Vanguard fund

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pages: 339 words: 109,331

The Clash of the Cultures by John C. Bogle

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asset allocation, collateralized debt obligation, corporate governance, corporate social responsibility, Credit Default Swap, credit default swaps / collateralized debt obligations, diversification, diversified portfolio, estate planning, Eugene Fama: efficient market hypothesis, financial innovation, financial intermediation, fixed income, Flash crash, Hyman Minsky, income inequality, index fund, interest rate swap, invention of the wheel, market bubble, market clearing, mortgage debt, new economy, Occupy movement, passive investing, Ponzi scheme, principal–agent problem, profit motive, random walk, rent-seeking, risk tolerance, risk-adjusted returns, Robert Shiller, Robert Shiller, shareholder value, short selling, South Sea Bubble, statistical arbitrage, The Wealth of Nations by Adam Smith, transaction costs, Vanguard fund, William of Occam

See also Index funds assets exchange traded funds versus future of growth in number of as portfolio core profile of trading volumes “Trafficking” in management contracts Transactions: cost of taxes on Trends Turner, Adair Turner, Lynn Turnover: actively managed equity funds exchange traded funds index funds mutual funds Stewardship Quotient and stock market Twardowski, Jan M. 12b-1 fees Value, corporate Vanguard: Admiral shares balanced index fund bond funds, defined-maturity cash flow emerging markets stock fund exchange traded funds “Extended Market” portfolio growth and value index funds history index fund family milestones international funds LifeStrategy Portfolios proxy votes REIT index fund small capitalization stock fund Stewardship Quotient structure and strategy tax-managed index funds Vanguard 500 Index Fund Vanguard Institutional Index Fund Vanguard PRIMECAP Fund Vanguard Total Bond Market Index Fund Vanguard Total Stock Market Index funds Vanguard U.S. Growth Fund Vanguard Wellington Fund. See Wellington Fund Vanguard Windsor Fund Volatility Volcker Rule “Wall Street Casino, The” (Bogle) Wall Street Journal, The Wealth of Nations, The (Smith) Wellington Fund: about advisory fees Annual Report (1967) Annual Report (1978) Annual Report (2000) Annual Report (2010) assets under management Beta dividend income projections dividend policy dividends equity ratio expenses Fall (1967–1978) founding income strategy, implications of investment committee lessons from memo on restructuring memo on speculation naming of other balanced funds versus other pioneer funds compared to performance portfolio approach to higher income Renaissance (1978-2012) restructuring memo returns Rise (1929-1966) shareholder objectives survey speculation memo Wellington Management Company.

Compounded, the appreciation of a $10,000 investment made at the close of 1986 was remarkable: average actively managed bond fund $29,900; Vanguard Total Bond Market Index Fund, $42,600, or a difference in profit of more than 40 percent. This stunning advantage once again reaffirms the timeless truism: Never forget either the magic of long-term compounding of returns, nor the tyranny of long-term compounding of costs. Learning from Experience Certainly the marketplace of bond investors has learned from that truism. In 1989, the assets of Vanguard’s bond index fund didn’t reach even $100 million, and represented 0.1 percent of the total assets of all taxable bond funds. But by 1996, assets of our bond index funds had soared to $4 billion, some 1 percent of the assets of all taxable bond funds, and by 2006, $45 billion or 4 percent. As 2012 began, assets of Vanguard’s bond index funds totaled $190 billion, a record-high share of nearly 9 percent of all taxable bond fund assets.

Post-Neff annual returns: Fund 6.5 percent; S&P 500 6.5 percent. . . . Inferior returns turn to superior; then back to inferior; then average. Yet again, RTM strikes. Vanguard U.S. Growth Fund (1960–2012) Cumulative Return vs. S&P 500 Vanguard U.S. Growth Fund began in 1958 as Ivest Fund. . . . Wellington Management acquires its manager in 1966. . . . Cumulative return during 1961–1967 best in the entire mutual fund industry; 327 percent versus 108 percent for the S&P 500. . . . Pummeled in the 1973–1974 crash: −55 percent versus −35 percent for the S&P 500. Pedestrian recovery. . . . Cumulative return 1960–1976: Fund 238 percent; S&P 218 percent. RTM strikes again. . . . Name changed to Vanguard Growth Fund in 1980, then became a separate U.S. Growth portfolio. . . . New manager in 1987. . . . Fund and S&P 500 both rise 18 percent per year in 1987–1999. . . .


pages: 345 words: 87,745

The Power of Passive Investing: More Wealth With Less Work by Richard A. Ferri

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asset allocation, backtesting, Bernie Madoff, capital asset pricing model, cognitive dissonance, correlation coefficient, Daniel Kahneman / Amos Tversky, diversification, diversified portfolio, endowment effect, estate planning, Eugene Fama: efficient market hypothesis, fixed income, implied volatility, index fund, Long Term Capital Management, passive investing, Ponzi scheme, prediction markets, random walk, Richard Thaler, risk tolerance, risk-adjusted returns, risk/return, Sharpe ratio, too big to fail, transaction costs, Vanguard fund, yield curve

Securities and Exchange Commission (SEC) U.S. small cap funds U.S. stocks U.S. Treasury bonds Value investing Value stocks van Dijk, Mathijs A. Vanguard 500 Index Fund: 15-year tax cost ratio for 25-year study on active funds and domestic equity funds of launch of proven record of sales load, lack of Vanguard Bond Market Fund Vanguard First Index Investment Trust Vanguard Group: first index fund, launch of as global investment managers indexing, growth of international indexing analysis web site for Vanguard REIT Index Fund Vanguard S&P 500 index fund Vanguard Small Cap Index Fund Vanguard Total Bond Market Index ETF Vanguard Total Bond Market Index Fund Vanguard Total International Stock Fund Vanguard Total Stock Market Index Fund Vanguard U.S. Total Stock Market ETF Wahal, Sunil Wall Street: battle against indexing selling sizzle as sell side of business Wall Street Journal Walmart 401(k) plan lawsuit Wealth-maximizing mutual fund investors Web sites, passive investing Wellington Board of Directors Wellington Fund, launch of Wellington Group of Funds Wells Fargo Bank Wharton School Williams, John Burr Wilshire 4500 index Wilshire 5000 index Wilshire Associates Winner’s curse, the Winning the Loser’s Game (Ellis) World War II X-Ray portfolio management tool Your Money & Your Brain (Zweig) Zechhauser, Richard Zero-sum game: alpha as market timing strategies as non-market risk and tactical asset allocation as Zweig, Jason

My test compared this index fund portfolio to thousands of randomly selected active funds from the Morningstar list, in the correct weightings. Table 6.7 Model Index Fund Portfolio Used in the Live Study Index Fund Name Percent Allocation Vanguard Total Stock Market Index Fund 45% Vanguard Total International Stock Index Fund* 15% Vanguard Total Bond Market Index Fund 40% * The Vanguard Total International Fund had its first full year under management in 1998. The FTSE All-World ex-US Index Fund (less 0.4 percent fee) is substituted for the years 1995 through 1997. The allocation of the FTSE ex-US could have been replicated using three other Vanguard international index funds that were in existence over the entire time period. The difference between the simulated fund and the actual funds was negligible. Using the Morningstar Principia database ending in December 2009, I screened each asset class for actively managed funds that were in the same fund category and had the same investment objective as each index fund.

Who’s been winning the battle? Let’s start by looking at the performance of Vanguard’s first index fund over the past 25 years. There were about 260 actively managed domestic equity funds available to investors at the time the Vanguard 500 Index Fund launched in late 1976, according to Lipper, a financial markets research and wholly owned subsidiary of Reuters Group PLC. About half of those funds have closed or merged over the years, leaving 136 surviving funds as of December 2009. Figure 3.1 illustrates how these remaining funds have performed relative to the Vanguard 500 Index Fund over a 25-year period ending in 2009 according to Lipper data. Figure 3.1 Active Funds Performance Relative to Vanguard 500 Index Fund (1985-2009) Figure 3.1 doesn’t include the closed or merged funds. It only includes data on funds that have survived since 1976.


pages: 194 words: 59,336

The Simple Path to Wealth: Your Road Map to Financial Independence and a Rich, Free Life by J L Collins

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asset allocation, Bernie Madoff, compound rate of return, diversification, financial independence, full employment, German hyperinflation, index fund, nuclear winter, passive income, payday loans, risk tolerance, Vanguard fund, yield curve

If you’ve read this far, you know I am a strong proponent of investing in Vanguard index funds. Indeed, unless you have no choice (as discussed in Chapter 17), my strong suggestion is that you deal only with Vanguard. Understandably, such a bold recommendation is going to raise some questions. In this chapter we’ll address the four most common: 1. What makes Vanguard so special? When Jack Bogle founded Vanguard in 1975, he did so with a structure that remains unique in the investment world. Vanguard is client-owned and it is operated at-cost. Sounds good, but what does it actually mean? As an investor in Vanguard funds, your interest and that of Vanguard are precisely the same. The reason is simple. The Vanguard funds—and by extension the investors in those funds—are the owners of Vanguard.

Or maybe you want to leave some money to your kids, grandkids or to a charity. All will have their own long term horizons. The Three Tools Once you’ve sorted through your three considerations, you are ready to build your portfolio and you’ll need only these three tools to do it. See, I promised this would be simple! 1. Stocks: VTSAX (Vanguard Total Stock Market Index Fund). Stocks provide the best returns over time and serve as our inflation hedge. This is our core wealth-building tool. (See Chapter 17 for variants of this same fund.) 2. Bonds: VBTLX (Vanguard Total Bond Market Index Fund). Bonds provide income, tend to smooth out the rough ride of stocks and serve as our deflation hedge. 3. Cash. Cash is good to have around to cover routine expenses and to meet emergencies. Cash is also king during times of deflation. The more prices drop, the more your cash can buy.

As you get older you might want to smooth the ride a bit, even at the cost of lower overall returns. You want to sleep at night. Now that I’m kinda, sorta retired and we are financially independent, me too. My wife and I hold some other stuff in our portfolio. But not much. Here it is: ~75% Stocks: VTSAX (Vanguard Total Stock Market Index Fund). Still our core holding for all the reasons we’ve discussed. ~20% Bonds: VBTLX (Vanguard Total Bond Market Index Fund). Bonds provide some income, tend to smooth out the rough ride of stocks and are a deflation hedge. ~5% Cash: We hold ours in our local bank. You can fine-tune these allocations to your own personal considerations. Want a smoother ride? Willing to accept a potentially lower long-term return and slower wealth accumulation?

All About Asset Allocation, Second Edition by Richard Ferri

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asset allocation, asset-backed security, barriers to entry, Bernie Madoff, capital controls, commodity trading advisor, correlation coefficient, Daniel Kahneman / Amos Tversky, diversification, diversified portfolio, equity premium, estate planning, financial independence, fixed income, full employment, high net worth, Home mortgage interest deduction, implied volatility, index fund, Long Term Capital Management, Mason jar, mortgage tax deduction, passive income, pattern recognition, random walk, Richard Thaler, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, Robert Shiller, Sharpe ratio, too big to fail, transaction costs, Vanguard fund, yield curve

Stock Market ETF (VTI) Vanguard Total International Portfolio (VGTSX) or Vanguard FTSE All World ex-U.S. ETF (VEU) Vanguard REIT Index Fund (VGSIX) or Vanguard REIT ETF (VNQ) Vanguard Total Bond Market Index Fund (VBMFX) or Vanguard Total Bond Market ETF (BND) Building Your Portfolio TA B L E 251 12-2 Early Savers—Moderate Multi-Asset-Class Portfolio (open-end mutual funds or ETF version) Asset Class Percent Sample Low-Cost Funds and Symbols U.S. Equity Core equity 25% Vanguard Total U.S. Stock Market Index (VTSMX) or Vanguard Total U.S. Stock Market ETF (VTI) Small value 10% Vanguard Small-Cap Value Index Fund (VISVX) or iShares S&P 600 Barra Value (IJS) 5% Bridgeway Ultra Small Company Market (BRSIX) or iShares Russell Microcap Index ETF (IWC) 10% Vanguard REIT Index Fund (VGSIX) or Vanguard REIT ETF (VNQ) Microcap Real estate International Equity Pacific Rim—large 5% Vanguard Pacific Stock Index (VPACX) or Vanguard Pacific Stock ETF (VLP) Europe—large 5% Vanguard European Stock Index (VEURX) or Vanguard European Stock ETF (VGK) International smallcap value 5% DFA International Small Cap Value* (DISVX) or WisdomTree International Small Cap Dividend (DLS) Emerging markets 5% DFA Emerging Markets* (DFEMX) or Vanguard Emerging Markets Stock ETF (VWO) Fixed Income Investment-grade bonds 20% Vanguard Total Bond Market Index Fund (VBMFX) or Vanguard Total Bond Market ETF (BND) High-yield bonds 5% Vanguard High Yield Bond Fund (VWEHX) or iShares iBoxx High Yield Corporate Bond (HYG) Inflation-protected bonds 5% Vanguard Inflation-Protected Securities (VIPSX) or iShares Barclays TIPS Bond Fund (TIP) *DFA funds are available only through select investment advisors.

Stock Market ETF (VTI) Vanguard Total International Portfolio (VGTSX) or Vanguard FTSE All World ex-US ETF (VEU) Vanguard REIT Index Fund (VGSIX) or Vanguard REIT ETF (VNQ) Vanguard Total Bond Market Index Fund (VBMFX) or Vanguard Total Bond Market ETF (BND) CHAPTER 12 256 TA B L E 12-4 Midlife Accumulators—Moderate Multi-Asset-Class Portfolio (open-end mutual funds or ETFs) Asset Class Percent U.S. Equity Core U.S. equity 20% Small value 10% Sample Low-Cost Funds and Symbols Vanguard Total U.S. Stock Market Index (VTSMX) or Vanguard Total U.S. Stock Market ETF (VTI) Vanguard Small-Cap Value Index Fund (VISVX) or iShares S&P 600 Barra Value (IJS) Bridgeway Ultra Small Company Market (BRSIX) or iShares Russell Microcap Index ETF (IWC) Microcap 5% Real estate 8% Vanguard REIT Index Fund (VGSIX) or Vanguard REIT ETF (VNQ) International Equity Pacific Rim—large 4% Europe—large 4% International small-cap value 5% Emerging markets 4% Vanguard Pacific Stock Index (VPACX) or Vanguard Pacific Stock ETF (VLP) Vanguard European Stock Index (VEURX) or Vanguard European Stock ETF (VGK) DFA International Small Cap Value* (DISVX) or WisdomTree International Small Cap Dividend (DLS) DFA Emerging Markets Core* (DFEMX) or Vanguard Emerging Markets ETF Fixed Income Investment-grade bonds 20% High-yield bonds 10% Inflation-protected bonds 10% Vanguard Total Bond Market Index Fund (VBMFX) or Vanguard Total Bond Market ETF (BND) Vanguard High Yield Bond Fund (VWEHX) or iShares iBoxx High Yield Corporate Bond (HYG) Vanguard Inflation-Protected Securities (VIPSX) or iShares Barclays TIPS Bond Fund (TIP) *DFA funds are available only through select investment advisors.

Stock Market ETF (VTI) Vanguard Total International Portfolio (VGTSX) or Vanguard FTSE All World ex-US ETF (VEU) Vanguard REIT Index Fund (VGSIX) or Vanguard REIT ETF (VNQ) Vanguard Total Bond Market Index Fund (VBMFX) or Vanguard Total Bond Market ETF (BND) Low-cost money market fund with checking 12-6 Transitional including Active Retirees—Moderate Multi-AssetClass Portfolio (open-end mutual funds or ETFs) Asset Class U.S. Equity Core U.S. equity Percent 18% Small value 8% Microcap 4% Real estate 7% International Equity Pacific Rim—large 3% Europe—large 3% International 4% Emerging markets 3% Fixed Income Investment-grade 24% High-yield bonds 12% Inflation-protected bonds 12% Cash Cash equivalent 2% Sample Low-Cost Funds and Symbols Vanguard Total U.S. Stock Market Index (VTSMX) or Vanguard Total U.S. Stock Market ETF (VTI) Vanguard Small-Cap Value Index Fund (VISVX) or iShares S&P 600 Barra Value (IJS) Bridgeway Ultra Small Company Market (BRSIX) or iShares Russell Microcap Index ETF (IWC) Vanguard REIT Index Fund (VGSIX) or Vanguard REIT ETF (VNQ) Vanguard Pacific Stock Index (VPACX) or Vanguard Pacific Stock ETF (VLP) Vanguard European Stock Index (VEURX) or Vanguard European Stock ETF (VGK) DFA International Small Cap Value* (DISVX) or small-cap value WisdomTree International Small Cap Dividend (DLS) DFA Emerging Markets* (DFEMX) or Vanguard Emerging Markets Stock ETF (VWO) Vanguard Total Bond Market Index Fund (VBMFX) bonds or Vanguard Total Bond Market ETF (BND) Vanguard High Yield Bond Fund (VWEHX) or iShares iBoxx High Yield Corporate Bond (HYG) Vanguard Inflation-Protected Securities (VIPSX) or iShares Barclays TIPS Bond Fund (TIP) Low-cost money market fund with checking *DFA funds are only available through select financial advisors.


pages: 335 words: 94,657

The Bogleheads' Guide to Investing by Taylor Larimore, Michael Leboeuf, Mel Lindauer

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asset allocation, buy low sell high, corporate governance, correlation coefficient, Daniel Kahneman / Amos Tversky, diversification, diversified portfolio, Donald Trump, endowment effect, estate planning, financial independence, financial innovation, high net worth, index fund, late fees, Long Term Capital Management, loss aversion, Louis Bachelier, margin call, market bubble, mental accounting, passive investing, random walk, risk tolerance, risk/return, Sharpe ratio, statistical model, transaction costs, Vanguard fund, yield curve

While all three of us believe that indexing is an excellent investment strategy, all three of us own actively managed Vanguard funds, too. Although Vanguard is known as the pioneer of index funds, it also offers a wide variety of actively managed funds, with some having delivered great returns. For example, for the first 20 years of its existence (1984 to 2004), Vanguard's Health Care Fund had the highest annual average return of any mutual fund in the world. And in the past 25 years, a portfolio of Vanguard's actively managed funds outperformed the Wilshire 5000 (the total U.S. stock market index) by an average of 0.9 percent per year. This portfolio's excellent performance has been largely due to a combination of good management coupled with low costs. Vanguard's actively managed funds, like all Vanguard funds, carry no sales charge and have an average annual expense ratio of just 0.47 percent.

