Welcome to the May 2, 2011, edition of the Carnival of Passive Investing (#5), a monthly collection of the best and most intelligent Passive Investing strategy articles around the internet. Some people foolishly want to beat the market (want being the key word) but we just want to invest with it.
We have some exciting news to report about next month’s carnival. Rick Ferri, the author of numerous books on Passive Investing, will be selecting the winners of the May Carnival of Passive Investing (#6)!
The purpose of the carnival is two-fold:
- To provide a forum to showcase articles and research in passive investing strategies (i.e. investing in ETFs, index mutual funds, etc. in such a way that one avoids employing active stock picking). By investing with the market, we are able to beat 70-80% of investment “professionals.”
- To create a community of passive investment bloggers to connect and share expertise.
The theme for this month’s carnival is: Behavior Gap sketches by Carl Richards. You can take a look at all of Carl’s sketches (he is creating new ones all the time) here. I’ve selected a few of my favorites to add some color and fun and under-the-radar learning experiences to the April 2011 carnival. I like Carl’s work for several reasons. One is that he focuses on the emotional side of the stock investing project and I view mastering the emotional side as the key to long-term success.
Another is that his sketches communicate to us without words. There are too many words written about investing! Seriously, we have heard the words so many times that we tune a lot of them out. Sketches can hit us with a familiar point in a fresh way. That can be a mighty good thing if the sketch is the thing that finally permits an important insight to sink through our thick skulls!
Here are this month’s top three editor’s picks:
1) Jon Elder presents 12 Pillars of Boglehead Wisdom at Free Money Wisdom. John Bogle’s genius is that he keeps it simple. There’s lots of complicated investing advice available to us today. Too much! Most of what is presented to us is noise! The key to success is getting the fundamentals right. Bogle’s 12 Pillars are the core principles of Passive Investing. So you cannot go over them too many times. Hopefully, you reviewed these principles when you first became a Passive Investor. My bet is that if you read Jon’s article today, you will discover some new insight in the same words that will make more sense to you now that you are a few more years along in your investing journey. It’s better to read the stuff that really matters 10 times than to read 10 articles of far less power one time each. Read the 12 pillars and think carefully about what has happened over the past year that has made them ring even more true to you today than they have before.
Juicy Excerpt: I’m a Boglehead. What’s a Boglehead you ask? I’m glad you asked! I could get pretty detailed but it’s simply an investment philosophy. A Boglehead is against market timing, performance chasing, expensive mutual funds, and putting one’s eggs in a single basket. At the core of this philosophy is the term “long term.” I invest for my future, not for short term profits. The ultimate goal of a Boglehead is to mitigate risk, invest wisely, make a solid return and eventually retire early. It’s as simple as that.
2) Darwin presents Daytrading Is a Total Scam — Don’t Fall for the Pitch at Darwin’s Money. This article of course highlights why you became a Passive Investor in the first place: You don’t have time for the nonsense! There’s a reason why all the scam approaches never die: They appeal to the Get Rich Quick impulse lurking deep inside us. Read’s Darwin’s piece to remind yourself of why you sought the solace and common sense available through the Passive Investing approach.
Juicy Excerpt: I constantly hear radio spots for getting rich day-trading. The claims on the commercials are so outrageous, I can’t even believe the FTC allows it. If you listen to satellite radio at all, you’ll know exactly which ads I’m referring to; they play a repeating cycle virtually every commercial break.
Juicy Excerpt: So, what, then, can investors do to help offset their risk and protect their portfolio from losses? The passivity argument helps keep costs low, but in a nowhere market, it’s not all that useful, and you’re going to need more from your investments as you should. There are a number of possibilities. Some of these are easy. Rebalancing on a yearly basis in one’s 401(k) allocation is a snap—particularly for those who can do so automatically when they enroll in their plan. Establishing a level at which one should sell assets, such as ETFs or other investments, after a certain percentage loss is a bit more difficult, but there are strategies that attempt to go this way to keep losses minimal. (Anyone who immediately exited hot tech funds after it lost 15 percent of its value in 2000 saved themselves a lot of pain. The downside? When there are occurrences like the May 6, 2010 “flash crash,” when popular stocks were suddenly traded briefly at a penny, a level that would have triggered sales for many investors.) Keeping a bit of money in Treasury securities that track rising inflation can help guard some of the portfolio against losses. Other strategies, which will be discussed, involve putting a cap on the losses one will tolerate before shares in index funds or ETFs are sold and allocating funds among a number of different asset classes, more than you’re used to doing in the past. Some of these ideas have their own pitfalls, and there are still plenty trying to come up with a better mousetrap that will solve everyone’s problems with a simple formula. No such formula exists.
TFB presents S&P 500 + Extended Market = Total US Stock Marketposted at The Finance Buff, saying “I’d like to move some of my money to this new fund to make my 401k holdings mimic the entire U.S. stock market.”
Tom Drake presents Canadian Index ETFs – XIU vs XIC at Canadian Finance Blog, saying “I believe XIC is worth the extra 0.08% MER as it provides much more diversification, including some exposure to small cap stocks.”
Philip presents Traditional and Roth IRA Income Limits at PT Money: Personal Finance, saying “There are limits (based on your income) that might affect your ability to use one of these accounts (IRAs) to your fullest advantage. Let’s look at each one closely.”
Outlaw presents The Pitfalls of Excess Contributions to Your Retirement Accounts at Outlaw Finance, saying: “Having various retirement plans to pick from gives a person versatility while planning for retirement, however it might also make it easier to make simple errors like going above the total annual contribution limits.”
Pat S presents Target Date Funds: Are They Right for You? at Compounding Returns, saying “The idea behind these funds is that you choose a date that is close to your expected retirement date, and the fund management automatically adjusts your portfolio allocation as you near retirement.”
James Nara presents 5 Rules to Help You Manage Your Money Savings at The Secret to Be Happy and Feel Fulfilled, saying “I will help you deal with your first savings in a very systematic way by providing you with 5 rules that you can follow without changing too much of your life style.”