Wednesday, June 20, 2018

Don't Leave Money On The Table: Reconcile Your Statements!

Balancing your checkbook is one of the most boring things a person can do.  It's the brushing your teeth of the finance world. You know you should do it but it's kinda a pain in the butt and if you skip it once in a while, is it really going to matter?

And it's not just bank statements that need to be balanced, or at the very least, reviewed. Any statement you get that involves money should be reviewed. That means credit card statements, brokerage statements, phone bills, utility bills, etc.

Now, you don't have to go over everything with a fine-toothed comb. In many instances, you just need to look for things that seem anomalous, unexpected.

For example, I rarely look at my brokerage statements in great detail. I'm not an active trader, so there usually isn't much activity to review. I do always look for one thing - fees. I shouldn't be incurring any fees in my accounts, and I always check to make sure that is still the case. But it's always possible I missed a notification of some change and could start incurring fees, so I want to watch out for that.

My credit card statements and bank statements, are another matter. With those, I do verify every single item. During the month, I enter all my charges and deposits in a phone app called Expense IQ (formerly Easy Money). When my statement comes, I go through each line, marking off each one in the app. When I'm done, my closing balance in the app should match the closing balance on my statement.

I will admit, this can be a chore. Ninety-five percent of the time, everything matches up. But, there are times where I have found charges I forgot to enter in the app.

I also sometimes find errors in my statement - like the one today that got me writing this post. I was reconciling my credit card statement against the entries in my app and found an error: I was double-charged at a fast food restaurant a week ago.

I remember exactly when it happened. I was paying through the restaurant's phone app. To do this, my phone displays a QR code that I hold up to a scanner at the register. The scanner has a green light that comes on when it has successfully scanned my code and charged my credit card.

(Not my hand or my phone.)

On this particular day, I went through that process and got the green light, but the cashier said it didn't go through. I said "But I got the green light." He said "Yes, but I have to hit something on my screen first." Hmm. Whatever. So we did it again and I got the green light again.

Sure enough, my statement came and I saw I was charged twice on that day. A quick call to my credit card company had the extra charge removed, but if I wasn't looking at each transaction, I would have missed this.

It's tempting to think that, with automated payments or electronic billing, things can't go wrong, but they do. It's your money, so watch over it and don't leave money on the table. I can guarantee you that the fast food restaurant would not have made any attempt to refund that money to me!

Wednesday, June 6, 2018

Goal Update: End of May 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 May, 2018
Current value: $44,656
Change from last Month: +$3,425
Percent of Goal:  41.07%

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:

Wow! My account value really took off this month. I didn't save any more than normal though. The gains were due to Realty Income stock going up about $2.50 during the month.

My SQL courses on Udemy generated $77.30 of income. My courses on SkillShare earned $63.14. That platform seems to be picking up steam and this month's payment was a new high. I also received $32.47 from a class action lawsuit settlement.

With this increase to over 40% of my goal, I have unlocked a new achievement!

Net Worth Update

Our net worth went up $11,885 this month to $845,455 - a new all-time high! Woo-hoo!

This was really surprising because we made several big purchases this month. We bought a new dining room table and chairs, as well as train tickets for our vacation next year. We had cash saved up for these, but we charged them to get the credit card points, which is why our credit card balance increased so much. Next month, after the bill is paid, you'll see a big drop in the Cash category (but with a corresponding drop in the Credit Cards column). Also, $2,000 of that credit card bill is for a business conference I will be attending that my company will reimburse me for.

Zillow said our home increased in value by $7,000 in May This is on top of the $20,000 it said it increased in April. There's nothing more I can say about the Seattle area housing market. If I wasn't living through it, I wouldn't believe it.

Another big wildcard in the works for June is our annual trip to Las Vegas. Lots of potential there for things to swing in either direction!

April 2018
May 2018

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

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.