The various LifeStrategy funds offered by Vanguard are good examples of these types of funds. Let's take a look at the composition of a couple of these funds. The Vanguard LifeStrategy Growth Fund has a fairly aggressive target asset allocation of 80 percent stocks and 20 percent bonds. This fund of funds invests in four Vanguard funds: 1. Total Stock Market Index Fund 2. Total International Stock Index Fund 3. Asset Allocation Fund 4. Total Bond Market Fund The Vanguard LifeStrategy Conservative Growth Fund has a more conservative target asset allocation of 40 percent stocks and 60 percent bonds. This fund of funds invests in five Vanguard funds: 1. Total Stock Market Index Fund 2. Total International Stock Index Fund 3. Asset Allocation Fund 4. Total Bond Market Fund 5. Short-Term Investment-Grade Bond Fund There are two other funds in the Vanguard LifeStrategy series that offer differing asset allocations.

Experienced investors understand this volatility and accept the inevitable declines. We know that by simply changing our allocation between stocks and bonds, we can lessen the amount of volatility in our portfolio until we reach our comfortable sleep level. Table 8.2 shows the maximum decline that would have occurred during the 2000 to 2002 three-year bear market using various combinations of two Vanguard funds-Vanguard's Total Stock Market Index Fund and Vanguard's Total Bond Market Index Fund, with annual rebalancing. It illustrates why nearly every portfolio should contain an allocation to bonds. If you were invested in stocks during the 2000 to 2002 three-year bear market, you undoubtedly have a good idea of your risk tolerance. If you sold losing funds, or if you lost sleep, your portfolio should almost certainly have held more bonds.


pages: 490 words: 117,629

Unconventional Success: A Fundamental Approach to Personal Investment by David F. Swensen

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asset allocation, asset-backed security, capital controls, cognitive dissonance, corporate governance, diversification, diversified portfolio, fixed income, index fund, law of one price, Long Term Capital Management, market bubble, market clearing, market fundamentalism, passive investing, pez dispenser, price mechanism, profit maximization, profit motive, risk tolerance, risk-adjusted returns, Robert Shiller, Robert Shiller, shareholder value, Silicon Valley, Steve Ballmer, technology bubble, the market place, transaction costs, Vanguard fund, yield curve

Regardless of the measurement period, the mutual-fund industry ill serves its taxable investors. Table 7.4 Most Mutual-Fund Assets Reside in Taxable Accounts Source: Investment Company Institute. Table 7.5 After-TaxMutual-Fund Returns Disappoint Performance Relative to the Vanguard 500 Index Fund Source: Arnott et al., Journal of Portfolio Management 26, no. 4 (2000). Notes: These returns do not reflect survivorship bias. Data reflect periods ending December 31, 1998. To add insult to injury, the Vanguard 500 Index Fund results emanate from a portfolio that lays no claim to tax-sensitive investing. While the generally low turnover of the Vanguard 500 Index Fund portfolio leads to reasonably attractive tax characteristics, paying attention to tax issues could further improve the after-tax results. For example, taxable investors gain an edge by simply realizing losses when they reach a critical size and using the proceeds to purchase a close substitute for the loss-making security.

Robert Arnott’s 2000 examination of U.S. equity mutual-fund returns shows a twenty-year pre-tax deficit of 2.1 percent per year relative to the result achieved by investors in Vanguard’s 500 Index Fund. Nearly 80 percent of actively managed funds failed to reach Vanguard’s market-mimicking return. Well-informed tax-deferred investors reach an obvious conclusion: look no further than low-cost, passively managed index funds. Since mutual-fund managers pay little or no attention to the tax consequences of their actions, after-tax results prove even more dismal for investors. Arnott shows a twenty-year after-tax shortfall of 2.8 percent per year relative to the Vanguard 500 Index Fund, which itself takes no account of tax considerations. More than 85 percent of mutual funds fail to meet the Vanguard 500 Index Fund after-tax return. The after-tax return deficit proves stunning both because of its size and because it describes the experience of the majority of mutual-fund investors.

The overwhelmingly likely explanation for this dichotomy suggests that benefits of scale accrue largely to fund-management-company profits with nothing left over for improving shareholder returns. Vanguard and GMO represent the exception; Principal and Bernstein, the rule. Table 8.8 Vanguard U.S. Value Fund Investors Receive a Fair Deal (Percent) Source: The Vanguard Group, Vanguard U.S. Value Fund Prospectus, 29 January 2004: 2, 7. Notes: Figures represent charges for the year ending September 30, 2003. As of September 30, 2003, the Vanguard U.S. Value Fund had approximately $474 million in net assets. Charges for asset levels in excess of $1 billion represent estimates. Management fees represent base fees, ignoring incentive fees that increase or decrease GMO’s compensation by as much as 0.125 percent. Beyond the unmet expectation that increasing scale should lead to decreasing fees, other evidence points to mutual-fund company fee gouging.

The Intelligent Asset Allocator: How to Build Your Portfolio to Maximize Returns and Minimize Risk by William J. Bernstein

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asset allocation, backtesting, capital asset pricing model, computer age, correlation coefficient, diversification, diversified portfolio, Eugene Fama: efficient market hypothesis, fixed income, index arbitrage, index fund, Long Term Capital Management, p-value, passive investing, prediction markets, random walk, Richard Thaler, risk tolerance, risk-adjusted returns, risk/return, South Sea Bubble, the scientific method, time value of money, transaction costs, Vanguard fund, Yogi Berra, zero-coupon bond

Of course, Vanguard also incurs these costs, but because of low index fund turnover, these expenses are much less than that of conventional actively managed funds. Here are the Vanguard stock funds I’d recommend: 1. Vanguard 500 Index Fund. The granddaddy of all index funds, which tracks the S&P 500. Sometime in the next year, it will almost certainly become the planet’s largest mutual fund. A fine choice for the long haul, particularly in tax-sheltered accounts, it does have some modest drawbacks for the taxable investor. Standard & Poor’s periodically adds and deletes stocks from the index, incurring distributions as the fund rearranges its portfolio accordingly. Because of this, I’d recommend two alternatives for the taxable investor—the Vanguard Total Stock Market Index Fund and the Vanguard TaxManaged Growth and Income Funds. 2. Vanguard Tax-Managed Growth and Income Fund.

Because this strategy results in high turnover, it is not suitable for taxable accounts. I suspect that Vanguard will be coming out with a tax-managed largecap value strategy sooner or later, but they’re not there yet. 5. Vanguard Small-Cap Index Fund. This fund tracks the Russell 2000 Index. It is suitable only for tax-sheltered accounts. 6. Vanguard Tax-Managed Small-Cap Fund. For taxable accounts, this fund uses the tax-managed strategy described above. This fund has a $10,000 minimum and the same 1% or 2% redemption fee as the TaxManaged Growth and Income Fund. It also carries a .5% purchase fee, payable to the fund itself to mitigate the spread and impact costs in this area. 7. Vanguard Small-Cap Value Index Fund. This fund is suitable for tax-sheltered accounts only because it is likely to have high turnover and distributions. It has a .5% purchase fee. Vanguard does not yet have a tax-managed small-cap value fund. 8.

The traditional all-U.S. half-stock and half-bond portfolio is extremely simple and easy to rebalance. Vanguard even offers single funds which will provide various mixes of U.S. stock and bond indexes. For this convenience, you are probably sacrificing 1% to 2% of long-term return for a given degree of risk. Another compromise would be to split your stock component equally into six Vanguard index funds (Value, 500 Index, Small-Cap, European, Pacific, and Emerging Markets) for your stock component and use one of their short-term bond funds for the fixed-income component. Even simpler, Vanguard offers a Total International Index Fund. For those who value the convenience of simple portfolios, these compromises may be worthwhile. (One caveat about the Vanguard Total International Fund: It is a “fund of funds” and thus not eligible for the foreign tax credit.


pages: 407 words: 114,478

The Four Pillars of Investing: Lessons for Building a Winning Portfolio by William J. Bernstein

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asset allocation, Bretton Woods, British Empire, buy low sell high, carried interest, corporate governance, cuban missile crisis, Daniel Kahneman / Amos Tversky, Dava Sobel, diversification, diversified portfolio, Edmond Halley, equity premium, estate planning, Eugene Fama: efficient market hypothesis, financial independence, financial innovation, fixed income, German hyperinflation, high net worth, hindsight bias, Hyman Minsky, index fund, invention of the telegraph, Isaac Newton, John Harrison: Longitude, Long Term Capital Management, loss aversion, market bubble, mental accounting, mortgage debt, new economy, pattern recognition, quantitative easing, railway mania, random walk, Richard Thaler, risk tolerance, risk/return, Robert Shiller, Robert Shiller, South Sea Bubble, transaction costs, Vanguard fund, yield curve

Steel, 147, 160 USA Today, 219, 220 Value averaging, 283–285 Value Line, 90 Value Line Fund, 90 Value stocks (“bad” companies) asset allocation, 120-122, 172, 248–255, 251–253 Graham on, 158 in portfolio building, 109, 120–122, 172 In Search of Excellence (Peters) on, 64 real returns on, 68, 69, 72 rebalancing, 289–290 returns on, 34-38 tax efficiency of, 263–264 Vanguard 500 Index Fund, 97, 98, 102–104, 215, 216 Vanguard GNMA Fund, 215-216 Vanguard Growth Index Fund, 249 Vanguard Limited Term Tax Exempt Fund, 261 Vanguard mutual funds fee structure, 210, 250, foreign indexed funds, 119 founding by Bogle, 213-214 as no-load company, 205 Vanguard Short-Term Corporate Fund, 261 Vanguard Small-Cap Index Fund, 99 Vanguard Tax-Managed Small-Cap Index Fund, 99 Vanguard Total International Fund, 255, 256 Vanguard Total Stock Market Fund, 104, 246 Vanguard Value Index Fund, 249-250 Variable annuity fund, 204 Variety, 145 Venetian prestiti, 10–13 Vertin, James, 96–97 Victoria, Queen of England, 143 Von Böhm-Bawerk, Eugen, 8 Wal-Mart, 34–35, 185 The Wall Street Journal, 85, 96, 98, 167, 211, 219, 222, 225 Wall Street Week (television program), 224 Walz, Daniel T., 231 Wellington Management Company, 213–214 Wells Fargo, first index fund, 96–97, 215, 245 Westinghouse, 133 Wheeler, Dan, 123 Where are the Customers’ Yachts?

There are many ways to approach this problem, but a reasonable compromise would be to add an additional fund for each $5,000 contributed. This will initially result in 0.2% extra expense—not a bad price to pay for the diversification obtained. I’d recommend adding in asset classes/funds in the following order: 1. $0–$5,000 added: Start with Vanguard 500 Index Fund. 2. $5,000–$10,000 total contributions: Add Vanguard Total International Fund. 3. $10,000–$15,000 total contributions: Add Vanguard REIT Index Fund. 4. $15,000–$20,000 total contributions: Add Vanguard Small-Cap Value Fund. Note that we are not adding $5,000 to each fund in sequence. For example, Yvonne’s asset allocation calls for a total of 13.2% foreign equity (the sum of the four international funds) and 6% REITs. So, of the second $5,000 added, only $1,500 will go into the Total International Fund.

Wells Fargo’s index fund was not initially available to the general public, but that was soon to change. A few years later, in September 1976, John Bogle’s young Vanguard Group offered the first publicly available S&P 500 Index fund. Vanguard’s fund was not exactly a roaring success out of the starting gate. After two years, it had collected only $14 million in assets. In fact, it did not cross the billion-dollar mark—the radar threshold of the fund industry—until 1988. But as the advantages of indexing became evident to small investors, it took off. For the past few years, it has been running neck-and-neck for the number one spot in asset size with Lynch’s old fund, Magellan. Truth be told, the Vanguard 500 Index Fund has gotten a little too popular. Of all the major stock indexes, the S&P 500 has done the best in recent years. Much of the new assets that the fund has collected are “hot money,” coming from naïve investors who are simply chasing performance.


pages: 222 words: 70,559

The Oil Factor: Protect Yourself-and Profit-from the Coming Energy Crisis by Stephen Leeb, Donna Leeb

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Buckminster Fuller, diversified portfolio, fixed income, hydrogen economy, income per capita, index fund, mortgage debt, North Sea oil, oil shale / tar sands, oil shock, peak oil, profit motive, reserve currency, rising living standards, Ronald Reagan, shareholder value, Silicon Valley, Vanguard fund, Yom Kippur War, zero-coupon bond

In the discussion a few paragraphs above, where we contrasted a buy-and-hold strategy with an oil indicator strategy and saw our return double, the results were based on buying and selling “the market.” And this was not in any way a mere theoretical exercise: it is entirely possible to buy and sell “the market” by investing in index funds that include all the stocks in particular market indices. In our comparisons, we assumed you were buying and selling the Vanguard 500 Index Fund, which is a no-load fund that can be purchased through the Vanguard Group. But while index funds are a convenient way to showcase our oil indicator’s performance, they won’t be good investments in the years ahead, and when oil flashes a positive signal, we don’t suggest that you buy “the market.” That’s because, as we explain later, we believe that oil prices have embarked upon a long-term uptrend. It is likely to be interrupted from time to time, but the overall direction will be up.

Appendix List of Recommendations Stocks Apartment Investment and Management (AIV) NYSE Apex Silver (SIL) NYSE Barrick Gold (ABX) NYSE Berkshire Hathaway (Class B—BRK) NYSE Boeing (BA) NYSE CACI International (CAI) NYSE ChevronTexaco (CVX) NYSE Devon Energy (DVN) AMEX Duke Realty (DRE) NYSE EnCana (ECA) NYSE Exelon (EXC) NYSE General Dynamics (GD) NYSE General Electric (GE) NYSE Headwaters (HDWR) NASDAQ Impala Platinum (IMPUY) NYSE Intel (INTC) NASD Lockheed Martin (LMT) NYSE Nabors (NE) NYSE Newmont Mining (NEM) NYSE Noble (NE) NYSE Northrop Grumman (NOC) NYSE Petro-Canada (PCZ) NYSE PetroChina (PRT) NYSE Raytheon (RTN) NYSE Schlumberger (SLB) NYSE Tiffany (TIF) NYSE Toyota Motor (TM) NYSE Weight Watchers International (WTW) NYSE Funds American Century Global Gold Fund (BGEIX) American Century Zero-Coupon Bond Funds: Target Maturities Trust: 2005 (BTFIX) Target Maturities Trust: 2010 (BTTNX) Target Maturities Trust: 2015 (BTFTX) Target Maturities Trust: 2020 (BTTTX) Target Maturities Trust: 2025 (BTTRX) Target Maturities Trust: 2030 (ACTAX) 1-800-345-2021; www.americancentury.com Excelsior Energy and Natural Resources Fund (UMESX) 1-800-446-1012; www.excelsiorfunds.com Fidelity Investment Grade Bond Fund (FBNDX) Fidelity Low-Priced Stock Fund (FLPSX) 1-800-343-3548; www.fidelity.com Gabelli Gold Fund (GOLDX) 1-800-422-3554; www.gabelli.com ICON Energy Fund (ICENX) 1-888-389-4266; www.iconfunds.com Royce Total Return Fund (RYTRX) 1-800-221-4268; www.roycefunds.com Third Avenue Small-Cap Value Fund (TASCX) 1-800-880-8442; www.thirdave.com Tocqueville Gold Fund (TGLDX) 1-212-698-0800; www.tocqueville.com Vanguard Energy Fund (VGENX) Vanguard Precious Metals Fund 1-877-662-7447; www.vanguard.com To buy silver and platinum directly, use the Web site www.kitco.com.

