Finance Questions we Should all know the Answers to

1.  Why am I hoping the stock markets fall, rather than rise?  See Warren Buffett's quote about this, on page 77 of my book.  If you don't have your book with you, please ask the teacher to provide you one.  There are eight copies on my desk.

     Warren Buffet's quote is basically an extended version of another of his famous quotes, "be greedy when others are fearful and fearful when others are greedy.  In other words you want the stock markets to fall because then so will stock prices, allowing you to buy more individual stocks.  Such as with the hamburger metaphor, you should want to buy your hamburger, and stock, at a lower price rather than at a higher one.  Thus if the stock market would crash tomorrow many intelligent investors would rejoice because the overall price of stocks would be cheaper and then they could buy them at a lower price to see them rise later.

2.  How have I personally determined my bond allocation?  If I wanted to take more risk with my money, what might my bond allocation be?

Mr. Hallam has determined his bond allocation by his age, so it is 38%.  Bond produce lower returns, but they act as a parachute when the stock market crashes and you end up losing less money.  After the stock prices have lowered you will be able to quickly take money out of your bond index and invest in the stock index when it is at a lower price.  And if you wanted to be riskier you would have less bonds and more stocks.  Thus your portfolio would have a higher potential for earning profit, however there is also a greater possibility that you can lose money.

3.  Why am I buying bonds right now, instead of stocks?  Hint.. it has nothing to do with my "predictions" about the stock market's short term direction, nor anything to do with current PE ratios.

Because the price of the stock index he is invested in is rising he is rebalancing to to keep his money balanced.  As his stock index increases the overall percentage of his money in the stock will increase past to what he has previously allocated.  The value of his stock will increase so that more than 62% of his money is in stocks, both international and Canadian.  Thus, to reallocate his funds he must sell some of his stocks and invest in bonds to keep his percentage at his set percentage.  This keeps him true to buying when others are selling and selling when other are buying.

4.  Why don't I invest in actively managed funds?

Actively managed funds have much higher expense costs than passively managed funds.  The best predictor of the success of a fund is how low it's expense ratio is, and passively managed index's cost less than actively managed funds.  Also, those who try to predict the future and beat the system often actually perform worse than an index fund.

5.  What is the typical expense ratio for the average actively managed mutual fund in the U.S.?  (See table 3.2 on page 54).

The average expense ratio for the typical actively managed mutual fund in the U.S is 1.53%.

6.  Notice my two stock market holdings:

VTI:  U.S. total stock market index (purchased as an ETF)

VEA:  The international stock market index (purchased as an ETF)

Within each of these indexes, there are thousands of individual stocks.  What is the average expense ratio for each of these exchange traded funds? 

The average expense ratio for the U.S. total stock market index is only 0.06% and the international stock market index is a bit higher at 1.2%.  However both of these index's are significantly lower than the U.S. actively managed stock market mutual funds.