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Your Retirement Savings Goal for 2021 – The Best Interest

Looking for a New Years Resolution? Start saving for retirement! This calculator helps you build a retirement savings goal for 2021.

Source: bestinterest.blog

The 2021 Monkey Dartboard Investing Invitational

We’re going to run a stock-picking competition in 2021. You can follow along. I’ve asked my patrons to make their stock picks. And I’m putting my real money on the line. Welcome to the 2021 Monkey Dartboard Investing Invitational.

P.S. If you’re looking for a 2021 New Year’s resolution, I’d suggest you try out the 2021 Savings Goal Calculator. It’ll help you calculate how much money you should aim to save in the coming year.

Monkeys and a Dartboard

This story starts in Burton Malkiel’s seminal work A Random Walk Down Wall Street. In that book, Malkiel writes:

A blindfolded monkey throwing darts at a newspaper’s financial pages could select a portfolio that would do just as well as one carefully selected by experts.

-Burton Malkiel

Surely Malkiel is bananas…right? Dartboard investing sounds…well it sounds dumb!

Actually, Malkiel’s bold statement was based on academic market research. Malkiel found that picking winning stocks is extremely difficult, even for experts. The question of “luck vs. skill” in the stock market has been answered. Consistent positive results—the result of skill—rarely occur. It’s mostly luck. And that means random monkeys can compete with seasoned “experts.”

If a few monkey throw a few darts, they’ll create a semi-diverse portfolio. That’s what we’ll be doing today.

But we could go a step further and take the monkey business infinite. With enough monkeys throwing enough darts, your portfolio would begin to look like a balanced distribution of the entire stock market. Ah-ha! We have a name for that concept. It’s an index fund. And that’s exclusively what I utilize in my personal investments.

That’s right. I don’t pick my own stocks. I don’t let another person pick my stocks. I let a million monkeys pick my stocks via dartboard investing. Why? Because the math predicts it’ll work, and history has proven those predictions true.

Sounds crazy, I know. Here’s how it worked out in 2020.

But if everyone invested in index funds, surely that’d lead to problems?!

Some investors argue that index funds are causing an asset bubble. Let’s dig into some quick details.

An efficient market, they claim, needs intelligent investors making informed decisions. Index funds, however, are “stupid.” An index fund does not make decisions for itself, but rather purchases stocks based on what everyone else in the market is doing. It’s just monkeys following the crowd. Dartboard investing misses obvious opportunities and therefore is inefficient. This is a reasonable argument.

Another index fund bubble argument points out that the stock market is like a “big theater with a small door.” Small trouble can lead to big panic. When baby boomers begin sell their stocks to fund their retirements, it could cause a mad dash for the exit door. “Sell stocks now, or else they’ll tank even further in price.” The prices will drop and drop and drop. Thus, they claim, the bubble will pop.

My two cents: the index fund bubble arguments are hogwash.

Asking My Patrons to Throw Darts

Let’s get back to today’s monkey business.

I reached out to the wonderful Best Interest patrons to help me with this year-long experiment. I asked them to give me a number 1 through 1000. Little did they know, their numbers would dictate which stocks I bought in this experiment.

The Russell 3000 is a stock market index, similar to the S&P 500 or Dow Jones. The Russell 3000 contains 3000 American stocks. It attempts to benchmark, or track, the entire U.S. stock market. Each patron’s chosen “dart” would hit three of these Russell 3000 stocks to add to my portfolio.

So let’s take a look at patron Craig, who picked 501. Great choice, Craig. Because of that pick, I’m going to include stock #501, #1501, and #2501 from the Russell 3000 in my portfolio. As of this writing, those stocks are:

  • 501: RPM International, an American multinational company with subsidiaries that manufacture and market high-performance specialty coatings, sealants and building materials
  • 1501: Zentalis Pharmaceuticals, a clinical-stage biopharmaceutical company focused on developing clinically differentiated, novel small molecule therapeutics that target fundamental biological pathways in cancer.
  • 2501: Preferred Apartment Communities, is a Maryland-based REIT corporation that acquires and operates multifamily properties in select targeted markets throughout the United States.

And then I’ll do the same for all the other patrons. We’ll have 33 total darts thrown onto our dartboard investing portfolio. This Google Sheet breaks down the portfolio and will be used to track the portfolio’s performance over the next year.