As noted above, though, it quickly became clear that Saddam lacked the ability to cripple oil production. And as oil prices collapsed back to the high teens, the recession ended. Stocks once again embarked upon a bull run—and this one was to be a bull run for the ages. Between 1991 and 2000, with oil prices remaining well under control, stocks staged one of the greatest rallies any financial market has ever seen. If you had invested in the S&P 500, say, by buying the Vanguard 500 Index Fund, in January 1991, you would have gained on average 20 percent a year for the next nine years. To put it differently, a $10,000 investment would have turned into more than $50,000. And because those nine years were ones of low inflation, your gains were mostly real gains in terms of their actual purchasing power. Moreover, as everyone knows, while the market as a whole was thriving, the tech sector, especially as the decade drew to a close, was on a real tear.


pages: 369 words: 128,349

Beyond the Random Walk: A Guide to Stock Market Anomalies and Low Risk Investing by Vijay Singal

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Andrei Shleifer, asset allocation, capital asset pricing model, correlation coefficient, cross-subsidies, Daniel Kahneman / Amos Tversky, diversified portfolio, endowment effect, index arbitrage, index fund, locking in a profit, Long Term Capital Management, loss aversion, margin call, market friction, market microstructure, mental accounting, merger arbitrage, new economy, prediction markets, price stability, profit motive, random walk, Richard Thaler, risk-adjusted returns, risk/return, Sharpe ratio, short selling, transaction costs, Vanguard fund

However, none of the alternative financial instruments works for these smallcapitalization stocks, as they are not part of any index, nor do they have traded options. Mutual funds have low transaction costs compared to stocks or futures. Unfortunately, none of the mutual funds fits the requirements—either they hold too many stocks or they hold stocks that are too large. Total market funds, such as Vanguard Total Market, hold about 3,500 of the largest stocks and do not include any of the smaller stocks. Vanguard Total Market fund’s weighted market cap is $32.5 billion, much larger than the objective of a $25 million median market cap. Perhaps the best fit is the Dimensional Fund Advisors U.S. Micro Cap Portfolio (formerly U.S. 9-10 Small Company portfolio), which claims to invest in the “smallest 4 percent of the market universe.” However, it holds 2,900 stocks that span the entire bottom 50 percent of the market.

Clearly, this is a large return for a short period and does not seem difficult to earn. MUTUAL FUNDS Many funds will not charge you a redemption fee provided you don’t trade multiple times in a year. Since the December effect requires only one buy and one sell in a year, it is unlikely that there will be any fees. Large, no-load S&P 500 index funds that are open to retail investors include Vanguard’s 500 Index Fund (VFINX), Dreyfus’s index fund (DSPIX), and Scudder Equity 500 Index Investment Fund (BTIEX). The fund returns are reported in Table 2.6. The returns earned are almost identical to those earned by the S&P 500. However, since the transaction cost is close to zero, the net return is about 1.8 percent over a five-day period. Therefore, index mutual funds are a superior vehicle for capturing the December effect.

The December effect of 1.5 percent could have been profitably exploited during that period using a simple technique: hold the S&P 500 index for about a week at the end of the year. Internet References http://www.cme.com: The Chicago Mercantile Exchange is the primary exchange for trading stock index futures. http://www.indexfunds.com: Provides a list of mutual funds and exchangetraded funds indexed to the S&P 500 and the Nasdaq 100. http://www.rydexfunds.com, http://www.profunds.com, http://www.vanguard.com: Sites of mutual fund families that offer index funds. The first two do not impose any penalty for frequent trading. The January Effect and the New December Effect References for Further Reading Agrawal, Anup, and Kishore Tandon. 1994. Anomalies or Illusions? Evidence from Stock Markets in Eighteen Countries. Journal of International Money and Finance 13(1), 83–106. Barry, Christopher B., and Stephen J.

Early Retirement Guide: 40 is the new 65 by Manish Thakur

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Airbnb, diversified portfolio, financial independence, index fund, Lyft, passive income, passive investing, risk tolerance, Robert Shiller, Robert Shiller, time value of money, Vanguard fund, Zipcar

Keep in mind, these are only investing best practices, not financial recommendations backed up by any professional certification. Speak with your financial advisor about your goals to find an investment that works well for you and your financial situation. Many people find success through other means, but this is the tried and true method that has been used by thousands of other people on their independence journeys. Challenges: 1. Set up a Vanguard fund today! 2. Put in at least $100 into an index fund after setting up your account Set up Automatic Deposit and Investing After understanding your spending habits and setting up your investment fund, it's time to set your investing on autopilot. After working through the budgeting section, you should understand how much is needed each month. Humans are terrible about consistently doing what's good for us, so let's make it as easy as possible to do a great thing for ourselves.


pages: 244 words: 79,044

Money Mavericks: Confessions of a Hedge Fund Manager by Lars Kroijer

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Bernie Madoff, capital asset pricing model, diversification, diversified portfolio, family office, fixed income, forensic accounting, Gordon Gekko, hiring and firing, implied volatility, index fund, Jeff Bezos, Just-in-time delivery, Long Term Capital Management, merger arbitrage, new economy, Ponzi scheme, risk-adjusted returns, risk/return, shareholder value, Silicon Valley, six sigma, statistical arbitrage, Vanguard fund, zero-coupon bond

But wouldn’t Mr Straw be quite upset with the company canteen folks if they forced him to pay this kind of price premium for a slightly more exotic-sounding and tasting fruit as part of his standard company lunch? The example described needs one further explanation. Namely, how did the hedge fund generate its 10 per cent return? If the hedge fund was just long the Standard & Poor’s 500 index and that index was up 10 per cent for the year, Mr Straw would have paid large fees for very little additional value. He could just have bought a Vanguard index fund and paid 0.2 per cent in total fees, not 7 per cent (although he might not be able to avoid some pension-fund costs to gain tax advantages). The directional funds still charge the fees, but do not add as much value (they just own something that went up) as those with 10 per cent pure alpha (value generation) – more on this later. As the events of autumn 2008 suggest, a large number of hedge funds were indeed long the markets and the value they generated was thus lower.

Something will have to give: the hedge-fund industry will either have to start charging lower fees, generally decline in size, or only charge fees when it can demonstrate actual outperformance. As the fallout from the turmoil of 2008 shows, there seems to be a good deal of evidence of at least the first two points. To get an idea of the scale of fees, imagine Mr Straw invested $100 in the type of fund used in the example above, while Mrs Straw takes $100 from her savings and puts it in a Vanguard fund. Now suppose that both those investments return 10 per cent per year before any fees over the ten-year period of the investment until Mr and Mrs Straw are ready for retirement. The results are both obvious and staggering. Investment comparison A simplistic example, but the fees to the hedge fund and fund of funds are ten times higher than those to Vanguard, and this is before pension-fund costs, expenses or trading costs.

When buying exposure to a stock index there are today so many competing products (ETFs, index funds, mutual funds, futures, etc.) that it should be possible to achieve the kind of exposure you desire and still be tax optimised (capital gains versus dividend income, etc.). With the ever-changing tax regime and planning possibilities available, optimising a portfolio for tax is well worth getting expert advice on. Where to invest Along with stock-market futures, index products like Vanguard tracker funds or the many ETFs (exchange traded funds) offer the cheapest access to the various indices they represent. If you buy 20 mutual funds that try to beat the S&P500 index, the chances are that on average they will underperform the index by approximately their fees. The fees in these mutual funds vary but, including trading and related expenses, come to around 1.5–2.0 per cent per year compared with tracker fund fees of roughly 0.2 per cent per year.


pages: 416 words: 118,592

A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing by Burton G. Malkiel

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accounting loophole / creative accounting, Albert Einstein, asset allocation, asset-backed security, backtesting, Bernie Madoff, BRICs, capital asset pricing model, compound rate of return, correlation coefficient, Credit Default Swap, Daniel Kahneman / Amos Tversky, diversification, diversified portfolio, Elliott wave, Eugene Fama: efficient market hypothesis, experimental subject, feminist movement, financial innovation, fixed income, framing effect, hindsight bias, Home mortgage interest deduction, index fund, invisible hand, Isaac Newton, Long Term Capital Management, loss aversion, margin call, market bubble, mortgage tax deduction, new economy, Own Your Own Home, passive investing, pets.com, Ponzi scheme, price stability, profit maximization, publish or perish, purchasing power parity, RAND corporation, random walk, Richard Thaler, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, Robert Shiller, short selling, Silicon Valley, South Sea Bubble, The Myth of the Rational Market, The Wisdom of Crowds, transaction costs, Vanguard fund, zero-coupon bond

Those who need a steady income for living expenses could increase their holdings of real estate equities, because they provide somewhat larger current income. A SPECIFIC INDEX-FUND PORTFOLIO FOR AGING BABY BOOMERS Cash (5%)* Fidelity Money Market Fund (FORXX), or Vanguard Prime Money Market Fund (VMMXX) Bonds (27½%)† Vanguard Total Bond Market Index Fund (VBMFX) Real Estate Equities (12½%) Vanguard REIT Index Fund (VGSIX) Stocks (55%) U.S. Stocks (27%) Fidelity Spartan (FSTMX), T. Rowe Price (POMIX), or Vanguard (VTSMX) Total Stock Market Index Fund Developed International Markets (14%) Fidelity Spartan (VSIIX), or Vanguard (VDMIX) International Index Fund Emerging International Markets (14%) Vanguard Emerging Markets Index Fund (VEIEX) Remember also that I am assuming here that you hold most, if not all, of your securities in tax-advantaged retirement plans. Certainly all bonds should be held in such accounts.

And it does minimize the regret that inevitably follows if you were unlucky enough to have put all your money into the stock market during a peak period such as March of 2000 or October of 2007. To further illustrate the benefits of dollar-cost averaging, let’s move from a hypothetical to a real example. The following table shows the results (ignoring taxes) of a $500 initial investment made on January 1, 1978, and thereafter $100 per month, in the shares of the Vanguard 500 Index mutual fund. Less than $39,000 was committed to the program. The final value was over $265,000. ILLUSTRATION OF DOLLAR-COST AVERAGING WITH VANGUARD’S 500 INDEX FUND Year Ended December 31 Total Cost of Cumulative Investments Total Value of Shares Acquired 1978 $1,600.00 $1,699.26 1979 2,800.00 3,273.66 1980 4,000.00 5,755.25 1981 5,200.00 6,630.16 1982 6,400.00 9,487.21 1983 7,600.00 12,783.16 1984 8,800.00 14,863.80 1985 10,000.00 20,905.05 1986 11,200.00 25,934.97 1987 12,400.00 28,221.32 1988 13,600.00 34,079.49 1989 14,800.00 46,126.09 1990 16,000.00 45,803.07 1991 17,200.00 61,009.59 1992 18,400.00 66,816.94 1993 19,600.00 74,687.08 1994 20,800.00 76,779.25 1995 22,000.00 106,944.33 1996 23,200.00 132,767.97 1997 24,400.00 178,217.41 1998 25,600.00 230,619.41 1999 26,800.00 280,564.59 2000 28,000.00 256,271.48 2001 29,200.00 226,622.13 2002 30,400.00 177,503.25 2003 31,600.00 229,523.84 2004 32,800.00 255,479.22 2005 34,000.00 268,932.69 2006 35,200.00 312,317.65 2007 36,400.00 330,350.05 2008 37,600.00 208,940.55 2009 38,800.00 265,755.99 Of course, no one can be sure that the next forty years will provide the same returns as past periods.

If bonds are held outside of retirement accounts, you may well prefer tax-exempt bonds rather than the taxable securities. Moreover, if your common stocks will be held in taxable accounts, you may want to consider the tax-managed index funds discussed in the next section. Finally, note that I have given you a choice of index funds from different mutual-fund complexes. Because of my long association with the Vanguard Group, I wanted also to suggest a number of non-Vanguard funds. All the funds listed have moderate expense ratios and are no-load. More information on these funds, including telephone numbers and Web sites, is listed in the Random Walker’s Address Book, which follows this chapter. ETFs and the Tax-Managed Index Fund One of the advantages, noted above, of passive portfolio management (that is, simply buying and holding an index fund) is that such a strategy minimizes transactions costs as well as taxes.


pages: 357 words: 91,331

I Will Teach You To Be Rich by Sethi, Ramit

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Albert Einstein, asset allocation, buy low sell high, diversification, diversified portfolio, index fund, late fees, mortgage debt, mortgage tax deduction, prediction markets, random walk, risk tolerance, Robert Shiller, Robert Shiller, shareholder value, Silicon Valley, Vanguard fund

To make this a little easier, when you click “Products and Services” on most sites, you’ll be able to find a fund screener that will let you add search filters like “international index funds with an expense ratio of less than 0.75%” to find funds that fit your criteria. Remember, this isn’t simple. Creating your own portfolio takes significant research. As an example of what you might end up with, here’s a sample portfolio made of all Vanguard funds: Stocks (“Equities”) 30 percent—Total Market Index/equities (VTSMX) 20 percent—Total International Stock Index/equities (VGTSX) 20 percent—REIT index/equities (VGSIX) Bonds 5 percent—U.S. treasury bond index/bonds (VFISX) 5 percent—Vanguard Intermediate-Term Treasury Fund (VFITX) 5 percent—Vanguard Long-Term Treasury Fund (VUSTX) 15 percent—TIPS bond index/bonds (VIPSX) These are just a few of the literally thousands of index funds that exist. You can be flexible with the funds. If you want to be more or less aggressive, you can change the allocation to match your risk tolerance.

But in 2000, just two years later, U.S. large-cap stocks lost 9.10 percent, foreign stocks lost 14.17 percent, and REITS gained 31.04 percent. Similarly, different types of bonds offer different benefits, including rates of return and tax advantages. STOCKS AND BONDS HAVE MANY FLAVORS WHAT A GRANNY NEEDS: TYPICAL ASSET ALLOCATIONS BY AGE Here’s what typical investors’ asset allocations—remember, that’s the mix of different investments—might look like as they get older. These figures are taken from Vanguard’s lifecycle funds. The fact that performance varies so much in each asset class means two things: First, if you’re trying to make a quick buck off investing, you’ll usually lose money because you have no idea what will happen in the near future. Anyone who tells you they do is a fool or a commission-based salesman. Second, you should own different categories of stocks (and maybe bonds) to balance out your portfolio.

In other words, if you invested $5,000 today, let it sit there, and earned a 10 percent return, you’d have $10,000 in about seven years. And it doubles from there, too. Of course, you could have even more by adding a small amount every month using the power of compounding. CHOOSING A LIFECYCLE FUND FOR YOUR ROTH IRA Two companies with popular lifecycle funds are Vanguard and T. Rowe Price, both of which are great. Vanguard’s Target Date 2045 fund (that is, assuming you’ll retire around sixty-five, your “target date” of retirement will be somewhere around 2045) has a very low 0.19 percent expense ratio. The minimum investment to get started is $3,000, and you can set up monthly recurring contributions of at least $100 each. (Note: Vanguard also charges a $30 annual account maintenance fee which you can get waived by signing up at Vanguard.com and getting your account notifications by e-mail instead of snail mail.)


pages: 426 words: 115,150

Your Money or Your Life: 9 Steps to Transforming Your Relationship With Money and Achieving Financial Independence: Revised and Updated for the 21st Century by Vicki Robin, Joe Dominguez, Monique Tilford

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asset allocation, Buckminster Fuller, buy low sell high, credit crunch, disintermediation, diversification, diversified portfolio, fiat currency, financial independence, fudge factor, full employment, Gordon Gekko, high net worth, index card, index fund, job satisfaction, Menlo Park, Parkinson's law, passive income, passive investing, profit motive, Ralph Waldo Emerson, Richard Bolles, risk tolerance, Ronald Reagan, Silicon Valley, software patent, strikebreaker, Thorstein Veblen, Vanguard fund, zero-coupon bond

Mark Zaifman told me that in his own practice—personal and professional—he uses Vanguard, a company that is known for simplicity and low fees. There are other mutual funds, some with socially responsible screens that may be important to you. Trying to speak to those FIers who want to keep it simple, he offered the four Vanguard Funds to narrow the field of thousands of mutual funds down to something manageable. Here’s his explanation: Mark’s suggestions for Your NEW FI Investment Strategy The most conservative approach for this strategy would be to use the Life-Strategy Income Fund, the first of the four Vanguard Funds. Although marketed as a fund for those in retirement, it is also applicable for those who are FI and no longer working for money. This fund seeks current income and has some growth of capital. The fund applies a fixed formula that over time should reflect an asset allocation of approximately 60 percent of the fund’s assets to bonds, 20 percent to short-term reserves and 20 percent to common stocks.

