Roth IRA

Class Notes

• Good Time to buy stocks:
• when economy is doing poor-share prices are low
• when a overall strong company has a temporary setback
• when others are fearful- others are selling
• asbestos in wall boards caused cancer: found out in 80's & 90's
• Americans sued the companies, companies lost money, share price dropped
• perfect time to invest in the company
• Bill Miller: one of greatest fund manager of all time
• had beaten S&P 500 15 times in a row
• Best way to predict success of actively managed funds
• the ones with the lowest expense ratios-costs
• bond index are useful because you can sell them at any time
• you can re-balance and sell bonds to buy into stocks

Further Research:

Project/Home Discussion:

      I am still unable to decide which type of fund to invest in because almost all the investment funds need a minimum of $1,000.  And because I actually want to start investing rather than simply pretending to, I need to find a investment fund that has a much lower minimum.  Preferably around $400.  If, however, I am unable to find one with such a low minimum,  I might have to borrow from the $10,000 that I will earn once I turn 18.  I have offered the idea to my parents that instead of earning the $10,00 when I turn 18, I will take out $1,000 now to invest in a stock index Roth IRA and then only receive $9,000 once I turn 18.  I have decided to invest in Vanguard Windsor II Fund because not only does it have the highest return but also because it is the same one my parents invest in.

ETF's

Class Notes

• custodial account: co-owned stocks for minors
• Exchange traded funds (ETF's): trade on a stock and can be purchased or sold mutiple times on any given day.  There's usually a commission to buy or sell ($9.99).  However with Vanguard ETF's, purchased through a vanguard account there's no commission. 
•  Index funds = no commissions and you can't trade them multiple times within a day
• with these indexes (via vanguard) you need $3,000 for a standard index (for a minimal initial purchase) or $1,000 for a target retirement fund - a combination of US Index, International Index and Bond Index
• vanguard S+P 500 index fund ticker = VFINX
• same thing as ETF form = SPY
• vanguard total stock market index = VTSHX
• ETF equivalent = VTI
• lower the fees= the higher the probability of the fund doing well in the future
• World Stock Index: 
• 45% US stocks
• 45% 1st world international developed markets
• 10% emerging markets

Investopedia explains 'Exchange-Traded Fund - ETF'

Because it trades like a stock, an ETF does not have its net asset value (NAV) calculated every day like a mutual fund does. By owning an ETF, you get the diversification of an index fund as well as the ability to sell short, buy on margin and purchase as little as one share. Another advantage is that the expense ratios for most ETFs are lower than those of the average mutual fund. When buying and selling ETFs, you have to pay the same commission to your broker that you'd pay on any regular order. 
Exchange-traded funds (ETFs) offer investors the ability to diversify over an entire sector or market segment in a single investment.

Exchange traded funds (ETFs) are open-ended investment funds listed and traded on a stock exchange. Your money is pooled with money from other investors and invested according to the ETF’s stated investment objective.

An ETF’s objective is to produce a return that tracks or replicates a specific index such as a stock or commodity index. ETFs are passively managed by ETF managers and do not try to outperform the underlying index. Hence, ETFs have fees and charges that are usually lower than those of actively managed investment funds. 

Types of ETF's:

Home Discussion:

After discussing my future project, my parents are excited and hopeful that I will start my own fund and be able to learn the tricks of the trade on my own.  However they are still unsure on which stock fund I should invest in, as am I.  They have actively managed stocks in Vanguard and my current plan is to invest in passively managed Vanguard stocks.  Now I just need to look into actually starting the investment, and setting up an account.   My finances are also still coming along as planned, but should spike shortly as I input my spring break costs into the formula.  

Dog & Leash/ PE Ratio

Class Notes:

• Dog and the Leash: comparison between price levels and profit levels
• Dog: run ahead or trails behind the owner - represents price levels
• Owner: steadily walks onward - represents profit return, always brings the dog back 
• the further the dog gets away from the owner, the longer it takes to recover
• eg. Japan's dog (the prices) increased rapidly but earnings didn't, now their economy is taking a long time to recover
• Peak: price level of the stocks is high
• to figure out how the stocks are doing you must compare the price to the profits

• Market Capitalization: share price X total number of shares that exist = total price of the company 
• Johnson & Johnson: $210 billion

• PE Ratio: price to earnings ratio is a more accurate measure of how expensive a stock is than it's price
• divide price of the company by it's previous year's profit
• for J&J: $210 billion / $14.3 billion = 14.8
• J&J is currently 14.8 more times more expensive than the profit they made in 2012
• this is happening because the earnings have caught up with the price
• on average the DOW trades at 14.5 times earnings
• DOW half as expensive as it was in 2,000

• Shorting Stocks: borrowing stocks and promising to pay it back
• if the fund does bad you make money but if the fund does well you lose money
• very risky: either gain big or lose big

Further Research:

