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3 Things 2-20

Just .5% More The following is an excerpt from a article written almost 10 years ago about the impact that earning .5% more on your investment portfolio over the long term. It is as relevant today as it was then... "(Let's consider) the lifetime impact of gaining an extra 0.5% of annual investment return. . . . The key here is to think about the long term. Many investors habitually think in terms of what we gain or lose in a short period: a month, a quarter, a year, a decade — or even all the years until we will retire. The accumulation phase of investing, in other words. But the advantages of an extra 0.5% in return don't stop when you retire because your portfolio will continue working for you as long as you live. . . . The long-term difference between earning a lifetime portfolio return of 8% and earning 8.5% . . . (is) a modest increase of about 6% in return in a single year. But would you believe that seemingly small difference could boost your nest egg at retirement by 16%? Would you believe it could boost your retirement income by 24%? Would you believe it could boost the money you leave to your heirs by 31%? In each case, you should believe that. Let's look at some numbers: If you save $5,000 a year for 40 years and make only 8% (the "small" mistake), you'll retire with about $1.46 million. But if you earn 8.5% instead, you'll retire with nearly $1.7 million. The additional $230,000 or so may not seem like enough to change your life, but that additional portfolio value is worth more than all of the money you invested over the years. Result: You retire with 16% more. Your gains don’t stop there. Assume you continue earning either 8% or 8.5% while you withdraw 4% of your portfolio each year and that you live for 25 years after retirement. If your lifetime return is 8%, your total retirement withdrawals are just shy of $2.5 million. If your lifetime return is 8.5% instead, you withdraw about $3.1 million. That's an extra $600,000 for your "golden years," a bonus of three times the total dollars you originally saved. Your heirs will also have plenty of reasons to be grateful for your 0.5% boost in return. If your lifetime return was 8%, your estate will be worth about $3.9 million. If you earned 8.5% instead, your estate is worth more than $5.1 million. To sum this up, at 8% your initial savings (totaling $200,000) turn into $6,447,194 — the sum of what you take out in retirement and what you leave in your estate. At 8.5%, the comparable number is $8,283,312. That difference, about $1.8 million, came only from the extra half-percentage-point of return. (There are) . . . places you are likely to find such a deal. The most obvious place . . . is to invest in funds with lower expense ratios. A typical actively managed equity fund charges expenses of more than 1%. A typical index fund charges less than half as much. Bingo, you've got it done. . . . A second place you are likely to find an extra 0.5% is to bump up your equity allocation by 10 percentage points. For example, you would have achieved that from 1970 through 2013 by investing 60% in equities instead of only 50%. A third source of higher returns that is extremely obvious to me: Adding equity asset classes that have long histories of outperforming the S&P 500 Index . . . . This is known as diversification, and it's one of the smartest things investors can do. . . . There are plenty of other smart moves that investors can make to boost their lifetime returns, but if you act on one or more of these three suggestions, you'll likely add more than a half percentage point to your return." As always, please pass it on.

Thing Two Beware Of Your Biases The following is also from "archives" and is a perfect companion piece to the .5% more post above. ........... "It’s funny what a bull market can do to our brains. . . . Money earned passively in the market, rather than from toiling at work, can feel easier to gamble with. It is a dangerous bias psychologists call the “house-money effect.”. . . Everyone wants to assume that they can think rationally. But with bear markets now a fading memory . . . now is an important time to understand the common behavioral biases that cause investors to make regrettable decisions during bull markets. Here are five others. The backfire effect. This is a powerful bias that causes us to double down on our beliefs when exposed to opposing viewpoints. “We think this response occurs because people respond defensively to being told that their side is wrong about a controversial factual issue,” says Brendan Nyhan, an assistant professor of government at Dartmouth College, who has studied the backfire effect in politics. “In the process of defending that view, they can end up convincing themselves to believe it even more than they otherwise would have if they had not been challenged,” he says. The same flaw can run wild in investing debates. If you are convinced that we are in a lasting bull market, how do you feel when you hear someone say that stock valuations are historically high, or that we are overdue for a correction? If you find yourself so critical of opposing views that you become even more convinced the bull market will last, watch out. Once your priorities shift from determining the truth to blindly defending your original views, you have lost the ability to think rationally. Confirmation bias. This flaw causes us to seek out only information that confirms what we already believe. Access to financial opinions has exploded in recent years . . . . But it can be dangerous, because no matter what you believe—and no matter how wrong those beliefs may be—you can likely find dozens of investors who agree with you. Having other people confirm your views may cause you to become more convinced that those views are correct. Charles Darwin had a knack for obsessing over information that disproved his own theories. Investors should try to do the same. Anchoring bias. This phenomenon causes us to cling to an irrelevant piece of information when estimating how much something is worth. Your opinion on how much a stock is worth may be anchored to how much you paid for it. If you paid $100 for a share of Apple stock, you are probably more likely to think shares are worth more than $100 than another investor who paid $80 for the stock. But the market doesn’t know how much either you of you paid for the shares. And it doesn’t care what either of you think is a fair price. Markets will do as they please, regardless of what price you are fixated on. Recency bias. This one is simple: It is another term for the tendency to use the recent past as a guide to the future. People like patterns. If stocks have just gone up, the natural tendency is to assume they will keeping going up—at least until they go down, and then we assume they will keep going down.... Markets move in cycles, but people forecast in straight lines. That is recency bias, and it is particularly dangerous after a long bull market. Blind-spot bias. This—the most dangerous investing bias—is a flaw that causes us to think the biases described above affect other people, but not ourselves." ............ And the conclusion (also from the archives) is that "...Individual investing has to be a long term commitment in order to be successful. Part of successful individual investing includes the ability to understand the role that our emotions and biases tend to play when stock prices decline. Since we humans tend to react more quickly to negative events than to positive occurrences, we are much more likely to do the exact wrong things at market bottoms and tops. We too often panic and sell when the market is falling rapidly, and then turn right around and buy when stocks are rising. That's the losing buy high and sell low 'model,' and it's harmful to one's long term financial health and well being. So becoming better acquainted with our emotional side is perhaps the best thing we need to know about individual investing..."

Thing Three Just A Thought "The biggest risk of all is not taking one." — Mellody Hobson


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