Tag Archives: investing

How Much Will Your Investment Be Worth?

One of the open questions I have re: investing is what – realistically – my investments will be worth after X # of years. Of course, one can estimate 3% annual return on the S&P 500 to be “conservative” and 10% to be the opposite, but in reality, what is the likely average annual return of the stock market?

While there’s no way to predict the future, lucky for us, there is a way to look at historical data to understand how we’d answer this question if we were to begin investing, say, in 1980.

According to this calculator – The S&P 500 Dividends Reinvested – we can find out that answer:

Scenerios

  • We started investing in 1990, and stopped in 2010, giving us 20 years of investment.
    • Total S&P 500 Price Return: 256.374% (inflation adjusted: 118%)
    • Annualize S&P 500 Price Return: 6.6% (inflation adjusted: 3.974%)
    • S&P 500 Return, Dividends Reinvested: 437.278% (inflation adjusted: 228%)
    • Annualized S&P 500 Return, Dividends Reinvested: 8.770% (inflation adjusted: 6.13%)
  • We started investing in 1984, and stopped in 2014, giving us 30 years of investment.
    • Total S&P 500 Price Return: 1094.274% (inflation adjusted: 427%)
    • Annualize S&P 500 Price Return: 8.6% (inflation adjusted: 5.7%)
    • S&P 500 Return, Dividends Reinvested: 2299% (inflation adjusted: 960%)
    • Annualized S&P 500 Return, Dividends Reinvested: 11.175% (inflation adjusted: 8.19%)
  • We started investing in 1974, and stopped in 2014, giving us 40 years of investment.
    • Total S&P 500 Price Return: 2829% (inflation adjusted: 538%)
    • Annualize S&P 500 Price Return: 8.8% (inflation adjusted: 4.7%)
    • S&P 500 Return, Dividends Reinvested: 1204% (inflation adjusted: 1963%)
    • Annualized S&P 500 Return, Dividends Reinvested: 12.049% (inflation adjusted: 7.8%)
  • We started investing in 1964, and stopped in 2014, giving us 40 years of investment.
    • Total S&P 500 Price Return: 2239% (inflation adjusted: 206%)
    • Annualize S&P 500 Price Return: 6.5% (inflation adjusted: 2.2%)
    • S&P 500 Return, Dividends Reinvested: 10367% (inflation adjusted: 1270%)
    • Annualized S&P 500 Return, Dividends Reinvested: 8.748% (inflation adjusted: 5.3%)
  • We started investing in 1999, and stopped in 2014, giving us 15 years of investment.
    • Total S&P 500 Price Return: 37.5% (inflation adjusted: -2.845%)
    • Annualize S&P 500 Price Return: 2.1% (inflation adjusted: -.192%)
    • S&P 500 Return, Dividends Reinvested: 81% (inflation adjusted: 28%)
    • Annualized S&P 500 Return, Dividends Reinvested: 4% (inflation adjusted: 1.6%)

Well, what this shows us is that generally investing in the S&P index over the long term works out fairly well. After inflation with dividend reinvestments 5% is a reasonable conservative estimate annual return for a long-term investment. However, if you started investing in 1999 and have invested for 15 years, you’d pretty much be at break even at this point (assuming you put all your money in up front.)

I’m still looking for a more robust calculator that enables one to input annual investments and see what these would have turned out with historic data. Do you know where one exists or care to build one I can use? 🙂

 

How to Get Rich Long

Good luck on getting rich quick. I gave up on that dream long ago. But getting rich (not super duper rich, but relatively compared to the rest of the U.S. population rich) is within reach for everyone. It really comes down to making more than you spend, spending less than you earn, earnings as much as possible when you’re as young as possible and investing that as quickly as possible into index funds.

Yes, it’s that simple.

If I could do it all over again, I’d get a job at the youngest age I legally could and start contributing as much as I could to a ROTH IRA each year. The best time to contribute to a ROTH IRA is when you’re making next to nothing. Why? ROTH IRAs are taxed up front, meaning if you’re making $10k a year you are not paying a whole lot in taxes but you’re still eligible to max out the ROTH IRA. Even the NY Times agrees with me.

Unfortunately, when I was 14 I had no idea what a ROTH IRA was, nor did I understand the magic of compound interest in terms of how it applies to personal finance over the years.

