Plain Money ideas

Pale, male and stale?

UntitledOver at, a writer has discovered that investment advisers are largely white males, with little diversity. I’m not surprised — but what should a woman or person of color do in response? First, recognize that there are thousands of investment advisers out there who are totally welcoming and affirming to their diverse client base.

But beyond that, if you don’t feel respected by the investment advisers you audition, consider this: Educate yourself, and buy and hold index funds. You’ll discover that you don’t need an investment adviser at all to get a good start on building lifetime wealth. If you follow simple passive strategies, before too many years go by, you’ll have enough money that the investment advisers will treat you with great deference. (Money talks in that business.) And it’s only then that you’ll need the tax advice and compliance help that investment advisers can provide.

But as to getting stock picks that will beat the market from an investment adviser? Forget it! The “advantage” of being comfortable with a stock-picking adviser will vanish in costs that make those picks almost certainly worse than buying and holding index funds. Whether you’re white, black, red or even purple, you can leave those  “pale, male and stale” advisers with their stock picks in the dust. Trust me, the best index funds don’t know or care about your race or gender. They just keep providing superior long-term returns.

Plain Money ideas

What’s next? (asks an investment firm)

Here’s an investment firm’s commercial — I have highlighted the key part:

Why do people invest?
They invest for what’s next.
That could be a college dream, a new priority, an active retirement.
Whatever next is, it takes smart investments managed by experts who actively spot risks and opportunities.
[Name of firm] has been doing that for over 65 years, helping millions of investors achieve what’s next.

For a minute, consider what I recommend — the opposite of that firm’s alleged strategy:

  • Smart investments? No, I recommend stupid investments, just index funds that hold  essentially every stock.
  • Managed by experts? No, I recommend funds that instead aren’t managed at all, since they hold everything and only do minor adjustments to stay in balance.
  •  Who actively spot risks and opportunities? No, I recommend not even trying to spot opportunities, neither trying to sell bad stocks on the way down or to buy into promising stocks on the way up.

And the result: My recommended stupid passive management strategy brought a ten-year return of 8.10 percent (in my favorite total stock market index fund). Go over to that other firm’s site — the one with the active experts — and you’ll see: They found it hard to beat a stupid passive strategy. But don’t be too hard on that firm. Its competitors fell short of the indexes more than half of the time, too.

The bottom line? Buy and hold index funds.

Plain Money ideas

Flash crash immunity

The Washington Post repeats a common theme: that small investors were the hardest hit in a stock market selloff.  The story has an appealing logic. When there is a big market move and small investors are trying to get their trades executed, they may well get locked out by the fat cats who dominate trading on Wall Street.

Here’s how the Post describes the problem:

Popular trading platforms run by TD Ameritrade, Scottrade and others ran slow or not at all as panic grabbed hold. It took just six minutes for the Dow Jones industrial average to suffer its biggest drop in history. And these investors could only watch.

What the Post misses is that smart small investors were not hurt at all. Why? Because smart small investors assume in advance that they cannot play the game of timing the market or beating the market. Instead, they buy and hold index funds.  That’s a hard strategy to beat over the long haul.

Dumb small investors were undoubtedly hurt. They were trying to pull their money out after widespread predictions that Monday would be a bad day on Wall Street — and they just couldn’t sell because the system was jammed. However, had they succeeded in selling on that Monday, for most of the day they’d have gotten a far worse deal than if they had waited until later in the week.

So: Get your budget in order as I describe in my book, only invest money in the stock market that you can afford to keep invested, and don’t worry about flash crashes.

Plain Money ideas

Easy money exploiting the index funds?

You’ll occasionally see articles like this one claiming that it’s relatively easy to exploit index funds with the following strategy:

  1. Figure out which stocks will be added to a widely tracked index, such as the Standard & Poors 500.
  2. Buy them before they are added.
  3. And then sell them when they’re added to the index, at a time when index funds are required to add them also, pushing their prices up.

