Index Fund and Stock Investing

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“I’m extremely sceptical that anyone can do stockpicking well. The evidence is clear that simple low-cost index funds have outperformed 90 per cent actively managed funds over 10 years. A precious few stockpickers do outperform but there is no way to know in advance who they might be.” ~ Dr. Burton Malkiel

Burton Malkiel’s mission has been a multi-decades long advocate of index-based investing. In his book, A Random Walk Down Wall Street, published in 1973, he championed the premise that short run changes in stock market prices are unpredictable and that trying to beat the market is a fool’s game

Currently, index-tracking strategies account for about 40 per cent of U.S. mutual fund assets. Mr Malkiel’s advice is to ignore swings in short-term sentiment and to follow the ideas that he has supported over half a century–invest in low cost index funds. “What you shouldn’t do is panic and sell out. It is invariably a mistake, contends Malkiel. “Rather than trying to find undervalued US stocks, maybe the best solution would be to buy and hold an index comprising all the securities available for investment globally.”

Invest in index-funds (low cost), and get international exposure. The US is only one third of the world economy, and other areas are growing quickly.

Investors cannot consistently beat the market or achieve outsized returns, so invest in low-cost, tax-efficient, broad-based index funds. Not only is it simple, but it’s likely to give you the best outcome as an individual investor.

Rules to stock investing

  1. Confine stock purchases to companies that appear able to sustain above-average earnings and cash flow growth for at least five years. Growth increases, earnings, dividends, and likely the multiple the market will pay for those earnings.
  2. Never pay more for a stock than can reasonably justified by a company’s intrinsic value. Not a perfect measure, but look at how stock trades relative to earnings and cash flow growth potential. Avoid stocks with many years of high growth priced in.
  3. It helps to buy stocks with the anticipated growth. Try to be where other investors will be a few months from now. Look for companies that have strong balance sheet and strong financial growth.
  4. Trade as little as possible. Ride the winners and sell the losers. Sell before end of each calendar year any stocks on which you have a loss. Don’t have patience for losing stocks whose fundamentals have changed. Losses can help less tax burden through tax loss harvesting.

According to Dr. Malkiel, you aren’t likely to win even with these sensible rules. That said, those with a penchant for investing in individual stocks of companies, may still enjoy the game and not want to give it up.

References:

  1. https://www.ft.com/content/c67c06ba-b19c-3341-9665-eb985e3f8d02
  2. https://calvinrosser.com/notes/random-walk-down-wall-street-burton-malkiel/

Dr. Burton Gordon Malkiel, Ph.D, the Chemical Bank Chairman’s Professor of Economics at Princeton University, is responsible for a revolution in the field of investment management. His book, A Random Walk Down Wall Street, first published in 1973, used new research on asset returns and the performance of asset managers to recommend that all investors use passively managed “index” funds as the core of their investment portfolios.

Mindfulness: Being Mindful

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Research suggests mindfulness influences how you interpret the world.

“I learned that courage was not the absence of fear, but the triumph over it. The brave man is not he who does not feel afraid, but he who conquers that fear.” ~ Nelson Mandela

To live mindfully is to live in the moment and reawaken oneself to the present, rather than dwelling on the past or anticipating the future. To be mindful is to observe and label thoughts, feelings, sensations in the body in an objective manner.

Mindfulness can help you achieve greater understanding, which in and of itself will bring you peace. It will also help you develop greater inner strength. This will enable you to make better choices in your lives, which will lead to a healthier and more fulfilling life. Being Mindful can mean meditating or simply stopping to smell the roses.

Mindfulness encompasses two key ingredients: awareness and acceptance.

  • Awareness is the knowledge and ability to focus attention on one’s inner processes and experiences, such as the experience of the present moment.
  • Acceptance is the ability to observe and accept—rather than judge or avoid—those streams of thought.

