Wednesday, May 23, 2018

A Look At The Last Four Years

It’s been just over 4 years since I started this blog and I thought it would be a good time to take a little look back at just how far I have come (and how far I have to go).

My first savings update was in May 2014 and I had saved about $4,880. I think at the time, I was saving about $100 a month of my paycheck income towards the car and funneling any extra money I received from gifts, side hustles, or work bonuses towards it. Four years later, both my income and my wife’s have greatly increased and I’m now able to save $600 a month of my paycheck. I could probably do more, but we have other goals and items we are saving for, so we are splitting our extra cash among various other projects.

Major milestones on my quest can be seen here. I reached $10,000 saved in December 2014 and 1 year later, I hit $20,000. Twelve months to save $10,000 isn’t too shabby, although that’s probably being a little over generous to my efforts. I am investing my savings in the stock market, so the total gain in value came from a combination of savings and stock price appreciation.

The next $10,000 took me 1 year and three months. What the stock market gives, the stock market takes away. Declining stock prices were a drag on my growth.

The next $10,000, which took me to $40,000 total, took only 10 months. I got there last January.

I made the below graph of the monthly change in value of my account. I had hoped to see a more or less increasing line because I have been steadily increasing my contributions as time goes on.

Quite a surprise! Despite consistently increasing my contributions over time, the monthly change has not increased in a linear fashion. I knew I had some down months, but I hadn't thought my monthly change was this volatile. This chart shows just how much stock market volatility can affect account value in the short term. As I get closer to my goal, I’ll have to start selling my stock to protect against a market downturn reducing my funds. But right now, my goal is, probably, a couple years away, so I plan to stay invested for the time being.

This project has pushed me to start various side hustles. Few have provided large returns, but the one that was definitely worth it was creating my own educational video courses to sell. Last November, I reached over $10,000 in earnings from that side hustle. This is even more amazing when you consider my sole monetary investment in creating the courses was a $149 microphone. Of course, I’ve spent my whole career learning about what I was teaching, but my employers paid me for that!

My courses are still earning money. In fact, the same courses are now for sale on a different platform and those are starting to generate some decent income as well.

That’s the power of passive income. Work once, get paid for years.

My goal has always been to save enough money and invest so that passive income will pay for my Tesla. It’s going to take a long time to save the more than $100,000 a Model S costs. I don’t want to plunk that money down and kiss it goodbye. Yes, I’d get a car in return, but that car will lose value over time. I’ve worked hard to amass this savings and I want to keep as much of it as I can.

I’m hoping that the snowball effect will start kicking in soon in a noticeable fashion. As my savings grow, I should start collecting more interest (or stock dividends, as the case may be) each month.

Two years to save $40,000. I wonder if I can save another $40,000 in one year?

Wednesday, May 16, 2018

Comparison: Vanguard S&P 500 vs. Three American Funds Mutual Funds

Photo credit: Norwood Themes

Reader M Solve commented on my previous post that three American Funds mutual funds have consistently beat Vanguard's S&P 500 fund since their inception. The comment was that actively managed funds are better than index funds. This flies in the face of extensive research detailed in such books as The Little Book Of Common Sense Investing, so I wanted to check it out. I asked for three American Funds that I could investigate. M Solve suggested AMCPX, AGTHX, and AWSHX.

The Analysis

All of these funds, with the exception of the Vanguard S&P 500 Admiralty shares have been around for a very long time - at least 1976. AWSHX is the oldest fund, starting back in 1952. So all have a substantial track record to look at. But first off, let's examine some facts of each fund.

Return since inception (1967): 11.46%
Expense ratio: 0.68%
Real overall return: 11.46% - 0.68% = 10.78%
Turnover: 21%
Tax-adjusted return since inception: 9.49%
Non-US holdings: 5.4%

Return since inception (1973): 13.53%
Expense ratio: 0.65%
Real overall return: 13.53% - 0.65% = 12.88%
Turnover: 25%
Tax-adjusted return since inception: 11.96%
Non-US holdings: 12.5%

Return since inception (1952): 11.76%
Expense ratio: 0.58%
Real overall return: 11.76% - 0.58% = 11.18%
Turnover: 25%
Tax-adjusted return since inception: 8.67%
Non-US holdings: 6.5%

Return since inception (1976): 11.01%
Expense ratio: 0.14%
Real overall return: 11.01% - 0.14% = 10.87%
Turnover: 3%
Tax-adjusted return since inception: 9.53%
Non-US holdings: 0.1%

VFIAX (VFINX Admiralty shares)
Return since inception (2000): 5.98%
Expense ratio: 0.04%
Real overall return: 5.98% - 0.04% = 5.94%
Turnover: 3%
Tax-adjusted return since inception: 5.49%
Non-US holdings: 0.1%

First off, Vanguard Admiralty shares look to have a horrible return, but this is mostly due to the fact that they were created in 2000. The other funds have 25+ additional years of investing to help smooth out the historical returns. Given that VFIAX is exactly the same as VFINX except for the expense ratio, I think we can look solely at VFINX for our comparison.

