Here’s the easiest way to know if you are actually beating the stock market

I do NOT recommend picking individual stocks. However, if you are going to ignore my advice– I admit I do for a small portion of my portfolio– then I want you to at least think about investing in individual companies correctly. You also need to track your performance against an appropriate benchmark like the total stock market. This can actually be pretty easy with this simple trick.

Make a ‘benchmark’ account

First, keep your stock-picking account separate from your other investments in its own separate account. Next, open another brokerage account of the same type as your ‘benchmark’ account.

Use a reputable brokerage like Vanguard— not scammy garbage like Robinhood– for God’s sake. Most people do and should use taxable (non-retirement) investment accounts for both your individual stocks and benchmark accounts. This keeps you from monkeying around with your retirement money.

A tip on avoiding taxes while owning stocks

I use a portion of my Roth IRA for my individual stock investing to avoid paying dividend or capital gains taxes when I trade. This also makes it easier to compare performance since I don’t have to subtract taxes from my investing results. Keep in mind that you can’t touch your Roth earnings until you’re 59.5 if you choose to go this route. Make sure you mentally separate this money from what you actually need to retire.

Keep the money flows in and out of both accounts equal

Now, fund each of these accounts equally. If you start out with $10,000 in one, put $10,000 in the other at the same time. With the benchmark account, put all of the money into whatever the appropriate benchmark is for comparing to the types of companies you’ll be investing in. If you are going to be picking mostly US stocks, then invest your benchmark money in a broad US index like the Vanguard Total Stock Market index fund (ticker: VTSAX), or its ETF (ticker: VTI.) Make sure you automatically reinvest dividends & capital gains into your benchmark fund (another reason to use Vanguard since they let you do this.) Your two accounts will look like this at the beginning:

In your stock-picking account, start buying and selling or holding cash as you like. Over time, your benchmark account will grow with the market, and your stock-picking account will grow (or shrink!) depending on your results. Whenever you want to compare your relative performance, just look at the two balances and see which is higher.

Let’s pretend that after two years, your stock-picking account has grown to $15,000, and your benchmark to $12,000:

50% absolute gain vs 20% VTI gain means you beat the market by 1.5/1.2 = 25% over two years, before subtracting taxes.

Make sure that whenever you add or remove money from one account in the future you do the same with the other at the same time. Ideally you would also log these money moves in or out of your accounts in a spreadsheet so that you can compute fancier comparisons like your average annualized percentage returns (using the XIRR formula.)

Even if you can’t be bothered to compute annualized gains, you can at least say whether or not you’re beating the market and by how much in absolute dollars and as an absolute percentage difference.

Using less money for your benchmark

You don’t technically have to use equal dollar figures in your benchmark, although it’s the easiest way. Instead, you might do 1/10th the amount in your benchmark. E.g.: $10 K in your stocks account and only $1,000 in your benchmark fund. However, you’ll need to remember to multiply your benchmark fund by ten to compare the two balances, and doing the same math for any money that goes in our out, including for taxes.

Accounting for taxes

If you use an individual account, you should try to account for taxes. The best way to do this is to just estimate your tax burden from the investments each year when you file your taxes. Use your 1099-B and 1099-DIV forms to see how much of your capital gains and dividends are attributable to your benchmark and your stock-picking accounts, then subtract the respective tax burden from each account at tax time.

Lazy tax accounting

Of course, if you use your Roth IRA like I do, you don’t have to do this because you don’t owe taxes on that money. If you’re using a taxable account and are lazy, you can just pretend that the dividends from your benchmark fund roughly cancel out your dividends from your stock-picking fund, and just focus on subtracting any capital gains taxes you generate from selling your stocks.

Keeping yourself honest

Comparing your investment results to what you could have received from a low-fee index fund is an essential step in picking stocks so that you can tell how you’re doing vs the market.

I hope the trick above makes it easy and convenient for you to keep tabs on your performance over time. Many happy (investment) returns!