Studies show mindfulness slashes stress, relieves pain, and improves your mood. And scientists are beginning to understand how. One study found that 8 weeks of regular meditation and being mindful can change parts of your brain related to emotions, learning, and memory. Even washing dishes can be good for your brain, as long as you do it mindfully.

As you develop mindfulness through your practice, your emotions will naturally change. The reason is that you begin to identify less with your ego, and you begin to see more clearly your connection with the rest of the world. And when you truly see this interconnection, your loneliness will disappear.

Through mindfulness, your anger and frustration will also subside. As you meditate, your mind will naturally calm down. This will reduce the mental agitation that triggers your unhealthy emotions. They will be replaced with more wholesome emotions, such as love, compassion, and joy.

“Meditation is not evasion; it is a serene encounter with reality.” ~ Thich Nhat Hanh

The more you practice mindfulness meditation, the deeper your understanding of your emotions will be. When you are truly mindful, you are aware of when your emotions arise, what your sources are, and have the inner strength to resist the temptation to fuel the negative emotions, and be able to cultivate the positive ones. This will lead to greater equanimity.

Mindfulness of Your Mind

As you get older, your mental abilities begin to decline. Your memory, concentration, and reasoning ability slowly diminish. This is an inevitable sad truth about growing old. However, not all of your mental decline is due to age, and there is a lot we can do to slow this decline.

Studies have shown that mindfulness meditation helps preserve and even improve your mental abilities. Mindfulness meditation can improve your memory, concentration, and abstract thinking. Several studies have shown that even small amounts of meditation can have a significant impact. The impact is even greater with years of practice.

In addition to mindfulness, another thing you can do to preserve your mind is to keep it active. However, not all mental activity is equally beneficial. Mental activities that require little use of your mind, such as crossword puzzles, have little effect. What has the most impact is learning a new skill, such as a new language. Learning a new skill forces your brain to create new neural pathways.

Proper nutrition can also have a tremendous impact on your mental abilities. This is more a matter of giving your brain what it needs to function at an optimal level. For example, your brain needs a fair amount of protein and fat to work properly. You also need plenty of fluids. When you’re dehydrated, which many of you are, your memory and concentration are greatly diminished.

Physical activity will also improve your mental abilities. In order for oxygen and nutrients to reach your brain, they have to be transported there through our blood, and physical activity improves the blood flow to the brain. You don’t need to do a lot of exercise to get the health benefits. Sometimes just walking regularly is enough to improve the blood flow.

Mindfulness encompasses awareness and acceptance, which helps you understand and cope with uncomfortable emotions, allowing you to gain control and relief. To cultivate these skills, concentrate on breathing to lengthen and deepen your breaths. Notice your thoughts and feelings, and practice curiosity and self-compassion.

References:

  1. https://www.psychologytoday.com/us/basics/mindfulness
  2. https://www.webmd.com/fitness-exercise/ss/twelve-habits-super-healthy-people
  3. https://mindfulnessmeditationinstitute.org/2020/12/05/find-greater-happiness-in-your-retirement-through-mindfulness/

THE U.S. NATIONAL DEBT IS NOW MORE THAN $31 TRILLION

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The U.S. national debt has now surpassed $31 trillion. Everyday the U.S. government spends over $1 Billion in interest payment on the National Debt.

The $31 trillion gross federal debt includes debt held by the public as well as debt held by federal trust funds and other government accounts, according to the Peter G. Peterson Foundation. In comparison, the U.S. gross national product, a monetary measure of the market value of all the final goods and services produced and sold in a specific time period by countries, is $25.25 trillion according to Bureau of Economic Analysis.

In very basic terms, gross federal debt can be thought of as debt that the government owes to others plus debt that it owes to itself.

The National Debt is now more than $31 trillion. What does that mean?

America’s high and rising debt matters because it threatens our economic future, reports the Peter G. Peterson Foundation. The coronavirus pandemic may have rapidly accelerated our nation’s fiscal challenges, but we were already on an unsustainable path, with structural drivers that existed long before the pandemic.

