Hugh Wynn's Two Cents

While I'm not an investor by profession, I have been curating sound personal financial habits and practicing those techniques since I was a youngster. Although the focus of this blog is on our three youngest generations, I will ceaselessly emphasize to all investors the importance of an early and routine savings habit, a common sense buy-and-hold strategy, a diversified investment portfolio, the wisdom of shunning market timing, and a “stick to your guns” attitude regardless of negative outside influences. I believe it is imperative that you keep your investment strategy simple and your investment costs as low as possible. Like the small investor’s best friend, Jack Bogle, was quick to remind us, “In the fund business, you get what you don’t pay for.”

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past Posts

High Fees v. Low Fees
December 5, 2019
According to a survey by the Investment Company Institute, a fund trade group, 22% of households that own mutual funds said the fees and expenses they pay “are not very important” or “not at all important”.
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Do You Have a Million-Dollar Habit?
November 21, 2019
By eliminating what I call Million-Dollar Habits, (e.g., failure to exercise spending discipline, smoking or vaping, excessive dining out, etc.), almost all of us will rediscover a few dollars we didn’t know we had.
read more
Time, Money… and Discipline
November 14, 2019
Need a new holiday recipe? Mix together equal parts time, money and discipline and let it simmer. You'll be rewarded with a nice dish of savings!
read more
The Definition of Saving
November 7, 2019
You had to learn how to crawl before you walked. You had to learn your ABCs before you learned how to write. Likewise, you have to learn basic financial concepts before you build your nest egg to monumental proportions!
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Save a Million Dollars for Retirement
October 31, 2019
In last week's blog - "Excuses for Not Saving in Your 50s" - I mentioned various options that delinquent non-savers might pursue to bridge the gap between a “no worries” and a “high stress” retirement resulting from a lifetime of deficient personal financial management. Today, I want to remind my readers, particularly the young ones, that there’s a better way.
READ MORE
The Case Against High-Fee Mutual Funds
December 5, 2019

IDespite a major shift by mutual fund providers in recent decades to low-fee options, a surprising 21% of all U.S. Large Cap funds still have expense ratios above 1.5% (source: Morningstar, Inc.). Notably, many of these same high-fee funds also have elevated levels of risk and a portfolio turnover of double the low-fee options. High portfolio turnover invariably leads to higher tax bills associated with the inevitable increase in short-term capital gains.

I Pay Fees?

According to a survey by the Investment Company Institute, a fund trade group, 22% of households that own mutual funds said the fees and expenses they pay “are not very important” or “not at all important”. In a study commissioned by the US Securities and Exchange Commission (SEC), 25% of investors said they didn’t even know which types of fees they pay (while 20% said they didn’t pay any fees at all – yeah, sure). I shudder when I read tidbits like this. And I’ll show you why using some examples.

Studies indicate that investors – busy… or apathetic – seldom get what they pay for when buying “high-fee” mutual funds. A January 2019 Wall Street Journal  article by Derek Horstmeyer, an assistant professor of finance at George Mason University’s Business School, sheds light on the detrimental long-term costs of high annual expense ratios (expense ratios are the annual fees expressed as a percentage of assets under management) that accompany many actively managed mutual funds – expense ratios often associated with “some of the worst performing, most poorly managed funds especially in the U.S. Large and Small Cap Fund categories”.

High Fees: Worth the Cost?

Although that “increased” annualized yield for investing in a low-fee fund (one charging less than 1.5%) versus a high-fee fund (over 1.5%) is largely an across the board phenomena, it is particularly noticeable in the U.S. Large Cap category. Over a 10-year period through the 3rd quarter of 2018, the high-fee category delivered an average annual return of 10.61%, after expenses, while the low-fee option delivered 12.26%, a positive difference of 1.65% percentage points.    