So, does that mean “buy and hold index funds” is a bad strategy? Hardly. The index funds know about this (surprise!) and so they begin building their holdings of likely index additions well in advance. The loss to index fund investors is minimal, leaving index fund returns still well above the averages and the alternatives.

In that same article you’ll notice the recommendation of two analysts to buy total market index funds to get around the problem:

Petajisto and Morningstar’s Rawson also suggest passive funds that buy the entire market can minimize the damage of front-running. By owning almost every stock, there’s barely anything for arbitragers to buy first.

The fund they cite is the exact one I recommend, the Vanguard Total Stock Market Index fund. The conclusion — you’re not surprised, are you? — is: Buy and hold index funds.

Plain Money ideas

Leader resources

If you’re getting ready to do a workshop using Getting a Grip on Your Money, here are some resources that may help:

Leader’s Guide (Word .doc format)

Leader’s Guide (.pdf format)

Matt and Jan’s checkbook (ready to go, .xls format)

Matt and Jan’s budget activity (with answers filled in, .xls format)

Matt and Jan’s values activity (with answers filled in, .xls format

Plain Money ideas

Brilliant vacation home strategy

Several times when I was growing up, my family visited others’ vacation homes — Uncle Claude’s beachfront house at Gulf Shores, a business friend’s cabin on the Savannah River, Jim and Mary Louise’s place on Lake Martin. I thought how neat it would be to have a vacation home when I grew up.

Later in life, I came to a different perspective as some of my wealthier friends began to buy vacation homes. They were always worrying about something. Did that last storm damage the lake house? Or, by the fireside at home in December: Did we remember to drain the plumbing, or are the pipes freezing even now, setting off a disaster? When vacation time came, there was only one place they could go — because they had so much money in it.

Being an economist, I started to reflect: What did I like so much about vacation homes? My short list of answers: the casual interiors, the open floor plans, the use of natural finishes and the wood stoves and fireplaces.

Then is when it hit me: I have a vacation home. Our (only) home has everything I would want in a vacation home (such as those natural wood finishes and wood stove). This all came about through various decorating and interior decisions over the years. We get to live causally at our place year round. We don’t have to worry about the maintenance or cost of another home. When we go on vacation, we usually go for a lakeside cabin rental. When our vacation ends, we pack up and go, happily leave the off-season maintenance to others. And then we return to our year-round vacation home. How’s that for a brilliant vacation home strategy?

Plain Money ideas

The book that started it

Getting a Grip on Your Money was published in 2002 and had a good five-year run. It was featured on nationally syndicated talk shows, published overseas, and used for group discussions in a variety of settings. The book is still available from and free leader resources are available but now that its active promotion has ended, this site seeks to promote and extend the “plain money” theme of the book.

Plain Money ideas

Phones: Why prepaid is (still) best

Smart cellphone customers use prepaid plans. These plans offer better value than traditional postpaid plans. Most such plans work the same way — you just pay before the month’s service instead of after.

Nexus 4The very best deals are for consumers who pay up-front for unlocked phones and then buy a prepaid plan. Just slip in the SIM card and you’re in business. Because the carrier hasn’t subsidized the cost of your new phone, it doesn’t have to build in monthly charges to recover that cost. (Do the math and you’ll find a “free” phone is very costly by the time you’re done with a two-year contract paying for it.)

For the past few years, the very best deal of all was to buy an unlocked Google phone that used the “GSM” standard — because AT&T, T-Mobile and foreign carriers all supported GSM. You could switch from AT&T to T-Mobile and back just by changing SIM cards. Instead of a monthly charge, you could have a pay-as-you-go plan and save even more money — especially if you spend most of your time around free Wi-Fi networks. One excellent plan by AT&T’s GoPhone charged $5 for 50 megabytes a month. That’s not much data but it’s enough for a cautious user who’s around Wi-Fi a lot.