Making the hard choices to put our nation on a more sustainable fiscal path will help ensure a stronger and more resilient economy for the future. Otherwise, staying the course means a bleaker economic future for the nation and threatens the economic well-being of all Americans.

References:

  1. THE NATIONAL DEBT IS NOW MORE THAN $31 TRILLION. WHAT DOES THAT MEAN?, The Peter G. Peterson Foundation, October 4, 2022. https://www.pgpf.org/infographic/the-national-debt-is-now-more-than-31-trillion-what-does-that-mean
  2. https://www.bea.gov/news/2022/gross-domestic-product-third-estimate-gdp-industry-and-corporate-profits-revised-2nd

Healthy Aging

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Attitude, habit and daily life choices can make a difference in your health and longevity.

Dr. Michael Roizen, M.D., founder of the Reboot Your Age program, writes in the new book The Great Age Reboot: Cracking the Longevity Code for a Younger Tomorow, 40 percent of premature deaths (premature meaning before you turn 75) are related to lifestyle choices.

According to Dr. Roizen, not enough people realize that their attitude, habits and daily life choices can make a difference in their long-term health and longevity. “The largest error is thinking that your choices do not make a difference, but making healthy choices early and consistently allows you to enjoy good health and a longer life,” says Roizen.

By the time you turn 60 years old, “75 percent of your health outcomes are determined by your habits (healthy or unhealthy) and choices”, submits Dr. Roizen.

Focus on 6 + 2

Roizen’s barometer for health success and healthy aging is “6 Normals + 2”. Here are the “Normals” and “Plus 2”, writes Jeff Haden, in Inc. Magazine.

  1. Regain and maintain normal blood pressure. The target is 110/75.
  2. Regain and maintain a healthy level of LDL cholesterol. The target is 100 mg per deciliter.
  3. Regain and maintain a healthy fasting blood glucose level. The target is 100 mg/dL or below.
  4. Maintain a healthy weight for your height. Here’s where it gets tricky. Most people use body mass index (BMI) to determine a “healthy” weight. But muscle, or lack of, matters. A 6′ tall NFL cornerback who weighs 215 pounds has a BMI of 29.2. That puts him at the high end of the “overweight” category, even though by any objective measure he’s incredibly fit. Your body fat percentage is probably a better indication of whether you’re maintaining a healthy weight.
  5. Practice ongoing stress management. Roizen’s target is to “sleep well and feel at ease in your own skin.” But don’t just think of sleep in terms of longevity; a 2018 study found that lack of sleep correlates with tension, anxiety, and lower overall mood. Sleep is good for you later, and good for you now. Aim to get 7 to 9 hours a night. For the best rest, do it on schedule — turning in and waking up at about the same times every day.
  6. Have no primary, secondary or tertiary smoke from tobacco in your body. If you aren’t familiar, tertiary smoke involves pollutants that settle indoors when tobacco is smoked. Think couches, curtains, bedspreads, etc. Your body repairs itself quickly once you quit smoking. As soon as 20 minutes after your last cigarette, your heart rate and blood pressure drop. In other words, don’t smoke. And, if feasible, try to avoid being around people who smoke.

Now for the “Plus 2.”

  1. Get a full body check up. You are what you measure, and you can’t know your numbers — and if necessary work to improve them — until you get your numbers.
  2. Keep your vaccinations up to date. Roizen recommends that everyone get an annual flu shot since it can decrease flu and lung problems as well as reduce the risk of heart attack and stroke. He also recommends people aged 50-plus get the shingles vaccine, and those 65 and over get the pneumonia vaccine.

The key is to consistently make healthy choices that help prevent chronic disease and set you up for a long life.

  • Don’t smoke, and if you do smoke, quit today.
  • Don’t drink alcohol beverages to excess, but drink plenty of water.
  • Get a good night’s sleep and practice mindfulness.
  • Eat a healthy, low refined carbohydrates, no processed food, high fiber diet.
  • Exercise 150 minutes a week.

