Investing

You may have heard “You should own bonds” or “Bonds are safe”. Are they? What are they? Should you own them? Today we welcome you to the world of bonds. Our goal is by the end you can make a decision that’s best for you and your situation regarding bonds.

What is a Bond?

You might be asking “ok but what is a bond”? That’s a good question. Let’s define what a bond is first so we can all be on the same page.

A bond is debt issued by a company, municipality, or even a government. It is a promise to pay the borrower interest payments on that debt. At maturity the owner of the bond receives their principal payment. This is provided that the entity that issued the bond is still in business.

Let’s look at a recent example. Apple issued 10 year bonds with 1.25% coupon. As an owner of an Apple bond you would receive interest payments of 1.25% of your investment on an annual basis and at the 10 year period, provided Apple is still in business (likely), you would receive your principal back.

What does this look like? 

In the chart we outline what you would receive from owning the bond. In the example we use $10,000 worth of bonds. This means you would have purchased $10K worth of Apple bonds.What’s a Bond Fund and Should You Own One?

Year	Interest Received
1	$125
2	$125
3	$125
4	$125
5	$125
6	$125
7	$125
8	$125
9	$125
10	$125

Over 10 years you would have received $1,250 worth of interest payments from Apple. At the end you receive your principal. Your $10K has turned into $11,250.

Is this a good deal for me?

Great question! For context if you had placed $10K in the S&P 500 for the last 10 years you would have considerably more money. Let’s look at the chart and see.

Right now you might be thinking “why would I want $11,250 when I could have $42K. That’s a great question and the answer comes down to the level of risk you are willing to take and volatility.

In the chart above you can see that the S&P had a negative return for 1 year. It was -4.4% in 2018.

Volatility and the risk that comes along with it is why many advisors recommend a mix of stocks and bonds.

Is it a good deal or what?

The answer is it depends on the level of risk you are willing to take and when you need your funds. If you can’t afford to have volatility in your funds having a portion of your money in bonds is a great idea.

While many of us have never experienced it there have been times in our history where bonds have outperformed stocks. John C Bogle points this out and details it in one of his books on investing.

Are Bonds Safe and Stocks Risky?

Bonds are often portrayed as a safe investment. They have risk. Bonds are debt. A company has borrowed money from…you. Before investing in bonds you need to know whether the companies or governments that are issuing the bonds are going to be around for the term of the loan.

Questions you should ask yourself before purchasing a mutual fund that contains bonds:

• What is the level of risk in these bonds?
• Who is the money being lent to?
• Is there a likelihood that they are in business 10,20,30 years from now (or whatever the term of the bond)?
• Does the level of risk match up with your comfort level?

Mutual funds that contain bonds outline the details of who they purchase. A fund that we have owned here at various times is a Vanguard fund that contains bonds from California authorities.

For example:

• California Department of Water Resources Water Revenue
• Bay Area Toll Authority Highway Revenue
• Anaheim Housing Authority Local or Guaranteed Housing Revenue

These are large entities that have sufficient revenue to pay back the bond. The bonds are also short term in this fund so it’s less of a risk.

Taking Action & Looking for a Bond Fund

Head over to your favorite mutual fund provider or brokerage that offers bond funds and start looking! 

A few items we want you to look for when selecting a bond fund:

• Fees matter! Make sure you aware of what the annual expense is for the fund
• Taxes matter! If there is a fund that provides you tax free payments that may be beneficial to your financial situation
• What is the goal of the fund? Each fund is different and some are designed more to preserve your investment than to grow it. Make sure you know what the goal is so you can align it with your investment goals.

Share with us where you are at in your investment journey! We look forward to hearing from you.

When you hear the phrase “goal setting” what comes to mind?

Unease?

No!

Goals aren’t necessary!

Oh here we go again.

You may have set a goal in the past and it didn’t work. You may have also set goals and totally crushed it. 

What we want you to be open to today is not just setting goals but goals with actions associated with them.

What do we mean?

If you set a goal of “$1 million in retirement” and yet change nothing…that’s not goal setting that’s wishing.

Let’s take a quick journey on setting goals. If you search “goal setting” on amazon you will get 8,000 results. Why do we bring this up? We won’t be able to comprehensively tell you everything about goal setting today however we hope to get you started in the right direction.

Our goal today is to motivate you and pump you up to set a goal and some actions to get toward that goal. 

Today we will focus on setting a long term goal. We define long term as 10+ years out.

Why?

We have discovered over time that long term goals scare people the most. In fact it scares them to the point they choose to take no action. No action leads to years of in-action and disappointment. Years where you haven’t made progress. 