The underperformance of high-fee funds was even more pronounced when considering the category of funds charging a ratio of 2.0% or more. In this case, the 10-year high-fee fund yield fell to 10.01%. The underperformance of high-fee funds impacted other asset classes, too, but to a lesser degree. In the case of U.S. Small Cap stocks, the average 10-year overperformance of low-fee funds was .73% points and for International Equity funds, 1.10%.

And The Dollar Cost Is…?

To illustrate the potential financial penalties associated with high-cost funds, let’s use a simple hypothetical of a high-fee investment of $10,000 increasing at an annualized rate of 5.35%, compounded annually during a 40-year career. After 40 years, the initial onetime investment of $10,000 would be worth about $84,000. Using the same assumptions but changing the annualized rate to 7.00% (to reflect a reduced fee of 1.65%),  the low-cost fund would be worth over $160,000 after 40 years, a dollar improvement of $76,000… almost double the high-cost fund. As noted earlier, that 1.65% improvement in yield (due strictly to reduced fees) during a 40-year career can be really significant.

Vanguard’s founder, John Bogle, often said, “The grim irony of investing is that, as a group, investors not only don't get what they pay for, they get precisely what they don't pay for." In short, every dollar you save by investing in a low-cost, unmanaged index fund is a dollar of return that benefits you, not some fund manager.

Burning Free Money

To ignore the realities of investing in high-fee versus low-fee mutual funds is a mistake as egregious as not optimizing a 401(k) plan employer match (FREE MONEY) at your workplace. I wouldn’t call such an action foolhardy, but I will be so bold as to call it a bullheaded pursuit of a costly million-dollar habit.

My motive for pointing the Horstmeyer study to a wider audience is purposely transparent. It’s another incentive to build a portfolio of funds around a low-fee, broad market index fund – or perhaps, simply stick with an all-index fund portfolio.

In any case, always try to invest at the lowest possible cost.

The Answer to the Million-Dollar Question
November 21, 2019

By eliminating what I call Million-Dollar Habits, (e.g., failure to exercise spending discipline, smoking or vaping, excessive dining out, etc.), almost all of us will rediscover a few dollars we didn’t know we had – enough dollars, at least, to initiate a meaningful savings program in advance of when most people start saving.

Good Will is Not Bad

Shoot, I’ve had astute but cash-strapped young couples – particularly those with new babies or those buying odds and ends for apartments or first homes – tell me they easily save $100 a month by shopping at Goodwill. Not interested? Try it, you might like paying 10-15 cents on the dollar for virtually new items (toys, baby clothes, kitchen items, knickknacks, etc.).

The Savings Ingredient

The savings ingredient in investing is simple, yet critical. If you don’t start saving early in life, you miss the cornerstone of what makes The Amazing Power of Compounding amazing (for a more detailed explanation of compounding, go to my blog titled Before You Get Rich You've Got to Master the Basics). To demonstrate your potential loss, let’s resurrect my stale old example of saving $100 per month, investing it in a Total Stock Market Index Fund (hopefully in a Roth IRA), earning 7%, compounded quarterly, for 45 years. What does it get you? Close to $380,000 before inflation upon retirement. And that’s in addition to Social Security, your 401(k) and other shrewd investments you make along the way.

By the way, you’ll soon learn that I stress simplicity throughout my blog postings, but let’s be quite clear about simplicity. The simplest things in life are very often hard to do. And saving early and often is one of them. You’ll quickly learn why if you haven’t already experienced it.

Ah, Those PDQ Principles

In an early posting on my daughter’s blog, I introduced those very clear, very simple, very basic principles that I try to adhere to in my own investment program: the PDQ Principles. These principles hold to yet another important principle – that most successful investors are also reliable savers who adopt an investment strategy that combines patience with a portfolio of diversified, quality assets, and then dare to be average! I will devote a later, more detailed blog on daring to be average, where the term is applied only to investing. And, of course, the PDQ Principles strategy, like all savings strategies, requires discipline.