SRI has grown as a field from 55 socially screened mutual funds with $12 billion in assets in 2005 to 260 funds with $202 billion in assets in 2007.2 Brent Kessel, cofounder of Abacus Portfolios and author of It’s Not About the Money says of this approach to investing, “While SRI was originally considered a fringe movement of tree-hugging Californians, the downfall of such corporate giants as Enron, Tyco, and Arthur Andersen brought a whole new population of SRI investors in from both sides of the political aisle.” Vanguard, the family of funds Mark uses with clients, also has an SRI fund, the Vanguard FTSE. Calvert, Ariel and Domini Funds have been around longer, but now, with the popularity of SRI, most mutual funds will offer some screened funds. For those who want to go this route, several FIers recommend the Web site of the Social Investment Forum, www.socialinvest.org, which offers comprehensive contacts, resources and information on socially responsible investing and is a good source of information about trends in the field and how these vehicles compare to the conventional market.

See frugality Thurow, Lester Tightwad Gazette, The (Dacyczyn) Time Bind, The (Hochschild) Time Dollars System tool sharing trading possessions transportation costs auto insurance consumer price index and expense category saving money on subcategories list trash treasury bonds Treasury Direct Treasury Inflation-Protected Securities (TIPS) Trimbath, Tom unconscious spending unemployment United Nations World Commission on Environment and Development unpaid jobs U.S. treasury bonds used items, buying utilities, subcategories list utopian communities vacations value, researching purchases valuing life energy aligning values and behavior evaluating expenditures joy-to-stuff ratio by maximizing income by minimizing spending Vanguard Funds Veblen, Thorstein venture capital victim mentality volunteer vacations volunteerism activism and advocacy after crossover point finding projects and causes freedom of helping and caring redefined Wachtel, Paul wages, disconnecting from work. See work, redefining wall charts adding investment income to awareness from hanging recording income and expenses Wall Street (movie) Wall Street Journal, The, bond information Wampler, Dave wealth, not equal to financial independence What Color Is Your Parachute?


pages: 363 words: 28,546

Portfolio Design: A Modern Approach to Asset Allocation by R. Marston

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asset allocation, Bretton Woods, capital asset pricing model, capital controls, carried interest, commodity trading advisor, correlation coefficient, diversification, diversified portfolio, equity premium, Eugene Fama: efficient market hypothesis, family office, financial innovation, fixed income, German hyperinflation, high net worth, hiring and firing, housing crisis, income per capita, index fund, inventory management, Long Term Capital Management, mortgage debt, passive investing, purchasing power parity, risk-adjusted returns, Robert Shiller, Robert Shiller, Ronald Reagan, Sharpe ratio, Silicon Valley, superstar cities, transaction costs, Vanguard fund

The Tremont hedge fund data set, for example, begins in 1994, while the HFRI data set begins in 1990. 13. Since geometric averages are involved, the premium is measured using the compound formula, (1.102)/(1.099) – 1 = 0.3%. And the estimate of the EAFE return based on the S&P 500’s 9.4 percent return is calculated as (1.094)∗(1.003) – 1 = 9.7%. 14. These portfolios are all invested in Vanguard Index Funds. The analysis below substitutes the bond and stock indexes which most closely correspond to the Vanguard funds involved. 15. Margaritaville was developed by Scott Burns, a Dallas Morning News financial columnist. Dr. Bernstein is a financial advisor to high net worth individuals, and Second Grader is presumably a young investor with a long enough horizon to invest 90 percent in equity! After we introduce alternative investments, we will consider another MarketWatch portfolio, the Unconventional Success portfolio recommended by David Svensen of the Yale Endowment.

PORTFOLIOS OF STOCKS AND BONDS By the time of retirement, the investor should have reduced the proportion of stocks in the portfolio way below that chosen during earlier working years. As discussed above, the Vanguard Target Retirement Fund shifts the investor from a 90 percent stock portfolio when the investor is 25 years from retirement to a 50/50 portfolio at retirement. The 50/50 retirement portfolio is a common one chosen, at least early in retirement. Because risk is central to the success or failure of spending rules, we will try to reduce risk by diversifying the portfolio just as in the previous chapter on foundations. In the case of bonds, the bond returns are based on the Barclays Aggregate index. In the case of stocks, both foreign and domestic stocks are included, with foreign stocks being one-fifth of the total stock allocation (as in the Vanguard Fund). Foreign stocks are represented by the Morgan Stanley EAFE index, while U.S. stocks are represented by the Russell 3000 index.

By the time of retirement 15 years later, this investor will have only 50 percent invested A 303 P1: a/b c15 P2: c/d QC: e/f JWBT412-Marston T1: g December 20, 2010 17:6 304 Printer: Courier Westford PORTFOLIO DESIGN At Rerement 15 years from rerement Foreign Stocks 15% Foreign Stocks 10% Bonds 25% U.S. Stocks 40% U.S. Stocks 60% Ordinary Bonds 40% Inflaon Protected Bonds 10% FIGURE 15.1 Portfolios for Investors 15 years Prior to and at Retirement (Vanguard 2025 Target Retirement Fund) Source: www.vanguard.com. in stocks and 50 percent invested in bonds with a 10 percent allocation in inflation-protected bonds (to help protect against inflation in retirement). Target retirement funds are designed to model the life cycle of investing beginning with the early years of working when very aggressive allocations are called for. Figure 15.2 shows the evolution over time of the Vanguard allocations in their 2035 target retirement fund.

Stocks for the Long Run, 4th Edition: The Definitive Guide to Financial Market Returns & Long Term Investment Strategies by Jeremy J. Siegel

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asset allocation, backtesting, Black-Scholes formula, Bretton Woods, buy low sell high, California gold rush, capital asset pricing model, cognitive dissonance, compound rate of return, correlation coefficient, Daniel Kahneman / Amos Tversky, diversification, diversified portfolio, dividend-yielding stocks, equity premium, Eugene Fama: efficient market hypothesis, fixed income, German hyperinflation, implied volatility, index arbitrage, index fund, Isaac Newton, joint-stock company, Long Term Capital Management, loss aversion, market bubble, mental accounting, new economy, oil shock, passive investing, prediction markets, price anchoring, price stability, purchasing power parity, random walk, Richard Thaler, risk tolerance, risk/return, Robert Shiller, Robert Shiller, Ronald Reagan, shareholder value, short selling, South Sea Bubble, technology bubble, The Great Moderation, The Wisdom of Crowds, transaction costs, tulip mania, Vanguard fund

Indexing became so popular that in the first six months of 1999 nearly 70 percent of the money that was invested went into index funds.13 By 2007, all Vanguard 500 Index funds had attracted over $200 billion in assets, but the largest single equity mutual fund is the American Growth Fund with assets of $185 billion.14 One of the attractions of index funds is their extremely low cost. The total annual cost in the Vanguard 500 Index Fund is only 0.18 percent of market value (and as low as 2 basis points for large institutional investors). Because of proprietary trading techniques and interest income from loaning securities, Vanguard S&P 500 Index funds for individual investors have fallen only 9 basis points behind the index over the last 10 years, and its institutional index funds have actually outperformed the index.15 THE PITFALLS OF CAPITALIZATION-WEIGHTED INDEXING Despite their past success, the popularity of indexing, especially those funds linked to the S&P 500 Index, may cause problems for index 12 Five years before the Vanguard 500 Index Fund, Wells Fargo created an equally weighted index fund called “Samsonite,” but its assets remained relatively small. 13 Heather Bell, “Vanguard 500 Turns 25, Legacy in Passive Investing,” Journal of Index Issues, Fourth Quarter 2001, pp. 8–10. 14 Vanguard’s number includes assets of its 500 Index Fund open to both individuals and institutions. 15 The Vanguard Institutional Index Fund Plus shares, with a minimum investment of $200 million, have outperformed the S&P 500 Index by 7 basis points in the 10 years following the fund’s inception on July 7, 1997. 352 PART 5 Building Wealth through Stocks investors in the future.

Steel Group, 49 Utilities sector: in GICS, 53 global shares in, 175i, 177 Utility, 322 Valuation, 144–145 value versus growth stocks and, 144–145 Value Line Index, 47n, 256 Value stocks, 362–363 growth stocks versus, 144–145 nature of, 157 Value-weighted indexes, 42–45 (See also Center for Research in Security Prices [CRSP] index; Nasdaq Index; Standard & Poor’s [S&P] index) Valuing Wall Street (Smithers and Wright), 117 Vanguard 500 Index Fund, 263n Vanguard Institutional Index Fund Plus, 351n Vanguard S&P 500 Index funds, 351 Van Strum, Kenneth S., 80n Verizon, 177 Vesting, 106 Viceira, Luis M., 35n Vietnam War, 233 bear market and, 85 Virginia Carolina Chemicals, 60i, 63 Vishny, R., 326n VIX Index, 281–282, 282i, 334 Vodafone, 177 Volatility (see Market volatility) 380 Volcker, Paul, 9, 195 Vuolteenaho, Tuomo, 158n Wachovia Bank, 21n Wages, Nixon’s freezing of, 194 Wall Street Journal, 38, 290 Wal-Mart, 155, 176i, 177 Wang, Jiang, 304n War: market movements and, 225, 231–235 (See also specific wars) War on terrorism, 234 Weber, Steven, 218n Wein, Byron, 86 Index Welch, Ivo, 325n Wells Fargo, 351n Werner, Walter, 12n, 21n Western Co., 63 White, Weld & Co., 97 Williams, Frank J., 319q Williams, John Burr, 101 Wilshire 5000 index, 342 Wisdom Tree Investments, 356 Withers, Hartley, 81 Wm.

Thus, the 1990s witnessed an enormous increase in passive investing, the placement of funds whose sole purpose was to match the performance of an index. The oldest and most popular of the index funds is the Vanguard 500 Index Fund.12 The fund, started by visionary John Bogle, raised only $11.4 million when it debuted in 1976, and few thought the concept would survive. But slowly and surely indexing gathered momentum, and the fund’s assets reached $17 billion at the end of 1995. In the latter stages of the 1990s bull market, the popularity of indexing soared. By March 2000, when the S&P 500 Index reached its alltime high, the fund claimed the title of the world’s largest equity fund with assets over $100 billion. Indexing became so popular that in the first six months of 1999 nearly 70 percent of the money that was invested went into index funds.13 By 2007, all Vanguard 500 Index funds had attracted over $200 billion in assets, but the largest single equity mutual fund is the American Growth Fund with assets of $185 billion.14 One of the attractions of index funds is their extremely low cost.


pages: 280 words: 73,420

Crapshoot Investing: How Tech-Savvy Traders and Clueless Regulators Turned the Stock Market Into a Casino by Jim McTague

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algorithmic trading, automated trading system, Bernie Madoff, Bernie Sanders, Bretton Woods, buttonwood tree, credit crunch, Credit Default Swap, financial innovation, Flash crash, High speed trading, housing crisis, index arbitrage, locking in a profit, Long Term Capital Management, margin call, market bubble, market fragmentation, market fundamentalism, naked short selling, pattern recognition, Ponzi scheme, quantitative trading / quantitative finance, Renaissance Technologies, Ronald Reagan, Sergey Aleynikov, short selling, Small Order Execution System, statistical arbitrage, technology bubble, transaction costs, Vanguard fund, Y2K

The e-mail said, “To the contrary, we would argue that the U.S. equity markets were a shining model of reliability and healthy function during what some are calling one of the most challenging and difficult times in recent market history.” A third participant wrote the SEC in advance of the meeting, “Implementing any type of regulation that would limit the tools or the effectiveness of automation available for use by any class of investor in the name of ‘fairness’ would turn back the clock on the U.S. equity market and undo years of innovation and investment.” The only mutual fund company invited to sit on the panel was Vanguard Funds. It was an outlier among mutual fund firms in that it staunchly defended HFT, arguing that the activity kept costs down by narrowing stock spreads and reducing transaction costs. Vanguard had a personal agenda: It was one of the largest managers of exchange-traded funds (ETFs), a product that was a cross between a mutual fund and an index option. Arnuk quipped in a blog that Vanguard churned out ETFs faster than Hasbro churned out Hannah Montana toys.

See consolidated tape time delay of consolidated tape, 72, 199-205, 225-226 “Toxic Equity Trading Order Flow on Wall Street: The Real Force Behind the Explosion in Volume and Volatility” (Arnuk and Saluzzi), 19 Toyota, approval ratings, 92 trade-through rule, 144-146 Tradeworx, 153-155 Trading Places (film), 29 Trillium Brokerage Services LLC, 210, 212 U–V uncertainty, volatility and, 177 unification of commodities and equities exchanges, 36, 70 “upstairs” market, 119-121 Uptick Rule, 50-51, 54 Vanguard Funds, 185 Vega, Clara, 98 volatility during Flash Crash, 72-73 after Great Recession, 2-3 in high-frequency trading (HFT), 8-9 reasons for, 175-182 rhythm of, 176-177 volume of trading declines in NYSE, 146-147 due to automated trading, 64 on equities exchanges, 31 during Flash Crash, 81 inflating, 22 revenue generated from, 165-166 W–Z Wachovia National Bank, 100 Waddell & Reed Financial, Inc., 69, 213-219 Warner, Mark, 187 Washington Post, 196 Weild, David, 142-143 Weisberg, Theodore, 222 Wells Fargo, 100 Whalen, Christopher, 40 Where Are the Customer’s Yachts?


pages: 670 words: 194,502

The Intelligent Investor (Collins Business Essentials) by Benjamin Graham, Jason Zweig

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accounting loophole / creative accounting, air freight, Andrei Shleifer, asset allocation, buy low sell high, capital asset pricing model, corporate governance, Daniel Kahneman / Amos Tversky, diversified portfolio, Eugene Fama: efficient market hypothesis, hiring and firing, index fund, Isaac Newton, Long Term Capital Management, market bubble, merger arbitrage, new economy, passive investing, price stability, Ralph Waldo Emerson, Richard Thaler, risk tolerance, Robert Shiller, Robert Shiller, Ronald Reagan, shareholder value, sharing economy, short selling, Silicon Valley, South Sea Bubble, Steve Jobs, the market place, transaction costs, tulip mania, VA Linux, Vanguard fund, Y2K, Yogi Berra

Two Acronyms to the Rescue Fortunately, you can bolster your defenses against inflation by branching out beyond stocks. Since Graham last wrote, two inflation-fighters have become widely available to investors: REITs. Real Estate Investment Trusts, or REITs (pronounced “reets”), are companies that own and collect rent from commercial and residential properties.10 Bundled into real-estate mutual funds, REITs do a decent job of combating inflation. The best choice is Vanguard REIT Index Fund; other relatively low-cost choices include Cohen & Steers Realty Shares, Columbia Real Estate Equity Fund, and Fidelity Real Estate Investment Fund.11 While a REIT fund is unlikely to be a foolproof inflation-fighter, in the long run it should give you some defense against the erosion of purchasing power without hampering your overall returns. TIPS. Treasury Inflation-Protected Securities, or TIPS, are U.S. government bonds, first issued in 1997, that automatically go up in value when inflation rises.

Nearly every growth fund owns Cisco and GE and Microsoft and Pfizer and Wal-Mart—and in almost identical proportions. This behavior is so prevalent that finance scholars simply call it herding.4 But by protecting their own fee income, fund managers compromise their ability to produce superior returns for their outside investors. FIGURE 9-2 The Funnel of Fund Performance Looking back from December 31, 2002, how many U.S. stock funds outperformed Vanguard 500 Index Fund? One year: 1,186 of 2,423 funds (or 48.9%) Three years: 1,157 of 1,944 funds (or 59.5%) Five years: 768 of 1,494 funds (or 51.4%) Ten years: 227 of 728 funds (or 31.2%) Fifteen years: 125 of 445 funds (or 28.1%) Twenty years: 37 of 248 funds (or 14.9%) Source: Lipper Inc. Because of their fat costs and bad behavior, most funds fail to earn their keep. No wonder high returns are nearly as perishable as unrefrigerated fish.

Longleaf’s Mason Hawkins looks for corporate managers who are “good partners”—meaning that they communicate candidly about problems, have clear plans for allocating current and future cash flow, and own sizable stakes in the company’s stock (preferably through cash purchases rather than through grants of options). But “if managements talk more about the stock price than about the business,” warns Robert Torray of the Torray Fund, “we’re not interested.” Christopher Davis of the Davis Funds favors firms that limit issuance of stock options to roughly 3% of shares outstanding. At Vanguard Primecap Fund, Howard Schow tracks “what the company said one year and what happened the next. We want to see not only whether managements are honest with shareholders but also whether they’re honest with themselves.” (If a company boss insists that all is hunky-dory when business is sputtering, watch out!) Nowadays, you can listen in on a company’s regularly scheduled conference calls even if you own only a few shares; to find out the schedule, call the investor relations department at corporate headquarters or visit the company’s website.