That plan is no longer available, but there is a $25 per month plan that offers 50 megabytes of data per month for $5. It competes directly with T-Mobile’s $30 per month plan. There are differences in the included voice minutes and messaging, so check both plans if you’re thinking of going this route.

In my family, we have two T-Mobile prepaid plans, one Tracfone and one GoPhone plan on a Nexus phone. The beauty of an unlocked phone like the Nexus is that you can go get a compatible (T-Mobile or AT&T) SIM card for it and switch carriers just that easily.

Summary: Prepaid service with unlocked phones is the best; with an unlocked phone you can easily go to another carrier.

Plain Money ideas

The market is near all-time highs . . .

but it is still best to buy and hold index funds.

Plain Money ideas

Buy and hold index funds

There is an investment strategy so powerful that Nobel laureates in economic science employ it — but so simple that you can use that same strategy with a minimum investment of only $250! That strategy is:

Buy and hold index funds.

Wait! Don’t go! There are usually two responses to this, and both are wrong. One response is “I’ve heard all this before.” The other is “That’s too complicated for me — I don’t even know what an index fund is.” Here’s why they’re wrong:

  • I have corresponded and spoken with many people whose reaction is “I’ve heard all this before.” They haven’t. Most often, they have been fed some half-baked slogans against index funds, and that’s all. I have yet to meet a fully informed investor who believes that it’s easy to top the results of buying and holding index funds.
  • If you think this is too complicated to figure out, read through just a few paragraphs more. I think you’ll change your mind.

Before you ever start investing, there are some first steps that you need to take. My book, Getting a Grip on Your Money, will show you what to do in some detail. Briefly, your object is to get your finances in order so that you can leave your invested money alone. You have to give it time to work; it won’t do much for you if you’re always snatching it in and out of the market.You’ll need to establish some goals, get control of your budget, and get your insurance in order first.

If you haven’t done any of this, then start with my Chapter 1, “Declare Victory,” the first of the steps to simplify your finances and prosper. But don’t wait too long! Time is on your side when you invest, so invest early and often, even if it’s not a big amount at any one time.

Key fact: A mutual fund can invest in stocks by pooling the money of individual investors, then in effect buying stocks on their behalf.

There are lots of good reasons to buy many different stocks rather than just one or a handful. But if you set out on your own to buy a set of stocks, you’ll face brokerage commissions and other expenses. Especially for small investors, this is why a mutual fund is often better then directly buying stock.

When you send your money to a mutual fund, the fund pools your money with that of many other investors, then puts the money into the stock market. You share in the gains and losses of the fund, according to how much money you have put in.

Key fact: Typical mutual funds incur a lot of cost trying to find stocks that will return more than the market (“beat the market.”).

Some mutual funds are actively managed, meaning that their managers try to pick stocks that will do better than the general market, or “beat the market.” It’s costly to hire analysts and trade frequently trying to beat the market.

How do they know when they succeeded in beating the market? They calculate how well their fund did, then compare that with how well an index of stocks did. An index is a collection of stocks. Indexes are averaged using different methods, but the intent is the same: to indicate how “the market” is doing.

For example, the Dow Jones Industrial Average is an index made up of 30 stocks. The performance of the Dow Jones is widely reported and you can easily calculate whether you’re “beating the Dow.”

You could make your own holdings duplicate the performance of the Dow Jones by buying small amounts of the 30 stocks in the Dow, in the same proportion they’re in the Dow. Of course, you’d spend a lot on commissions and transaction fees.

Key fact: An index fund avoids the cost of trying to beat the market, by just matching the market.

The Standard and Poors 500 is a collection of 500 big stocks. You could duplicate its performance, too, just by buying small amounts of those 500 stocks in the same proportion they’re in the index. But you would have to pay the commissions and fees associated with buying 500 different stocks! That would be impractical for a small investor.

