I created an Excel spreadsheet for my last financial report card. We’re still making good progress. As you can see, we’re still on a good path. Our total savings went down, because we paid off a little more debt than, strictly speaking, we should have. The metric here I’m really looking at is our savings rate, and how we’ve reduced spending over the previous month. We were down a whole 20% over what we spent in January, even though our goal was only a 10% reduction. I’m fantastically pleased about that! Our emergency fund isn’t as robust as I’d like, and our percent on that actually moved in the wrong direction because we paid off a little more debt than we should have.
Getting the 10% reduction in spending that we’re aiming for in March will be difficult. We paid a six-month auto insurance premium in March, and had a significant car repair. We’re going to have to really tighten things up to make that 10% goal, but I’m hopeful that we’ll be able to do that!
In my piece on the Four Percent Rule, I talked about Jeremy Grantham’s November 2012 essay, “On the Road to Zero Growth1. In that piece I listed some of the marvelous recommendations Grantham has received from the likes of Bogle and Bernstein.
Mr. Grantham forecasted that GDP growth for the US is going to be about 1.4% a year, or 0.9% adjusted for inflation. (Specifically, he forecasts 0.9% a year through 2030, decreasing to 0.4% from 2030 to 2050.) This is in contrast with the greater than 3% growth rate we’ve had for more than 100 years.
I lamented that Grantham did not discuss the investment implications of this low-growth forecast, instead promising it for a future newsletter. Well, Grantham has delivered in his latest, titled, “Investing in a Low-Growth World.”
I was concerned that a lower-growth forecast for GDP would result (if it was accurate) in lower investment returns. But I pointed out that Bernstein, in Chapter 4 of Investor’s Manifesto, said investment returns are often the opposite of those for a country as a whole — “high grade” countries often have mediocre results, and mediocre2 often have spectacular results.
Grantham backs up this view, showing that there is a mild negative correlation between GDP growth and stock market returns. Grantham and his company, GMO, have gone back 100 years for developed and emerging markets and have confirmed the same negative correlation.
All this means is that we don’t really have to worry about Grantham’s prediction, at least through the narrow lens of picking investment vehicles and portfolio allocation.
I recently finished ”Think, Act, and Invest Like Warren Buffett: The Winning Strategy to Help You Achieve Your Financial and Life Goals,” by Larry Swedroe. The Warren Buffett stuff is just a facade — a shtick to get investors who are frightened by scholarly works to read the book. Nevertheless, the book is worth reading, and is generally well-written and accessible. As far as I can tell, it’s correct in all of its prescriptions. None of it really breaks new ground, but it’s a book worth reading.
One particularly new bit of information I got from it was the “Opportunistic Rebalancing” approach to rebalancing a portfolio. The idea is that you check your portfolio often for opportunities to rebalance it (weekly or even more often) but, because you’re only rebalancing when your portfolio gets outside a tolerance zone, you’re not actually rebalancing (and incurring trading costs) that often. As I wrote about in my Chapter 6 notes from Investor’s Manifesto, William J. Bernstein doesn’t recommend it, but it’s certainly not a dangerous idea — per Bernstein it’s simply a lot of work for probably not much gain.
So what the bottom line on this book? It’s worth reading, but it doesn’t replace “Investor’s Manifesto” as my pick for the first book you should pick up in your quest for financial competence. It’s hard to match Bernstein’s incredibly clear and well-written prose. Swedroe is good, but Bernstein is better. I’ve added this book to the Reading List in the “Optional Reading” section.
It’s time for my end-of-month financial report card, this time for January, 2013.
I’m intelligent, talented, have a good job that pays me well, and have had more good luck in this life than I deserve. So why am I broke?
Broke? Yes. I’m 40 years old, have zero credit-card debt, few savings, owe back taxes, and my wife has student loans. Our net worth is negative.
I think there’s three reasons why we’re broke, and I think they may apply to many readers as well, so I’m going to talk about them here.
Continuing our detailed review of “The Investor’s Manifesto” by William J. Bernstein, we’re going to look at Chapter 6, “Building Your Portfolio.”
This chapter boils down to one sentence of advice from Mr. Bernstein: “Save as much as you can, start as early as you can, and do not ever stop.”
It’s time for some Inside Baseball about schof.org. There haven’t been too many change to the site that most people noticed, but I’ve made some significant changes under-the-hood, and I thought I’d take a moment to speak about them, and also about the tools I use to make this website.
This is a WordPress blog, hosted on WPEngine.com. I previously wrote about my search for a home for my blog, and everything I wrote there still stands. I still recommend WPEngine.com1 I’m a big fan of WordPress as a blogging tool — it’s a large enough ecosystem that you’ve got every tool you could possibly imagine, and it’s flexible enough to do just about anything. Sure, a lot of people complain about WordPress, but I think it’s good enough for the vast majority of uses.
I recently switched from the (free) Ascetica theme to the (paid) Standard Theme. So far I’m a big fan of the Standard Theme. I like the look, and it’s been fairly simple to customize it to suit my needs.
I use the following plugins:
- Akismet — automatically put spam comments in a spam folder. Without this plugin it would not be possible for most blogs to have comments. In a few days I have a few hundred spam comments that Akismet has kept me from having to deal with. So far I’ve never had a false positive, although there have been a few false negatives (spam comments that found their way through the filter).
- BWP Google XML Sitemaps — Generates an XML Sitemap that tells Google and other search engines about the pages on this blog. Useful to get your blog pages listed in search engines.
- FD Footnotes — Gives me the footnotes I use on this site.2
- Jetpack by WordPress.com — Jetpack is a multi-purpose collection of plugins published by the same guys who created WordPress. I use it primarily for the equation support (letting me put nicely-formatted equations on the site) and because it provides statistics about user visits.
- Post Revision Display — This is the most important plugin on the site. If I modify a post or page after it’s been published, Post Revision Display puts that information at the bottom of the page, and lets you see whatever changes I’ve made. I consider this plugin vital to the credibility of this site. I stand by the content I publish, and if I get something wrong, you’ll be able to see that I’ve fixed it, and what my original mistake was.
- WP-Syntax — Gives me nicely-formatted output when I put some computer source code in a post. I haven’t been using this much lately, but since I’ve been investigating using Python for financial analysis, it may get more use in the future.
I’m also using Google Analytics to give me a little more data than Jetpack does about how people use the site, and I’m running a single Google Ad on each page to help offset the cost of running the site.
Continuing my chapter-by-chapter notes on William Bernstein’s “Investor’s Manifesto,” here we take up Chapter 5.
I’ll open with a quote from Bernstein that nicely summarizes the chapter:
The prudent investor treats almost the entirety of the financial industrial landscape as an urban combat zone. This means any stock broker or full-service brokerage firm, any newsletter, any advisor who purchases individual securities, any hedge fund. Most mutual fund companies spew more toxic waste into the investment environment than a third-world refinery. Most financial advisors cannot invest their way out a paper bag. Who can you trust? Almost no one.
When I first heard about Healthcare Savings Accounts, I was intrigued, then disappointed, and then forgot about them.
The idea behind an HSA is that you put money in an IRA-like account (tax-free) that can only be used for healthcare expenses. My medical expenses aren’t that high — why do this?
Well, it turns out I was wrong to dismiss the idea. The Mad Fientist has written a truly excellent piece on the advantages of HSAs, and I now think they deserve a position in most people’s tax-advantaged accounts, especially if they’ve maxed out their other tax-advantaged vehicles like IRAs and 401ks.