The Smartest Investment Book You'll Ever Read: The Simple, Stress-Free Way to Reach Your Investment Goals by Daniel R. Solin

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asset allocation, corporate governance, diversification, diversified portfolio, index fund, market fundamentalism, passive investing, prediction markets, random walk, risk tolerance, risk-adjusted returns, risk/return, transaction costs, Vanguard fund

First, he looked at the performance of all 494 actively managed mutual funds in the United States that had, as their goal, beating the S&P 500 Index for the five-year period July 1993 through June 1998. How hard could this be? The managers of these funds are among the best, brightest and highest-paid people in this country. Some of them earn millions of dollars to beat the S&P. Their funds charge more than eight times the cost of a simple index fund, like the Vanguard 500 Index Fund (VFINX). And we know this fund will always give investors the returns of the S&P 500 Index (reduced only by the amount of its low fees), because it is set up to do precisely that. O'Neal then did the same analysis for the next five-year period, from July 1998 through June 2003. Here is what he found: Only 46% of the actively managed funds beat the index during the first five-year period and only a pathetic 8% beat the index during the second five-year period.

Su market timing (predicting the future) Toronto Stock Exchange (TS£), 24, 135 Toronto Stock Exchange 300 (TSE 300), 113 trailcr fees, 60 Su also costs and fees, IOvesdng Trueman, Bren, 157 trusteeship, standards for, 99-101,138,168 trusts, income, 134-35, 169 Trzcinka, Charles, 151 Tufano, Peter, 149-50 Unconventional5uC(m (Swensen), 108, 182 universities, as Smart Investors, 106, 108 U.S. se<:urities industry, in Canada, 119, 152 U.S. stocks barriers to Canadian investors in, 119, 160 in index funds, 19 value stocks, 84-87, 114 Vanguard 500 Index Fund, 45 Vanguard Group, 89 Want, Liping, 169 Warywoda, Mark, 160 websites for Index Funds Advisors, 182 for this book, 124 Weinberg, Neil, 81 Weiss Ratings, Inc., 155 What Kind ofan Investor Art' You? (Deaves), 150--51, 162, l SI Wheeler, Daniel M., 91 WiUis, Andrew, 167 world stocks. &t'international srocks wrap accounts, 65--66, 161 Wynne, Harold, 153-54 Yacktman, Donald, 145 Yale University endowment fund, 108 Zensche, D irk, 134, 169


pages: 519 words: 118,095

Your Money: The Missing Manual by J.D. Roth

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Airbnb, asset allocation, bank run, buy low sell high, car-free, Community Supported Agriculture, delayed gratification, diversification, diversified portfolio, estate planning, Firefox, fixed income, full employment, Home mortgage interest deduction, index card, index fund, late fees, mortgage tax deduction, Own Your Own Home, passive investing, Paul Graham, random walk, Richard Bolles, risk tolerance, Robert Shiller, Robert Shiller, speech recognition, traveling salesman, Vanguard fund, web application, Zipcar

If the Fidelity Freedom 2035 is too aggressive for you, for example, go with the Fidelity Freedom 2025 instead. You can read more about lifecycle funds in this New York Times article: http://tinyurl.com/NYT-tdfunds. All-in-one funds If you like the idea of investing in just one fund but you don't want its asset allocation to change over time, you have a handful of other single-fund options, including: Vanguard STAR Fund (VGSTX), a collection of 11 other Vanguard mutual funds. The STAR fund is 45% U.S. stocks, 15% foreign stocks, 35% bonds, and 5% cash. (Investing in cash means putting money into things like money market accounts and CDs, which you learned about in Chapter 7.) This is a great fund to start with because you can invest as little as $1,000 into it (some funds have much higher initial investments). Fidelity Four-in-One Index Fund (FFNOX), a collection of four other Fidelity mutual funds.

Note Exchange-traded funds (or ETFs) are basically index funds that you can buy and sell like stocks (instead of going through a mutual fund company). To learn more about the subtle differences between index funds and ETFs, head to http://tinyurl.com/YH-etfs. In Unconventional Success: A Fundamental Approach to Personal Investment (Free Press, 2005), David Swensen writes, "Fully 95% of active investors lose to the passive alternative, dropping 3.8% per annum to the Vanguard 500 Index Fund results." In other words, people who own index funds have typically earned almost 4% more each year than those who own actively managed funds. (This long article offers a good summary of the arguments for using index funds: http://tinyurl.com/dowie-index.) By owning index funds, you can beat the returns of nearly everyone you know. But to do this, you can't let yourself get caught up in classic investing mistakes like those described in the next section.

In his book, he suggests several different portfolios, including this "no-brainer" collection of index funds that keeps things simple: 25% Vanguard 500 Index (VFINX) 25% Vanguard Small-Cap Index (NAESX) 25% Vanguard Total International Stock Index (VGTSX) 25% Vanguard Total Bond Market Index (VBMFX) You can read more about this portfolio at http://tinyurl.com/LP-nobrain. The Coffeehouse Portfolio by Bill Schultheis Bill Schultheis, the author of The New Coffeehouse Investor (Portfolio, 2009), believes that the secret to financial success is mastering the basics: saving, asset allocation, and matching the market. He says you can match the market with this lazy portfolio: 40% Vanguard Total Bond Index (VBMFX) 10% Vanguard 500 Index Fund (VFINX) 10% Vanguard Value Index (VIVAX) 10% Vanguard Total International Stock Index (VGSTX) 10% Vanguard REIT Index (VGSIX) 10% Vanguard Small-Cap Value Index (VISVX) 10% Vanguard Small-Cap Index (NAESX) To read more about The Coffeehouse Portfolio, head to http://tinyurl.com/LP-coffee. Other lazy portfolios These are just a few suggestions. There are scores of index funds out there, and countless ways to build portfolios around them.


pages: 295 words: 66,824

A Mathematician Plays the Stock Market by John Allen Paulos

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Benoit Mandelbrot, Black-Scholes formula, Brownian motion, business climate, butterfly effect, capital asset pricing model, correlation coefficient, correlation does not imply causation, Daniel Kahneman / Amos Tversky, diversified portfolio, Donald Trump, double entry bookkeeping, Elliott wave, endowment effect, Erdős number, Eugene Fama: efficient market hypothesis, four colour theorem, George Gilder, global village, greed is good, index fund, invisible hand, Isaac Newton, John Nash: game theory, Long Term Capital Management, loss aversion, Louis Bachelier, mandelbrot fractal, margin call, mental accounting, Nash equilibrium, Network effects, passive investing, Paul Erdős, Ponzi scheme, price anchoring, Ralph Nelson Elliott, random walk, Richard Thaler, Robert Shiller, Robert Shiller, short selling, six sigma, Stephen Hawking, transaction costs, ultimatum game, Vanguard fund, Yogi Berra

If the light bulb needed changing the market would have already done it. Efficient market theorists tend to believe in passive investments such as broad-gauged index funds, which attempt to track a given market index such as the S&P 500. John Bogle, the crusading founder of Vanguard and presumably a believer in efficient markets, was the first to offer such a fund to the general investing public. His Vanguard 500 fund is unmanaged, offers broad diversification and very low fees, and generally beats the more expensive, managed funds. Investing in it does have a cost, however: One must give up the fantasy of a perspicacious gunslinger/investor outwitting the market. And why do such theorists believe the market to be efficient? They point to a legion of investors of all sorts all seeking to make money by employing all sorts of strategies.

To the extent these predictions reflect a consensus of opinion, they’re already accounted for. To the extent that they don’t, they’re tantamount to forecasting coin flips. Whatever your views on the subject, the arguments for an efficient market spelled out in Burton Malkiel’s A Random Walk Down Wall Street and elsewhere can’t be grossly wrong. After all, most mutual fund managers continue to generate average gains less than those of, say, the Vanguard Index 500 fund. (This has always seemed to me a rather scandalous fact.) There is other evidence for a fairly efficient market as well. There are few opportunities for risk-free money-making or arbitrage, prices seem to adjust rapidly in response to news, and the autocorrelation of the stock prices from day to day, week to week, month to month, and year to year is small (albeit not zero). That is, if the market has done well (or poorly) over a given time period in the past, there is no strong tendency for it to do well (or poorly) during the next time period.

getting what you pay for insider trading and overvaluation price anomalies that lead to predictability price targets of selecting. see stock-picking uniformity of positive ratings value stocks Stocks for the Long Run (Siegel) stop-loss orders strike prices, of stock options subterranean information processing support levels survivorship bias Taleb, Nassim taxes, progressive technical analysis blackjack strategies as parallel to Elliott wave theory illusion of control created by moving averages as predictor of stock prices vs. random-walk theory resistance and support levels sequence complexity and trading rules and trends and predictability telecommunications industry Thaler, Richard on calendar effects contrarian anomalies in stock studies of on counter-productive behavior notion of mental accounts thinly traded stocks pump and dump strategy and shorting and distorting strategy time saving, heuristic rules for Titman, Sheridan traders. see also investors “blow up” and becoming “ghosts,” irrational interactions between technical traders and value traders Wolfram model of interactions between trading strategies. see also investment strategies; predictability, of stock market buy-sell rules complexity of data mining and market predictions and role of chance in technical traders vs. value traders treasury bills trend analysis. see also technical analysis Tversky, Amos ultimatum games undervalued stocks, lists of unemployment United Nations UUNet division, WorldCom (WCOM) value investing. see also fundamental analysis accounting practices and better returns than with growth investing contrarian basis of contrasted with growth investing risk and value stocks Vanguard 500 fund variance from mean as measure of risk portfolio volatility and volatility Beta (B) values and diversification and measuring with standard deviation online trading and options prices and resistance and support levels and stock market stocks treasury bills Wall Street. see also stock markets European market causing reaction on variety of influences effecting Wall Street Journal Warner, Kurt Web. see Internet Weill, Sanford whim. see also chance windfall money The Winner’s Curse (Thaler) Wolff, Alexander Wolff, Edward Wolfram, Stephen World Class Options Market Maker (WCOMM) world markets, liquidity in World Trade Center WorldCom (WCOM) acquisitions by anchoring to fifty-two-week high attempts to help out board game buying more as price drops decision to sell emotions dictating increased investment in guilt and despair over losses impact of Ebbers sell-off infatuation with margin calls on moving averages and purchase of Digex as example of “losing through winning,” recommended as strong buy in 1990s UUNet division Yahoo!


pages: 300 words: 77,787

Investing Demystified: How to Invest Without Speculation and Sleepless Nights by Lars Kroijer

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Andrei Shleifer, asset allocation, asset-backed security, Bernie Madoff, bitcoin, Black Swan, BRICs, Carmen Reinhart, cleantech, compound rate of return, credit crunch, diversification, diversified portfolio, equity premium, estate planning, fixed income, high net worth, implied volatility, index fund, invisible hand, Kenneth Rogoff, market bubble, passive investing, pattern recognition, prediction markets, risk tolerance, risk/return, Robert Shiller, Robert Shiller, sovereign wealth fund, too big to fail, transaction costs, Vanguard fund, yield curve, zero-coupon bond

Cheap and liquid index exposure is now commonplace and something most major financial firms offer. The right product for you is really an individual choice dependent partly on your tax and currency situation. But the key facts are the same. Buy as broad an index tracker as you can and as cheaply as you can. If you do that, you are doing pretty well. 1 At the time of writing, in the UK the only way to buy the Vanguard funds below £100,000 is through Alliance Trust. Vanguard has been making noises about introducing easier and more direct options. 2 See The Intelligent Asset Allocator: How to Build Your Portfolio to Maximize Returns and Minimize Risk by William Bernstein (American Media International LLC, 2004). part four Other things to think about chapter 15 * * * Pension and insurance For many individuals their investing lives are dominated less by issues relating to their rational portfolio, but rather by the options and choices with regard to pensions, life annuities and related products.


pages: 162 words: 50,108

The Little Book of Hedge Funds by Anthony Scaramucci

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Andrei Shleifer, asset allocation, Bernie Madoff, business process, carried interest, Credit Default Swap, diversification, diversified portfolio, Donald Trump, Eugene Fama: efficient market hypothesis, fear of failure, fixed income, follow your passion, Gordon Gekko, high net worth, index fund, Long Term Capital Management, mail merge, margin call, merger arbitrage, NetJets, Ponzi scheme, profit motive, quantitative trading / quantitative finance, random walk, Renaissance Technologies, risk-adjusted returns, risk/return, Ronald Reagan, Saturday Night Live, Sharpe ratio, short selling, Silicon Valley, too big to fail, transaction costs, Vanguard fund, Y2K, Yogi Berra

Scott Frush, Understanding Hedge Funds (New York: McGraw-Hill, 2006). 4. Mark J. P. Anson, The Handbook of Alternative Assets (Hoboken, NJ: John Wiley & Sons, 2006), 123. Chapter One What Is a Hedge Fund? The Traditional Long-Only Portfolio versus the Alternative Hedge Fund Portfolio Hedge funds are generally perceived to be the investment of choice of the rich and the informed, and they are more interesting and fun to discuss than your Vanguard index fund. —Cliff Asness, AQR Capital Management The year was 1989. I had just started working at Goldman Sachs in the world of investment banking—the industry adored by many Ivy League students and business school graduates. A few floors up, legendary research director Lee Cooperman was asked by Goldman Sachs to create a mutual fund and lead the Asset Management Division. This long-only equity mutual fund was called GS Capital Growth.


pages: 840 words: 202,245

Age of Greed: The Triumph of Finance and the Decline of America, 1970 to the Present by Jeff Madrick

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accounting loophole / creative accounting, Asian financial crisis, bank run, Bretton Woods, capital controls, collapse of Lehman Brothers, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, desegregation, disintermediation, diversified portfolio, Donald Trump, financial deregulation, fixed income, floating exchange rates, Frederick Winslow Taylor, full employment, George Akerlof, Hyman Minsky, income inequality, index fund, inflation targeting, inventory management, invisible hand, laissez-faire capitalism, locking in a profit, Long Term Capital Management, market bubble, minimum wage unemployment, Mont Pelerin Society, moral hazard, mortgage debt, new economy, North Sea oil, Northern Rock, oil shock, price stability, quantitative easing, Ralph Nader, rent control, road to serfdom, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, Ronald Reagan: Tear down this wall, shareholder value, short selling, Silicon Valley, Simon Kuznets, technology bubble, Telecommunications Act of 1996, The Chicago School, The Great Moderation, too big to fail, union organizing, V2 rocket, value at risk, Vanguard fund, War on Poverty, Washington Consensus, Y2K, Yom Kippur War

The government decided to prosecute on the basis of a flimsy case of tampering and obstruction of justice, rather than outright fraud, but after two trials ended in hung juries, Quattrone was acquitted in 2007 and back in the financial business. Kickbacks and payoffs contributed to the stock market bubble. But after the 2000 crash, nearly all the thousands of IPOs issued in the late 1990s had fallen to below their initial offering prices. Half of the ones that hadn’t gone out of business were selling for less than $1 a share. John Bogle, who had founded Vanguard Funds, estimated that the top executives of both old-line and newly public companies earned in total $1 trillion when they sold their shares during the bull market of the late 1990s. Fees and commission payments to investment banks, brokers, and mutual funds totaled another $1.275 trillion, he figured. “If the winners raked in what we can roughly estimate as at least $2.275 trillion, who lost all the money?”