Expense ratios eat away at fund overall returns. American Funds have an expense ratio of between 0.58% and 0.68%. Compare this to VFINX's 0.14%.

Turnover, given as a percentage of the portfolio that changes each year, in the actively managed funds is, as expected, quite high. Between 21% and 25% of the positions in these funds are bought and sold each year. That creates a potential huge tax bill. This is what Morningstar's tax-adjusted return takes into account. Notice that the tax-adjusted return lops 1% to 2.5% off the total return for the American Fund offerings. (Frequent turnover also creates high trading commissions the fund has to pay, which isn't shown in these figures.)

If we compare the tax-adjusted return of the funds, we see that two of the American Fund offerings,  AMCPX and AWSHX, perform worse than VFINX: 9.49% and 8.67% to Vanguard's 9.53%. That knocks out two of the three contenders.

But to be generous, for the sake of this comparison, let's assume you hold these funds in a tax-advantaged account, such as a Roth IRA. In this case, taxes are not a concern, so it looks like the American Funds offerings are, in fact, better.

But I left out one fact from this analysis so far: the front end load.

What Is A Front End Load?

This is a fee that the mutual fund charges you when you purchase shares. So if a fund has a 10% front end load and you invest $1,000, the company takes $100 and you only get $900 worth of fund shares.

All the American Fund offerings have a 5.75% front end load fee. Vanguard has no front end load fee. None of the funds have back end load fees (fees charged when you sell).

Let's look at how this affects a hypothetical $10,000 investment in each of these funds over 20 years.

Because of the front load fee, $10,000 invested in any of the American Fund offerings results in a net investment of $9,425. The net investment in Vanguard is the full $10,000. Assuming we are in a tax-advantaged account, using the actual return (return minus expense ratio) for these funds (and not the lower tax-adjusted return), after 20 years, we have:

FundInitial InvestmentReturnAmt @ 20 years

AMCPX and AWSHX still lose to Vanguard in the long run, even in a tax advantaged account. Only AGTHX beats VFINX over 20 years.

By itself, that is pretty impressive for AGTHX, but it's not the whole story.

What About Geographic Distribution?

The American Funds have significantly more international exposure than the Vanguard funds - up to 100 times more. Not only are these funds subject to foreign market forces, they are also subject to fluctuations in currency exchange rates. This may or may not be acceptable to you.  Here are the percentage foreign holdings of each fund.


M Solve's original comment was "All US-focused American Funds have beaten the Vanguard S&P 500 in its lifetime." In fact, the only fund that does beat Vanguard is the one with the most international exposure. With a 12.5% total investment in foreign stocks, I'm not sure I'd call that fund "US-focused."

A higher return typically means a riskier investment. Surprisingly, the American Funds are rated by Morningstar as a below average risk (over a 10 year time frame). As an index fund that mirrors the S&P 500, by definition, VFINX has an average risk rating.

Here's Morningstar's performance graphs.

Click to enlarge
The green line is the S&P 500.

Time Frame Matters

The original commenter specified that these funds consistently beat Vanguard over their lifetime. Here's the value of $10,000 invested in all four mutual funds from 1976, the first year all four funds were in existence:

Wow. I can see where M Solve is coming from. From about 1978 on, the returns seem awful similar to the S&P 500. Knowing that time is the investor's best friend, let's zoom in on that early period and see what was going on. Here's the chart from Aug 31, 1976 to January 1, 1979:

We can see that between December, 1976 and March, 1978, the three American Funds offerings had better performance than both Vanguard and the S&P 500. After that, they started more or less tracking the index.

When looking at long time frames, good performance early on will lead to greater dollar returns decades later due to the power of compounding. I wonder if what we are seeing is simply the natural result of the American Funds offerings having a great couple of initial years? Let's look at some returns not from inception.