References:

  1. https://www.inc.com/jeff-haden/a-noted-physician-says-better-health-greater-longevity-comes-down-to-rule-of-6-plus-2.html
  2. https://www.webmd.com/balance/ss/slideshow-binge-watch-risks

Stop focusing on how stressed you are and remember how blessed you are.

Cash Flow is King During Retirement

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Cash flow, or money going in and out of your household bank account, may be the most important personal financial metric for retirees. Cash flow positive retirees are financially good to go and do not worry about paying their bills.

Retirees, and their Financial advisers, often focus only on the money in side of cash flow, that is retirement income. But retirees should thoroughly evaluate the target and aim of cash flow. That is expenses or the money out side of the ledger, also.

Thus, it is essential for retirees not to skip over a thorough review of estimated retirement cash flow.

Knowledge is power. To know thyself was such an important principle that this adage was inscribed on the Temple of Apollo in Ancient Greece. When retirement savings and cash flow are on the line, do not allow stock market fear impact your investment decisions.

Reviewing expenses empowers you with information to make informed, realistic decisions. A known fear is less intimidating than an imagined, uninformed worry.

Here are some suggestions to help retirees navigate volatile markets and perform an essential cash flow assessment.

  • A cash flow management isn’t budgeting. It is a process of clarity and honesty. It helps retirees really see all their income (money in) and spending (money out). Cash flow management allows you to see what you are doing wrong (or right). Knowledge is power and financial freedom.
  • Be realistic. Health care is a huge expense, for example. So, plan realistically. Living expenses are often more than anticipated and returns on investment are never consistent. Be conservative in your estimations and assumptions.
  • Get comprehensive. Beyond the standard expenses, make sure to allot expenses for items such as continuing home repairs, occasional renovations and automobile replacement costs.
  • Don’t get lost in the weeds. It is more important to capture all the large expenses than worry about recording precise numbers. It isn’t necessary to record the past year’s expenses down to the penny.
  • Control your emotions. Retirees, like all people, are emotional. However, emotional people don’t make the best investors or managers of personal cash flow. Do not allow fear impact your investing or cash flow. As Warren Buffett said, “If you cannot control your emotions, you cannot control your emotion.”

When stocks are down and stock markets are crashing, ‘don’t watch the markets closely’ and ‘stick to your financial plan’. If you were to react to the market wild swings and all the fear everyone has when it drops, you’ll end up with less value and cash flow than you started, every time. The stock market will fluctuate up and down dramatically at times. It is not always a rational and logical place because of fear.

References:

  1. https://www.nasdaq.com/articles/cash-flow-king-when-planning-retirement-2016-08-12

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of BrowleeGlobal, LLC

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Ian: The Most Powerful Storm Ever to Hit the U.S. Mainland

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Florida, North and South Carolina faced a massive clean-up on Saturday from the destruction wrought by Hurricane Ian, after one of the most powerful storms ever to hit the U.S. mainland caused tens of billions of dollars in damage and killed more than 20 people, according to Reuters.

Ian, now a post-tropical cyclone, was weakening but still forecast to bring treacherous conditions to parts of the Carolinas, Virginia and West Virginia into Saturday morning, according to the National Hurricane Center.

“Major to record river flooding will continue across central Florida through next week. Limited flash, urban and small stream flooding is possible across the central Appalachians and the southern Mid-Atlantic this weekend, with minor river flooding expected over the coastal Carolinas,” advises the National Hurricane Center.

The Category 4 major hurricane struck Florida’s Gulf Coast near Fort Meyers on Wednesday, with wind speeds of 150 mph, turning beach towns into disaster areas. And after landfall, it brought devastating winds and floods across Central Florida on Thursday.

Ian exhibited a larger wind field and radius of maximum winds than previous hurricanes. And, Ian tracked slowly across Florida after landfall, amplifying the effects of wind and water.

On Friday, Category 1 hurricane pummeled waterfront Georgetown, north of the historic city of Charleston in South Carolina, with wind speeds of 85 mph.