The Wazoos (Proceed With Caution)

Humankind tends to complicate things far beyond what is usually necessary. Complex strategies are mostly devised by a group of folks I endearingly call the Ivory Tower Boys (Wazoos) who help the average small investor not one whit! And it’s the “small investor” I want to help, a category that includes me. This green eye-shade, Wall Street crowd devises complicated strategies to convince you that you need them to uncomplicate what they’ve creatively complicated. Granted, complex fortunes (the billionaires among us) require greater sophistication, but most of us don’t have complex fortunes. We save a few bucks a month to invest somewhere that, hopefully, over time will grow into a meaningful retirement fund. And the process does not have to be complicated. In fact, it can be quite simple…the simpler the better.

Don’t be fooled by all the bulls**t. And those green pastures (the internet) are littered with that commodity. Some facts are good to know, but you don’t have to possess a full vocabulary of buzzwords. Join me in this effort. Toss most of this recently digested hay aside, adopt a few basic principles of saving and investing, and over time, you will accumulate a nice nest egg for retirement. And yes, you do have the time. Question is, do you have the discipline? All it involves is spending less (saving) by simply delaying gratification – and avoiding those Million-Dollar Habits.

Buy the Haystack

To sum it up, let me quote the small investor’s dearly departed friend and Vanguard founder, John Bogle who said, “Beating the market is a zero-sum game for investors. Money managers, as a group, must provide the market return, but that return comes only before their exorbitant fees, operating expenses, and portfolio turnover costs are deducted. The zero-sum game before costs becomes a loser’s game after costs.”  

In his highly publicized support of index funds for the little guy, Bogle also wisely counselled, “Don’t look for the needle in the haystack. Just buy the haystack.”

The Recipe for Investment Success: Time, Money…and Discipline
November 14, 2019

I have repeatedly stressed the importance of three basic ingredients of saving for investment: time, money…and discipline.

The more time you spend saving, the greater your potential reward. That comes as no surprise. And the more money you save, the greater your potential reward. But without discipline, the simple act of tucking money into your savings account every single month, you WILL fail to achieve your optimal goal.

That’s not a criticism, that’s just a fact.

We’re addressing two very important concepts here: (1). The Time Value of Money and (2). The Amazing Power of Compounding – concepts that are inextricably linked. Let’s use a simple example. If you save $100 per month for 45 years and hide it faithfully in a can buried in the back yard, you’ll end up with $54,000 at age 65, a tidy sum. However, if you save $100 per month and invest it in a low-risk, tax-advantaged investment account (a Roth IRA) paying 7%, compounded monthly for 45 years, you’ll end up with $384,000 at age 65.

Money held as cash, uninvested, has no worth beyond its moldy face value regardless of its time spent in the can (I could mention that it actually loses purchasing power due to Izzy the Inflation Monster but that’s a blog for another day). The same money invested at 7%, compounded monthly for 45 years clearly indicates The Amazing Power of Compounding over time. That’s why discipline is so important in any saving and investment strategy.

Save early, save often, do it without fail, and do a good job of investing it wisely.  And please…please…avoid dipping into the till along the way.

Before You Get Rich You've Got to Master the Basics
November 7, 2019

During my previous blog posts, I’ve used terms and phrases that require some definition and clarification. Yes, you’ve heard them before, but I want to focus your attention on their importance in developing and carrying out a personal finance plan. I’ll list them in alphabetical order (ignoring the pronoun “The”).

The Amazing Power of Compounding

Most financially successful people get that way not through business innovation but by optimizing compound interest on their savings and investments. An important lesson they learn early is that a saver can contribute less now than more later to enjoy the same ultimate accumulation of wealth. A simple example: If a 22-year-old invests $1,000 on January 1 at 7% per annum, next year the investor will have $1,070. The following year, the investor will theoretically gain the same 7% on the initial $1,000 plus the $70 earned last year, which would increase the investor’s balance to $1,145. In 10 years, the investor’s initial $1,000 would grow to $1,967. Upon retirement, at age 65, that single initial investment of $1,000 will have grown to $18,344. Alternatively, to achieve the same nest egg of $18,344 at age 65, a single initial investment at age 32 would need to be $1,967. The magic came from reinvesting the principal plus earned interest every year.