Here's a chart for the last 10 years, from January 2008 to January 2018:

That pattern of closely tracking the S&P 500 is present, but the returns are much closer this time. In fact, our previous champion, AGTHX, now is slightly underperforming both the S&P 500 index and VFINX, while AMCPX is the one overperforming.

Or how about the 10 year period from January 2001 to January 2011:

In this period, the winner is AWSHX.

But wait a minute. Every one of those charts overstates the return of the American Funds offerings. Why? Because all these charts assume a starting value of $10,000. As I mentioned before, American Funds charges a 5.75% front load fee, meaning you really aren't starting out with $10,000. You're starting with $9,425! On their website, Morningstar states "Unless otherwise noted, Morningstar does not adjust total returns for sales charges (such as front-end loads, deferred loads, and redemption fees)..."

In fact, this is also stated in the latest Quarterly Fact Sheets from American Funds. Here's the section from the AGTHX fact sheet:

When you exclude that front load fee (NAV line), the returns look great. When you include it (MOP line), not so much. I highlighted two sections - the AGTHX returns INCLUDING the front load fee and the S&P 500 returns over the same time. With one exception, AGTHX lagged the S&P 500 and the one time it didn't, it only beat the index by 0.2%.

Here's the same data from the Vanguard VFINX fact sheet:

Looking at these numbers, we see, when taking into account fees, VFINX beat AGTHX in four of the five time periods. The exception, again, was the 5 year time frame. (AGTHX must have had a decent run during that time. It is possible to outperform the market in the short term.)

This Is Just Market Timing Disguised As Sales Talk

Let's recap what we have discovered: If we look at returns "from inception," all three funds beat the Vanguard fund and the S&P 500. If we look from 2008 to 2018, two of the three underperformed the Vanguard and S&P 500 index and only one, AMCPX, beat them. In the 2001 to 2011 period, AWSHX was the highest returning fund.

Now, I don't know about you, but I don't have a crystal ball, so I can't predict which one, if any, of these funds will beat VFINX in the next 10 year period. I also don't have a time machine that will let me go back in time and invest in these funds when they were first opened.

I do know that when I hear terms like "from inception," I'm immediately suspicious. That seems like a cherry-picked reporting period that gives the fund owners a way to look good and that probably won't hold up to closer examination.

The Bottom Line

I spent several hours pouring over the data and the prospectuses of these funds. I'm still not 100% sure I didn't miss something. For example, I was unable to find any confirmation one way or the other if the stated returns take the expense ratio into account. But even with all that research, the actively managed fund only beats the index if you get lucky and pick the right fund at the right time and hold it for the right length of time.

As John Bogle pointed out decades ago, when you account for the fees and tax consequences of actively managed funds, there is no way they can consistently beat a passive index fund.

We've shown that front load fees greatly reduce the long term return of a fund. We've also shown that, depending on what time period you are looking at, an actively managed fund will lead or lag the index. You can't know if the future will be one of those leading or lagging periods, so why rely on luck when picking an actively managed fund? Why not just invest in the index itself? You may not beat it, but you can be guaranteed you will never underperform it.

Return since inception data, expense ratios, and percent of foreign holdings are taken from the websites of American Funds and Vanguard. Turnover, tax-adjusted return, front load fee information is taken from Morningstar. Data is for American Funds class A shares. Future values calculated with the interest rate calculator here.

Wednesday, May 9, 2018

Our Dwindling Pile Of Cash

Photo credit: Annette Fischer

I hardly ever carry cash anymore. It's rare that I have more than $5 in my wallet and most the time, I don't have any bills at all. Just about everyplace accepts credit cards now. Thanks to mobile phones and services like Square, even places that used to be cash-only, such as farmer's markets, can now accept cards.

I'm fine with this. Cards are much more convenient. I also can earn points or cash back on more purchases. But it wasn't until the last time I took a trip to Las Vegas that it struck me just how common the lack of cash has become.

My Credit Union Doesn't Deal With Cash

OK, that's a bit of an exaggeration. I can still deposit cash at any ATM, but when I was planning my last trip to Vegas, I needed to visit a branch to withdraw our gambling money, an amount larger than I can withdraw at an ATM. I also wanted $100 bills, so I needed to see a teller.

My credit union has 56 locations in Washington state. Do you know how many have tellers that can accept and dispense cash?


All the other branches are "neighborhood financial centers." You can do everything there that you would expect - open an account, apply for loans, transfer money from one account to another, or get a cashier's check. But the one thing you cannot do is withdraw cash. Even when you open an account, you do all the paperwork and then make the initial deposit at an ATM.

