisted.

“We must take care of ourselves and our immediate families through better planning, saving, and investing. When we do that, we are in a better place. But we must take care of our fellow citizens too. That’s the best way to ensure that all the new changes we’ve adopted over the course of this book have the best chance for success.”

Sounds like a page right out of the Democrat talking points, doesn’t it? It’s not my intent to take this review down the political path. Let’s just say that I think the above excerpt from the book is absolute hogwash. The book could have easily been written without it.

Politics aside, this is a decent book. It’s a great primer for someone starting out.

Other reviews from around the web: Adam Chudy

*Affiliate Link

Yesterday’s 1.58% decline for the Dow Jones Industrial Average was the 6th worst first day of the year in the history of the Dow (going back to 1929).

If history is our guide, we’re in for a ho-hum year. I looked at the 20 worst first trading days for the DJIA and then looked at the return for that year. Please note that I used price returns for the DJIA and also included total returns for the S&P 500 because I don’t have total returns for the DJIA going back that far. Because I used two different indexes you’ll see instances where the total return is less than the price return.

20 Worst DJIA Starts

I miss the days when total return information for various indexes were available for download. For some reason, companies have decided to take their information offline. For data nerds like me, this is hard to stomach.

I always liked to follow the sector returns for the Dow Jones Total Market Index. Fortunately, iShares has had exchange-traded funds for all ten of the sectors since mid-2000. That data is easy to find.

To calculate these returns, I used the adjusted closing price from Yahoo!.

By far the best performing ETF of the group over the last 15 years was the iShares Consumer Goods (IYK), which had an average annual ROR of 8.44%. The largest holdings in IYK is Proctor & Gamble, Coca-Cola, and Pepsico. This makes sense because consumer goods are usually defensive and hold up well during rough markets.

By far the worst performer over the same period was Telecom (IYZ), which returned only .68% per year. Ouch!

By far the worst performing asset class for 2015 followed by AFM was the MSCI Emerging Markets Index, which was down nearly 15%. Based on the numbers I found this morning, it’s a very volatile index:

MSCI Emerging Markets Index TR

Yet, even with all that volatility, it still performed a lot better than the S&P 500 over the same period. NOTE: The iShares MSCI Emerging Markets ETF (EEM) began trading on 4/14/2003. Since that day, it has had a 10.51% average annual rate of return vs. 8.95% for the iShares S&P 500 Index ETF (IVV).

Here is the up-to-date report through 2015 (click on the graphic to download the PDF).

Total Returns for Various Indexes - Dec 2015

The following is a screen capture of a comment exchange between BG (the same BG who comments on posts here at AFM) and Pamela Yellen:

Yellen Comment

Ms. Yellen doesn’t understand that compound annual growth rate (CAGR) is the same as the average annual return.

The calculation is very simple. Using the VFINX adjusted closing price of $95.51 on 12/19/2005 and the closing price of $188.21 on 12/18/2015, we can calculate the CAGR or average annual return like this:

[(188.21 ÷ 95.51)1 ÷ 10] – 1

[1.970545.1] – 1

1.070184 – 1

.070184 or 7.02%

THIS is the return that investors should be concerned with.

The average return (also known as the arithmetic mean), which is simply adding up all the one-year returns and dividing them by the number of years, would have been a much higher, but misleading, 8.92%.

Be wary of anyone who calls themselves an expert.

Good Stuff Right Here

December 22, 2015 — 1 Comment

Saw this video on facebook and thought I would share it here. Enjoy.

For those of you not familiar with Pamela Yellen, she is the author of the Bank on Yourself strategy. She has written a couple of books espousing the insurance based strategy. I haven’t read them. What I have to say in this blog post has nothing to do with the message of her books.

I can understand an insurance person not liking the stock market. I get it. When you sell products that are supposed to “reduce risk” you’re not going to be a fan of something like the stock market.

What I don’t like and can’t respect is a person who willingly misleads others by not telling the whole truth.

How does Ms. Yellen mislead her followers?

Take a look at the following snippet that was recently published on her blog:

Okay… so over the last nearly 16 years, since January 1, 2000, the S&P 500 (which represents the broad market) has had only a 2.15% average annual gain.

Did you guess that it was more than 2.15%? Most people do.

And coincidentally, that 2.15% per year return was cancelled out by the 2.19% average annual rate of inflation during that same time period! Oops!

So, was that return worth the risk you took? Was it worth your sleepless nights?

It Gets Worse, Because You Didn’t Actually Get that 2.15% Average Return – Here’s Why…

For starters, in order to participate in the returns of the S&P 500 (or any other index), you have to buy a financial product, like an S&P 500 Index mutual fund or an Exchange Traded Fund.

And those financial products have fees, typically totaling at least 1% per year.

So when you subtract that from the 2.15% annual return of the index, well… now you’re down to maybe 1.15%.

Which means, when you factor in inflation, you’ve actually been going backwards for the past 16 years. All that risk for so little reward.

Now take a look at the chart she included in her post:

Yellen's Chart

Look closely. What did she conveniently leave out?


I have called her out on this before (NOTE: I have since been banned from leaving comments. Only people who agree with her are allowed to post comments on her blog.). She claims that talking about dividends would confuse the matter. Interesting. Dividends will confuse people, but using the price return for an index and then subtracting off another ONE PERCENT for management fees and then reducing it even more for inflation isn’t confusing?

Because I’m a nice guy, I will help Ms. Yellen out with the math. To be fair, I used the Vanguard S&P 500 Index Mutual Fund (VFINX) since it is an actual investment vehicle and not just an index. Its adjusted close on December 31, 1999 was $102. Its adjusted closing price on December 16, 2015 was $192.11. There were 15.96 years between the two dates, giving us an average annual rate of return of 4.05%. The math looks like this:

[(192.11 ÷ 102)1/15.96] – 1

[1.883431.062657] – 1

1.040465 – 1

.040465 or 4.05%

That’s roughly 3.5 TIMES the return Ms. Yellen posted on her blog!

I’ll be the first to admit that stock market returns have not been great during the 2000s, but they haven’t been nearly as bad as Ms. Yellen makes them out to be.

Not only that, most people have to dollar-cost-average into an investment. For kicks, I ran the numbers to see what the personal rate of return would be for someone who invested $100 each month into VFINX since December 31, 1999. Using the XIRR function in Excel, I found the personal rate of return to be 7.95%. This is due to the fact that the investments are made a little at a time over a long time horizon.

For someone who holds herself out as an “expert,” she should know better.

For your entertainment, here is my first post regarding Ms. Yellen’s tactics from 2014.

UPDATE: I just ran the numbers to reflect the last two down days (the DJIA has lost over 600 points on Thursday and Friday (12/17/2015 – 12/18/2015)). The personal rate of return for 12/31/1999 through 12/18/2015 is 7.44%.