Roads were flooded and blocked by trees while a number of piers were damaged.

Around 1.7 million homes and businesses were without power in the Carolinas and Florida at 8:00 a.m. ET on Saturday, according to tracking website PowerOutage.us.

References:

  1. https://www.reuters.com/world/us/florida-carolinas-count-cost-one-worst-us-hurricanes-2022-10-01/
  2. https://www.rms.com/blog/2022/09/29/hurricane-ian-strongest-hurricane-in-southwest-florida-since-2004

Invest in Stocks of Great Companies and Hold Them for the Long-Term

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Investors are far more likely to earn the best returns by investing for the long term in the stocks of great companies.

From 1926 through the end of 2021, the S&P delivered an average stock market return rate of 10.49%. That average annual return includes dividends, but not inflation. If you adjust for inflation, the average stock market return drops to 7.37%.

In the past 50 years, the S&P 500 has gained in value 40 of the past 50 years, generating an average annualized return of 9.4%.

Yet, there’s simply no reliably accurate way to predict which years will be the good years and which years will underperform or even lead to losses. But we do know that, historically, the stock market has gone up more years than it has gone down.

Despite that, only a handful of years actually came within a few percentage points of the actual average. Far more years significantly either underperformed or outperformed the average than were close to the average.

Invest in the stocks of high-quality companies, ideally regularly across every market condition, and hold those investments for many years.

The evidence is overwhelming that investors who try to time the market, who try to trade their way to higher returns with short-term moves or who try to buy and sell based on projections of short-term peaks and bottoms generally earn below-average returns, writes Motley Fool. Moreover, those strategies require substantially more time and effort. They can also result in higher fees and taxes that further reduce gains.

If you’re looking to build wealth, investing for the long-term in stocks is an excellent place to start. Investing is the best way to compound your money.

It is recommended that you invest in a market index fund or you invest in the stocks of profitable and stable companies, and hold them for the long-term. By holding your investment for the long-term — think decades — your invested capital can experience compounding growth.

The lesson for investors is don’t get sidetracked by short-term stock movements and market volatility, which tend to stir up lots of headlines and cause investor panic or fear of missing out. Reasonable and largely stable investment returns will realize you the best returns.

To get the best returns in stock investing, use the method that’s tried and true: Buy the stocks of great companies and hold them for the long-term.

Stocks do offer some limited protection against inflation, as companies can typically raise their prices to compensate for a weakening dollar and loss of purchasing power. But stocks over the long-term have not beaten real estate as a hedge against inflation.

References:

  1. https://www.fool.com/investing/how-to-invest/stocks/average-stock-market-return/
  2. Jeremy J. Siegel, Stocks for the Long Run: The Definitive Guide to Financial Market Returns & Long-Term Investment Strategies, fifth edition, New York, NY: McGraw-Hill Education, 2014.
  3. https://www.mckinsey.com/capabilities/strategy-and-corporate-finance/our-insights/prime-numbers/markets-will-be-markets-an-analysis-of-long-term-returns-from-the-s-and-p-500

Burton G. Malkiel: Index Funds and Bond Substitutes

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Burton Gordon Malkiel, the Chemical Bank Chairman’s Professor of Economics, has been responsible for a revolution in the field of investing and money management. And he’s also author of the widely influential investment book, A Random Walk Down Wall Street.

His book, A Random Walk Down Wall Street, first published in 1973, used research on asset returns and the performance of asset managers to recommend that all investors would be wise to use passively managed total market “index” funds as the core of their investment portfolios. An index fund simply buys and holds the securities available in a particular investment market.

There were no publicly available index funds when Malkiel in a Random Walk first advanced this recommendation, and investment professionals loudly decried the idea. Today, indexing has been adopted around the world.

Additionally, Malkiel believes that investors “probably needs to take a bit more risk on that stable part of the portfolio”. One asset class that he recommends, instead of low yielding bonds, is preferred stocks. There are good-quality preferred stocks, which are basically fixed-income investments. They’re not as safe as bonds. Bonds have a prior claim on corporate earnings.