Cash seems to be going away.

The Swedish Experiment

For a government, printing currency is expensive. Bills wear out and need to be replaced. Coins are heavy and people don't like using them. As more anti-counterfeiting measures are incorporated, costs rise. On the other hand, the government has a responsibility to provide currency that its citizens can use to conduct commerce.

In Sweden, businesses have slowly been shifting away from cash and towards card-only payment methods (including phone payments) in recent years. Banks too, are joining this trend. Like my credit union, there are banks in Sweden that only deal with cash at a few locations.

Surprisingly, this trend away from cash is not driven by the government, but by consumers. Speaking about the effort to support cash, Swedish bank customer Viktor Sjoberg said "There's no need to keep an infrastructure alive if no-one uses it."

To be fair, there are concerns that not everyone will be able to function in a cashless society. There are concerns that many, especially the elderly, might not be able to use or be comfortable using cashless payment methods. It does seem, at least at this point, that Sweden may be an outlier here. On the other hand, they could just be the start of a trend. I think it's too soon to tell.

Will The U.S. Ever Go Cashless?

Probably not. In fact, I don't think any society will ever be completely cashless. There are simply too many people that don't have access to the things a cashless society needs - a bank account and a debit or credit card -  for cash to completely disappear. Plus, there are privacy concerns that arise when every single transaction can be traced. But I do think we will see cash become less and less common. Soon, it will be the exception rather than the norm.

The decline of cash won't be a government conspiracy to track everyone's spending, as I'm sure many conspiracy theorists will claim. Rather, just as is happening in Sweden, it will be consumers' behavior that reduces cash's place in our day to day lives.

What are your thoughts?

Wednesday, May 2, 2018

Goal Update: End Of April 2018

At the end of each month, I post an update of my goals, including a brief discussion of any notable events that might have occurred during the month. The latest month's figures can always be found under the Featured menu in the menu bar at the top of the blog.

Last updated: End of April, 2018
Current value: $41,231
Change from last Month: +188
Percent of Goal:  37.92%

Note that the funds in this account are invested in stock, so there will be fluctuations in value that are outside my control. I never withdraw money from this account, so any dips are purely due to stock price changes.

Events Of Note Last Month:

My SQL courses on Udemy generated $116.84 of income. My courses on SkillShare earned $18.86, which is a drop from the $42.25 from last month. It's still higher than the $10 in February though. I also earned $101.62 from ads on my blogs. (That represents almost a full year of ad revenue. Yeah, I'm not working hard to monetize this blog.) Despite all of that income, plus the $600 I regularly contribute to this fund each month, my increase over last month's total was less than $200. Sometimes the stock market sucks.

And speaking of sucky things, I had an unexpected car repair bill in the amount of $1,850. The sunroof on my Prius would not open. First world problem, I know. Actually, if that was the only issue, I would have left it, but it did open a tiny bit before stopping. When I tried to close it, it may or may not have closed completely but when I turned the car off, I got a warning beep indicating that I had a window open, so I wasn't sure it really did close. Given the frequent rain we get here in Washington, I didn't feel it was worth taking the risk of having a leak ruin the inside of my car, so I took it in to the shop for repairs. It turns out the motor that drives the sun roof had somehow died. To replace it, they had to take pretty much the whole headliner apart. A $600 motor plus a lot of labor charges equals a big bill.

Still, I really can't complain too much. I do have a car repair budget / savings account and it had enough funds to cover this. That's not to say I enjoyed forking out that much. All in all, I have no complaints about the car. It's 8 years old with 140,000 miles. It's been fully paid off for at least 6 years. This was the first major repair I ever had to do to it. Heck, I haven't even had to replace the original brake pads yet.

Net Worth Update

I was shocked to see our net worth went up $15,235 this month, which puts us just $3,000 under our December net worth. We're also less than $4,000 away from what I believe was our all-time high set back in May of 2017.

This was a total surprise to me. It didn't really feel like our investments were gaining ground this month. The only figure I was somewhat monitoring closely was the Tesla account and that went down. It turns out, my feeling was correct:

March 2018
April 2018

As you can see, it wasn't our investments that caused the jump in our net worth - it was our house. Zillow says it increased in value by almost exactly $20,000 in April. I've said the Seattle area is a crazy real estate market and at some point, prices will come down. So right now, this feels like a bit of a hollow victory. 

If you have any questions or suggestions for topics, please drop me a line in the comments section!