., prl.1, prl.2, 7.1 Trump, Donald Tsai, Gerald Tudor Investment Tunney, John, 7.1, 7.2 Turner, Ed Turner, Ted, 8.1, 8.2, 8.3, 8.4, 8.5, 13.1 Turner Broadcasting Network (TNT), 8.1, 8.2, 8.3 Tuttle, Holmes Twentieth Century Fox, 7.1, 8.1, 8.2 Two Lucky People (Friedman and Friedman), 2.1 Tyco, 17.1, 17.2 Tynan, Kenneth UBS, 19.1, 19.2, 19.3, 19.4 Uhler, James Carvel, prl.1, prl.2 Uhler, Lewis, ix–x, prl.1, prl.2, 2.1, 7.1, 7.2 underwriters, 1.1, 6.1, 13.1, 13.2, 16.1, 16.2, 16.3, 17.1, 17.2, 17.3, 17.4, 17.5, 17.6, 17.7, 18.1, 19.1 unemployment insurance, 2.1, 2.2, 7.1 unemployment rate, prl.1, 2.1, 2.2, 2.3, 2.4, 2.5, 2.6, 2.7, 2.8, 3.1, 3.2, 4.1, 6.1, 8.1, 8.2, 9.1, 9.2, 9.3, 9.4, 9.5, 10.1, 11.1, 11.2, 11.3, 11.4, 12.1, 12.2, 12.3, 14.1, 14.2, 14.3, 14.4, 14.5, 17.1, 19.1, 19.2, 19.3, 19.4, 19.5, 19.6 United Technologies, 4.1, 5.1 Unruh, Jesse Updike, John uranium, 4.1, 5.1, 14.1 Utah International, 4.1, 5.1, 5.2, 12.1, 12.2 Value at Risk (VAR), 15.1, 15.2, 15.3, 15.4, 15.5, 17.1, 17.2 Vanguard Funds Van Horn, Rob Versailles, Treaty of (1919) Veterans Administration (VA), 18.1, 18.2 Viacom, 8.1, 16.1 Vietnam War, prl.1, 1.1, 2.1, 3.1, 3.2, 3.3, 3.4, 3.5, 3.6, 7.1, 10.1, 12.1, 19.1 Vilar, Alberto Viner, Jacob, 2.1, 2.2 Vinson & Elkins Volcker, Paul, 11.1, 11.2; background of, 3.1, 6.1, 11.3; in Carter administration, 11.4, 11.5, 11.6; as Federal Reserve chairman, itr.1, 6.2, 6.3, 6.4, 9.1, 9.2, 11.7, 13.1, 13.2, 13.3, 14.1, 15.1, 18.1, 19.1, 19.2; Greenspan compared with, 14.2, 14.3, 14.4, 14.5, 14.6; inflation policy of, 6.5, 6.6, 6.7, 6.8, 9.3, 11.8, 11.9, 11.10, 11.11, 11.12, 11.13, 11.14, 11.15, 11.16, 11.17, 14.7, 14.8; interest rates policy of, 6.9, 6.10, 9.4, 11.18, 11.19, 11.20, 11.21, 11.22, 15.2, 18.2, 18.3; in Reagan administration, 11.23, 11.24, 11.25; tax policy of, 11.26, 11.27, 11.28; as Treasury undersecretary, 3.2, 3.3, 6.11, 6.12, 6.13, 9.5, 9.6; unemployment rate and, 11.29, 11.30 Voorhis, Jerry Vranos, Michael, 12.1, 18.1 Wachtel, Paul wage controls, 2.1, 3.1, 3.2, 3.3, 3.4, 3.5, 3.6, 14.1 wage levels, itr.1, prl.1, prl.2, prl.3, 1.1, 2.1, 2.2, 2.3, 2.4, 2.5, 2.6, 2.7, 2.8, 2.9, 2.10, 2.11, 3.1, 3.2, 3.3, 3.4, 3.5, 3.6, 4.1, 4.2, 8.1, 8.2, 9.1, 9.2, 9.3, 10.1, 10.2, 11.1, 11.2, 11.3, 11.4, 11.5, 12.1, 12.2, 13.1, 14.1, 14.2, 14.3, 16.1, 17.1, 17.2, 19.1, 19.2 Walker, Charls Wall, Danny Wallace, George Wallich, Henry Wall Street, x, 1.1, 1.2, 1.3, 1.4, 3.1, 4.1, 6.1, 8.1, 8.2, 8.3, 9.1, 9.2, 9.3, 11.1, 12.1, 12.2, 12.3, 12.4, 13.1, 13.2, 13.3, 13.4, 13.5, 14.1, 14.2, 14.3, 14.4, 14.5, 15.1, 15.2, 15.3, 15.4, 15.5, 15.6, 16.1, 16.2, 16.3, 16.4, 16.5, 16.6, 17.1, 17.2, 18.1, 19.1, 19.2, 19.3, 19.4, 19.5, 19.6, 19.7, 19.8, 19.9, 19.10, 19.11, 19.12, 19.13, 19.14 Wall Street Journal, 2.1, 6.1, 16.1, 16.2, 17.1, 17.2 Wal-Mart, 8.1, 8.2 Walras, Léon Walters, Barbara Walton, Bud Walton, Sam, 8.1, 8.2, 12.1 Warner, Douglas, III Warner-Amex Cable, 8.1, 8.2 Warner Bros., 7.1, 8.1, 8.2 Warner Bros.


pages: 372 words: 89,876

The Connected Company by Dave Gray, Thomas Vander Wal

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A Pattern Language, Albert Einstein, Amazon Mechanical Turk, Amazon Web Services, Atul Gawande, Berlin Wall, business process, call centre, Clayton Christensen, complexity theory, en.wikipedia.org, factory automation, Googley, index card, interchangeable parts, inventory management, Jeff Bezos, Kevin Kelly, loose coupling, market design, minimum viable product, more computing power than Apollo, profit maximization, Richard Florida, self-driving car, shareholder value, side project, Silicon Valley, skunkworks, software as a service, South of Market, San Francisco, Steve Jobs, Steven Levy, Stewart Brand, The Wealth of Nations by Adam Smith, Tony Hsieh, Toyota Production System, Vanguard fund, web application, WikiLeaks, Zipcar

Notes for Chapter Four AMERICAN EXPRESS 2011 Global Customer Service Barometer, a research paper prepared for American Express by Echo, http://about.americanexpress.com/news/docs/2011x/AXP_2011_csbar_market.pdf. HATED COMPANIES “The most hated companies, and the most hated industries, are service providers.” From “Banks, Utilities, Telecoms Top Most Hated Companies List,” by Jason Chupick, PRNewser, October 14, 2011, http://www.mediabistro.com/prnewser/banks-utilities-telecoms-top-most-hated-companies-list_b28712. VANGUARD Vanguard Mutual Funds information based on interviews conducted by the author, 2011. Chapter 5. How companies lose touch Your most unhappy customers are your greatest source of learning. — Bill Microsoft Gates Companies tend to lose touch with customers as they grow, for a variety of reasons. Companies must find ways to create, maintain, and develop deep connections as they grow. Why Do Companies Lose Touch?

Think about the information available to Whole Foods employees on demand: they can look up any store on the platform and see the best-selling items in the store. They can rank stores by sales, growth, or profitability. If they want to look for the best cutting-edge practices, they know exactly where to look and whom to talk to. To maintain a shared awareness of customer issues and concerns, Vanguard Mutual Funds collects customer feedback through multiple channels like surveys, focus groups, comments on the website, customers conversations with phone associates, and so on. The customer feedback is aggregated and published to the entire company in a daily email called Voice of the Client (or VOC for short), so everyone can see the actual things that customers are saying, in their own words, on a daily basis.


pages: 537 words: 144,318

The Invisible Hands: Top Hedge Fund Traders on Bubbles, Crashes, and Real Money by Steven Drobny

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Albert Einstein, Asian financial crisis, asset allocation, asset-backed security, backtesting, banking crisis, Bernie Madoff, Black Swan, Bretton Woods, BRICs, British Empire, business process, capital asset pricing model, capital controls, central bank independence, collateralized debt obligation, Commodity Super-Cycle, commodity trading advisor, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency peg, debt deflation, diversification, diversified portfolio, equity premium, family office, fiat currency, fixed income, follow your passion, full employment, Hyman Minsky, implied volatility, index fund, inflation targeting, interest rate swap, inventory management, invisible hand, London Interbank Offered Rate, Long Term Capital Management, market bubble, market fundamentalism, market microstructure, moral hazard, North Sea oil, open economy, peak oil, pension reform, Ponzi scheme, prediction markets, price discovery process, price stability, private sector deleveraging, profit motive, purchasing power parity, quantitative easing, random walk, reserve currency, risk tolerance, risk-adjusted returns, risk/return, savings glut, Sharpe ratio, short selling, sovereign wealth fund, special drawing rights, statistical arbitrage, stochastic volatility, The Great Moderation, time value of money, too big to fail, transaction costs, unbiased observer, value at risk, Vanguard fund, yield curve

Protégé bet on the performance of five funds-of-hedge funds—specifically, the averaged returns that those vehicles deliver net of all fees, costs, and expenses. Buffett bet on the performance of the Vanguard S&P 500 Admiral Fund. The time frame is January 1, 2008 to December 31, 2017. Each side committed roughly $320,000. The total funds of about $640,000 were used to buy a zero-coupon Treasury bond that will deliver $1 million at the bet’s conclusion, which will be given to charity regardless of who wins. If Protégé wins, the money is to be given to Absolute Return for Kids (ARK), an international philanthropy based in London. If Buffett wins, the intended recipient is Girls Inc. of Omaha. To see more information about the bet, go to www.longbets.org. During the course of 2008, the Vanguard S&P 500 fund was down 37 percent and on average (net of all fees, costs, and expenses) the five funds-of-funds selected by Protégé were down 23.9 percent.

During the course of 2008, the Vanguard S&P 500 fund was down 37 percent and on average (net of all fees, costs, and expenses) the five funds-of-funds selected by Protégé were down 23.9 percent. At year-end 2009, the Vanguard 500 Index Fund’s (VFINX) return was 26.5 percent while the HFRI Fund of Funds Composite Index (a proxy for the five funds-of-hedge-funds) was up 11.2 percent for the year. After two years of performance, the approximate BAV (Bet Asset Value) is: Protégé 84.6; Buffett 79.7. You cannot have it both ways. Either you take an absolute return approach regardless of the market environment, or you just go for efficient beta and be happy with the outcome. I use the former approach when managing my personal money. I have the vast majority of my wealth in my own fund and with other hedge fund managers whom I respect, where I am confident in their ability to make money year in and year out. Some years might be up a lot, while others only up a little, but there is a very high probability that each year will at least be positive.

National Labor Relations Board (NLRB), corporate pension ruling U.S. public/private pension fund assets growth inflation, impact U.S. TIPS (2008-2009) U.S. Treasuries investment purchase worthlessness U.S. Treasury bonds (1987-1988) markets, protest Notes Valuation examination importance Valuation-driven tactical asset allocation models, time frame (increase) Value-at-Risk (VaR) calculation model Value-driven fundamental models, belief Vanguard 500 Index Funds (VFINX) return Vega, limits Venture capital opportunities, cash flow production Vision macro Visualization VIX, Fed funds (relationship) VIX Index (2007-2009) Volatility adjustment collapse dampening explanation usage Volcker, Paul Wages, transmission Washington State Investment Board West Texas Intermediate (WTI) crude World financial system, collapse World Trade Organization (WTO), China entry Wyatt, Watson Wynn, Steve credit bubble, recognition creditworthiness diversification perspective feedback, usage future correlations, usage historical correlations, usage interview lessons macro scenario, preparation money making ability multiple scenarios, tracking psychology, importance risk capital, reduction skill, recognition Swedish bond market, forward market introduction time horizon, alteration volatilities, usage Yale Asset Class, results Yale Endowment Investment Committee long-term investment popularity/usage Yale Model Yale University, endowments annual long-term performance control (Swensen) decline equity returns portfolio composition Yield curves, impact Zero-sum game, alpha extraction (relationship) Zimbabwe hyperinflation inflation/equities (2005-2008) market


pages: 461 words: 128,421

The Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street by Justin Fox

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Albert Einstein, Andrei Shleifer, asset allocation, asset-backed security, bank run, Benoit Mandelbrot, Black-Scholes formula, Bretton Woods, Brownian motion, capital asset pricing model, card file, Cass Sunstein, collateralized debt obligation, complexity theory, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, discovery of the americas, diversification, diversified portfolio, Edward Glaeser, endowment effect, Eugene Fama: efficient market hypothesis, experimental economics, financial innovation, Financial Instability Hypothesis, floating exchange rates, George Akerlof, Henri Poincaré, Hyman Minsky, implied volatility, impulse control, index arbitrage, index card, index fund, invisible hand, Isaac Newton, John Nash: game theory, John von Neumann, joint-stock company, Joseph Schumpeter, libertarian paternalism, linear programming, Long Term Capital Management, Louis Bachelier, mandelbrot fractal, market bubble, market design, New Journalism, Nikolai Kondratiev, Paul Lévy, pension reform, performance metric, Ponzi scheme, prediction markets, pushing on a string, quantitative trading / quantitative finance, Ralph Nader, RAND corporation, random walk, Richard Thaler, risk/return, road to serfdom, Robert Shiller, Robert Shiller, rolodex, Ronald Reagan, shareholder value, Sharpe ratio, short selling, side project, Silicon Valley, South Sea Bubble, statistical model, The Chicago School, The Myth of the Rational Market, The Predators' Ball, the scientific method, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thomas Kuhn: the structure of scientific revolutions, Thomas L Friedman, Thorstein Veblen, Tobin tax, transaction costs, tulip mania, value at risk, Vanguard fund, volatility smile, Yogi Berra

Then the magazine that had gotten him into the mutual fund business, Fortune, came through for him with a lengthy article by a recent graduate of the University of Rochester’s Business School, headlined “Index Funds—An Idea Whose Time Is Coming.”39 After that, the money flowed.40 Now it’s possible that the index fund would have been created even in the absence of these writings and of the efficient market hypothesis that helped inspire them. But it’s hard to see how. The work of ivory tower scholars had launched a new school of investing, one that would survive and flourish in the decades to come. It was one of the great practical triumphs in the history of the social sciences. AFTER THE LAUNCH OF THE Vanguard index fund, Paul Samuelson announced in his Newsweek column that he had celebrated the birth of his first grandson by buying the boy a few shares.41 Ben Graham, just before he died in 1976, offered his own endorsement. In a Q&A with Charley Ellis in the Financial Analysts Journal, Graham defended index funds against their detractors on Wall Street and said that, in some matters, he now considered himself “on the side of the ‘efficient market’ school of thought now generally accepted by the professors.”

Years later, as pension funds heeded their consultants’ calls to diversify into new asset classes, many even began investing in the funds of 1980s corporate raiders that had rebranded themselves as “private equity” firms. Unruh died in 1987, but Dale Hanson—hired away from Wisconsin’s state pension fund that year to run Calpers—proved a more than capable successor as a shareholder activist. Hanson saw that his potential allies weren’t just the other pension funds that belonged to the Council of Institutional Investors, but mutual fund companies such as Fidelity and Vanguard. The mutual funds had no interest in waging public battles with the corporations whose 401(k) business they were courting, but their burgeoning size (and in Vanguard’s case, its indexing bent) made it ever harder for them to bail out of underperforming companies. If Hanson wanted to raise a little hell, they weren’t averse to quietly supporting him. It all came to a head during the economic downturn of the early 1990s.


pages: 288 words: 16,556

Finance and the Good Society by Robert J. Shiller

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bank run, banking crisis, barriers to entry, Bernie Madoff, capital asset pricing model, capital controls, Carmen Reinhart, Cass Sunstein, cognitive dissonance, collateralized debt obligation, collective bargaining, computer age, corporate governance, Daniel Kahneman / Amos Tversky, Deng Xiaoping, diversification, diversified portfolio, Donald Trump, Edward Glaeser, eurozone crisis, experimental economics, financial innovation, full employment, fundamental attribution error, George Akerlof, income inequality, invisible hand, joint-stock company, Joseph Schumpeter, Kenneth Rogoff, land reform, loss aversion, Louis Bachelier, Mahatma Gandhi, Mark Zuckerberg, market bubble, market design, means of production, microcredit, moral hazard, mortgage debt, Occupy movement, passive investing, Ponzi scheme, prediction markets, profit maximization, quantitative easing, random walk, regulatory arbitrage, Richard Thaler, road to serfdom, Robert Shiller, Robert Shiller, Ronald Reagan, self-driving car, shareholder value, Sharpe ratio, short selling, Simon Kuznets, Skype, Steven Pinker, telemarketer, The Market for Lemons, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, Vanguard fund, young professional, Zipcar

But it is perhaps not necessary for governments to put any caps on the salaries that investment managers earn, for the market forces needed to bring them down may already be in place. If we are seeing the bursting of a bubble in investment manager compensation, we may see relatively lean times in coming years for people in this line of business. Anyone contemplating going into this line of work must take such considerations into mind. In his book Enough! True Measures of Money, Business, and Life, the founder of the Vanguard Funds, John C. Bogle, laments that many in the nancial community are milking society based on their false hopes of extraordinary pro ts. There must be some element of truth here, but the true magnitude of this “milking” is hard to pin down, as Bogle himself recognizes: “I know of not one academic study that has systematically attempted to calculate the value extracted by our nancial system from the returns earned by investors.”13 It will be just as hard to measure the bene t that the nancial community provides in improving the allocation of resources and incentives to achieve business success.


pages: 274 words: 93,758

Phishing for Phools: The Economics of Manipulation and Deception by George A. Akerlof, Robert J. Shiller, Stanley B Resor Professor Of Economics Robert J Shiller

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Andrei Shleifer, asset-backed security, Bernie Madoff, Capital in the Twenty-First Century by Thomas Piketty, collapse of Lehman Brothers, Credit Default Swap, Daniel Kahneman / Amos Tversky, dark matter, David Brooks, en.wikipedia.org, endowment effect, equity premium, financial intermediation, full employment, George Akerlof, greed is good, income per capita, invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, Kenneth Rogoff, late fees, loss aversion, Menlo Park, mental accounting, Milgram experiment, moral hazard, new economy, payday loans, Ponzi scheme, profit motive, Ralph Nader, randomized controlled trial, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Reagan, Silicon Valley, The Predators' Ball, the scientific method, The Wealth of Nations by Adam Smith, theory of mind, Thorstein Veblen, too big to fail, transaction costs, Unsafe at Any Speed, Upton Sinclair, Vanguard fund, wage slave

Cambridge, MA: Harvard University Press, 2012. van Amsterdam, Jan, A. Opperhuizen, M. Koeter, and Willem van den Brink. “Ranking the Harm of Alcohol, Tobacco and Illicit Drugs for the Individual and the Population.” European Addiction Research 16 (2010): 202–7. DOI:10.1159/000317249. Vanguard. “See the Difference Low-Cost Mutual Funds Can Make.” Accessed January 7, 2015. https://investor.vanguard.com/mutual-funds/low-cost. Veblen, Thorstein. The Theory of the Leisure Class: An Economic Study of the Evolution of Institutions. New York: Macmillan, 1899. Velotta, Richard N. “Gaming Commission Rejects Slot Machines at Cash Regi­sters.” Las Vegas Sun, March 18, 2010. Last accessed May 12, 2015. http:// lasvegassun.com/news/2010/mar/18/gaming-commission-rejects-slot -machines-cash-regis/?utm_source=twitterfeed&utm_medium=twitter.