Dare to be Average

Next to saving, one of the hardest thing to accomplish as an investor is daring to be average. It’s an index fund’s essence, its overriding fundamental. Think about it, if you invest in a Total Stock Market Index fund, or less broadly, an S&P 500 Index fund, you’ve deliberately chosen to be satisfied with  a broad market yield. “Why,” you ask, “would I want to just be average?” Truth be told, you’re not just being average. Study after study of index (passive) fund results show that over time, they outperform managed (active) funds. And those managed funds that outperform index funds represent a moving target from one year to the next. In short, here today, probably gone tomorrow.

Beating the market is hard to do. Accounting for what’s known as “survivorship bias” (the attrition rate of poor performing mutual funds), over a very recent 15-year period, roughly 92% of large-cap funds lagged the yield of a simple S&P 500 index fund. Mid-cap and small-cap funds lagged their benchmark indexes even more: roughly 95% and 93%, respectively. In other words, the odds that you’ll do better in an actively managed domestic fund (versus an index fund) are about 1 in 20. That’s why I dared to be average years ago! Certain “friends” told me that, in my case, being average probably came naturally.

Dollar Cost Averaging

An investment technique that involves buying a fixed dollar amount of shares of stock or units of a mutual fund on a regular schedule (say, the 15th of every month), regardless of the share price on that date. In short, the investor purchases fewer units or shares when prices are high and more units or shares when prices are low. A side benefit is that it just might reduce the inclination of an investor to make purchases in a frothy market or sales in a bearish market.

Million-Dollar Habits

Behavior patterns that, if not modified or completely corrected, could wind up costing an individual hundreds of thousands if not millions of dollars over a lifetime. The most commonly abused such habit is Impulse Buying (more about impulse buying later).

Rule of 72

The one-step formula used to estimate the number of years required to double invested funds at a given annual rate of return (i.e., if an investment promises an 8% annual compounded rate of return, it will take about 9 years to double the invested money (72/8 = 9). The Rule of 72 applies to cases of compound interest, not to cases of simple interest (see below). Alternatively, if you divide the number of years (within which you want to double your money) into 72, the result is the approximate yield you’ll need to earn to achieve your objective (72/9 = 8%).

The Safe Retirement Withdrawal Rate

A calculation of how much an individual can  “safely” pull from a retirement portfolios on an annual basis without significant risk of long-term depletion. Fair Warning: you’ll get about as many answers to the “safe” withdrawal rate as the number of people you ask the question.

Saving: It’s Never Too Late, But Early Is Best

This simple maxim is attributable to those wise parents and financial planners among us. In any event, because Time is Money, it’s always wise to start saving as soon as possible… not when you’re hired part- or full-time right out of high school or college, but RIGHT NOW!

Simple Interest

Used for calculating interest on investments where the accumulated interest is not added back to the principal (i.e., multiply the principal amount by the daily interest rate and by the days that elapse between payments). Yeah, I know, you learned that in grade school.

Time is Money

This simple maxim is often attributed to the wise and witty Benjamin Franklin. He reinforced its meaning by simply stating that if a person skips half a day of work, he forfeits half a day of wages. Let’s apply this maxim to a delinquent saver using The Amazing Power of Compounding above. Had our saver waited until age 40 (instead of age 22) to start saving, to reach the same goal of $18,344 at age 65, he would have to make an initial contribution of $3,380 instead of $1,000. In short, if you don’t start saving until later in life, your required initial contribution will necessarily be larger to reach the same goal at age 65.

The Time Value of Money

This simple concept recognizes that cash in hand is worth more than the same amount of cash received a year from now. Why? Because cash in hand can be invested to earn income during that year (not sure how that applies to birds).