Let’s say a 14 year old contributes the maximum to her ROTH IRA (just $5500 a year) from age 14 through retirement. This smart gal wants to retire at 75. If she begins investing $5500 a year at 14 for 50 years, she will have $1,272,055 in retirement. That’s a lot, and should be enough to inspire kids to start saving young. But that’s with 5% ROI compounding annually. What if the stock market performs even better? Say, over 50 years the stock market is up 10% YoY on average? That same investment will be worth $7,687,296 at retirement.

Forget about inheritances, there is nothing more helpful for your children then to support them in maxing out their Roth IRA from the youngest possible legal age.

While it’s not possible for every family, offering your teenager a match on their earnings as long as they commit to putting what they actually earned into a Roth IRA, up to $5500, is a good way to start. If not possible to do a full match, think about what you can afford to match (50%?) to encourage them to save. Also, create charts which show them how much their dollar today will be worth in 50 years. While teens want to spend now more than later and aren’t thinking about their golden years yet, letting them know that your help could turn them into a millionaire in retirement by saving just $5500 a year will go a long way.

I wish the government would offer this program for youth — you earn $5500 and we’ll match it by putting $5500 into your retirement account. I guess that’s social security, but it’s not a 1 for 1 match. This should be a program for people under the age of 21 to teach them about the value of savings and give everyone a head start for retirement. I don’t know how that would work, but it would certainly help out families that cannot afford to match their children’s contributions.

Even if your kids can put away just $1000 per year in a Vanguard STAR fund, this will go a long way in retirement (though I recommend maxing out the Roth IRA every year from age 14 on.)

So you didn’t start a Roth IRA at 14?

Investing ASAP, whenever that is, will help you get to wealth. For better or worse our economy is set up where riches only come with some risk. If you don’t take risks, you may very well lead a comfortable life, but it’s unlikely you’ll be rich (unless you have a trust fund.)

If you give yourself 40 years until retirement at a 5% YoY return rate, you’ll have $736k when you retire at 65 (and start investing at 25.) A 10% YoY return rate will give you a nice $2.9M in retirement. Given that today people should try to reach $2M before retiring, starting investing at 25 at the latest is an ideal move.

Ultimately, if you wait longer to invest, you have to invest more per year in order to catch up. That can be very hard when you’re not earning a lot in your 20s and then if/when you have kids and find it harder to save in your 30s. Starting early when you are supported by your parents but can still earn and invest the best way to prepare for retirement, so you don’t even have to think about it beyond the $5.5k annual contribution throughout your life. You can also start to max out your 401k if you have access to one ($17.5k) at some point, but there will be less pressure on doing this and you can enjoy your money when you’re still young enough to travel and have a very active life.

Rich, IMO, is not about the $ amount you have in the bank, but about the financial security you have so you feel comfortable spending money NOW to enjoy life. This is not the same as wasting money on frivolous luxury items (though if this makes you happy and you have saved for retirement and your other basic needs, then go for it) but this means being able to afford a house, a car, family vacations, dining out every once in a while, and the lifestyle YOU want. That’s what “rich” is. Working towards reasonably hitting $2M in retirement (which again, is very possible if you start at age 14 – 20), will make you rich.

How to Estimate Your Tax Rate in Retirement

As I’ve been running calculations on whether or not it makes sense to do a Roth Conversion, I came back to the question — what will my effective tax rate be in retirement?

That’s a question a lot of us considering a Roth Conversion should ask, but it’s not one that is easy to answer. What’s important, though, is that the numbers you plug into your calculations are reasonable. After all, expecting a 40% income tax in retirement each year can greatly skew your calculations if in actuality you’ll see a 20% effective tax rate.

This Forbes article by Erik Carter was really eye-opening: Why Your Taxes in Retirement May Be Less Than You Think

Article Highlights 

  • You are probably overestimating what you will have to pay in taxes at retirement
  • Withdrawls from Roth accounts are tax-free at 59.5
  • Social Security is taxed at ordinary income rates but only part of it is taxable
  • Long-term capital gains are taxed at lower rates than income tax (*at least according to current tax law)
  • Your income will probably be lower and put you in a lower tax bracket (i.e. experts recommend 80% of your pre-retirement income, but you may need less)
  • When you are older than 65, you get different deductions than younger people. For instance, you have a $1550 higher standard deduction than us young folk
  • A lot of 401k contributions withdrawn yearly will be taxed at lower rates, especially if you plan on taking out less than $36k per year (note, that’s no where near 80% of my current salary, but I could live on it in another state if I owned a house free and clear)
  • Tax rates could be higher when you retire but that’s unlikely (*not impossible)
  • Lots of people retire in states that don’t have income tax like Texas, Florida and Nevada. (*check out this handy-dandy state income tax calculator and weep… unless you live in a state with low income tax.)
  • Move where all the old people live and you’ll be fine.