Halah Touryalai, “10 Wall Street Expenses That Make the SEC’s Budget Look Pathetic,” Forbes, February 17, 2011, accessed January 16, 2015, http://www.forbes.com/fdc/welcome_mjx.shtml. The same can be said of Citigroup’s expenditures for marketing and advertising: larger than the whole SEC budget. 19. Vanguard, “See the Difference Low-Cost Mutual Funds Can Make,” accessed January 7, 2015, https://investor.vanguard.com/mutual-funds/ low-cost. 20. Edward Wyatt, “Judge Blocks Citigroup Settlement With S.E.C.,” New York Times, November 28, 2011, accessed June 10, 2015, http://www .nytimes.com/2011/11/29/business/judge-rejects-sec-accord-with-citi.html ?pagewanted=all. 21. Jed S. Rakoff, “The Financial Crisis: Why Have No High-Level Executives Been Prosecuted?” New York Review of Books, January 9, 2014. 22. Harry Markopolos, No One Would Listen: A True Financial Thriller (Hoboken, NJ: Wiley, 2010), Kindle location 587. 23.


pages: 375 words: 105,067

Pound Foolish: Exposing the Dark Side of the Personal Finance Industry by Helaine Olen

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asset allocation, Bernie Madoff, Cass Sunstein, Credit Default Swap, David Brooks, delayed gratification, diversification, diversified portfolio, Donald Trump, Elliott wave, en.wikipedia.org, estate planning, financial innovation, Flash crash, game design, greed is good, high net worth, impulse control, income inequality, index fund, London Whale, Mark Zuckerberg, mortgage debt, oil shock, payday loans, pension reform, Ponzi scheme, quantitative easing, Ralph Nader, RAND corporation, random walk, Richard Thaler, Ronald Reagan, Saturday Night Live, too big to fail, transaction costs, Unsafe at Any Speed, upwardly mobile, Vanguard fund, wage slave, women in the workforce, working poor, éminence grise

Over the years Quinn made numerous enemies, ranging from brokers to heads of mutual fund companies, for relentlessly putting the financial interests of the consumer ahead of the financial interests of the financial services industry. Quinn sees herself as both a part of the consumer movement and the personal finance and investment communities. She names as her contemporaries such financial pioneers as Bruce Bent, the creator of the now ubiquitous money market fund, and John Bogle, the force behind Vanguard’s low-cost index funds. Yet a look at Quinn’s work demonstrates both the promise and the perils of the financial advice arena. A quick run through the many, many profiles of her penned over the years shows howlers mixed in with the prescient comments, sometimes in the same piece, proving how hard it is to get this forecasting thing right. In a USA Today interview in 1991, for example, she opines “You can no longer count on your real estate to make you rich,” a statement that was objectively untrue, at least at that time.


pages: 497 words: 124,144

Red Moon Rising by Matthew Brzezinski

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Albert Einstein, anti-communist, Columbine, cuban missile crisis, RAND corporation, Ronald Reagan, skunkworks, trade route, V2 rocket, Vanguard fund, walking around money

Medaris responded in the petty spirit of interservice rivalry: “So I also closed the door and told our people to give the Air Force no information on our satellite plans.” It was juvenile and “preposterous,” he admitted in retrospect, but he couldn’t help himself. Unbeknownst to Medaris, there was a reason for the newfound secrecy; a third party also coveted the WS-117L: the CIA. Richard Bissell had been eyeing the project ever since he had started searching for a replacement for the U-2. He had helped fund Vanguard from his slush fund and tried to covertly buy the Itek Corporation, an optical research laboratory in Boston, which was working on recoverable cameras that could operate from outer space. In the summer of 1957, Bissell, Edwin Land, and James Killian had begun hatching a scheme with Schriever for the CIA to assume direct control over spy satellites, as it had done with spy planes. Schriever was amenable because his missiles would be used to launch the CIA satellites, and he could still play a significant role in the operation.

Eisenhower Library, Abilene, Kansas, at http://www.history.nasa.gov/sputnik/iik4.html. 227 “piece by rotten piece”: Stehling, Project Vanguard, p. 119. 227 There were moisture problems, poorly located pressure indicator lines, unsoldered wire connections, corroded and leaky fittings: Ibid., pp. 109-11. “What! You want to put a ball in that rocket?”: Ibid., pp. 87-88. “We’re never going to make it”: Green and Lomask, Vanguard, p. 131. 228 “an unaccepted, incompletely developed vehicle”: Ibid., p. 177. “An astonishing piece of stupidity”: Time, October 21, 1957. the Stewart Committee had been “prejudiced”: Stehling, Project Vanguard, p. 60. 229 “the funds estimated by Secretary Quarles were totally inadequate”: Witkin, ed., The Challenge of the Sputniks, p. 21. Wilson interviewed by Mike Wallace: Ibid., p. 47. “Implicit in all the criticism”: Ambrose, Eisenhower, p. 457. a crack team of Wall Street lawyers: Robert A. Caro, Master of the Senate: The Years of Lyndon Johnson (New York: Alfred A. Knopf, 2002), p. 1022. 230 “He never asked the head of my organization”: Eilene Galloway, NASA Oral History transcript, at http://www.jsc.nasa.gov/history/oral_histories/NASA_HQ/Herstory/GallowayE/EG_8-7-00.pdf.


pages: 415 words: 125,089

Against the Gods: The Remarkable Story of Risk by Peter L. Bernstein

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Albert Einstein, Andrew Wiles, Antoine Gombaud: Chevalier de Méré, Big bang: deregulation of the City of London, Bretton Woods, buttonwood tree, capital asset pricing model, cognitive dissonance, Daniel Kahneman / Amos Tversky, diversified portfolio, double entry bookkeeping, Edmond Halley, Edward Lloyd's coffeehouse, endowment effect, experimental economics, fear of failure, Fellow of the Royal Society, Fermat's Last Theorem, financial deregulation, financial innovation, full employment, index fund, invention of movable type, Isaac Newton, John Nash: game theory, John von Neumann, linear programming, loss aversion, Louis Bachelier, mental accounting, moral hazard, Nash equilibrium, probability theory / Blaise Pascal / Pierre de Fermat, random walk, Richard Thaler, Robert Shiller, Robert Shiller, spectrum auction, statistical model, The Bell Curve by Richard Herrnstein and Charles Murray, The Wealth of Nations by Adam Smith, trade route, transaction costs, tulip mania, Vanguard fund

Today's hero is often tomorrow's blockhead. Over the long run, active investment managers-investors who purport to be stock-pickers and whose portfolios differ in composition from the market as a whole-seem to lag behind market indexes like the S&P 500 or even broader indexes like the Wilshire 5000 or the Russell 3000. Over the past decade, for example, 78% of all actively managed equity funds underperformed the Vanguard Index 500 mutual fund, which tracks the unmanaged S&P 500 Composite; the data for earlier periods are not as clean, but the S&P has been a consistent winner over long periods of time. There is nothing new about this pattern. In 1933, Alfred Cowles, a wealthy investor and a brilliant amateur scholar, published a study covering a large number of printed financial services as well as every purchase and sale made over four years by twenty leading fire insurance companies.

*Kahneman has described his introduction to experimentation when one of his professors told the story of a child being offered the choice between a small lollipop today or a larger lollipop tomorrow. The child's response to this simple question correlated with critical aspects of the child's life, such as family income, one or two parents present, and degree of trust. *An excellent review of this matter appears in "The Triumph of Indexing," a booklet published by the Vanguard Group of mutual funds in May 1995. This controversial subject receives more detailed treatment later in this chapter. *In a speech to the National Association of Realtors in May 1995, none other than the Chairman of the Federal Reserve Board, Alan Greenspan, confirmed the piggy bank metaphor: "It is hard to overestimate the importance of house price trends for consumer psyches and behavior.... Consumers view their home equity as a cushion or security blanket against the possibility of future hard times."


pages: 304 words: 22,886

Nudge: Improving Decisions About Health, Wealth, and Happiness by Richard H. Thaler, Cass R. Sunstein

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Al Roth, Albert Einstein, asset allocation, availability heuristic, call centre, Cass Sunstein, choice architecture, continuous integration, Daniel Kahneman / Amos Tversky, desegregation, diversification, diversified portfolio, endowment effect, equity premium, feminist movement, framing effect, full employment, George Akerlof, index fund, invisible hand, late fees, libertarian paternalism, loss aversion, Mahatma Gandhi, Mason jar, medical malpractice, medical residency, mental accounting, meta analysis, meta-analysis, Milgram experiment, pension reform, presumed consent, profit maximization, rent-seeking, Richard Thaler, risk tolerance, Robert Shiller, Robert Shiller, Saturday Night Live, school choice, school vouchers, transaction costs, Vanguard fund, Zipcar

The problem with this approach is that, as we have already mentioned, most people hardly ever change their portfolios unless they change jobs and have to fill out a new set of forms. So a better way to judge what people are thinking is to look at the percentage of money being invested in stocks by new participants who have just made the decision. We have data on one large group of such participants who were customers of plans administered by the Vanguard mutual fund company. In 1992 new participants were allocating 58 percent of their assets to equities, and by 2000 that percentage had risen to 74. In the next two years, however, the allocation to equities for new participants fell back to 54 percent. Their market timing was backward. They were heavily buying stocks when stock prices were high, and then selling stocks when their prices were low. We observe similar behavior in the asset allocations within equities.


pages: 265 words: 93,231

The Big Short: Inside the Doomsday Machine by Michael Lewis

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Asperger Syndrome, asset-backed security, collateralized debt obligation, Credit Default Swap, credit default swaps / collateralized debt obligations, diversified portfolio, facts on the ground, financial innovation, fixed income, forensic accounting, Gordon Gekko, high net worth, housing crisis, illegal immigration, income inequality, index fund, interest rate swap, London Interbank Offered Rate, Long Term Capital Management, medical residency, moral hazard, mortgage debt, pets.com, Ponzi scheme, Potemkin village, quantitative trading / quantitative finance, short selling, Silicon Valley, too big to fail, value at risk, Vanguard fund

And we're not the only ones watching it." Mike Burry couldn't see exactly who was following his financial moves, but he could tell which domains they came from. In the beginning his readers came from EarthLink and AOL. Just random individuals. Pretty soon, however, they weren't. People were coming to his site from mutual funds like Fidelity and big Wall Street investment banks like Morgan Stanley. One day he lit into Vanguard's index funds and almost instantly received a cease and desist order from Vanguard's attorneys. Burry suspected that serious investors might even be acting on his blog posts, but he had no clear idea who they might be. "The market found him," says the Philadelphia mutual fund manager. "He was recognizing patterns no one else was seeing." By the time Burry moved to Stanford Hospital in 1998 to take up his residency in neurology, the work he had done between midnight and three in the morning had made him a minor but meaningful hub in the land of value investing.


pages: 236 words: 77,735

Rigged Money: Beating Wall Street at Its Own Game by Lee Munson

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affirmative action, asset allocation, backtesting, barriers to entry, Bernie Madoff, Bretton Woods, buy low sell high, California gold rush, call centre, Credit Default Swap, diversification, diversified portfolio, estate planning, fiat currency, financial innovation, fixed income, Flash crash, follow your passion, German hyperinflation, High speed trading, housing crisis, index fund, joint-stock company, moral hazard, passive investing, Ponzi scheme, price discovery process, random walk, risk tolerance, risk-adjusted returns, risk/return, too big to fail, trade route, Vanguard fund, walking around money

Longleaf Partners got fed up back in 2003 when Schwab raised the OneSource fees to 40 basis points. In a letter to shareholders, the fund said that the fees were “duplicative and excessive.”3 Schwab shot back and prohibited clients from purchasing Longleaf funds except for a select group of institutional advisers. The only problem is that Schwab decides who gets to be a part of that select group. Now that doesn’t sound fair to me. Big players with their own marketing muscle like Vanguard and American Funds would rather be out of the NTF game. How could Vanguard offer rock bottom prices if forced to pay 0.4 percent to Schwab? Well, they just pay less. That is easy to do if you are already a major player with strong demand. If you are using a transaction fee fund—the type of fund where you pay a small fee to trade in your brokerage account—Schwab still gets some money from the fund. Schwab says it is usually $20, but “sometimes as high as $30.”


pages: 280 words: 79,029

Smart Money: How High-Stakes Financial Innovation Is Reshaping Our WorldÑFor the Better by Andrew Palmer

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Affordable Care Act / Obamacare, algorithmic trading, Andrei Shleifer, asset-backed security, availability heuristic, bank run, banking crisis, Black-Scholes formula, bonus culture, Bretton Woods, call centre, Carmen Reinhart, cloud computing, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, David Graeber, diversification, diversified portfolio, Edmond Halley, Edward Glaeser, Eugene Fama: efficient market hypothesis, eurozone crisis, family office, financial deregulation, financial innovation, fixed income, Flash crash, Google Glasses, Gordon Gekko, high net worth, housing crisis, Hyman Minsky, implied volatility, income inequality, index fund, Innovator's Dilemma, interest rate swap, Kenneth Rogoff, Kickstarter, late fees, London Interbank Offered Rate, Long Term Capital Management, loss aversion, margin call, Mark Zuckerberg, McMansion, mortgage debt, mortgage tax deduction, Network effects, Northern Rock, obamacare, payday loans, peer-to-peer lending, Peter Thiel, principal–agent problem, profit maximization, quantitative trading / quantitative finance, railway mania, randomized controlled trial, Richard Feynman, Richard Feynman, Richard Thaler, risk tolerance, risk-adjusted returns, Robert Shiller, Robert Shiller, short selling, Silicon Valley, Silicon Valley startup, Skype, South Sea Bubble, sovereign wealth fund, statistical model, transaction costs, Tunguska event, unbanked and underbanked, underbanked, Vanguard fund, web application

They may be fast, critics say, but they are thoughtless.22 Yet the academic consensus also broadly supports the contention that high-frequency traders have helped bring down transaction costs. The British government’s lengthy 2012 investigation of automated trading found that liquidity had improved, bid-ask spreads had narrowed, and markets had become more efficient. Testimony delivered to the Securities and Exchange Commission in 2010 by George Sauter of Vanguard, a big fund manager, concluded that “high-frequency traders provide liquidity and ‘knit’ together our increasingly fragmented marketplace, resulting in tighter spreads that benefit all investors.”23 (Critics riposte that narrower spreads are illusory if the prices quoted are not the ones at which trades are actually executed.) It is true that investors’ holding periods have gone down and down in recent years, but if short termism is a problem, its roots go deeper than the arrival of the ultrafast traders: the average holding period for British shares approached eight years in the mid-1960s and had come down to around one year by the mid-1980s.


pages: 545 words: 137,789

How Markets Fail: The Logic of Economic Calamities by John Cassidy

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Albert Einstein, Andrei Shleifer, anti-communist, asset allocation, asset-backed security, availability heuristic, bank run, banking crisis, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Black-Scholes formula, Bretton Woods, British Empire, capital asset pricing model, centralized clearinghouse, collateralized debt obligation, Columbine, conceptual framework, Corn Laws, correlation coefficient, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, Daniel Kahneman / Amos Tversky, debt deflation, diversification, Elliott wave, Eugene Fama: efficient market hypothesis, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, full employment, George Akerlof, global supply chain, Haight Ashbury, hiring and firing, Hyman Minsky, income per capita, incomplete markets, index fund, invisible hand, John Nash: game theory, John von Neumann, Joseph Schumpeter, laissez-faire capitalism, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, Louis Bachelier, mandelbrot fractal, margin call, market bubble, market clearing, mental accounting, Mikhail Gorbachev, Mont Pelerin Society, moral hazard, mortgage debt, Naomi Klein, Network effects, Nick Leeson, Northern Rock, paradox of thrift, Ponzi scheme, price discrimination, price stability, principal–agent problem, profit maximization, quantitative trading / quantitative finance, race to the bottom, Ralph Nader, RAND corporation, random walk, Renaissance Technologies, rent control, Richard Thaler, risk tolerance, risk-adjusted returns, road to serfdom, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, shareholder value, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, statistical model, technology bubble, The Chicago School, The Great Moderation, The Market for Lemons, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, unorthodox policies, value at risk, Vanguard fund

If fundamental analysis doesn’t work and most fund managers routinely fail to outperform the market, there can be no justification for the hefty fees that actively managed mutual funds charge investors. Investing in index funds, which keep their fees at minimal levels, is much more sensible. By 2000, tens of millions of Americans had taken Malkiel’s advice and placed much of their retirement money in these types of savings vehicles. (For many years, Malkiel served as a director of the Vanguard Group, which pioneered index funds. Fama joined another firm that manages index funds, Dimensional Fund Advisors.) The rise of efficient market theory also signaled the beginning of quantitative finance. In addition to the random walk model of stock prices, the period between 1950 and 1970 saw the development of the mean-variance approach to portfolio diversification, which Harry Markowitz, another Chicago economist, pioneered; the capital asset pricing model, which a number of different scholars developed independently of one another; and the Black-Scholes option pricing formula, which Fischer Black, an applied mathematician from Harvard, and Myron Scholes, a finance Ph.D. from Chicago, developed.