Uncle Grabby

The U. S. Treasury Department’s Internal Revenue Service and its impulse buying sidekick, the U. S. Congress.

Watch the Pennies and the Dollars Will Take Care of Themselves

Another maxim often incorrectly attributed to Benjamin Franklin (and frequently used by my father), but first coined by William Lowndes, a long-ago Secretary to the Treasury of Great Britain who used pence and pounds. Impulse buyers might keep this old maxim in mind while shopping.

Wazoos

Those intellectual, highbrow, disdainful investment advisors who attempt to convince us that investing should not be simple; that they alone can introduce order to the market’s chaos with their complex investment theories.

Your Age in Bonds Rule

This simple rule of thumb states that whatever your age is should dictate the percentage of your portfolio that should be in fixed income (bonds). The rest would be in equities (stocks). For example, a person aged 65 would have 65% of his/her retirement portfolio allocated to fixed income (bonds). I’m not completely sold on this formula because it exposes investors to the ravages of Izzy the Inflation Monster. There will be an upcoming blog on the long-term impact of inflation on saving for retirement. You’ll be surprised how damaging it can be.

Start Saving in Your 20s and Retire a Millionaire
October 31, 2019

The average family only saves a little more than a $100,000 or so by the decade leading up to their retirement.

When you associate that number with the fact that 50% of all individual Americans age 65 and older have annual incomes in the range of $24,000 – far less than what most need to meet living and healthcare expenses – it’s reason to wonder how they plan to financially navigate the 10-20 years many will spend in retirement.

A Gentle Reminder

In last week's blog - "Excuses for Not Saving in Your 50s" - I mentioned various options that delinquent non-savers might pursue to bridge the gap between a “no worries” and a “high stress” retirement resulting from a lifetime of deficient personal financial management. Today, I want to remind my readers, particularly the young ones, that there’s a better way. One that, in conjunction with an increasingly unstable Social Security program, should provide a more secure retirement (85% of Americans 65 and older draw Social Security that ultimately will require some political attention to ensure its long term availability).

Start Saving Now

The key to a secure retirement is not rocket science. You need a plan. And it’s never too late to develop a plan but right now is best. I’m talking in your 20s; certainly no later than your 30s. And build that plan around a simple set of principles – the PDQ Principles come to mind…Patience, Diversification and Quality. But first you must save. Once you develop the habit of saving on a routine and consistent basis, then you apply these principles.

As I’ve stated ad nauseum, keep it simple. Build your portfolio around a low-cost index fund (S&P 500, Total Stock Market, etc.). Such a fund automatically provides you with diversification and quality, and a steady and routine savings habit necessarily embodies patience. And remember, you need to employ all three principles together. Now, let’s provide a simple example that demonstrates both The Amazing Power of Compounding and the importance of Daring to be Average (an index fund, in essence, yields the market rate of return…no more, no less) .

Another Boring Example

Let’s assume that you’re a 25-year-old high school or college graduate that earns $50,000 per year; that you save 10% of your after tax salary – about $400/month; that you create a Roth IRA and invest in a Total Stock Market Index Fund; and that the fund earns 7% per year, compounded quarterly for 40 years. Using a Bankrate calculator, upon retirement at age 65, your Roth would be worth $1 million before inflation. To demonstrate the amazing power of compounding, using the foregoing numbers, had you deposited the money in a bank account earning a fraction of 1 percent, you would have ended up with less than $200,000.  

The Point Of This Exercise

Everything discussed in this blog is “old hat”. We’ve been down this road before. My point is simply this. Based on statistics year-in, year-out, folks keep arriving at retirement’s doorstep financially ill-prepared for 10-20 years of retirement living. There’s a better way.

My example is strictly hypothetical, but it’s a gentle reminder that, while young, with a bit of prior planning and by developing a few good habits (no, not those million-dollar spending habits), an individual can enter a “stress-reduced” retirement phase of life simply because of good financial planning.

Try it. You might like it.