Today we take a small step to change all of that. 

Step 1: How many years out Is the goal?

The first step is where people really start to bog down. They start to say phrases like the following:

• I have time if it’s that far out.
• It’s too long, why should I start!
• Who knows what will happen between now and then?

Here are some phrases we want you to replace those thoughts/feelings with:

• Time is going to happen anyway I would like to accomplish something along the way
• I might be able to shorten that time frame down if things improve on my original estimate
• I have seen/heard others do the same thing I can do

After adopting this new mindset we want you to determine how far out the goal is. Make an initial goal of how far out. Don’t worry about how much money you need right now that happens in step two. 

To attach an example to this let’s say you have a child, young cousin, or some child you want to help go to college. They are 5 now and you want to help them when they go to college at 18.

You have a goal that is 13 years away.

Step 2: How much do I need to accomplish this goal?

This step can be another hurdle where folks bog down. They aren’t sure how much they need so they select in-action over action.

We want you to take action!

Revisiting our goal from step 1 where it’s helping someone attend college it’s a good idea to know how much college is going to cost 13 years from now.

We go to Google and do a little searching. A simple phrase like “cost of college calculator” yields tons of great solutions. We found a college calculator. 

We don’t even have to plug in numbers. We just select some choices from drop downs.

Based on our choices of wanting to cover 35% of the bill the calculator estimates that we need to have $61,008 on hand in 13 years.

At this point many give up. They say phrases like:

• That’s more than I make
• I can’t possibly save that much
• Just forgot about it

All we want you to say is “it’s possible” and move on to step 3. What we promise is that by setting goals, even if you miss them, you will end up farther than not setting them at all. So let’s keep grinding it out and see where we land.

Step 3: How much would I need to invest annually for this goal? What does that work out to monthly or annually?

Most individuals at this point look at that $61,008 number and work backwards.

• 13 years – $4,692.92
• Monthly – $391.08

One of two things happens. They go “that’s just too much” or they dig in and figure out how they can get it done.

A challenge with working backwards is it’s often done with the assumption that you are saving 100% of the money. In other words you are not investing, you are only powering the savings with your hard work.

That can make things even harder and more discouraging. Leveraging the power of investing your money over just saving can reduce what is needed.

For that we visit our friends over at Vanguard and take a look at their college calculator.

Let’s say you decided you had $205 a month to save. You know that’s what you can afford to invest. On working the math backwards you believe you will save only 50% of what you targeted.

Let’s see how it works out!

What we discover after plugging things into Vanguard is that the $205, over 13 years, has the opportunity to grow. Vanguard is predicting you will have 100% of the $60K goal that you targeted.

How is this possible?

• You took action
• Compound interest
• Time…starting early is your best ally

Set a Goal and Take Action

Today we hope you start taking action on your future goals. To keep it simple we recommend the following:

• Start with three goals
• One short term, one mid time goal, and one long term goal
• Write all three down and write one action item you can do today to start working toward those goals

Share your goals with us! We want to know and be part of the support group that pumps you up and roots for you!

Twins Rules for Financial Success

As with all of our content here we want to encourage you to follow three core rules :

• Have an Emergency Fund/Squirrel Funds
• Invest for the Long Term
• Invest Automatically & Consistently

Selecting a new mutual fund usually brings on one of two emotions. People are either excited or turn into a nervous wreck about the entire process.

We hope to set your mind at ease today.

Before you venture into selecting a new mutual fund there are a two tasks we recommend completing prior.

1. An emergency fund is established and funded
2. You currently own a mutual fund that follows the S&P 500 or the total stock market and it is the cornerstone of your portfolio

Questions to Ask Yourself Before You Buy Your Next Mutual Fund

When you want to select a fund for growth there are a few questions we recommend asking yourself:

• Do I want to invest in a mutual fund that contains stocks?
  • Will the fund target companies in certain industries (energy, healthcare, real estate)?
  • Will they be large cap, mid cap, or small cap stocks?
• Do I want to invest in a mutual fund that has bonds?
  • Do I want government bonds that have a tax advantage?
  • Do I want corporate bonds that have higher yield for more risk?
• Do I want to invest in US based companies or international markets?
• What risk am I prepared to take?
• Is this better for me than increasing my investment in mutual funds I already own?

Narrowing Down Your Choices of Mutual Funds

In the questions above let’s say you decided that you wanted to invest in a stock fund and you are not sure if it should contain large cap or mid cap stocks.

You have determined that bond funds won’t meet your growth target, you are ok with higher risk, and you want to explore beyond mutual funds you already own.