How to avoid money management companies that want to sucker you

My conservative SWAG is that ~95% of the financial ‘services’ being provided to your average investor are legalized theft, and actively doing harm to consumers as opposed to helping them retire, send their kids to college, live within their means, etc. As an (independent, commission-free) person in the financial services industry, let me be the first to tell you that you should be extremely skeptical and selective about whom you go to for investment advice, insurance, and investment services & products.

Trust no one. Except me; I’m one of the few good guys (but test me anyway just to show you’re paying attention!)

You can guess which kind are Good and which are Bad or Ugly… (For spaghetti Western nerds: you want to invest in the grave next to Arch Stanton’s, not his.)

There is really only one investment firm I recommend to keep your investments at, and that’s Vanguard, because of the unique way the company is structured.

However, there are TONS of firms I hate, and I’m happy to tell you by name whom they are. I already talked about sh***y banks, so let’s turn to financial ‘services’ firms aka money managers. The MO of all of these firms is straightforward and, in my opinion, should be criminalized because of the billions in harm they do to consumers each year:

They spend a lot on salespeople and advertising and get you to invest with them in the guise of looking out for your interests, and then…

… they sell you high-commission-generating or otherwise high-fee products that secretly steal your money without you really being aware of it. This can happen through commissions that they get but you don’t directly pay, through high expense ratio mutual funds that you pay straight from your account balance without noticing, or in other similar ways. They compound the evil by getting all their money up front through high ‘sales loads’ or commissions at the time of sale (vs annually in an expense ratio or annual fee, although they do that too, the bastards.) Commonly, even after you’ve figured out that you’ve been hoodwinked, getting out of the product doesn’t help much because most of the damage has already been done to you.

You end up MUCH MUCH poorer because of all the fees being siphoned off, and these guys laugh all the way to the bank, with the lower-level grunts maybe not even realizing what an evil they’re perpetrating. Read the anecdote about “the customers yachts“.

The evil firms in the money management space that I see most frequently taking advantage of average investors are:

Ameriprise: they sell you expensive, illiquid products like cash value life insurance and non-tradable REITs and get exorbitant kick-backs– politely called ‘revenue sharing’ or just ‘commissions’– from the folks who’s high-fee products they sell you (or they cut out the middleman and sell you their own high-fee products.) When you try to get out of these products, you find you’ve already paid a huge upfront commission, might have MORE fees to pay for the privilege of taking your own money back, and/or would have to sell at a big loss in a secondary market (*cough* time shares and non-traded REITs!)

Ameriprise has paid up at least twice in multimillion-dollar class-action lawsuits, which is amazing considering how much leeway they already have to legally steal from people. But hey, when you’re greedy and shady and have investors to please, why stop at just the legal ways of separating investors from their hard-earned money?

Edward Jones: same thing as Ameriprise, but often with high-fee mutual funds that they get their kick-backs from.

Raymond James: same business model as the other two scoundrels.

I don’t see UBS, Merril Lynch, Bank of America, Wells Fargo and the other big ‘wealth management’ guys picking on the small investors as much, but avoid them too. I think they tend to fleece wealthier folks through high investment management fees, but I suspect they also use commissions too to juice their egregious takings.

Instead, manage your own money with the only two investments you need instead. If you need help, read this blog and DIY if you have the time, acumen and energy, or reach out to a fee-only (= no commissions!) financial advisor like me, or these guys. I recommend paying only for one-time financial planning or incidental on-going advice, but NOT for as advisor to manage your assets via Assets Under Management (AUM) fees.

If you really think you need ongoing investment management services AND the fee is well under 1%, you could consider it. Vanguard charges 0.3% AUM for this service, which is reasonable, but I still think you’re better off keeping that 0.3% and doing it yourself.

Instead, ask your fee-only advisor for their investment recommendations and implement them yourself, or better yet, 98% of you can probably go with my ‘two investments’ guidance and be done with it (and the other 2% would still do fine if they took the same advice.)