       After class when I went home I was realized I was still not 100% on how to define the P/E ratio and thus I decided to research it more.  What I found out was that the P/E ratio is only one component in determining the health in the stock.  Or according to Ken Little "The P/E is the most popular metric of stock analysis, although it is far from the only one you should consider".  I also learned that the definition of the P/E ratio is that company's stock price divided by it's earning per share (EPS).  For example, a company with a share price of $40 and an EPS of 8 would have a P/E of 5 ($40 / 8 = 5).  A key paragraph that made understanding P/E ratio came from the same author, Ken Little.  In it he said "What does P/E tell you? The P/E gives you an idea of what the market is willing to pay for the company’s earnings. The higher the P/E the more the market is willing to pay for the company’s earnings. Some investors read a high P/E as an overpriced stock and that may be the case, however it can also indicate the market has high hopes for this stock’s future and has bid up the price" 

Finance check:
      My finances are still coming along steadily, they haven't increased to greatly since the last big spending: interim.  However, with spring break coming up I anticipate a large increase on my tracking chart.  Which could raise my bills to an astonishing level.  

Passive Investing/ Class Discussion

The Evidence the Fund Management Industry Would Prefer You Not to See

• industry has more than 4 trillion pounds in its management
• only 2% of actively managed beat index funds for a sustain period of time
• most fund managers are simply gambling when they are investing your stocks
• 10 billion pounds in "dog funds" under performing their benchmark number for the past 3 years
• fund managers regularly under-perform
• has become harder to outperform index
• fund managers make around 10 billion pounds overall, whether or not they make their investors any money
• TER: total expense ratio
• excludes extra costs that can seriously erode your finances
• charges for fund managers in the UK have steadily raised over recent years
• Canada: charges 2.5% per year of everything you have invested
• US: charges 1.5%
• people are petitioning for the government to step in and create laws to lower these fund

Class Discussion Notes:

• elephantitis: if a fund does really well than many people will start investing in it, and that fund will have too much money to smartly invest
• that fund will have to be less picky about which stocks they invest in
• fund managers don't want to close the funds to stop elephantitis because they earn less money if they close 
• broker dealer: sale advisers, make money according to fees
• financial advisers: charge by the hour, don't make commissions on products
• short term government bonds are best
• short terms are unaffected by inflation
• first world government bonds are safer than infesting in companies
• couch potato: rebalancing 
• low cost
• diversified: safer

Further Research:

One of the most important decisions investors will ever make is their asset allocation—the percentage of stocks, bonds, cash and other asset classes in their portfolio. For example, a mix of 60% stocks and 40% bonds is common in a balanced portfolio.

The problem is that asset allocations don’t stay constant. As the markets move month by month, your portfolio’s stock-bond mix will change, sometimes dramatically. If you had a 60-40 portfolio in mid-2008, the stock portion fell to about 45% by March 2009. If you were at 60-40 when the market bottomed, then your mix would be close to 80% equities today.

That’s why investors should occasionally adjust their portfolio to get it back to its target. You can do this by adding new money to the underperforming asset classes, or by selling off some of the outperforming funds and using the proceeds to prop up the laggards. In either case, the idea is to “reset” your portfolio to its original asset allocation.

          

Finance Tracking:

     At the moment the most costly thing I am spending money on is taxi's.  This is because not only are they expensive but I use them too frequently.  After recording how much money I spend on taxi's I can confidently say that I would save substantial amounts of money if I either walked or took public transport.  I am able to cut down on food expenses because it is a lot cheaper to buy groceries and make the food myself or eat leftovers from dinner than it is to buy food from the school cafeteria.  

Class Discussion/ Chapter 5

Class Discussion Notes

• statistics show that actively managed funds have less a chance of being successful
• Morning star 5 star funds: top 5 actively managed funds based on their performance over the last 5 years
• elephantiasis: when funds have too much money and not enough ideas, has to become less picky in order to invest all the money flowing in
• lower the cost associated with an actively managed funds, the higher rate of success it has
• but financial investors will push for higher cost funds because they earn more money
• average fund manager has barely more financial education than I do know
• No scholarly argument against index funds
• however there are several fund managers that are able to beat the market and earn more money than the index funds

• Rear-view mirror revelation: It's easy to comment on something that has happened but very hard to predict what will occur

• Couch Potato Portfolio Concept: 
• when you buy or sell your stocks to keep your index at a set percentatge
• be greedy when others are fearful and fearful when others are greedy
• Eg. Scott Burns- 1991
• a portfolio comprised of 50% US stock index & 50% US Bond Index

Chapter notes:

• total stock market index funds are good, but it doesn't represent a balanced portfolio
• bonds act as parachutes when the stock market does poorly
• Bonds:
  ·        Don’t make as much money as stocks
  Types:

  ·     Safest are the first world bonds

  
  

  ·    In short-term Gov Bonds

  
  

  ·    In short-term Corporate Bond

  
  

  ·    Short term- because inflation can eat away at your money 

  
  Bond allocation that is roughly equivalent to your age your age – 10
  
  
  
  
  
  
  
  

  ·        Riskier Bonds pay higher interest, but they could forfeit on the loan 

  
  