You head on over to our friends at Vanguard and look at the 131 mutual funds they offer. You can do this activity at any company or brokerage that offers mutual funds. We are using Vanguard as an example.  We recommend that you find a company that you are comfortable with, that has the lowest fees possible, and is an established company.

Arriving at Vanguard’s mutual fund page you see a screen that looks similar to below. They show you the 1,5, 10 and since inception returns for the fund.

You scan down the list and for this exercise, you are looking for serious growth, you locate two funds that you want to dig deeper.

The two funds you locate are:

• Mid-Cap Growth Index Admiral Shares which in 2020 had a 34.48% return on the market. That’s compared to the 18.6% of the S&P so it outperformed against the index of your core fund in your portfolio.
• Vanguard U.S Growth Fund which in 2020 had a 58.57% return vs the 18.6% for the S&P 500 and a 5 year run of 22.69%.

You now have two funds to perform additional analysis to determine which one is right for your portfolio.

Reviewing Funds in Additional Detail

It’s important to dig into the details of the funds. Selecting just off the most recent return is called “return chasing”. It’s critical to know what stocks make up the mutual fund so you can be confident that they are investing in companies you know, ones that you believe will outperform the market, and in sectors that are growing and not shrinking.

Vanguard Growth Fund

Digging into the Vanguard Growth fund you notice the following:

• 43.4% of the fund is invested in the Information Technology 
• 21.20% of the fund is in companies in the consumer discretionary 
• 13.10% is in the communication services

77% of the fund is in the 3 industry verticals listed above. If those meet industries that you believe will outperform the market it’s worth digging into details to see which stocks the fund actually owns.

If you don’t believe in the stocks the fund is buying this may not be the fund for you.

The top 10 stocks in this fund, which make up 37.3% of the fund are companies that many will know. They include names such as Amazon, Microsoft, Apple, & Tesla.

This particular fund owns 248 different companies and these are just the top 10.

One of the great parts of Vanguard is they make it easy to see all of the holdings of the fund.

With another click we notice they also own companies like Alphabet (Google), Wayfair, Uber, Nike, & Home Depot. While this fund carries a risk level 4 out of 5 it’s also made up of companies that are established and growing fast.

The expense ratio of this fund is .38% so that is something you want to consider in your final decision.

Vanguard Mid-Cap Growth Index Fund

Digging into the Vanguard Mid-Cap Growth fund you notice the following:

• 33.3% of the fund is invested in the Technology 
• 14.80% of the fund is in companies in the industrials
• 16.70% is in healthcare

Right off the bat this fund is made up differently in it’s investments by sector. Of note is that it is invested far more heavily in healthcare than the growth fund.

In the growth fund 10 stocks made up 37% of the fund assets however in the Midcap the top ten largest holdings made up only 13% of the assets. This means these top 10 will have far less influence on the overall fund returns compared to the growth fund.

Let’s look at the holdings and see what kind of companies we find.

These companies, with the exception of Twitter and Chipotle, are less recognizable to most consumers.

Docusign is a fast growing company that IPO’d recently and the Match group owns data apps like Tinder and Hinge.

This fund is made up of 162 holdings compared with 248 in the Growth fund.

Looking into some of the details you can find other companies that are more recognizable such as Roku, Trade Desk, Pinterest, and Dollar Tree.

Taking Action & Selecting the Fund That’s Best For You

The 10 year returns for these funds are 15.91% for the mid cap and 18.4% for the US Growth fund. It’s worth noting the US Growth fund has been around since 1959 and has averaged 11.27% whereas the mid cap fund hasn’t been around for even 10 years.

Before you make your purchase look in detail at the companies that make up the portfolios of each fund. Do some digging to see which companies are growing faster. Which companies are positioned to continue rapid growth, profitably, over the next 10 years.

After you have done that you can decide which fund is best fit for your portfolio.

Twins Rules for Financial Success

As with all of our content here we want to encourage you to follow three core rules :

• Have an Emergency Fund/Squirrel Funds
• Invest for the Long Term
• Invest Automatically & Consistently

Before we get into why owning an index fund should be a cornerstone of your portfolio let’s get a quick definition out of the way. What is an index fund?

Indexes are a group of stocks that are grouped together and reported on as a group. For example the Dow Jones is made up of 30 large stocks. The S&P 500 is made up of 500 companies, however at present contains 505 stocks because some companies have multiple classes of shares.

When you purchase a mutual fund that tracks one of these or the other indexes you are not buying a stock in a single company rather you are buying a fund or stock that owns this basket of companies.

