Salamat
An original painting by Alex Ferrar
On display at his restaurant Sobremesa, Antigua, Guatemala
Welcome to the second in this series of posts featuring questions and answers from the comments that have accumulated during my recent travels. As before, the post is named after the featured painting above.
As described in the last post, Q&A, traveling without a computer, as I do, provides a wonderful break from the relentless onslaught of non-stop connectivity that is the mark of our modern world. For a brief few weeks it gives me the chance to return to the more peaceful time of not so long ago when our days were more fully our own. But this leads to a backlog of great comments and questions waiting for a response.
So in this series of Q&A posts as I work thru all these comment/questions, answering them in the posts where they were made, I’m also going to select a sample of the most interesting and reproduce them as posts in their own right. I see four benefits:
It will get responses to readers who were kind enough to comment.
It will get the flow of new posts started.
It will introduce readers who don’t currently bother reading the comments to some of the content to be found there.
It might even introduce you to some older posts you’ve missed so far.
Hope you enjoy them!
From:
Stocks Part VI: Portfolio Ideas to Build and Keep your Wealth
Scott:
Hi Jim,
I’m loving your posts referred by MMM, thanks so much for all the great info.
A long time ago, I kinda fell into the conventional wisdom trap of 60/40 allocation of stocks/bonds; but I have to say that I am comfortable with a bit more risk (even at my advanced age :).
I’m 56 and retired 3 years ago, and left my 401k in my company’s plan because it’s cheap and easy. 58% is mostly in 3 funds, S&P Index (.06 fees), BlackRock US Equity (.09) and BlackRock Extended Equity (also 9 cents). The 42% is in PIMCO’s biggie, the Total Return Fund, but the expense here is significant — 0.46 %.
The past 10 yrs has been great, but the last 2 PIMCO has suffered. So I guess I have 3 questions for you, if you care to opine:
I’m happy with the stock fund returns and think the expense is low, am I right?
Am I crazy to want to change the allocation by 10 pts, to 68/32?
Even if PIMCO’s expense is high, I think it has performed much better than Vanguard’s — do you still think it’s a bad idea to stay with it?
You should know that I’ve got a separate 50k invested in REIT’s outside the retirement fund, as well as 50k in a Colombian coffee farm! And I’m considering Lending Club as well… so I feel like I’m doing pretty well as far as diversification goes.
Thanks! Scott
jlcollinsnh:
Welcome Scott!
Glad you found your way here.
You certainly sound well diversified and I bet there is a great story behind your Columbian coffee farm! If you care to share it, I also bet I’m not the only one who’d be interested. 
As to your questions:
1. Your S&P index fund and the two BlackRock funds have nice low ERs. While it is good you’re happy with the returns, don’t forget we’ve been in a powerful Bull market for the last few years. At some point the Bear will revisit for a while. This won’t mean the funds stopped working. Just a heads up.
2. Not crazy at all, especially with your other diverse investments and as long as you recognize that you will be adding some risk in seeking greater returns. Balancing risk/reward and smoothing the ride is what asset allocation is all about. But don’t be tempted to try to time the market in doing this. See: Investing in a Raging Bull
3. Jack Bogle is fond of saying “performance comes and goes, but expenses are forever.” Or something like that. Many actively managed funds will outperform the index for a year or two or even several. But ultimately they underperform as apparently PIMCO is now. If, as I suspect, your BlackRock funds are also actively managed I would have the same concern about them even though it sounds like they’ve done well for you of late. This is why my money is only in index funds as described in the post.
Hope this helps!
Clint:
Two questions regarding small cap stocks:
1. If small caps historically tend to outperform large caps (over the long-term and provided you don’t panic), why do you not recommend overweighting small caps? Or being only invested in a small cap index?
2. More practically, if one only has a choice of an S&P-tracking index fund in a 401K, would you see any problem with balancing it out with the addition of a small cap fund?