How to identify the other bad guys

The above wasn’t an exhaustive list of the bad guys– like bacteria, they are too numerous to count,– so here’s a few helpful tips for deciding whether the financial person you’re dealing with is going to rip you off. (I don’t care how neatly pressed his suit is, how well it fits, or how shiny his shoes are!) If the answer is ‘yes’ to any of these questions, grip your wallet tighly and run the other way:

  1. Are they recommending cash value/whole/universal/variable life insurance to you? If you ever hear the word life insurance in a sales context, unless it’s immediately preceded by the word ‘term’, you know the person is a scoundrel.
  2. Are they recommending an annuity? Annuities, like cash value life insurance, are notoriously high-fee and inflexible. AVOID!
  3. Do the mutual funds they recommend take any ‘front loads’ (upfront fees)? If so, RUN! Good mutual funds generally have no loads, back or front, and very low annual expense ratios (under 0.5%; Vanguard’s core index funds average around 0.1%.)
  4. Are they recommending any mutual funds with expense ratios > 0.5%? Don’t pay a guy in a suit to underperform the market. Get the market return using a low-fee index fund and leave those other suckers investors in the dust.
  5. Are they offering to ‘manage’ your money by buying and selling individual stocks? Very few people can beat the market, and no one that can is going to spend much time tracking you down, because they’ll be too busy making money hand-over-fist to let you in on their secrets.
  6. Are they selling any product that sounds sexy or complicated like REITs, private equity, oil and gas partnerships, some hot new industry/sector of the market, stock or IPO that you should get in on? You don’t need any of that complicating garbage. It’ll only hurt you on average with fees, taxes, and illiquidity.
  7. Are they selling timeshares, or real estate as an ‘investment’? Real estate, and timeshares specifically, have super high fees and liquidity problems. Let your personal residence be the extent of your real estate ‘portfolio’, and leave the rest of the real estate game to the pros. Real estate brokers get paid to sell you real estate, so ignore them when they tell you how wonderful it is (“it’s ALWAYS a good time to buy!”), and read my skepticism instead.

There you go. Avoid these guys selling these products and you will make me very happy and make yourself much richer. I hate seeing people who should have so much more money than they currently do because they’ve fallen victim to the folks above. And, sadly, many people I see have, including many of my clients, friends, and family members. That puts the personal in personal finance, let me tell you!

Don’t be one of the bad guys’ victims, and if you have been, fix the situation by getting your money away from them and out of whatever bad product it’s been put into as carefully and costlessly as you can. I can help if you need it.

To financial service professionals employed by one of these firms

I should note too that this isn’t a dig at any particular person working at these companies. If you’re one of them, I’m sure you believe and try to do right by your customers, but you’re ‘paid not to understand’ how bad the incentives are at your employer and how self-serving the products you’re encouraged to sell are.

Good people + bad incentive systems = bad behavior by otherwise good people, often with the perpetrators not even realizing that they are doing something bad for their clients, or rationalizing it away. “Well, they’d just go to some other big firm that’ll rip them off in the same way!” “But I need these commissions to live. My family’s gotta eat too!”

All of these are lies you tell yourself to feel better about hurting people because it’s good for your bottom line.

To you I make this plea: If you’re a financial services provider working at one these companies, get out of a corrupt system and make money in a more honorable way if you can. I’m happy to chat about how I decided to run my business the way I do in case you’re interested in leaving the Dark Side of personal finance.

Hear the great Charlie Munger speak at the 2021 Daily Journal Corp shareholder’s meeting

Munger and the Daily Journal Corp CEO hold forth of Gamestop and Robinhood, bankers, Wells Fargo, Costco vs Amazon, and much more! Munger is Warren Buffett’s right hand man at Berkshire Hathaway, and a wise old man!

Watch the full meeting here on Yahoo Finance: https://www.yahoo.com/now/charlie-munger-speaks-daily-journal-162005167.html

How to retire way earlier in 10 minutes

This is the first post in a series of easy steps I’m writing for the New Year that will dramatically improve your financial security in 15 minutes or less.