Why an Index Fund That Tracks a Broad Index Should Be a Cornerstone

Index funds take the work out of selecting a single stock. They reduce your risk of owning one stock and give you the opportunity to own a piece of the market.

For every person who put their money in TSLA and has done tremendously well there are those that put their money in GE and have owned a piece of a company that was removed from the S&P 500.

With all of this, why should you make it a cornerstone of your portfolio or your investment strategy?

Simply put there are only a handful of investors who repeatedly beat the market and they are professionals who spend all day reviewing reports, speaking with individuals at companies, and reviewing large chunks of data.

You may not have the time, desire, or energy to research companies. You also may be getting started and want to provide yourself with the greatest chance at profiting from the market. A terrific way to do this is to purchase a fund that tracks a very broad index.

The most common index is the S&P 500. This is because it is a broad index made up of the 500 very large companies.

A new investor will recognize the names in the S&P 500 as they range from Apple to Google to Advanced Autoparts.

Warren Buffet has said that the stock market is transferring money from the inpatient to the patient. Let’s look at how two levels of investment would have been transformed over the last 10 years had you invested in the S&P.

 

 

 

 

 

 

 

 

 

What we hope you discover is that an investment in this index provides you an opportunity to increase your initial investment. Please keep in mind this is not a guarantee. Had you invested your funds at the beginning of 2018 you would have received a -4.4% on your money by the end of that year. You might have been tempted to pull out your money and start “investing” in lottery tickets. 

Had you done that though you would have missed out on 2019 where the return was 31.5%. You would have made back your money and then some.

Part of the key to investing is to put money aside that you are not going to need for awhile. The money is going to work on your behalf so you want to avoid interrupting it while it is working for you.

The chart below shows the annualized return rate of the S&P 500. It’s important to note that trying to “time” the market or selling when it’s high and then buying low is fraught with disaster.

 

 

 

 

 

 

We hope that you have decided to make an index fund a cornerstone of your portfolio. Now you have to decide which fund to purchase.

Index Funds that are Worth Your Time

• Fidelity Zero Large Cap Index – What’s cool about this fund is that it has $0 in expense fees. It’s a newer fund so it doesn’t have reports for its previous years however it’s designed to follow the market and is not actively managed. Fund shares are affordable at less than $15 a share at the time of this writing so you have an opportunity to own more shares with your investment dollars.
• Vanguard S&P 500 ETF – Here we are big fans of Vanguard. In this ETF you have an expense ratio of .03% which translates to $3 for every $10,000 that you invest.

Twins Rules for Financial Success

As with all of our content here we want to encourage you to follow three core rules :

• Have an Emergency Fund/Squirrel Funds
• Invest for the Long Term
• Invest Automatically & Consistently

Vanguard is a company that we believe in here. One of the reasons we continue to invest in Vanguard is that they put the investor first. You might be asking, “Don’t all companies say that?”. It’s true that’s what other companies will tell you however we believe no where is it more clear than at Vanguard.

Vanguard is not a publicly traded company. They are owned by the investors. In other words they don’t focus on a share price they focus on the investors.

We get it, you still might be saying, so what does it matter. Let’s look at a few Vanguard facts from our friends over at investopedia.

“The average expense ratio of Vanguard’s funds is .10% vs the mutual fund industry average of .63%.”

A Quick Summary of Why Fees Matter

.53% might not seem like much however it adds up big over the long haul. Let’s say you invested $10,000. One fund returned 8% and one returned 7.5%. This is the approximate difference in the fees you are paying. Over 20 years that is $4,659 of your hard earned money.

Vanguard is about reducing the fees to the investor. 

We cover fees in detail in other posts but that’s one of the reasons we love Vanguard. 

James has said from time to time that you end up loving the funds you own. You root for them to succeed. You check on your Vanguard app and see how they have done for you recently, over the last 6 months, and even over the last several years.

So what else is there to like about Vanguard? Let’s take a look.

John C Bogle Was a Pioneer That Others Ended up Copying

We are big fans of index funds. We have them thanks to John C Bogle. Why are we fans of these types of funds? Simply put they end up following the market. 

It takes a very devoted, smart, and forward thinking money manager to beat the market. Very few in fact have beat the market on a consistent basis. When you look at the long term investors who have beat the market they are names like Warren Buffet and Peter Lynch. If you look up the top 11 investors of all time you will find Bogle on the list.

The pioneer of index funds was Bogle. He created the first fund that tracked the S&P 500. We believe that everyone should have a portion of their portfolio in an index fund. By building a fund that tracked the index there was no active management. Without the active management the cost to maintain the fund could be reduced.

