For starters: Index and ETFs investing in your 20s according to Burton G. Malkiel

Suppose you are new to investing, and would like to participate in the market but don’t have the time or knowledge to research individual stocks (or  you’re just lazy), what should you do? Let’s explore a few options from the book: A Random Walk Down Wall Street by Burton G. Malkiel. For this article, let’s focus on two things, the importance of low fees and the asset allocation for the folks in their 20s according to Burton G. Malkiel.

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HIGH FEES? WE DON’T NEED NO STINKIN’ HIGH FEES.

Now before you purchase that mutual fund your bank advisor is trying shove down your throat, consider looking at the different expense fees. Recently, many funds have come under criticism for their high fees and poor performance (compared to the benchmark), and rightfully so. Be aware of the MER, TER, front and back loads on these funds. A MER (Management Expense Ratio); is whats going to cost you for them to manage your money per year. A simple example is the following:

You find a nice mutual fund you’d like to invest in, and decide to place your hard earned $10,000 into that fund with an MER of 2.5% (this is high, and quite common). Essentially, you’ll lose $250 just to management expense fees. Now let’s assume the benchmark is the market, and it’s returning about 7%. Simply put it, you better hope your fund returns at least 9.5% just to get even with the market. Note that many funds, after fees don’t consistently outperform the market.

Now I know what you’re thinking, what’s 2.5% to you? Don’t think 2.5% is a lot?

Consider the following:

Let’s say you choose a fund that performs just as well as the market but has an MER of 2.5%. You invest $10,000 for 20 years.

Market performance: $10,000 at 7% compounded for 20 years: $38,697.

Fund performance: $10,000 at 4.5% (7-2.5) compounded for 20 years: $16,386.

You’ve indirectly lost $22,311, or about 136% to that “tiny” 2.5% fee. The longer the time, the more you lose indirectly to fees. High fees are crippling, and most people (especially starters) don’t notice them, so be careful.  

“It is not necessary to do extraordinary things to get extraordinary results… By periodically investing in an index fund, the know-nothing investor can actually outperform most investment professionals.”

– Warren Buffett

For beginners, Burton G. Malkiel recommends diversifying to decrease risk by purchasing different Indexes or ETFS: Stocks, Bonds and REITs and by weighing them differently during the stages of your life. For starters in their early 20s, diversify, seek a no-load, low expense, broad-based index funds, and it’s advisable to make these purchases in a Tax-Free Savings Account (TFSA).

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Because you’ve got much time in your 20s before retirement, Malkiel recommends consistent contributions (to a no-load fund) and that the majority of your holdings:

(70%) be of stocks. He recommends to put one half in U.S. small cap growth stocks (no-load, low expense Index and ETFs) and the other half in international stocks, including emerging markets.

-Cash (5%) should be in money-market fund or short term bond funds.

-Real estate (10%) should consist of high quality REIT portfolio.

-The remaining bonds (15%) should contain: no-load, high grade corporate bond fund, foreign bonds, some Treasury inflation protection securities or dividend growth stocks.

Some Equity Index Funds and ETFs tickers from A Random Walk Down Wall Street:

FSTMX, SWRXX, VFIAX, VOO, VTI, IWB, TWOK, VEMAX, VTIAX.

Now as you enter your 30s, 40s and so on, the mix of stocks, bonds, real estate (REITs) and cash will change. For instance, according to Malkiel, in your 30s, your Stocks-Cash-Bonds-Real Estate allocation would be: 65%-5%-20%-10%, respectively. You would slowly move to “safer” investments as you age.

If you’re relatively new to stocks, don’t expect quick gigantic returns, especially not from Malkiel’s recommendation. This type of diversified allocation has the goal to decrease risk through exposure of broad indexes. Long term index and ETFs are made to pay off in the long term. Briefly, for starters: the takeaway would be to look out for high fees and contribute to index and ETF funds according to your age. Always do your own research.

All in all, you can find the full asset allocation by age from: A Random Walk Down Wall Street. It was an amazing book, written like no other and it sheds new light to numerous important topics such as the efficient market hypothesis (EMH), behavioural finance, random walk theory, diversification and much more. I will have a review on this book soon. Meanwhile, you can find the book here.Of course all this, JMO (just my opinion).

