"If You Can" by William Bernstein

William Bernstein is a well know personal finance writer who tries his best to convince people to save for retirement using low cost broadly diversified index funds.  He has written a few books on the topic but recently released a short e-book for young people who need help investing.   You could read this book and learn quite a bit on how to DIY.

The book's advice in incredibly easy to follow and it works.  Here is really all you need to know.

The book is written for an American audience so I've changed it to meet a Canadian's needs.

1. Save 15% of your pretax income, each and every year from your first year of working until retirement.  So if your yearly salary is $60,000, save $9000 per year.

Remember our Canadian experts Fred Vettese and Malcolm Hamilton think 15% is too much to save.  It means you will have more money to spend in retirement than when you were busy working and raising a family.  But, the decision is yours.

2. Invest this money in 3 things equally:
1/3 in a low cost Canadian etf like Vanguard Canada's VCN.
1/3 in a low cost international etf like Vanguard Canada's VUN
1/3 in a low cost Canadian bond fund like Vanguard Canada's VAB

3. Once a year, re-balance your 3 etfs so that they each stay at 1/3 of your total portfolio. For example, if bonds do well one year, you may sell some VAB and buy some VCN and/or VUN.  Or else, don't buy any VAB next year but instead purchase only VCN and/or VUN.  Just keep the 3 etfs at equal value.

That's all folks.

Now that Vanguard has introduced their all in one product, you don't even have to worry about buying 3 etfs and rebalancing each year.  Vanguard does it all for you.  The job is even easier now.  Your job is to set up a self directed trading account with any of the big banks and save.  Once a year, buy some VGRO or VBAL or VCNS and forget about it .

Do this every year for 40 years, and you should have a superb retirement.

If your company offers you a pension plan and together you contribute at least 15% of your pay to it,  you don't have to save anything more for retirement.  Just make sure you are out of debt before you retire.

IS THE STOCK MARKET OVERVALUED? DOES IT MATTER?

IS THE STOCK MARKET OVERVALUED? DOES IT MATTER?



If you spend any time watching or reading about the stock market, I’m sure you will often hear debate on whether now is a good time to invest.  Some will argue that the market is overvalued and is due for a drop, while equally intelligent sounding people will argue the market is not expensive and now is a good time to invest.

We’ll they can’t both be right, can they?  And does it really matter in the end whether the market goes up or down 10 or even 20% in the next few months?

Question #1:  Is the stock market overvalued?  We’ll focus on the USA and Canada for now.

The case for overvalued:  Robert Shiller from Yale University believes the markets are overvalued because the price to earnings ratio of companies that make up the S&P 500 is very high relative to its 136 year average.  His price to earnings ratio is averaged over the past 10 years to smooth out super strong and super weak years.  It’s commonly called the CAPE 10.

The case for not being too overvalued (no one is really arguing stocks are cheap today):  Larry Swedroe from etf.com believes that Robert Shiller’s CAPE 10 is flawed for a variety of reasons.  His main argument is if you remove the horrible 2008-2010 years when earnings collapsed in the US, the numbers look a lot better.  Secondly, the data that Robert Shiller uses in his historic calculations is just not that accurate.  Instead Larry thinks the data used should start around 1960 instead of 1871.  Using Larry’s data set, the S&P 500 is not as overvalued as Robert Shiller suggests.

In Larry’s camp is Warren Buffett who also believes the market isn’t cheap but considering how low bond interest rates are, he doesn’t see the current valuation as being that problematic.

Conclusion:  Who the heck knows?  Probably not cheap but your guess is as good as mine.

Question #2:  Is it worth worrying about answering question #1 above?

Probably not, because a guaranteed answer is not available.  If you are worried that future returns will not be the same as past returns, you could always increase your savings from 6% to 10% of income.

Secondly, in any given year, the stock market can be up or down 15 or 20%.  If you have the courage to wait and then buy in a dip, you can turbo boost your returns.  For example, from April 24, 2015 to January 20, 2106, the TSX was down 23%.   If you were worried that stocks were too expensive last year, you could have bought them for a 23% discount a few months ago.  Since the January low, stocks have rebounded and are up 20% from the lows.  Do you have to courage to buy when the world is telling you to sell?

Lastly, none of these month to month gyrations will matter much if you invest faithfully for 30 or 40 years.  Far more important is sticking to a plan year after year, decade after decade, then re-balancing as required and forgetting the market noise.

INDEX CARD INVESTING

INDEX CARD INVESTING



Investing doesn’t have to be complicated.  It shouldn’t be complicated but bankers and financial planners want to complicate things so you need to go to them for advice. Here’s the newest thing I’ve heard of with respect to simplifying investing, something I’m trying to do with my blog.

The index card you see above came from a University of Chicago professor who was being interviewed on how the financial industry tries to overly complicate investing.  The index card was his brilliant response.

To translate for a Canadian audience:

Accept any employer matching contributions to your RRSP
Invest in low cost index funds
Save 20% of your income
Pay off all credit cards in full every month
Maximize your government assisted saving programs (RRSP and TFSA)
My only issue is the 20% savings rate.  This is very high and will mean you will have more income in retirement than you had while working and raising your family.  Our Canadian experts recommend a savings rate of between 6 and 10%  to achieve to same standard of living in retirement that you had while working.

If you are planning on retiring before age 65, then increasing your savings rate makes sense.   Your spouse and kids may not support you here, but that’s a decision that is up to you and your family.

One disagreement aside, this index card advice really does do a great job of visually showing that you can do it alone.  Take a few moments to review the blog postings from December  and consider how doable it is to become a DIY investor and how much money you will save over your working life.

I hope you will find it in you to go this route.  Happy DIYing!!

To see a clearer version of the index card:

https://www.washingtonpost.com/news/wonk/wp/2013/09/16/this-4×6-index-card-has-all-the-financial-advice-youll-ever-need/