Vanguard Admiral Funds: Rebalancing for Lower Fees

One of the things I realized recently that I’ve been spending more than I have to on fees inside of my IRA accounts. While Vanguard funds are low fee to begin with, did you know that Admiral funds (which require $10k minimum investment per fund vs $3k) still have significantly lower fees?

Fees can significantly eat away at your investments, especially over time in your retirement accounts. I know for a fact my old 401k that I haven’t rolled over is wasting money with some of its funds at .90% fees or higher! I’m holding off on rolling that over in the case I will do a Roth IRA conversion if/when I go to grad school on about $100k of other IRA investments, but for all my other accounts I want to be as fee-efficient as possible.

Expense Fees Add Up Fast!

Here’s a little experiment… (try your own out in this expense ratio calculator) say I invest 100,000 today and plan to keep that money invested for 30 years. I earn an average of 10% each of those 30 years (woohoo.)

If my fund has a low .10% expense ratio then I’ll see a 2.96% reduction of my future value due to fees (costing $51,596.) This sounds like a lot, but it really isn’t compared to the cost of most funds.

Say you have a still relatively low-cost fund at .20% expense ratio. You are then spending 5.83% of your future value on fees ($101,716!)

Some funds have high expense ratios too. If you are investing in a fund that has an expense ratio of .80%, 21.51% of your future value is gone thanks to this fee ($373645.77!!) So you see how a little expense ratio can quickly add up.

After reading a bit more about taxes and what funds to hold in Roth IRAs vs traditional IRAs I decided to shift around funds in my Vanguard accounts. I also changed things up over at Sharebuilder because my $10500 basis Roth over there is significantly underperforming, but I’ll cover those changes in another post.

Also, I read that high-dividend funds make sense in your Roth IRA but not in your traditional IRA. Why?  Because dividends have two purposes — to provide you income today at low(ish) capital gains tax rates, or to compound over time in your investments and to be taken out tax free upon retirement (in a Roth.) Going high dividend in a traditional IRA is silly because you have to pay income tax on it when you retire and take it out — i.e. those proceeds would be cheaper today in a taxable account!

Until today, my Vanguard IRA accounts looked like this:

Traditional IRA

VDAIX / .20%
VHDYX / .19%
VGSIX / .24%
VTTSX / .18%
VGTSX / .22%

Roth IRA

VFIFX / .18%
VTSAX / .05%

Updates to my Portfolio

While there was nothing wrong with this breakdown, per se, I had high-dividend REIT and dividend growth funds in my traditional IRA while I had index growth funds in my Roth. I also had certain funds split between my Roth and Traditional IRA where because I had $10k split between two accounts I couldn’t qualify for the lower admiral fund rates.

Luckily at Vanguard it’s free to trade your funds inside your account, so rebalancing is easy (unlike at Sharebuilder where I’m wasting tons of money trading and will eventually give in and just move my “fun money” to Vanguard.)

I made quite a few (free) trades at Vanguard to fix my portfolio. Here is what I have now, which, as you can see is greatly simplified:

Traditional IRA

VIGAX / growth index fund admiral shares .09% expense
VTIAX / admiral version of VGTSX — .14% expense vs .22%

Roth IRA

VDADZ / dividend appreciation index fund — .10% expense ratio
VGSLX / admiral REIT fund — .10% expense to .24% of VGSIX

I also killed off all of my “target retirement date” funds because I’ve read they are too conservative and at my ripe young age of 30 I want to be aggressive but not stupid (working on the not stupid part.)

Why keep my Sharebuilder account open at all?

Good question! Mostly I keep it open so I can trade precious metals in my Roth IRA (i.e. GLD) since they are taxed at a collectible rate (high tax) unless they’re in an IRA, and I can’t buy gold or silver in my Vanguard fund. I also have some specific REITs which I like to watch to learn more about REITs because they are interesting — especially since I do not actually own any tangible real estate. More on that later.

AMZN: Sell or Hold the Overvalued Stock?

