Title: How a Second Grader Beats Wall Street: Golden Rules Any Investor Can Learn
Author: Allan S. Roth
The author Allen Roth sets out to teach his son Kevin how to invest. Kevin is in second grade. This is Kevin’s simple portfolio:
|Vanguard Total Stock Market Index Fund||VTSMX||60%|
|Vanguard Total International Stock Index Fund||VGTSX||30%|
|Vanguard Total Bond Market Index Fund||VBMFX||10%|
Chapter 1: The Claw Will Take Your Money
People can debate about active management versus passive management and the efficient market hypothesis, but the real danger is expensive. Fees will eat away at your profits. Choose index funds to reduce fees and expenses.
Golden Rule: 10 – 2 = 8
Chapter 2: Own the World
Diversify by buying index funds that track the entire market.
Total U.S. Index Funds
|Total U.S. Stock Market Index Choices||Symbol||Expense Ratio||Investment Minimum|
|Vanguard Total Stock Market Index Fund ETF||VTI||0.07%||1 share|
|Fidelity Spartan Total U.S. Market Index Mutual Fund||FSTMX||0.10%||$10,000|
|Vanguard Total Stock Market Index Mutual Fund||VTSMX||0.5%||$3000|
|iShares Dow Jones U.S. Index ETF||IYY||0.20%||1 share|
|State Street Spider Dow Jones Total U.S. Market ETF||TMW||0.20%||1 share|
International Index Funds
|Total International Index Choices||Symbol||Expense Ratio||Minimum Investment|
|Fidelity Spartan Total International Stock Market Index Mutual Fund||FSIIX||0.10%||$10,000|
|Vanguard FTSE All World Excluding U.S. ETF||VEU||0.25%||1 share|
|Vanguard Total International Stock Market Fund||VGTSX||0.32%||$3000|
|iShares MSCI EAFE Index Fund ETF||EFA||0.32%||1 share|
|State Street Spider All World Excluding U.S. ETF||CWI||0.35%||1 share|
|Vanguard FTSE All World Excluding U.S. Mutual Fund||VFWIX||0.40%||$3000|
Golden Rule: Don’t put all of your eggs in one basket.
Chapter 3: The Advantage of Having Wall Street Marketing Blinders (and Where Can I Get Some?)
The phrase “beat the market” is misleading. When people say they beat the market, they are usually referring to the S&P 500 or some other similar index. The S&P 500, however, only tracks the top companies and does not fully represent the entire market. The S&P 500 also does not include dividends paid by these companies. So by simply including the earnings from dividends in your portfolio, you can say that you’ve beaten the market. Usually when managers say they beat the market, they are actually making an unfair comparison.
Chapter 4: Adults Behaving Badly
value = benefit – cost
The main point of this chapter is don’t be superstitious. This chapter goes over a several logical fallacies and human biases.
Golden Rule: Don’t act silly with money.
Chapter 5: Can You Be A Second Graders Portfolio
The answer is No. While it is not impossible to beat the market, there is no product that you can buy that will outperform an low cost index fund in the long term due to expenses, fees, and taxes.
Chapter 6: Beyond the Second Grader Portfolio
Hedge by investing in alternative asset classes that negatively correlate to the stock market such as bonds, real estate, and precious metal.
REIT Index Funds
|REIT Index Choices||Symbol||Expense Ratio||Investment Minimum|
|Vanguard REIT ETF||VNQ||0.10%||1 share|
|Vanguard REIT Index Mutual Fund||VGSIX||0.20%||$3,000|
|Street TRACKS DJ Wilshire REIT ETF||RWR||0.25%||1 share|
|iShares Cohen & Steers Realty Majors||ICF||0.35%||1 share|
|iShares Dow Jones U.S. Real Estate||IYR||0.48%||1 share|
Precious Metals Funds
|Precious Metals and Mining Choices||Symbol||Expense Ratio||Investment Minimum|
|Vanguard Precious Metal and Mining Fund||VGPMX||0.28%||$3,000|
|Van Eck Gold Miners ETF||GDX||0.55%||1 share|
Chapter 7: Bonds — Your Portfolio’s Shock Absorber
Bonds have a lower return than stocks. They help stabilize and reduce risk to your portfolio, but don’t buy junk bonds. Do you remember the housing bubble?
|Total Bond Index Choices||Symbol||Expense Ratio||Minimum Investment|
|Vanguard Total Bond Market ETF||BND||0.11%||1 share|
|Vanguard Total Market Index Mutual Fund||VBMFX||0.19%||$3,000|
|iShares Lehman Aggregate Bond ETS||AGG||0.20%||1 share|
Chapter 8: Better Than Bonds
Buy CD’s. CD’s are essentially risk-free investment if your bank is insured by the Federal Government (FDIC).
Chapter 9: Simply Brilliant or Brilliantly Simple — Building Your Portfolio
Put any funds you won’t need in 10 years into the stock market
Chapter 10: Investors Who Love to Pay Taxes, and the IRS Who Loves Them
Hold stocks for over a year to get the long term tax rate. Avoid taxes by using a 401k and a Roth IRA.
Chapter 11: Nightmare off Wall Street — The Scary Tale of Trick-or-Treat Investing
Avoid scams such as insurance investment. Don’t subscribe to investment newsletters. Avoid seminars and software. Don’t buy hedge funds.
Chapter 12: Increase Your Return No Matter What the Market Does
Put your cash somewhere where it will make money like CD’s. Pay off your most expensive debt.
Chapter 13: Keep It Simple Stupid (KISS)
Buy low cost index funds.