It was, and still is in many cases, common for mutual funds to have a 1% fee. While this seems small it adds up to a large sum over the life of an investment. Bogle wanted to make sure investors had the best chance for investment success and that is the mission of Vanguard to this day.

Vanguard Provides The Investor Options

Vanguard is the second largest mutual fund company in the world second to only Blackrock. As a result of their size they have options to provide to investors. You can have everything from 401Ks to IRAs to Mutual funds to College Savings accounts. They can be your one stop should you desire.

Is Vanguard Right for You?

This is a question that only you can answer. For the new investor some of Vanguard’s funds require minimum opening balances between $1,000 to $3,000. For the new investor this means one must have at least $1,000 to open an account while other firms might allow you to start with as little as $25.

We ultimately believe that you should investigate Vanguard and determine if they are right for your investment dollars.

Habits are a funny thing.  You can have good habits that propel you to greater health, success, happiness or you can have habits that hamper your health, cause you to struggle financially, and even contribute to depression.  As we are focused on financial wellness we thought it best to address habits that can help you achieve greater success financially. 

Now before you think that this is going to be a post about cutting coupons or eliminating your favorite coffee don’t worry.  Habits differ for each person and our objective in sharing about different habits is to give you a way of looking at your habits and adjusting them to help you enjoy the financial success you have envisioned.

Spending Oriented Habits

Spending oriented habits are those activities where you spend on a regular basis.  Now this is not to be confused with spending that is mandatory such as gas or food, this is referring to those spending activities which are optional.

Take for example one of the most common habits that has been addressed online, on podcasts, mocked on memes…the Starbucks habit.  Now the popular advice would be to simply ditch your purchases at Starbucks.  Afterall, the logic goes, if you are spending ~$2+ dollars a day, x5 times a week then you could be saving $50+ dollars a month.  Do that for an entire year and you can be $600+ in the positive…sounds great, right?

While eliminating a spending habit such as Starbucks sounds like a great way to save the reality is that you are unlikely to stick with it.  We would say that when you look at your spending oriented habits it is unrealistic to think that you are going to eliminate them entirely.  Instead of trying to eliminate the spending habit, try making an adjustment that allows you to keep up the enjoyment but realize savings.  For example if you love Starbucks consider the following adjustments:

• Starbucks 2x a week: $2+ each visit
• At home Keurig Starbucks 3x a week: .63-.71 a serving

While this might be a small change you can still end up realizing $10-$15 a month in savings that can contribute to your goal of finding at least $50 a month in savings.

Automated Investing to Create a Savings Habit

Starting a savings habit is one of the more difficult for those new to financial wellness to start. Of course when it comes to creating a savings habit there is nothing finer than setting up a habit that allows you to be successful…even if you forget.  If you have struggled with building up your savings then we invite you to consider setting up an automated savings plan.  If you are just getting going with automated investing the amount isn’t important, it is more important to simply start.  

For many people starting an automated investing plan seems foreign but oddly it seems perfectly normal to have Netflix, Apple Music, Disney+, etc. hit your card.  When you have the psychology that investing is a form of reward (to your future self) then it will be much easier to start and continue an automated investing plan.

Savings from Spending

Changing your habits can be a challenge and we understand that.  What if, instead of changing a spending habit, that you could save while you continue to spend?  While we certainly would recommend looking at your spending there are apps that allow you to start the journey of saving or even investing while you spend.  Consider a few of the following apps to help transform your spending habit into one that gets you closer to financial freedom.

• Acorn – https://www.acorns.com/pricing/ – While acorn does have a checking account as an option the focus of their app is that of investment.  Instead of some applications that are free Acorn starts at $1 per month for their platform.  The unique aspect about Acorn is that it focuses on investments from your spare change which gives you a greater chance to grow as you spend.
• Guac – https://www.guacapp.com/ – Guac is an app that gets tied to your checking account and helps you save a set percentage of your spending for specific goals.  For example you could set your savings percentage at 10% and you spend $100 then it would send $10 to your Guac account.  Being able to set a goal and a % is a great way to build up savings.
• BofA – Keep the Change – We started with BofA prior to going to USC and have kept them to this day.  One program they have, that is tied to your Debit Card, is called Keep the Change.  The Keep the Change program rounds up to the nearest dollar on transactions from your Debit Card and puts it into your savings account.  If you are accustomed to using your debit card on a regular basis this is a great way to start building up your savings.

Whether you change your spending habit, start automated investing, or even start saving with your existing spending the key is to start.  It can be tough to start, but select a strategy that works best for you and stick with it.