Link: The 2021 Monkey Dartboard Investing Invitational Google Sheet Tracker

How Will We Rate the Portfolio’s Performance?

There are a few ways we can consider evaluating this portfolio’s 2021 performance.

The first way is to compare it against the market in general—will our random picks outperform the market as a whole? Will they perform better than the S&P500? Better than the totality of the Russell 3000?

The second comparison is against some “expert” hand-picked mutual funds. For example, here are the first five “alpha mutual funds” I found via a Google search. (“Alpha” in this context refers to fund performance that is uncorrelated to general market performance. These mutual funds are trying to beat the market, not just mimic the market the way an index fund would.)

Below are the mutual fund ticker symbols, their net asset values, and their expense ratios. We’ll track these over time in the Google Sheet for comparison.

  • NEXTX, NAV = $44.53, Exp = 1.34%
  • ATRFX, NAV = $8.98, Exp = 3.02%
  • ALFAX, NAV = $26.32, Exp = 1.53%
  • IQDAX, NAV = $12.45, Exp = 2.46%
  • TTDAX, NAV = $13.04, Exp = 1.31%

The goal of these funds is to outperform the rest of the market. At the very least, they ought to beat the Best Interest monkeys patrons, right? Time will tell.

Small Cap vs. Large Cap

Of the 33 stocks in our portfolio, 6 of them are considering “large-cap,” having a total market capitalization (e.g. total value of all their stock shares) of $10 billion or higher. Another 13 are “mid-cap,” with a market cap between $2 billion and $10 billion. The remaining 14 are “small-cap,” with market caps less than $2 billion.

That means about 80% of our portfolio is associated with small-cap and mid-cap stocks. Historical precedent suggests that these small businesses tend to be higher risk/higher reward investments when compared against large-cap stocks. But in this short 1-year context, I’m not sure that’ll matter. In one given year, the large-cap vs. small-cap preference is a 50-50 coin flip.

Updating My Favorite Performance Chart For 2019

The Proudest Monkey

At the end of 2021, I bet that one of the Best Interest patrons will see that their three stocks performed significantly better than average, while another patron will drastically underperform the field.

It will be tempting to ask, “Is one of those patrons more skilled than the others?”

Of course, the answer is no. We already know that. These were random choices that the patrons weren’t even aware they were making.

While the real stock market isn’t quite as random, it is still closer to pure randomness than it is to pure skill. It’s better to be lazy than to hope that you’re skilled, and an MIT study backs up that idea.

Learn Through Practice

Nothing teaches a lesson like having skin in the game. If choosing stocks makes you nervous, my hope is that this fun year-long exercise will help you learn that (despite not having skin in the game yourself). I have $1650 in this game, and it’ll be fun to see what happens to that money!

If you enjoyed this article and want to read more, I’d suggest checking out my Archive or Subscribing to get future articles emailed to your inbox. That’s how you can get future updates throughout this year 🙂

This article—just like every other—is supported by readers like you.

Source: bestinterest.blog

The Motley Fool Review: Is Their Stock Advisor Program Legit?

This page may include affiliate links. Please see the disclosure page for more information. As you increase your interest in building wealth and investing, you might be looking to take your knowledge to the next level. And as you consistently work on your investing strategy and expand your interests, there will be more to understand and manage….

The post The Motley Fool Review: Is Their Stock Advisor Program Legit? appeared first on Debt Discipline.


The Motley Fool Review: Is Their Stock Advisor Program Legit? was first posted on May 27, 2020 at 6:00 am.
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What Is a SEP IRA and How Does It Work?

SEP IRA stands for Simplified Employee Pension Individual Retirement Account. (Many people mistakenly think “SEP” stands for “Self-Employed”.) It’s a retirement plan that an employer or self-employed individuals can establish. This account is primarily for…

The post What Is a SEP IRA and How Does It Work? appeared first on Crediful.

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Traditional And Roth IRA Contribution Limits Announced

The contribution limits for the Roth IRA and Traditional IRA were just announced. Here’s what IRS limits are for the upcoming year.

The post Traditional And Roth IRA Contribution Limits Announced appeared first on Bible Money Matters and was written by Peter Anderson. Copyright © Bible Money Matters – please visit biblemoneymatters.com for more great content.

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Fractional Shares: What They Are and How to Buy Them

Investing in fractional shares can help make certain investments more accessible. Learn what they are and how to invest in them.

