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The huge money mistake most millennials make

Re-posted from MSN.com

A majority of millennials treat their retirement accounts like a piggybank.

According to ETrade, more than a third of millennials make withdrawals from their 401(k) plans – and they use the money for a purchase, vacation or other personal expense.

“That’s a very high percentage,” said Gregg Murset, a certified financial planner and CEO of BusyKid, a savings app for kids and families. These early withdrawals point to an inability to set priorities, he says.

Young workers who do this clearly lack a full understanding of why they’re setting that money aside in the first place. Murset says three things are responsible for this gap.

The first is the lack of financial literacy. Only 17 states have a required personal finance course for high school students. This can set kids up for financial problems later in life, including lower credit scores.

Parents and schools blame each other, Murset says. “Parents say the schools should be teaching it,” he said. “And the schools say these lessons should be learned at home.”

We all make financial decisions all day, every day, according to Murset, making it more important than many school subjects.

Whether kids should learn about personal finance at school or at home, though, they are the ones who are left clueless about how to manage money.

Kids need to know what you have to do to earn money and, once you get it, what you can do with it.

The “three S’s” — saving, spending and sharing — are things adults do every day. “We go to work, we earn money,” Murset said. “We save some, we share some with charity and we spend the rest.”

Typical Americans spend and share, according to Murset. “Americans are generous people,” he said. Americans are also known for enthusiastic spending. But savings always gets short shrift.

Next is the issue of money that’s becoming more abstract. Increasingly, fewer people carry cash. “It’s getting to be a bigger problem,” Murset said. “Money is invisible to kids; to them, it’s numbers on a screen.”

That disconnect with the value of money can push millennials to make irresponsible financial decisions, such as taking money out of a retirement plan since it doesn’t seem as concrete as cash.

Last is millennials’ own lack of understanding how investing works.

Without some financial education and experience, it’s easy to see why someone would tap their 401(k) for some vacation money.

But this is perhaps the biggest misunderstanding. When it comes to saving for retirement, kids who have learned how money grows over time with compound interest will understand that $5,000, for instance, will grow over the decades to a sum far beyond its original amount.

Kids who successfully learn how to manage their money in a balanced way will eventually have the lightbulb moment that comes with saving money: “This small number turns into a big number over time,” Murset said.

Open Wallet

Amount you need to retire early depends on 2 factors

Re-posted from MSN.COM

You’ve seen the stories, touting the the hard-won feat of early retirement: “Self-made millionaire retires early in his 30s,” “Millennial retires early after seven years of work.”

Many can’t help but wonder: How did they do it? And more importantly, can that nest egg really last a whole lifetime?

Saving enough money to retire early involves diligence, planning, strategy, and usually a few lifestyle changes. After all, $1 million isn’t what it used to be – or what it will become. In 2016, Time magazine estimated that with a 3% inflation rate, $1 million in savings in 40 years would have the same spending power as $306,000 today.

How much money you need to retire early depends on two things.

Your cost of living

It makes sense that location will play a role in determining early retirement savings. The cost of living in a place like New York City or Los Angeles is a lot higher than somewhere in the midwest, like Wichita, Kansas, or in the south, like Birmingham, Alabama.

Living in a place with a lower cost of living means that it’s easier to live below your means. Chris Reining, a self-made millionaire who retired at age 37, draws only 2% from his investment accounts a year (half of the recommended 4% one should expect to draw when financially independent) – but that’s because he’s able to live frugally in Madison, Wisconsin. Location also plays a role in taxes, depending on what kind of accounts you have money in.

“If all your money is in IRAs and 401(k)s, not only will you pay state and federal income tax when you take it out to pay your bills – after all , it has never been taxed – but you may also pay a 10% penalty for premature withdrawals (under age 59 and a half),” Mari Adam, a certified financial planner based in Florida who founded Adam Financial Associates, told Business Insider.

Keep in mind, nine states don’t have state income taxes.

Adam recommends keeping an even balance between savings in retirement accounts like IRAs and 401(k)s, tax-free growth accounts like Roths, and already-been-taxed accounts like individual brokerage accounts.