Retire way earlier by boosting your retirement contributions in 10 minutes

Log into your employer’s retirement plan (e.g.: 401k/403b) and increase your contribution to 20%. Or, just put in the full IRS-allowed max of $19,500 for 2021. Divide $19,500 into your base salary to get a percentage.

Contributing 20% will only reduce your take-home by 15%-ish, depending on your tax bracket, because of the taxes you’ll save. If you were already contributing 10% to your 401k, an extra 10% will only cost you 7-8%. You can live off 93% of your old spending without even noticing, I promise!

If 20% is more than you can stomach to do right now based on your current spending, just log on and boost your contributions by 2-3% instead, which you definitely not miss since that’s a mere 1.5 – 2.5% of your take-home. After upping your contribution, set a goal of getting to 20% eventually, and use the automatic increase function that most providers offer to boost your savings annually by 2% until you get to 20% (or the max contribution limit.)

No matter how much you decide to contribute, definitely put in enough to get all of any employer matching your company offers. That’s free money you can’t afford to pass up.

Why boost your retirement contributions?

In addition to saving thousands a year in taxes, boosting your 401k contribution from 10% to 15% per year means you will have 50% more money at retirement.

Yes, that’s right, for the price of only a ~3.5% decrease in stuff-you-could-buy-that-you-didn’t-need-anyway, your income in your golden years will go up by 50%! Even a mere 2% boost from 10 to 12% ups your retirement income by 20%, so at least do that much.

I’d take this deal any day; wouldn’t you…? If you’re still not convinced that saving for your future is something you must do now, picture yourself in your 60s or 70s: grey hair– or white, if yours is already grey–, (more) wrinkles, a slower step, and someone wiser, quieter, but a little more lonely and less lively than you are now. Don’t you want that person– you— to be financially comfortable, maybe even relatively wealthy, even if it means a small sacrifice on the younger you?

Do it right now, before you read any further!

Log into your workplace’s retirement account, which for most people is either a 401k or 403b plan. Search your company’s benefits site if you don’t know where to go, or if you know they use Vanguard or Fidelity, head straight there and login (create an online login if you’ve never logged in before.)

Click on your 401k or 403b account if you have multiple accounts, and then look for something that says ‘contributions’ like ‘change my contributions’. Click that, and find your current contribution, usually expressed as a percentage of your base salary. Enter the new number that you decided upon above, and save your work. You should get some kind of confirmation screen.

Great work! Keep reading. You need to do one more thing while you’re logged in.

Optimize your investments with a few more button clicks

Switch both your current investments as well as your future contributions to a low-fee Target Retirement fund like those offered by Vanguard or the Fidelity Freedom funds. Choose the year closest to your 75th birthday (e.g.: if you were born in 1980, choose the 2065 fund.) You should see some option like ‘change investments’ and might have to do this once for future contributions and once for the money already invested in your account.

For bonus points, double-check your ‘beneficiaries’, or set them up if you haven’t before. You want to make sure your assets are sent to the people or charities you want to get them if something untimely happened to you.

Don’t have an employer retirement account? Use an IRA instead

If your employer doesn’t have a retirement account, or you freelance and don’t want to set up a self-employed IRA, open a Roth IRA at Vanguard instead, then set up automatic monthly deposits with this link after you’re logged in. The maximum yearly contribution if you’re under 50 is $6,000/year, and $7,000 if you’re 50+. Max out if you can.

I’m assuming a Roth is best for you since I’m predicting you’re at or under the 22% tax bracket (i.e.: you make less than $100,000 single, or your family makes less than $200,000 if married.) If your marginal rate is 24% or more and would rather save on taxes now, use the Traditional IRA instead.

You’re now retiring earlier, or more luxuriously, or both!

Boom! You just secured your age 60+ retirement in the time it takes to make a cup of coffee. Pat your self on the back, take a lap and hit the showers.

Next up, make this simple change to you direct deposit and never worry about spending too much again.

If you want to retire earlier than that, read this too.

Share in the comments how much you bumped up your contribution, and whether you changed your investments or beneficiaries!