3. If one were to look to tilt toward small caps, would you recommend VISVX (small value) or VSMAX (small cap index)?
As always, thank you. Hope you’re having a good vacation.
jlcollinsnh:
Great questions, Clint…
and thanks for the kind wishes on my travels and you patience in waiting tim my return for this response! It was a wonderful trip!
OK….
1. Your premise is correct and that could be a fine strategy.
But you have two considerations. First, the small caps will give you an even more volatile ride, along with long periods of underperformance. Second, you’ll want to consider adding an international fund, and the extra risk these entail, as you won’t have this covered as with VTSAX. For more: International Funds
2. That would work. Just remember, if your aim is to duplicate VTSAX, that index holds only about 20% in small caps. So 80/20 would be your S&P 500/SC allocation.
3. I’d go with VSMAX for the broader sweep of small cap stocks it holds.
Hope that helps!
From:
What we own and why we own it
Alan:
Hi Jim, hope all is well. I’ve been absorbing your blog like a sponge absorbs water. I just finished reading the entire stock series… really great stuff you’ve got here, it’s enlightening to say the least. Thank you!
I have a question for you regarding Vanguard’s money market fund (VMMXX). Since it is a money market account, Vanguard allows for checkwriting services… my question is, are there any tax implications for writing checks? Vanguard states on their website that “for tax purposes, checks are considered redemptions”.
Here is a link:
https://personal.vanguard.com/us/whatweoffer/accountservices/checkwriting
jlcollinsnh:
Thanks Alan…
Glad you’re enjoying it and I appreciate the kind words!
Money Market funds strive to maintain share value at exactly $1, so typically there is no capital gain or loss when you sell shares. So, no taxable event — even though checks written on them are redemptions.
I say typically because on rare occasions an MM fund will “break the buck” — that is the share value will drop below $1. This is a very big and negative deal. It last happened in the financial crisis of 2008, but only with a couple of MM funds. None were Vanguard’s.
So for all practical purposes, you have nothing to worry about here.
But, with interest rates so low, MM funds are no longer a very profitable place to keep cash. Banks, especially on-line banks, pay more these days and enjoy the benefit of FDIC insurance. My checking account actually pays more interest than VMMXX. But both are vanishingly small percentages.
I still use the MM fund, but mostly now just for convenience.
From:
Stocks Part VIII: The 401k, 403b, IRA and Roth Buckets
Jonathan:
Hey Jim,
Just wanted to tell you I’m so glad I came across your blog!!
I’ve always found the stock market to be so interesting and wanted to become a broker but in the end I’m majoring in accounting. Turned out to be one of the best things I’ve done because I’m already working for a firm making about 25k a year (after taxes).
Anyway, I’m 19 and just opened a Roth and invested my first few paychecks – 3k (enough for VTSMX). I’m extremely lucky at the opportunity I’ve been given.
I still live at home and only have my phone payment; saving about 90%. I’m currently working to get my AA, while it’s not easy being a FT student and maintaining a FT job, I know it’ll be worth it in the end.
Can’t say how grateful I am at the plethora of information I’ve devoured on your site, One step closer to having my FU Money.
Thanks – Jonathan
jlcollinsnh:
Hey Jonathan…
Congratulations on what sounds like a splendid start. Would that I were as wise when I was 19!
As you might well already know, once your VTSMX account hits 10k Vanguard will automatically roll it into the lower cost VTSAX for you.
Finally, thanks for the kind words. You made my day!
From:
Stocks Part XVII: What if you can’t buy VTSAX, or even Vanguard?
Ali Clark:
Newbie here! Trying to make sense of all this.
I’m looking for your Vanguard recommendations in my freshly started 401K.
Are these index funds?
Vanguard LifeStrategy® Conservative Growth 0.70%
Vanguard LifeStrategy® Moderate Growth 0.70%
Vanguard LifeStrategy® Growth 0.70%
LVIP Vanguard International Equity ETF 1.20%
What about this guy?
LVIP SSgA S&P 500 Index 0.54%
jlcollinsnh:
Welcome Ali…
Always nice to have another newbie join in!
Only the last one is an index fund.
However, the first three are each what are known as a “fund of funds.” That is, they are made up of other funds and each of these are made up of index funds.