The potential for investment growth and passive income

Just because you’ve retired early doesn’t mean you’ll never see cash flow again. You can save enough knowing there’s still room for your savings to grow through investments and lucrative hobbies.

Justin McCurry, who retired early at 33 with an investment portfolio $1.3 million, brings in some monthly income through his blog, Root of Good. Coupled with strategic investments, his portfolio has since grown to more than $1.7 million over five years.

McCurry is not the only early retiree to earn money from a blog after leaving the corporate world. J.P. Livingston, who retired early at age 28 with a nest egg of more than $2 million, was surprised to learn she could still bring in income after retiring early.

She runs the personal-finance blog The Money Habit; after its first year, it made more than $62,000 in passive income through affiliate commissions and ads.

“I ended up getting active again with different hobbies and projects,” she previously told Business Insider. “Eventually, one or more of those projects yielded income. It’s hard to be awake for 60-plus hours a week and not find a single enjoyable way to earn some money.”

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How soon can I retire?

Reposted from KSL.com “How Soon Can I Retire?”

TIME FOR SAVINGS. Watch and coins copy space concept for saving fund, financial, banking, investment, money or other your content. Malaysia coins.

ksl.com – How soon can I retire? June 1, 2017

 NEW YORK (CNNMoney) — “How do I calculate the earliest possible date I can retire — my “take this job and shove it!” date — beyond which working is my choice and earnings are gravy?” — Jason, New York

Like Jason, many of us are counting down to the day we can say “shove it!” to a job we hate and pursue our own interests. But most people wrongly assume that day won’t come until our 60s or 70s. Lots of people are taking the concept of “early retirement” to new extremes by becoming financially independent in their 50s, 40s, or even 30s.

While the concept of “retirement” may sound boring to some people, early retirement guru Brandon of the Mad Fientist blog prefers to call it “freedom.”

“Retirement makes you think of [old people] moving to Florida,” he says. “But really, retirement is freedom. Freedom to do what you want to do with your time, freedom from jobs you don’t like, freedom from bosses you don’t like.”

Brandon, who only uses his first name for privacy reasons, is part of an online movement of early retirement enthusiasts who preach that retirement is attainable for anyone at almost any age. It’s just a matter of calculating how much it costs for you to live, and saving up enough to support yourself for the rest of your life.

First, understand the math.

There are many schools of thought on how to calculate your number, depending on your spending and age.

“Traditional late-retirement advice aims to maximize lifetime consumption and what people therefore look at is either saving a million dollars or saving 10-15% of all income over some 40 years on the job,” explains Jacob Lund Fisker, author of the book and website Early Retirement Extreme.

But for those who want to retire much sooner than age 65, he says, that conventional advice does not apply.

“The goal [for early retirement] is to save 25-35 times one’s annual expenses. Once this goal is reached, one is financially independent and working is a choice.”

The early retirement rule is simple: For every $1,000 you spend a year, you need to invest $25,000 to $35,000.

The more money you save, the more you’d have to spend. Similarly, and key to many young retirees, the less money you spend each year, the less you have to save and the sooner you can retire.

This breaks down to spending, Fisker says. “The easiest way to find $1,000/year in the budget is to start the few largest expenses — namely, housing, driving, and eating. It’s easier to make a few decisions about a few big items than constantly make decisions about many small items.”

But how do you make the money last for decades? A common rule of thumb is what’s known as the “4% rule.” “This equation multiplies your spending by 25 to give you how much you need to save. If you need $40,000 per year, multiply that by 25 a year, you get a million bucks,” explains Fisker, “$40,000 is 4% of a million.”

But that assumes your money consistently earns at least 4% a year. Some experts think the rule is flawed and could cause some early retirees to run out of money.

Fisker takes an even more conservative approach with his equation: Annual expenses should be less than 3% of your invested savings. So for that same $40,000 a year in income, you’d need $1.3 million invested. (Fisker also has other tips on calculating how much money you need to retire.)

And of course, it never hurts to start planning early.

“Less than a decade of delayed retirement savings can cost someone $1 million in forgone savings,” says financial adviser Barbara O’Neill. “People who start saving at age 34 and accumulate $1 million at age 67 could have saved $2 million had they started at age 25, assuming an 8% average annual return.”