In investing money, the amount of interest you want should depend on whether you want to eat well or sleep well.

-J. Kenfield Morley

Disclosure: I have no positions in any of the recommended ETFs or Indexes at the date of this article. I wrote this article myself and it expresses my own opinions, I am not a financial advisor. I do not get any compensation from this, other than from Amazon Affiliate links and advertisements. On the date that this article was posted, I have no affiliation with any of the ETFs or Indexes.

 

 

 

The Best Investment Book for Starters

We’re all aware of the importance of starting early and we all know the costly price of starting late. That last minute 10 page essay, that last minute “studying” (if you even call that studying anymore) before the math exam always ends up with you always asking yourself: Why didn’t I start earlier ?

Procrastination is a terrible habit and we’ve all been guilty of it, some more than others     (I, for one, am – you are too, no need to lie). On the other hand, procrastinating on that 10 page history paper isn’t the worst of the last minute bullsh***ing. It’s when you procrastinate on more important things such as learning to invest that you will pay the costliest price.

Starting your investments early will allow you to take advantage of time; giving you the ability to ride out some mistakes and more importantly use compound interest. I cannot stress the importance of compound interest. You can check out the article about why you should start early here.The earlier you learn about investing, the earlier you can start; the earlier you make capital gains. Now, you can’t learn EVERYTHING about investing, but without a doubt you need to learn the fundamentals before even thinking of starting.

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In my opinion, one of the very best investment book ever written (if not, THE best) is The Intelligent Investor by Benjamin Graham (the second investment book I’ve read). Although I strongly recommend Graham’s “investing bible” to anyone, it’s not the book of choice when people ask me what to read as their first book.

The first book I ever read, was “The Neatest Little Guide to Stock Market Investing” by Jason Kelly, and I strongly recommend it for starters as their first book. Now before, I get stoned by the crowd for thinking I’m not recommending “THE best book” first, hear me out first. When I was a beginner in investing, there would have been no way for me to fully understand and appreciate The Intelligent Investor (you need to read it a few times), had I read it first. It’s not an easy read for beginners, especially if you have no background in business. It can be intimidating, and the length can turn people off.

Let’s jump straight into it: Why “The Neatest Little Guide to Stock Market Investing” is the best book for the Jon Snows of investing (those who know nothing):

1. It’s a very easy read. It teaches you the very basics of stocks, what they are, how they work and how you can make money while owning stocks. It teaches you the basics of evaluating stocks and touches upon growth investing and value investing. Additionally, the basics on how to read stock pages.

2. It will briefly touch upon Fundamental vs Technical Analysis. You will learn the basics of fundamental stock measurements such as Dividend Yield, EPS, ROE, Net Profit Margin, etc. You’ll also learn a bit about technical analysis basic measurements such as RSI, SMA, MACD, etc.

3. It introduces you to some of the most successful investors. The highlight of this book is that it summarizes the basic points and strategies of the most successful investors, notably : Benjamin Graham, Warren Buffett, Philip Fisher, Peter Lynch, Bill Miller and William O’Neil. This allowed me to follow up on my investing journey by reading “The Intelligent Investor” which changed my life.

4. The author also gives you a list with a description of numerous resources that provide research on stocks. Furthermore, he describes a few long term strategies. He also suggests ways to get started (setting up an account) and provides a few of his very own strategies he uses/ made.

Again, I cannot stress enough the importance of starting early in your investing journey. For me, this book eased my way into the investing world; it easy to read and has the right amount of important content so I didn’t lose interest (I get bored easily). It was very well structured and the summary of the greatest investors allowed me to follow up on my learning after I finished reading the book.

It will answer most, if not all questions of the beginner investor. All in all, I’m glad it was my first book, and I’m sure you’ll enjoy it as your first investing book too. It will provide you all the information you need to start your investing journey, as it did for me, long ago. Again, like preparing for your math final: start reading (and actually learning) about investing early– not later. In the end, when you’re looking at your account, you never want to say “I wish I started earlier“, instead you want to say: “I’m glad I started early“. Remember, you can bulls**t your history paper, but don’t bulls**t with your investments. Of course, JMO (just my opinion). You can find the book here.