.”: Quoted in John Cassidy, Dot.con: The Greatest Story Ever Sold (New York: HarperPerennial, 2002), 122–23. 179 “[I]f they want to beat their . . .”: Quoted in “Valuing Those Internet Stocks,” BusinessWeek, February 8, 1999. 179 “I simply can’t analyze . . .”: Quoted in Fidelity Magellan Annual Report, March 31, 1999, available at www.secinfo.com/d1RUq.6c.htm. 179 “Time has come . . .”: “Fidelity Magellan Fund-FMAGX-Rated ‘Aggressive Buy’ and Vanguard 500 Index Fund-VFINX-Rated ‘Buy’ by FidelityAdviser.com,” Business Wire, April 1, 1999. 180 “Is the stock market in a speculative bubble?”: Lauren R. Rublin, “Party On! America’s Portfolio Managers Grow More Bullish on Stocks and Interest Rates,” Barron’s, May 3, 1999, 31–38. 181 Pension fund investment in the Internet bubble: Eli Ofek and Matthew Richardson, “DotCom Mania: The Rise and Fall of Internet Stock Prices,” Journal of Finance 57, no. 3 (June 2003): 1122. 181 “From an efficient markets perspective . . .”: Markus K.


pages: 478 words: 126,416

Other People's Money: Masters of the Universe or Servants of the People? by John Kay

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Affordable Care Act / Obamacare, asset-backed security, bank run, banking crisis, Basel III, Bernie Madoff, Big bang: deregulation of the City of London, bitcoin, Black Swan, Bonfire of the Vanities, bonus culture, Bretton Woods, call centre, capital asset pricing model, Capital in the Twenty-First Century by Thomas Piketty, cognitive dissonance, corporate governance, Credit Default Swap, cross-subsidies, dematerialisation, diversification, diversified portfolio, Edward Lloyd's coffeehouse, Elon Musk, Eugene Fama: efficient market hypothesis, eurozone crisis, financial innovation, financial intermediation, fixed income, Flash crash, forward guidance, Fractional reserve banking, full employment, George Akerlof, German hyperinflation, Goldman Sachs: Vampire Squid, Growth in a Time of Debt, income inequality, index fund, inflation targeting, interest rate derivative, interest rate swap, invention of the wheel, Irish property bubble, Isaac Newton, London Whale, Long Term Capital Management, loose coupling, low cost carrier, M-Pesa, market design, millennium bug, mittelstand, moral hazard, mortgage debt, new economy, Nick Leeson, Northern Rock, obamacare, Occupy movement, offshore financial centre, oil shock, passive investing, peer-to-peer lending, performance metric, Peter Thiel, Piper Alpha, Ponzi scheme, price mechanism, purchasing power parity, quantitative easing, quantitative trading / quantitative finance, railway mania, Ralph Waldo Emerson, random walk, regulatory arbitrage, Renaissance Technologies, rent control, Richard Feynman, risk tolerance, road to serfdom, Robert Shiller, Robert Shiller, Ronald Reagan, Schrödinger's Cat, shareholder value, Silicon Valley, Simon Kuznets, South Sea Bubble, sovereign wealth fund, Spread Networks laid a new fibre optics cable between New York and Chicago, Steve Jobs, Steve Wozniak, The Great Moderation, The Market for Lemons, the market place, The Myth of the Rational Market, the payments system, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Tobin tax, too big to fail, transaction costs, tulip mania, Upton Sinclair, Vanguard fund, Washington Consensus, We are the 99%, Yom Kippur War


pages: 350 words: 103,270

pages: 598 words: 172,137

Who Stole the American Dream? by Hedrick Smith

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Affordable Care Act / Obamacare, airline deregulation, anti-communist, asset allocation, banking crisis, Bonfire of the Vanities, British Empire, business process, clean water, cloud computing, collateralized debt obligation, collective bargaining, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, David Brooks, Deng Xiaoping, desegregation, Double Irish / Dutch Sandwich, family office, full employment, global supply chain, Gordon Gekko, guest worker program, hiring and firing, housing crisis, Howard Zinn, income inequality, index fund, informal economy, invisible hand, Joseph Schumpeter, Kenneth Rogoff, knowledge economy, knowledge worker, laissez-faire capitalism, late fees, Long Term Capital Management, low cost carrier, manufacturing employment, market fundamentalism, Maui Hawaii, mortgage debt, new economy, Occupy movement, Own Your Own Home, Peter Thiel, Plutonomy: Buying Luxury, Explaining Global Imbalances, Ponzi scheme, Ralph Nader, RAND corporation, Renaissance Technologies, reshoring, rising living standards, Robert Shiller, Robert Shiller, rolodex, Ronald Reagan, shareholder value, Shenzhen was a fishing village, Silicon Valley, Silicon Valley startup, Steve Jobs, The Chicago School, The Spirit Level, too big to fail, transaction costs, transcontinental railway, union organizing, Unsafe at Any Speed, Vanguard fund, We are the 99%, women in the workforce, working poor, Y2K

As the Harvard-Cornell team put it, there were “lucky directors” motivated to manipulate the option dates of their “lucky CEOs” because the board members also “luckily” got backdated options. Options: A Smokescreen for Wealth Transfer Some of the sharpest criticism of the stock options game came not from academics or liberal politicians, but from staunch capitalists such as John C. (Jack) Bogle, founder and longtime chairman of the Vanguard mutual fund family. Bogle contended that ordinary shareholders were being cheated by the massive stock grants given to CEOs because the value of everyone else’s shares was being diluted by the gift of free or low-cost shares to the executive elite. In his book The Battle for the Soul of Capitalism, Bogle derided the whole concept as a smokescreen for a massive “wealth transfer to [corporate] insiders” from ordinary investors.


pages: 264 words: 115,489

Take the money and run: sovereign wealth funds and the demise of American prosperity by Eric Curt Anderson

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asset allocation, banking crisis, Bretton Woods, business continuity plan, business intelligence, business process, collective bargaining, corporate governance, credit crunch, currency manipulation / currency intervention, currency peg, diversified portfolio, floating exchange rates, housing crisis, index fund, Kenneth Rogoff, open economy, passive investing, profit maximization, profit motive, random walk, reserve currency, risk tolerance, risk-adjusted returns, risk/return, Ronald Reagan, sovereign wealth fund, the market place, The Wealth of Nations by Adam Smith, too big to fail, Vanguard fund

According to the Norges Bank Investment Management team, their performance could best be attributed to two events: (1) the fund’s move to place more than 40% of its investments in the equity market since 1998, and (2) the “worst decline in global equities markets since the 1930s,” which began in 2000.37 Needless to say, this performance has garnered significant criticism at home, with at least one critic claiming the fund’s investment managers only “make Norway more poor.”38 (The Norges Bank team actually did not do as poorly as one might first suspect. A review of stock performance using a buy-and-hold model for the same time period (1998–2006) reveals that the following rates of return could have been expected by purchasing only “name brand” shares: Dow Jones Industrials 6.11%, Standard & Poor’s 500 Index 4.94%, Vanguard 500 Index Fund 7.37%, and NASDAQ Composite Index 5.88%.) China’s new sovereign wealth fund managers have also suffered setbacks in their efforts to wisely invest the approximately $200 billion39 Beijing has placed in their hands.40 The China Investment Corporation (CIC) purchased a 9.3% share of the Blackstone Group private equity firm for $3 billion prior to the firm’s initial public offering (IPO) in June 2007.


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Fault Lines: How Hidden Fractures Still Threaten the World Economy by Raghuram Rajan

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accounting loophole / creative accounting, Andrei Shleifer, Asian financial crisis, asset-backed security, bank run, barriers to entry, Bernie Madoff, Bretton Woods, business climate, Clayton Christensen, clean water, collapse of Lehman Brothers, collateralized debt obligation, colonial rule, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, currency manipulation / currency intervention, diversification, Edward Glaeser, financial innovation, floating exchange rates, full employment, global supply chain, Goldman Sachs: Vampire Squid, illegal immigration, implied volatility, income inequality, index fund, interest rate swap, Joseph Schumpeter, Kenneth Rogoff, knowledge worker, labor-force participation, Long Term Capital Management, market bubble, Martin Wolf, medical malpractice, microcredit, moral hazard, new economy, Northern Rock, offshore financial centre, open economy, price stability, profit motive, Real Time Gross Settlement, Richard Florida, Richard Thaler, risk tolerance, Robert Shiller, Robert Shiller, Ronald Reagan, school vouchers, short selling, sovereign wealth fund, The Great Moderation, the payments system, The Wealth of Nations by Adam Smith, too big to fail, upwardly mobile, Vanguard fund, women in the workforce, World Values Survey


pages: 250 words: 87,722

pages: 515 words: 132,295

Makers and Takers: The Rise of Finance and the Fall of American Business by Rana Foroohar

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3D printing, accounting loophole / creative accounting, additive manufacturing, Airbnb, algorithmic trading, Asian financial crisis, asset allocation, bank run, Basel III, bonus culture, Bretton Woods, British Empire, call centre, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, carried interest, centralized clearinghouse, clean water, collateralized debt obligation, corporate governance, corporate social responsibility, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, crowdsourcing, David Graeber, deskilling, Detroit bankruptcy, diversification, Double Irish / Dutch Sandwich, Emanuel Derman, Eugene Fama: efficient market hypothesis, financial deregulation, financial intermediation, Frederick Winslow Taylor, George Akerlof, gig economy, Goldman Sachs: Vampire Squid, Gordon Gekko, greed is good, High speed trading, Home mortgage interest deduction, housing crisis, Howard Rheingold, Hyman Minsky, income inequality, index fund, interest rate derivative, interest rate swap, Internet of things, invisible hand, joint-stock company, joint-stock limited liability company, Kenneth Rogoff, knowledge economy, labor-force participation, labour mobility, London Whale, Long Term Capital Management, manufacturing employment, market design, Martin Wolf, moral hazard, mortgage debt, mortgage tax deduction, new economy, non-tariff barriers, offshore financial centre, oil shock, passive investing, pensions crisis, Ponzi scheme, principal–agent problem, quantitative easing, quantitative trading / quantitative finance, race to the bottom, Ralph Nader, Rana Plaza, RAND corporation, random walk, rent control, Robert Shiller, Robert Shiller, Ronald Reagan, Second Machine Age, shareholder value, sharing economy, Silicon Valley, Silicon Valley startup, Snapchat, sovereign wealth fund, Steve Jobs, technology bubble, The Chicago School, The Spirit Level, The Wealth of Nations by Adam Smith, Tim Cook: Apple, Tobin tax, too big to fail, trickle-down economics, Tyler Cowen: Great Stagnation, Vanguard fund


pages: 349 words: 134,041

Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives by Satyajit Das

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accounting loophole / creative accounting, Albert Einstein, Asian financial crisis, asset-backed security, Black Swan, Black-Scholes formula, Bretton Woods, BRICs, Brownian motion, business process, buy low sell high, call centre, capital asset pricing model, collateralized debt obligation, complexity theory, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, cuban missile crisis, currency peg, disintermediation, diversification, diversified portfolio, Eugene Fama: efficient market hypothesis, financial innovation, fixed income, Haight Ashbury, high net worth, implied volatility, index arbitrage, index card, index fund, interest rate derivative, interest rate swap, Isaac Newton, job satisfaction, locking in a profit, Long Term Capital Management, mandelbrot fractal, margin call, market bubble, Marshall McLuhan, mass affluent, merger arbitrage, Mexican peso crisis / tequila crisis, moral hazard, mutually assured destruction, new economy, New Journalism, Nick Leeson, offshore financial centre, oil shock, Parkinson's law, placebo effect, Ponzi scheme, purchasing power parity, quantitative trading / quantitative finance, random walk, regulatory arbitrage, risk-adjusted returns, risk/return, shareholder value, short selling, South Sea Bubble, statistical model, technology bubble, the medium is the message, time value of money, too big to fail, transaction costs, value at risk, Vanguard fund, volatility smile, yield curve, Yogi Berra, zero-coupon bond

‘You lied to us,’ thundered the chairman. Not really, it is how the game is played. The trustee meetings were never the same again. Agents all The entire investment management process is flawed – projected returns are too high and actual returns are measured with tools that the fund managers and asset consultants choose. It is like getting a student to mark their own exams. John Bogle, the founder of Vanguard, a low-cost mutual fund manager, is the Bolshevik of the industry. His arguments are simple: fund expenses are too high; trading costs eat into returns as fund managers churn portfolios to the delight of dealers; hidden fees and charges eat into the value of investments; a small difference of 1% or 2% each year in return over 30 years is staggering. Bogle argues that fund managers do not put the investor’s interests first but exploit their ignorance instead.


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Efficiently Inefficient: How Smart Money Invests and Market Prices Are Determined by Lasse Heje Pedersen

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algorithmic trading, Andrei Shleifer, asset allocation, backtesting, bank run, banking crisis, barriers to entry, Black-Scholes formula, Brownian motion, buy low sell high, capital asset pricing model, commodity trading advisor, conceptual framework, corporate governance, credit crunch, Credit Default Swap, currency peg, David Ricardo: comparative advantage, declining real wages, discounted cash flows, diversification, diversified portfolio, Emanuel Derman, equity premium, Eugene Fama: efficient market hypothesis, fixed income, Flash crash, floating exchange rates, frictionless, frictionless market, Gordon Gekko, implied volatility, index arbitrage, index fund, interest rate swap, late capitalism, law of one price, Long Term Capital Management, margin call, market clearing, market design, market friction, merger arbitrage, mortgage debt, New Journalism, paper trading, passive investing, price discovery process, price stability, purchasing power parity, quantitative easing, quantitative trading / quantitative finance, random walk, Renaissance Technologies, Richard Thaler, risk-adjusted returns, risk/return, Robert Shiller, Robert Shiller, shareholder value, Sharpe ratio, short selling, sovereign wealth fund, statistical arbitrage, statistical model, systematic trading, technology bubble, time value of money, total factor productivity, transaction costs, value at risk, Vanguard fund, yield curve, zero-coupon bond

Investment: A History by Norton Reamer, Jesse Downing

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Albert Einstein, algorithmic trading, asset allocation, backtesting, banking crisis, Berlin Wall, Bernie Madoff, Brownian motion, buttonwood tree, California gold rush, capital asset pricing model, Carmen Reinhart, carried interest, colonial rule, credit crunch, Credit Default Swap, Daniel Kahneman / Amos Tversky, debt deflation, discounted cash flows, diversified portfolio, equity premium, estate planning, Eugene Fama: efficient market hypothesis, Fall of the Berlin Wall, family office, Fellow of the Royal Society, financial innovation, fixed income, Gordon Gekko, Henri Poincaré, high net worth, index fund, interest rate swap, invention of the telegraph, James Hargreaves, James Watt: steam engine, joint-stock company, Kenneth Rogoff, labor-force participation, land tenure, London Interbank Offered Rate, Long Term Capital Management, loss aversion, Louis Bachelier, margin call, means of production, Menlo Park, merger arbitrage, moral hazard, mortgage debt, Network effects, new economy, Nick Leeson, Own Your Own Home, pension reform, Ponzi scheme, price mechanism, principal–agent problem, profit maximization, quantitative easing, RAND corporation, random walk, Renaissance Technologies, Richard Thaler, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, Robert Shiller, Sand Hill Road, Sharpe ratio, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, spinning jenny, statistical arbitrage, technology bubble, The Wealth of Nations by Adam Smith, time value of money, too big to fail, transaction costs, underbanked, Vanguard fund, working poor, yield curve

The very purpose of passive management through index funds, he contended, was to allow the investor to have inexpensive exposure to an asset class and to forego the high fees associated with active management. And indeed, other early index funds with exceptionally high fees did not enjoy sustained success. Colonial Index Trust, for instance, generally involved a sales load of 4.75 percent and a running expense ratio of 1.5 percent. This fund lasted only 7 years, closing in 1993.57 It was not until the early 1990s that Vanguard started to see any meaningful competition. Vanguard had eleven different index funds by the end of 1992. That same year, thirty-five new index funds were formed by competitors, bringing the total number of index mutual funds in the investment market to just under eighty. The universe of product offerings also expanded. In 1993, Vanguard and some of its competitors offered the first bond index funds. With these, investors could get exposure to a wider array of investments than just equities.