As my investments add up (now valued at $298k) I’m trying to make smarter moves when it comes to (mostly) holding and yet selling when all signs point to it being time to let go of a stock. In the case of AMZN, this seems to be one of those times.

AMZN — which I have $3897 in at the moment, a nice 89% gain from my initial $2100 investment — yet the stock sticks out in my portfolio list like  sore thumb due to its 835 PE. Given slowing growth I’m fairly confident that the stock will continue to retreat in value for the remainder of 2014. Starbucks is the only other stock anywhere near this and that’s at a 253 PE. Compare this to AAPL at 16 and GOOGL at 30 and one can say that AMZN is probably overvalued right now. Don’t get me wrong, I think Amazon is a great company, but the stock market has been a bit too kind to it. Now, like many holders of AMZN, I’m trying to decide what to do.

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Investing in China ETFs: It’s Complicated

Whether or not you believe in any specific countries’ ability to economically eclipse the U.S., it’s common investor knowledge that one should diversify internationally in case sh*t hits the fan in America.

In many cases investing in a good general international index fund, like Vanguard’s Total International Stock Index Fund (VTISX), checks off the global diversification box. Yet for others taking educated bets on particular regions may be ultimately more lucrative. Given China’s fast-growing economy, I wanted to do a bit of research into investment opportunities for the average investor to take advantage of China’s potential reward. Of course, investing in a young market has its many risks. My goal is to educate myself on these so I can invest wisely in the country (I already own a small amount of HAO — China Small-Cap ETF, but nothing too significant yet.)

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Stock Investment Insights Part I: Dumb Moves

Using my handy dandy Google Spreadsheet account and Google Finance’s awesome tools that make it easy to see all of the stupid investment mistakes you’ve made, I’ve compiled a list of all my stock sells from my Sharebuilder account and compared them to the price they’d be worth today. I sold off AAPL because I was way overweight AAPL *AND* needed to buy a car (figured paying $17,000 cash was better than a loan) but here you can see that actually wasn’t the case. My worse sells according to this chart would be AAPL, INTC and XLF. Other than taking money out for my car on the AAPL transaction I did reinvest all of the proceeds from any sale here, so I need to somehow figure out how much the money made/lost in comparison to see if any of these sales were a smart move. The AAPL one kills me though. I should have just taken out a damn loan. Oh well, you live, you learn, right? (goes to cry in the corner.) (*ps I didn’t sell CBOU that was something that happened automatically as they went private or something.)

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Project: Determining Annual Interest Value of Investment Accounts

While I’ve been invested haphazardly since 2007, I still am pretty clueless when it comes to smart investment choices. OK, so the only real smart investment choices, one can argue, is diversification and low-fee ETFs (shout out @Vanguard.) However, my little investing hobby has led me to put my money into some – somewhat – riskier individual stocks and non-standard ETFs. And to be honest I have no idea how they are performing because my investment brokerage (Sharebuilder) only shows me the total % increase on my account (not annual) and doesn’t take into account any losses or gains from sales. So I’m at a loss for what is going on.

Thus, as a project of unemployment, I’m trying to dig through all my investing records and put together a clean google spreadsheet where I can at least see what the hell happened each year. Sharebuilder lets you see all your past history but doesn’t make it easy before 2012. It’s a PITA before 2012 as you have to manually go back to each month and can’t skip over the years, both for starting month and end month. I wish they made this feature easier to use! Continue reading

Motif Investing vs ETFs: Digital Finance Tech

Mint.com, you finally — finally — provided a relevant offer that piqued my interest. Instead of offering ways to deal with the debt-that-i-do-not-have, you shared an investing company I had not heard of yet — Motif.com, and enticed me with an offer for $150 to sign up, and sign up I did.

The general concept of Motifs is that, much like ETFs, they provide you the opportunity to diversify in a specific industry without buying a ton of individual stocks. But instead of being limited to existing ETF funds, they offer “Motifs” — themes with a group of stocks that they recommend looking into for investing. You can also customize the Motif so you can make it more to your liking and still pay the same fee for buying the diversified batch of stocks. Instead of boring ETF themes they can be very niche, such as the high-performing “fracking” theme (see screenshot below), yet enable you to diversify within this motif for a $9.95 trade fee. That’s quite high compared to the cost to buy an ETF at Vanguard or even Sharebuilder (where I enjoy autotrades for $3.95 to buy), but it does provide some interesting means to go after short-term growth. Continue reading