The idea is that you get diversification and automatic rebalancing, but the ER (expense ratio) is a bit higher.
For instance, Vanguard LifeStrategy® Growth –https://personal.vanguard.com/us/funds/snapshot?FundId=0122&FundIntExt=INT — is made up of:
–Vanguard Total Stock Market Index Fund Investor Shares 56.1%
–Vanguard Total International Stock Index Fund Investor Shares 24.1%
–Vanguard Total Bond Market II Index Fund Investor Shares† 15.9%
–Vanguard Total International Bond Index Fund 3.9%
Basically an 80/20 stock/bond split using a nice selection of funds.
Were I young and planning a few more years of work, of those you listed that’s the one that would be my choice.
From:
Case Study #7: What it looks like when everything financial goes wrong
Deacon:
Great story and some very worthwhile advice from all involved. I love the points about living with less and focusing on relationships over “stuff”. I’m also amazed by Tom’s ability to live such a mobile life with a family in tow. Hard to do that with lots of unnecessary possessions on hand. Reminds me of the wisdom in one of David Cain’s recent posts on raptitude.com (“Everything In It ‘s Place, Now and Forever.” )
So as not to armchair quarterback Tom’s decisions in an effort to apply lessons to my own life, I’d love to hear what advice he has based on his story. Above and beyond his very wise comment about the value of relationships over material desires, that is. With all the forks in the road that he faced, I’m sure he developed at least an unconscious list of rules to live by that have helped him maintain such a positive outlook and ability to attract quality people in his life. I say this based on both his successes and his failures, as lessons obviously can be learned from both.
Tom:
Hey, Tom here. In response to Deacon’s request, I have a few rules I live by …
#1. Seek the truth; there is a lot of deception in the world. Learn to find out what is true and what is false. It takes some effort, but it’s worth it.
#2. Get outside everyday and breath fresh air, get some exercise, even if it’s just a nice long walk.
#3. Look everyone in the eyes when you talk to them; it will instill trust in both parties and you will learn to read others’ responses.
#4. Tell the ones you love (family and partner) that you love them.
#5. Simplify, simplify … Thoreau was right. We sure can’t take all this stuff with us.
#6. Work at a job you love and put your all into your work. That being said, don’t take your work home with you. Take time to unwind.
#7. Eat healthy, have a drink daily, but don’t overdo either.
#8. Be thankful for the things money can’t buy.
#9. If you have kids, take them fishing, camping, whatever. Show them there is another world out there that has nothing to do with electronics or stuff.
#10. Take the back roads in life, stay off the freeways.
Deacon:
Thanks for the response Tom, and to jlcollinsnh for the addendum. Very wise words to live by. I have to say that my #1 and #2 would be exactly the same. Interesting how certain life events will cause me to remember or re-evaluate certain of my own ‘rules’, but these two (and maybe a couple others) are constantly in focus. Thanks again for the words to live by.
Tom Kemper:
You will end up a wealthy man Deacon … like me.
From:
Stocks Part III: Most people lose money in the market
Chris:
One thing I don’t get: How is it that supposedly MOST people perform worse than the corresponding index share market?
Let’s say you are right and one can not predict shares that outperform the market, – is it then not that by pure chance 50 % of us would perform better, 50 % would perform worse, – i.e. would there not a normal bell curve type distribution around the mean?
This is of course different if I pay fees for a managed fund, or if I pay lots of fees for trading, – but if we take that out of the equation for this question, – if it just came to me deciding to pick my own stocks out of a basked (let’s say the Dow Jones), – would my chances not have to be 50 : 50?
Thanks for clarifying!
jlcollinsnh:
Hi Chris…
Sorry for the delay. I was actually hoping to get the Mad Fientist to weigh in on this as I’m curious as to what his take might be.
In any event, my answer is simply that people have an almost endless array of ways to repeatedly lose money in the market:
Trying to time it
Trading
Stock picking
Bad managers
High fees
..and a bunch more I’m not thinking of just now. So it is not just one event with a 50/50 chance but an endless stream of events, each stunningly easy to get wrong.