According to Malkiel, investors need some part of the portfolio to be in safe, bond like assets–such as preferred stocks, or what he calls bond substitutes, for at least some part of their portfolio.

He suggest a preferred stock of like JPMorgan Chase. He doesn’t think you’re taking an enormous amount of risk. The banks now have much more capital. They are constrained by the Federal Reserve in terms of what they can do and buying back stock and increasing their dividends. And with a portfolio of diversified, high-quality preferred stocks, one can earn a 5% yield.

And if one wants to take on even a bit more risk, there are high-quality common stocks that also yield 5% or more: a stock like IBM, which has a very well-covered dividend, yields over 5%; AT&T– you can think of basically blue chips and they might play a role.

Regarding diversification, investors do need some income-producing assets in their portfolio. But his recommendation is that you think in the diversification of not simply bonds, but maybe some bond substitutes. However, there is a trade-off; there is going to be a little more risk in the portfolio. And one needs to recognize that there is not a perfect solution.

But part of the solution for an investor, especially a retired investor, must be to revisit their spending rule. If one is worried about outliving one’s money, then the spending rate has to be less. In part, it means maybe a bit more belt-tightening.

There’s no easy answer to this. Malkiel wished there were an easy answer that there’s a riskless way to solve the problem. But there isn’t. In terms of wanting more safety, one ought to be saving more before retirement, and maybe the answer is to be spending less in retirement. Thus, on a relative-value basis, things like preferred stocks, and some of the blue chips that have good dividends, and dividends that have been rising over time, ought to play at least some role in the portfolio.

In this age of “financial repression”, where safe bonds yield next to nothing, an asset allocation of 40% bonds is too high, states Malkiel. Now, of course, there’s not just one figure that fits all. For some people it might be 60-40 would be OK. But, in general, the asset allocations that Malkiel recommended have a much larger equity allocation and a much smaller bond allocation. And if you look at the 12th edition of Random Walk book, you’ll find that he has generally reduced the fixed-income allocation and increased the equity allocation–different amounts for different age groups,

References:

  1. https://dof.princeton.edu/about/clerk-faculty/emeritus/burton-gordon-malkiel
  2. https://www.morningstar.com/articles/995453/burton-malkiel-i-am-not-a-big-fan-of-esg-investing

Update: Tropical Storm Ian

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Tropical Storm Ian continues to bring dangerous wind, rain and storm surge conditions to parts of Northeast Florida and is expected to regenerate into a hurricane by Thursday evening,

At 2 EDT, Tropical Storm Ian is located 40 miles northeast of Cape Canaveral, FL, and is located 275 miles south of Charleston, SC. It has maximum sustained winds of 70 mph and is moving north by northeast at 9 mph.

A turn toward the north is expected late today, followed by a turn toward the north-northwest with an increase in forward speed Friday night. On the forecast track, Ian will approach the coast of South Carolina on Friday. The center will move farther inland across the Carolinas Friday night and Saturday.

Tropical Storm Ian continues to bring dangerous wind, rain, flash flooding and storm surge conditions to parts of Florida as it churns in the Atlantic Ocean. Ian is expected to become a hurricane again by Thursday evening and make landfall as a hurricane on Friday, with rapid weakening forecast after landfall. A hurricane warning has been issued for the entire South Carolina coast. A tropical storm warning has been extended northward to Duck, North Carolina.

The strongest winds right now from Ian are in northeast Florida (Jacksonville), where some gusts have topped 70 mph in Daytona Beach. Additionally, some gusts over 50 mph have been recorded in Gainesville and Jacksonville, and over 30 mph gusts have worked their way along the coasts of Georgia and South Carolina.

Ian is a large tropical cyclone. Tropical-storm-force winds extend outward up to 415 miles from the center. A WeatherFlow station in New Smyrna Beach recently reported a sustained wind of 69 mph.

Source: National Hurricane Center