  ·       If you go the full duration of the bond (lets say five years)

  
  

  ·       Gov guarantees your money back with a fixed interest rate    

  
  

Home Discussion:

       Tonight we discussed how most of my parents portfolio is in bonds, rather than stocks.  I learned because my parents would rather have a stable amount of money to fall back on than earn a lot of money.  And my funds have been invested in actively managed funds, and we agreed that after learning that index funds have a higher probability of earning me more money, that is it time to switch to index funds. 

small percentages pack big punches

Chapter Notes:

• with just three index funds your money can be spread over nearly every available global money basket
1. a home country stock market index
2. an international stock market index
3. a government bond market index

• Paul Samuelson: "the most efficient way to diversify a stock portfolio is with a low fee index fund"

• How actively managed funds work
1. your adviser takes your money and sends it to a fund company
2. that fund company combines your money with those of other investors into an active mutual fund
3. the fund company has a fund manager who buys and sells stocks within that fund hoping that their buying and selling will result in profits for investors

• 5 factors dragging down returns of actively managed US mutual funds
1. expense ratios
2. 12B1 fees
3. trading costs
4. sales commissions
5. taxes

Discussion with parents:
           After last class when we learned about the benefits of an index fund I really got thinking about active versus passive investing.  I talked with my parents about my funds and learned that I have a actively managed funds for when I turn 21.  And since my mom has also read "A Millionaire Teacher" she was of like-mind when I discussed what I learned with her from chapter three.  Thus we both agreed that we should convert my actively managed bonds into passively managed bonds, however we were both unsure on how to convert our funds from actively managed funds to index funds.
This Article: http://knowledge.wharton.upenn.edu/article.cfm?articleid=2702 further enforces what I learned in chapter three.  About how financial advisers will advise investors to buy actively managed funds even though index funds often perform better.  They do this because index funds will allow them to earn more profit.

Finance Tracking:
    I have finally finished converting my finance tracking from my journal to excel.  I was surprised to see how much my total was, an astonishing $5,000.  Besides my interim costs, what added mostly to my monthly costs was my groceries cost.  It far outweighed my personal spending at school or on the weekends.

the blog after interim

If someone invested $10,000 in the US stock index in January 1990 they would earn roughly 65,000

• you search vfinx on morning star and change the dates to start from 1990 and end in the present day

If someone invested $10,000 in the US bond market in January 1990 they would earn roughly 44,000

• you search vbmfx on morning star and change the dates to start from 1990 and end in the present day

Average return on investment markets vs. individual investors 

dollar cost averaging: investing a constant sum into an investment every single month

• When the market is high it buys you less units
• When the market is high it buys you more units

           We learned that on average an investor will only make about a third of what the market makes on their return  of investments.  This is because many investors feel the need to buy stocks when the prices are high and rising because they believe the stocks will continue to increase.  However what usually happens is that investors spend more money on a single unit than they need to and that bond loses value and in the end the person will either lose money or not make as much money as they should. To combat this, many knowledge investors will use the dollar cost averaging technique.  This is when a person invests a constant sum into an investment every single month.  Thus it ensures that you buy more units when the prices are low and fewer units when the prices are high even though you are investing the same amount every month.

Most people invest in the stock market through one of four vehicles

1. actively managed mutual funds
• most commonly used the stock market
• a collection of stocks that a fund manager trades on behalf of the funds' investors 
• a fund manager watches the economy and interest rates and tries to find the best stocks for his or her fund
• regulated by the securities and exchange commissions 
2. passively managed mutual funds
• these funds don't have fund managers that choose stocks based on forecasts or quality
• they own all of the stocks in a given market: the good and the bad
3. individual stock purchases
4. hedge funds
• 
  

Which performs better: passively managed or actively managed

1. After all fees and taxes, it is easy to find actively managed mutual funds that beat index fund over times 
• not by looking for past performers but by predicting future performers
2. After all fees and taxes, is is hard to find actively managed funds that beat indexed passive funds 
• not by the past performers but by the odds of future performers 

http://money.usnews.com/money/personal-finance/mutual-funds/articles/2012/10/12/study-active-funds-consistently-fail-to-beat-benchmarks 

According to these websites it is actually better, or there is a higher chance of success, to use passively managed funds than actively managed funds.  However, surprisingly more people are investing in actively managed funds.  I was curious to as why this is, and what I found out is that financial advisers earn substantially more when their client choose actively managed funds.  And after reading this I decided to discuss what types of funds we have with my parents.  And, unfortunately, I found out that we too have actively managed funds.  And again, it was because my parents were advised to do this by their financial advisers.  We then discussed the possibility of switching from actively to passively managed funds, and my parents said they would think it over but it was a definite possibility.  

The finance tracker is coming along well, but since I do not have an I-phone, I have to simply plug in my expenses on my desktop at home.  Thus my list is not as accurate as I would have hoped.  The groceries cost coupled with interim expenses have added up to a surprisingly large amount of money.