Here’s where an index fund comes in. As a special kind of mutual fund, it pools funds from you and other investors, then invests the money in the stocks that make up an index. Because it has millions of dollars to deal with, it avoids the high commissions and fees that would be faced by an individual investor. Better yet, it can easily invest in 500 or more stocks.

So if you invest in a Standard and Poors 500 index fund, you’ll get something like the average return of those 500 stocks. Some will do well, some will do poorly, and you’ll get the average.

What’s so good about that?

Key fact: An index fund gives you average returns at a below-average cost. That’s why index funds usually beat conventional actively managed funds.

What matters to investors is a fund’s net return. If a high gross return is eaten up by big expenses, that means a low net return — your bottom line. With an index fund you get average returns, by definition. But you get to keep a bigger part of those average returns, because your fund hasn’t incurred big expenses trying to beat the market.

Key fact: In most years, index funds outperform more than half of the actively managed funds.

Sometimes conventional actively managed funds do well. Their managers spot good stocks, buy them up, and hold on to them long enough for superior returns. But they incur expenses in doing this. In most years, these funds don’t do well enough to outperform the indexes.

The investment firm Standard and Poors keeps a regular scorecard of how well actively managed funds do against the indexes. The scorecard is called “SPIVA.” Go on over to that link and check for yourself. The last time I checked, an astounding 86 percent of large-stock mutual funds underperformed their index. There are some technical reasons why that figure is a little exaggerated, but the basic truth remains: In most years, actively managed mutual funds do not beat index funds.

Key fact: It is very difficult to find any investment strategy that outperforms buying and holding index funds.

This is one of the most obvious facts among those who have carefully studied investment markets. The more you know, the more likely you are to see the advantages of holding index funds. Nobel laureate William F. Sharpe is the author of financial market theories that highlight the advantages of indexing. Sharpe was asked whether he invests his money in keeping with his own academic work:

Q: Do you invest your own money in broadly diversified stock index funds?
A: I certainly do.
Q: Do you try to pick individual stocks or time the market?
A: No. I invest in various funds covering bonds, large stocks, small stocks and international stocks.

(Source: Interview with William F. Sharpe in Classrooms and Lunchrooms.)

On the other hand, people who know less about financial markets are likely to underestimate the advantages of indexing. It’s hard to call index fund investing a “secret,” but it’s surprising how many people get inferior returns each year because they don’t know about it.

In Getting a Grip on Your Money, I promise readers to keep up with the mutual fund industry and let them know who the low-cost leader is. At the time I finished the draft of the book, that firm was the Vanguard Group of Investment Companies. That’s still true today, and I still recommend the Vanguard Group. However, there is one additional possibility to check out if you have a smaller amount of money to invest. See below for details.

One more check: Are you really ready to invest?

You’re not ready to invest unless you have gotten your insurance and banking relationships in order, taken maximum advantage of tax-deferred retirement plans and saved an emergency reserve. Remember, the strategy is to “buy and hold.” That means not pulling your money out of the market except in truly unusual circumstances.

Time for a disclaimer: This information is free and I’m not your financial adviser. I’m not getting paid by any of the investment companies. Before you invest in any fund, read the prospectus carefully. Understand that mutual funds can gain or lose value and there is no assurance that you will get your original investment back. Don’t trust anyone who claims that any investment is a “sure thing”!

If you are ready to invest, here’s what’s next. Start with a money market fund, then add a total stock market index fund and a total bond market index fund. You’ll need a $3000 minimum to open each account. To get started, either:

The specific funds you’re interested in are:

  • Prime Money Market Fund (fund number 30)
  • Total Stock Market Index Fund (fund number 85)
  • Total Bond Market Index Fund (fund number 84)

There are also good things to be said for the investment companies TIAA-CREF (of which I am a customer) and Fidelity (of which I am not). Check their websites if you’re interested in them:



But if you really want to know what you’re doing, go get my book for 1 cent plus shipping (prices may vary) at