Or, they could have just retired much sooner.

Second, figure out when you’ll get there

So now that you have a general idea of the amount you need to call it quits, it’s time to figure out how long it’ll take you to get there.

A million dollars may seem like a big number, but the more you can save, the faster you’ll reach your goal. Say you’re 25 and you want to retire by 45. Investing $1700 a month will get you to a million in 20 years, assuming an 8% return. Too steep? Learn to live on less and you won’t need a full million. Or be less ambitious about your retirement age. Saving $675 a month will get you there by age 55. This CNNMoney calculator can help you figure out how long it’ll take.

Or try the FI Tracker on the Mad Fientist blog. This online app allows you to track your progress toward financial independence by calculating your net worth, expenses, savings, and countdown to retirement.

If this all feels too overwhelming, you can always find a Certified Financial Planner to walk you through the steps and coach you through your best path toward retirement.

“My best advice to someone trying to figure out if they can retire is to spend some time with a CFP to help them make one of the biggest decisions in their life,” says financial planner Howard Pressman. “You really only get one shot at this and it’s worth doing it right.”

Copyright 2017 Cable News Network. Turner Broadcasting System, Inc. All Rights Reserved.

Dimensional

AN INTRODUCTION TO DFA

Dimensional Fund Advisors is a leading global
investment firm that has been translating academic
research into practical investment solutions since
1981. Guided by a strong belief in markets, we work to
implement compelling ideas in finance for the benefit
of clients. An enduring philosophy, strong client
commitment, and a strong connection with
the academic community underpin our approach.
INVESTMENT PHILOSOPHY AND PROCESS
Our investment philosophy has been shaped by decades
of research. We believe that security prices reflect all
publicly available information as intense competition
among market participants drives prices toward fair value.
We use the information in market prices, combined
with fundamental data, to systematically identify
differences in expected returns among securities.
We seek to add value by building portfolios that target
higher expected returns in a cost-effective manner.
Through a dynamic investment process that integrates
research, portfolio design, portfolio management,
and trading, we manage the tradeoffs that matter
for performance—balancing competing premiums,
diversification, and costs. This approach is applied
consistently across a full suite of global and regional
equity and fixed income strategies, allowing us to help
meet the diverse needs of investors worldwide.

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desks are located across the US, Europe, and Asia Pacific, enabling us to cover global markets and manage strategies on a continual basis. Our global investment team applies the same philosophy, process, and systems across offices and regions.
RESEARCH-BASED SOLUTIONS
Dimensional has forged deep working relationships with leading financial economists—including Eugene Fama, Kenneth French, and Robert Merton—who work closely with our Portfolio Management, Trading, and Research teams, in addition to serving on our Investment Research Committee. The opportunity for vigorous exchange between our internal researchers and these lauded academics has allowed us to bring the ideas of financial science to life for investors.
A strong belief in markets frees us to think and act differently about investing. The longevity of our client relationships—many dating back decades—demonstrates our commitment to client service and the stability of our organization. By evolving with advances in financial science, Dimensional has delivered long-term results
for investors.

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Profitability is a company’s operating income before depreciation and amortization minus interest expense scaled by book equity.
“Dimensional” refers to the Dimensional entities generally, rather than to one particular entity. These companies are Dimensional Fund Advisors LP (founded in 1981), Dimensional Fund Advisors Canada ULC, DFA Australia Limited, Dimensional Fund Advisors Ltd., Dimensional Fund Advisors Pte. Ltd., and Dimensional Japan Ltd.
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investment objectives, risks, and charges and expenses of the Dimensional funds carefully before investing. For this and other information about the Dimensional funds, please read the prospectus carefully before investing. Prospectuses are available by calling Dimensional Fund Advisors collect at (512) 306-7400 or at www.dimensional.com. Mutual funds distributed by DFA Securities LLC.
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Past performance is no guarantee of future results.
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Investment Shock Absorbers

Ever ridden in a car with worn-out shock absorbers? Every bump is jarring, every corner
stomach-churning, and every red light an excuse to assume the brace position. Owning an
undiversified portfolio can trigger similar reactions.