But you are right in this way: If you and I were to choose a given stock and you went long while I went short, we would each have a 50/50 chance of being right.
In fact this is exactly what happens with each specific trade in the market. For every buyer who thinks the time is now, there is a seller happy to unload. At that moment, only one can be right.
Index funds, on the other hand, rise relentlessly (although not smoothly) and are self cleansing. as described in this series.
Make sense?
Mad Fientist:
Hey Chris, Jim emailed me to ask if I’d take a stab at replying to your comment.
Luckily, Jim chimed in with a great response (no big surprise there) so hopefully that answered your question.
I wrote an article about some of the cognitive biases that cause us to make bad investing decisions so feel to check that out for a few more reasons why most people underperform the market.
From: Stock Series
Mike P:
Hi Jim,
I recently found your site along with MMM and the Mad Fientist and I am loving everything I have read. I have implemented most of the stuff you teach here in my own finances.
My question is about a traditional IRA vs a Roth IRA. I am 24 with a $50K salary. I noticed you are a big proponent of the Roth IRA however in Part XX, Mad Fientist contradicts this and suggests it’s better for someone in my position to use a traditional IRA.
Just wanted to get your thoughts on this and if you actually recommend the traditional or Roth for someone in my position.
Thanks for creating this amazing blog and I look forward to anything you might post in the future!
jlcollinsnh:
Hi Mike…
…and welcome!
Thanks for the kind words. Glad you like it here.
Astute observation and great question.
Indeed MF’s analysis has altered my thinking. Go with the ideas in Part XX.
Mike P:
Thanks for the quick response! I was hoping you would say that since I already maxed out my Traditional IRA for 2014 haha!
From:
Stocks Part I: There is a major crash coming!!!
Mingtian:
I am so happy I have found your blog. It is slowly changing my thinking.
Have you ever watched/read anything from Michael Maloney such as his series Hidden Secrets of Money?
These are extremely well produced and (I think and would love to hear why you think not) very persuasive. I understand he is someone who could be just selling something (precious metals) but he doesn’t come across that way at all.
So I am torn. Is what he says right or is it more unreasonable to bet against this country and its economy?
I would love to hear your thoughts!
Thanks so much for your blog!
jlcollinsnh:
Welcome Mingtian…
Glad you are finding value here.
I am not familiar with Mr. Maloney or his series and unfortunately don’t have the time, or candidly the inclination, to spend with it.
I will say that one of the reasons I started this blog is because there is so much nonsense out there. Some is simply bad advice. Much is bad advice design to sell you crap.
I will also say that there are no “Hidden Secrets of Money.”
As you read thru the blog here you’ll have a clear idea of how I see things. It then shouldn’t be hard then to contrast my ideas with others and decide for yourself.
Just be careful. And you might want to read this: You, too, can be conned
From: Disclaimers
Farmboy:
Love to read here.
Just a thought . . . not that I’m a lawyer…
Looking at the following text “…By leaving a comment on this blog it becomes the property of jlcollinsnh.com and it may be used in another post, article or book. …”
I wonder if you might be better served by adjusting a portion of that from “…becomes the property of jlcollinsnh.com…” to something along the lines of “…becomes licensed to jlcollinsnh.com in an ulimited fashion, though the material itself is solely the product and property of the posting entity…”
My thought may be obvious, though if not, I suspect it’s a better liability to have an unlimited license to use the product rather than becoming the owner of the product, with whatever liability the ownership may carry.
If you happen to read this comment and find it way off base, I look forward to finding out how/why.
Cheers
Farmboy
Often willing to “pay it forward” & encourage others to do the same . . .
jlcollinsnh:
Thanks Farmboy…
Glad you like it!
Thanks, too, for your suggested phrasing. It may well be better than what I’m using, or not. Thanks for giving me a chance to reconsider it.
I’m not a lawyer either and am just trying to let people know what to expect when they post comments and questions and I respond.
I know we have lawyers out there reading. Any thoughts?