Chp 12&13
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| Assembling the 4 Pillars |
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| why do we save? | we save so that we can spend later
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| what do we save for? | retirement, emergencies, a house, the benefits of future generations, most save for all this in one portfolio
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| retirement | author says to plan on living 35 years in retirement, however, there is not much difference in living 35 years or eternity, 35 yrs you need around 746K and eternity you need 1m
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| amortization or rather planning on living only 35 years of retirement | is a dangerous idea. A wrong calculation could be dangerous, retirees should not take out more than 5% or they are tempting fate.
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| monte carlo analysis | best way of determining retirement, efficient solution written a windows based program for Monte Carlo,
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| standard deviation | measure of portfolio risk
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| how to fight bare markets, | spend less and save more in retirement years.
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| the only way investors can ensure their chance of success with no risk | to deprive themselves before and after retirement. This normally will not work, you must live a little and take some risks
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| Chapter 13 | Defining Your Mix
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| building the portfolio | 3 main materials, us stocks, foreign stocks and us bonds
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| famed financial writer Charles Ellis (winning the loser's game) | investing like tennis, you can lose by missing the easy shots or hitting the ball too hard, the best approach to win is too safely return the ball each time, you don't win, you avoid losing
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| portfolio strategy is exactly the same, we design portfolios that avoid losing
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| the U.S. Market | Most would say the S&P 500, these are not the largest US companies, rather companies chosen by Standard and Poor, it is a capitliztion weighted index,
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| total outstanding U.S. Stock, 7000 companies in all | ~ 13 trillion dollars, this is also called market capitalization or market cap for short
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| How much does the S&P 500 account for of the market cap? | ~ 10 trillion dollars, although it is not a true index since it only holds 500 companies
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| Largest company in S&P 500 is GE | ~ 400 billion dollars
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| Smallest company in S&P 500 is American Greeting | ~ 700 million dollars
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| Three true market Indexes | Wilshire 5000, and Russell 3000 that owns the 3000 biggest companies, CRSP, Center for research and security prices
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| passively managed funds | owns some but not all of the stock in an index fund,
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| Granddaddy of all index funds | the Vangaurd total stock market index fund rock bottom expenses of .2%, it has managed to beat the index by 4 basis points even after expenses
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| choice the S&P 500 or Wilshire 5000 or Russell 3000 | 500 big companies, 5000 is really 7000 a sampling of all companies, and 3000 is short the smaller companies that make up the 1% of the market capitalization
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| Would you hold the Vanguard granddaddy index fund in retirement account | only if you want things to be simple, usually you will want to break up the markets
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| what kind of stocks have the highest returns? | value stocks and small cap. Small cap because they are riskier.
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| Why do value stocks have higher returns? | bit of a mystery, but 1st is a behavioral reason, investors overestimate the value of stocks, and second value stocks are riskier than growth stocks and should have higher returns.
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| What is the most common way to split the market? (5 asset classes to use in your portfolio) | Large growth, large value, small growth and small value and Real Estate investment trusts (REITS)
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| S&P 500 | made up of Large growth and large value
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| S&P 600 or Russell 2000 | made up of the small growth and small value
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| REITS | Considerably high expected returns
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| Foreign Markets | only large mrkt is indexed
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| 3 main regions of foreign markets | 1. Pacific (Japan)
2. Europe
3. Emerging markets (Mexico, Indonesia, Korea, Taiwan)
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| Vanguard International Value Fund | Can invest in foreign values stocks using this fund. (Not an index fund)
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| tax efficiency | the measure of return after the taxes have been paid.
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| Bonds | Keep it short in duration, the longer you hold the bond the more risk you take,
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| 3 categories of bonds | 1. Government securities; bills = less than 1 yr, notes = 1-10 yrs > 10 years 2. Corporate bonds 3. Municipal bonds
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| Moody's rating and default listings since 1920 | AAA 0%, AA 0.04%, A 0.09%, BBB 0.025%
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| How should you buy Corporate and Muni bonds? | Through and bond fund, VAnguard off best at very low rates.
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| How should you buy Treasury bonds | directly (no fund needed)
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| hold only tax efficient funds in your account | hold the tax inefficient in your retirement account
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| once you have determined you asset allocation | keep it across portfolios, all you have to do to move up and down the risk ratio is to vary the stock bond ratio
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| 80% tends to be the upper limit of the stock allocation | design our portfolios for the long term
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| two bucket mode | the bonds provide support during the bad times and your stocks providing support during the good times
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