Source: goodfinancialcents.com

5 Best Hedges in the Face of Inflation

Inflation measures how much an economy rises over time, comparing the average price of a basket of goods from one point in time to another. Understanding inflation is an important element of investing.

The Bureau of Labor Statistics CPI Inflation Calculator shows that $5.00 in September 2000 has the purchasing power equal to $7.49 in September 2020. To continue to afford necessities, your income must pace or rise above the rate of inflation. If your income didn’t rise along with inflation, you couldn’t afford that same pizza in September 2020 — even if your income never changed.

Inflation represents a real risk for investors as it could erode the principal value of your investment.

For investors, inflation represents a real problem. If your investment isn’t growing faster than inflation you could technically end up losing money instead of growing your wealth. That’s why many investors look for stable and secure places to invest their wealth. Ideally, in investment vehicles that guarantee a return that’ll outpace inflation. 

These investments are commonly known as “inflation hedges”. 

5 Top Inflations Hedges to Know

Depending on your risk tolerance, you probably wouldn’t want to keep all of your wealth in inflation hedges. Although they might be secure, they also tend to earn minimal returns. You’ll unlikely get rich from these assets, but it’s also unlikely you’ll lose money. 

Many investors turn to these secure investments when they notice an inflationary environment is gaining momentum. Here’s what you should know about the most common inflation hedges.

1. Gold

Some say gold is over-hyped, because not only does it not pay interest or dividends, but it also does poorly when the economy is doing well. Central banks, who own most of the world’s gold, can also deflate its price by selling some of its stockpile. Gold’s popularity might be partially linked to the “gold standard”, which is the way countries used to value its currency. The U.S. hasn’t used the gold standard since 1933.

Still, gold’s stability in a crisis could be good for investors who need to diversify their assets or for someone who’s very risk-averse. 

If you want to buy physical gold, you can get gold bars or coins — but these can be risky to store and cumbersome to sell. It can also be hard to determine their value if they have a commemorative or artistic design or are gold-plated. Another option is to buy gold stocks or mutual funds. 

Is gold right for you? You’ll need to determine how much risk you’re willing to tolerate with your investments since gold offers a low risk but also a low reward. 

Pros

  • Physical asset: Gold is a physical asset in limited supply so it tends to hold its value. 
  • Low correlation: Creating a diversified portfolio means investing in asset classes that don’t move together. Gold has a relatively low correlation to many popular asset classes, helping you potentially hedge your risk.
  • Performs well in recessions: Since many investors see gold as a hedge against uncertainty, it is often in high demand during a recession.

Cons

  • No dividends: Gold doesn’t pay any dividends; the only way to make money on gold is to sell it. 
  • Speculative: Gold creates no value on its own. It’s not a business that builds products or employs workers, thereby growing the economy. Its price is merely driven by supply and demand.
  • Not good during low inflation: Since gold doesn’t have a huge upside, during periods of low inflation investors generally prefer taking larger risks and will thereby sell gold, driving down its price.

2. Real Estate Investment Trusts (REITs)

Buying real estate can be messy — it takes a long time, there are many extra fees, and at the end of the process, you have a property you need to manage. Buying REITs, however, is simple.

REITs provide a hedge for investors who need to diversify their portfolio and want to do so by getting into real estate. They’re listed on major stock exchanges and you can buy shares in them like you would any other stock.

If you’re considering a REIT as an inflation hedge you’ll want to start your investment process by researching which REITs you’re interested in. There are REITs in many industries such as health care, mortgage or retail. 

Choose an industry that you feel most comfortable with, then assess the specific REITs in that industry. Look at their balance sheets and review how much debt they have. Since REITs must give 90% of their income to shareholders they often use debt to finance their growth. A REIT that carries a lot of debt is a red flag.

Pros

  • No corporate tax: No matter how profitable they become, REITs pay zero corporate tax.
  • High dividends: REITs must disperse at least 90% of their taxable income to shareholders, most pay out 100%.
  • Diversified class: REITs give you a way to invest in real estate and diversify your assets if you’re primarily invested in equities.

Cons

  • Sensitive to interest rate: REITs can react strongly to interest rate increases.
  • Large tax consequences: The government treats REITs as ordinary income, so you won’t receive the reduced tax rate that the government uses to assess other dividends.
  • Based on property values: The value of your shares in a REIT will fall if property values decline.