In a motor vehicle, the suspension system keeps the tires in
contact with the road and provides a smooth ride for passengers
by offsetting the forces of gravity, propulsion, and inertia.
You can drive a car with a broken suspension system, but it
will be an extremely uncomfortable ride and the vehicle will
be much harder to control, particularly in difficult conditions.
Throw in the risk of a breakdown or running off the road
altogether and there’s a real chance you may not reach
your destination.
In the world of investment, a similarly bumpy and
unpredictable ride can await those with concentrated and
undiversified portfolios or those who constantly tinker
with their allocation based on a short-term rough patch in
the markets.
Of course, everyone feels in control when the surface is
straight and smooth, but it’s harder to stay on the road during
sudden turns and ups and downs in the market. And keep in
mind the fix for your portfolio breaking down is unlikely to be
as simple as calling a tow truck.
For that reason, the smart thing to do is to diversify,
spreading your portfolio across different securities, sectors,
and countries. That also means identifying the right mix of
investments (e.g., stocks, bonds, real estate) that aligns with
your risk tolerance, which helps keep you on track toward
your goals.
Using this approach, your returns from year to year may not
match the top performing portfolio, but neither are they likely
to match the worst. More importantly, this is a ride you are
likelier to stick with.

Just as drivers of suspensionless cars change their route to
avoid potholes, people with concentrated portfolios may
resort to market timing and constant trading as they try to
anticipate the top-performing countries, asset classes,
and securities.

Here’s an example to show how tough this is. Among
developed markets, Denmark was number one in US
dollar terms in 2015 with a return of more than 23%. But
a big bet on that country the following year would have
backfired, as Denmark slid to bottom of the table with a
loss of nearly 16%.¹

It’s true that the US stock market (by far the world’s
biggest) has been a strong performer in recent years,
holding the number three position among developed
markets in 2011 and 2013, first in 2014, and sixth in 2016.
But a decade before, in 2004 and 2006, it was the second
worst-performing developed market in the world.¹

Predicting which part of a market will do best over a
given period is also tough. For example, while there is
ample evidence to support why we should expect positive
premiums from small cap, low relative price, and high
profitability stocks, these premiums are not laid out

evenly or predictably across the map. US small cap stocks
were among the top performers in 2016 with a return
of more than 21%. A year before, their results looked
relatively disappointing with a loss of more than 4%.
International small cap stocks had their turn in the sun
in 2015, topping the performance tables with a return
of just below 6%. But the year before that, they were the
second worst with a loss of 5%.²
If you’ve ever taken a long road trip, you’ll know that
conditions along the way can change quickly and
unpredictably, which is why you need a vehicle that’s
ready for the worst roads as well as the best. While
diversification can never completely eliminate the impact
of bumps along your particular investment road, it
does help reduce the potential outsized impact that any
individual investment can have on your journey.
With sufficient diversification, the jarring effects of
performance extremes level out. That, in turn, helps you
stay in your chosen lane and on the road to your
investment destination.
Happy motoring and happy investing.

1. In US dollars. MSCI developed markets country indices (net dividends). MSCI data © MSCI 2017, all rights reserved.
2. In US dollars. US Small Cap is the Russell 2000 Index. Frank Russell Company is the source and owner of the trademarks, service marks, and
copyrights related to the Russell Indexes. International Small Cap is the MSCI World ex USA Small Cap Index (gross dividends). MSCI data
copyright MSCI 2017, all rights reserved.

‘‘Outside the Flags’’ began as a weekly web column on Dimensional Fund Advisors’ website in 2006.
The articles are designed to help fee-only advisors communicate with their clients about the principles
of good investment—working with markets, understanding risk and return, broadly diversifying
and focusing on elements within the investor’s control—including portfolio structure, fees, taxes, and
discipline. Jim’s flags metaphor has been taken up and recognized by Australia’s corporate regulator
in its own investor education program.

Past performance is no guarantee of future results. There is no guarantee an investing strategy will be successful. Diversification
does not eliminate the risk of market loss.

Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the
management of an actual portfolio. Frank Russell Company is the source and owner of the trademarks, service marks, and
copyrights related to the Russell Indexes. MSCI data © MSCI 2017, all rights reserved.

All expressions of opinion are subject to change. This article is distributed for informational purposes, and it is not to be construed
as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services.
Dimensional Fund Advisors LP is an investment advisor registered with the Securities and Exchange Commission.
©2017 Dimensional Fund Advisors LP. All rights reserved. Unauthorized copying, reproducing, duplicating, or transmitting of this
material is prohibited.

Carl Richards Sketch - Weight of Evidence Seesaw

Passive investing, a winner in 2016, shows no sign of stopping

Reposted from http://www.marketwatch.com

Trend expected to accelerate in 2017 thanks to ‘fiduciary rule’

2016 was the year of the passive investor—again.

One of the biggest investment trends of the past decade continued unabated this past year, as investors rotated out of active investments—where the components are chosen by an individual or team rather than being pegged to a benchmark—to passive-based ones.

According to Morningstar, active funds saw outflows of $285.2 billion in 2016; passive funds attracted inflows of $428.7 billion. This extends a trend that has occurred for nearly 10 years, according to EPFR Global.

While more assets continue to be held in active strategies than passive—$9.3 trillion versus $5.3 trillion, according to Morningstar—the shift is clear, and the reasons behind it are simple: Not only are passive-based strategies typically cheaper than active ones (analysts see the industry in a “race to zero” when it comes to fees), they’ve historically boasted greater performance.

Winning may be hard to measure. Passive strategies, by definition, cannot outperform (or underperform) their underlying index. And, the number of active strategies that can consistently “beat the market” over the long term is essentially zero. According to S&P Dow Jones Indices, a mere 0.81% of large-cap domestic equity funds remained in the top quartile of performers over five consecutive 12-month periods. Results were even worse for other market cap and asset class categories.

These issues—performance and fees—have also led to an exodus from hedge funds and their Exchange-traded fund imitators in 2016.

Passive strategies particularly pay off in bull markets, when gains are fairly broad-based. In order for an active equity fund to outperform this year, it would have had to surpass the S&P 500’s SPX, -0.07%  11.1% rise, and do so by such an extent that the gains were larger than the broader market’s return even after fees were taken into account.

That outcome is so hard to achieve that in a relatively strong period for active managers—the third quarter of 2016, when markets were extremely volatile due to the fallout from Brexit and the U.S. election—only 53% of active managers managed the feat.

Opinion: This might be the time to turn away from index funds

A number of active managers fail to outperform because they have low degrees of “active share,” meaning they have a high overlap with their underlying benchmark. This limits the funds’ potential for outperformance, especially after fees are taken into account.

According to Andrew Slimmon, a managing director at Morgan Stanley Investment Management, it is extremely difficult for an active manager to outperform net of fees if their active share is below 80%. Arguably, only one well-known entity has managed the feat: the Dow Jones Industrial Average DJIA, +0.16% which is chosen by committee and has outperformed the S&P 500 for large stretches of time.

The move into passive is not only seen continuing in 2017, it is expected to accelerate, when the Labor Department’s “fiduciary rule” takes effect in April. The rule requires that the financial advisers and brokers who handle individual retirement and 401(k) accounts must act in the best interest of their clients, rather than recommending investments that, although clients may be able to afford them, may not be the cheapest or best options.

Advisers are more likely to recommend passive to a far greater extent than active or “smart beta” funds, which use rules designed to deliver a particular investing strategy like “low volatility” or “momentum.” These funds have higher fees than passive strategies, and research has shown that they don’t boast notable or consistent outperformance over passive strategies.

In May, Morningstar estimated that “upwards of $1 trillion may move into passive investments” as a result of the rule. By another estimate, the market for exchange-traded funds—more tax-efficient than mutual funds and heavily tilted toward passive strategies—could triple to $10 trillion by 2020.

Advisers to President-elect Donald Trump have said that he would repeal the rule, but most industry watchers think that step is unlikely. Even so, such action isn’t expected to halt the trend toward passive investing.