3. Aggregate Bond Index

A bond is an investment security — basically an agreement that an investor will lend money for a specified time period. You earn a return when the entity to whom you loaned money pays you back, with interest. A bond index fund invests in a portfolio of bonds that hope to perform similarly to an identified index. Bonds are typically considered to be safe investments, but the bond market can be complicated.

If you’re just getting started with investing, or if you don’t have time to research the bond market, an aggregate bond index can be helpful because it has diversification built into its premise. 

Of course, with an aggregate bond index you run the risk that the value of your investment will decrease as interest rates increase. This is a common risk if you’re investing in bonds — as the interest rate rises, older issued bonds can’t compete with new bonds that earn a higher return for their investors. 

Be sure to weigh the credit risk to see how likely it is that the bond index will be downgraded. You can determine this by reviewing its credit rating. 

Pros

  • Diversification: You can invest in several bond types with varying durations, all within the same fund.
  • Good for passive investment: Bond index funds require less active management to maintain, simplifying the process of investing in bonds.
  • Consistency: Bond indexes pay a return that’s consistent with the market. You’re not going to win big, but you probably won’t lose big either.

Cons

  • Sensitive to interest rate fluctuations: Bond index funds invested in government securities (a common investment) are particularly sensitive to changes to the federal interest rate.
  • Low reward: Bond index funds are typically stable investments, but will likely generate smaller returns over time than a riskier investment.

4. 60/40 Portfolio

Financial advisors used to highly recommend a 60/40 stock-bond mix to create a diversified investment portfolio that hedged against inflation. However, in recent years that advice has come under scrutiny and many leading financial experts no longer recommend this approach. 

Instead, investors recommend even more diversification and what’s called an “environmentally balanced” portfolio which offers more consistency and does better in down markets. If you’re considering a 60/40 mix, do your research to compare how this performs against an environmentally balanced approach over time before making your final decision.

Pros

  • Simple rule of thumb: Learning how to diversify your portfolio can be hard, the 60/40 method simplifies the process.
  • Low risk: The bond portion of the diversified portfolio serves to mitigate the risk and hedge against inflation.
  • Low cost: You likely don’t have to pay an advisor to help you build a 60/40 portfolio, which can eliminate some of the cost associated with investing.

Cons

  • Not enough diversification: Financial managers are now suggesting even greater diversification with additional asset classes, beyond stocks and bonds.
  • Not a high enough return: New monetary policies and the growth of digital technology are just a few of the reasons why the 60/40 mix doesn’t perform in current times the same way it did during the peak of its popularity in the 1980s and 1990s.

5. Treasury inflation-protected securities (TIPS)

Since TIPS are indexed for inflation they’re one of the most reliable ways to guard yourself against high inflation. Also, every six months they pay interest, which could provide you with a small return. 

You can buy TIPS from the Treasury Direct system in maturities of five, 10 or 30 years. Keep in mind that there’s always the risk of deflation when it comes to TIPS. You’re always guaranteed a minimum of your original principal at maturity, but inflation could impact your interest earnings.

Pros

  • Low risk: Treasury bonds are backed by the federal government. 
  • Indexed for inflation: TIPS will automatically increase its principle to compensate for inflation. You’ll never receive less than your principal at maturity.
  • Interest payments keep pace with inflation: The interest rate is determined based on the inflation-adjusted principal. 

Cons

  • Low rate of return: The interest rate is typically very low, other secure investments that don’t adjust for inflation could be higher. 
  • Most desirable in times of high inflation: Since the rate of return for TIPS is so low, the only way to get a lot of value from this investment is to hold it during a time when inflation increases and you need protection. If inflation doesn’t increase, there could be a significant opportunity cost.

The Bottom Line 

Inflation represents a real risk for investors as it could erode the principal value of your investment. Make sure your investments are keeping pace with inflation, at a minimum. 

Inflation hedges can protect some of your assets from inflation. Although you don’t always have to put your money in inflation hedges, they can be helpful if you notice the market is heading into an inflationary period. 

The post 5 Best Hedges in the Face of Inflation appeared first on Good Financial Cents®.

Source: goodfinancialcents.com

Best Stock Research Tools

Investing is an important part of everyone’s financial life. Here are the best tools to research stocks so you can grow your portfolio over the long term.

The post Best Stock Research Tools appeared first on The Dough Roller.

Source: doughroller.net