An important message from Vanguard’s F. William McNabb III: The power of compounding can put time on your side The purpose of my annual letter to you is, of course, to report on how your fund fared over the past year. But while it’s important to be aware of how your fund is doing in the latest market environment, short-term performance isn’t what matters most. The focus on the preceding 12 months shouldn’t distract investors from the long-term commitment they need to help themselves be successful. To be sure, there are many aspects of investing success that you can’t influence, … [Read more...]
Yield of Dreams
We are now over 1400 days after the official end of the Great Recession, and the Federal Reserve is still holding interest rates at historically low levels. Take a look at the chart below which includes the yield curves at the same number of days after the previous three recessions. At this point in the recovery period after the 1982 recession, investors were earning between 5 and 6% on short treasuries, and over 8% on 30 year treasuries. A similar but slightly flatter pattern existed in the recovery following the 1990 recession. During the recovery after the 2001 recession rates were … [Read more...]
A Sleep Well(esley) at Night Fund
You can be sure that 90% of what you read about retirement investing is either (A) not very helpful or (B) confusing. Yet there are some simple solutions and tools to use that are helpful and easy to understand. One of them is a fund to which I recently made a sizable contribution. But first let’s look at the dismal reality of the 401(k), which most baby boomers will depend on in retirement. Your 401(k) isn’t worth as much as you think it is. That’s because at age 70½ you need to begin making annual withdrawals based on an IRS life expectancy table and pay taxes at your ordinary income … [Read more...]
Up 30% with GNMA
You’re right to be concerned about higher interest rates and a decline in bond prices. Yet it would be a shame to miss the boat on the wonderful returns coming from bond funds with short-term maturities. The Vanguard GNMA fund, for example, with an average maturity of less than two years, has returned 7.6% YTD. For income investors, GNMA provides a relatively attractive yield of 3.27% compared to other short-term bonds like Treasuries. The Vanguard Short-Term Treasury, for example, yields only 0.30%. And compared to stocks, the Vanguard GNMA fund was up 7.2% in 2008 while the S&P 500 … [Read more...]
They’ll Wonder How You Live So Well
The businesses of the top 10 companies in the Vanguard Dividend Achievers fund could easily be part of your Saturday morning errands, especially if the kids and family are visiting. You could start the morning by leaving the house with a can of Diet Pepsi, stop by a Chevron station to fill up the tank, then swing into Walmart for some baby supplies like Pampers and Johnson’s Baby Shampoo for the little ones and Ibuprofen for yourself just in case you use the self-checkout lane. Hop back in the car, zip over to ExxonMobil for a car wash, scoot across the street for a Coke and a Big Mac, and … [Read more...]
Need Yield?
Do you invest in stocks for income? Is your portfolio focused primarily on U.S. stocks? If so, you might consider diversifying globally. The dividend yield on the U.S. stock market is one of the lowest yields in the world. In the chart below, I show the yields of 23 of the world’s major stock markets. The dividend yield on U.S. stocks is only 2.11%, compared to an average of 3.09% and a high of 5.45% in Spain. The U.S. is the sixth-lowest-yielding stock market in the group. If you invest in stocks for dividends or income, a global approach is advisable. When you take a global approach to … [Read more...]
A Simple Strategy for Stock Market Success
For over four decades I have used a simple strategy to successfully invest in the stock market. I invest exclusively in dividend paying stocks. I especially favor those with high yields, a strong balance sheet, and a history of annual dividend hikes. This strategy is simple, but it works. Historically, high dividend payers have outperformed non-dividend payers. In the chart below I show the growth of $1 in non-dividend paying stocks to the growth of $1 in the highest yielding quintile (top 20%) of U.S. stocks. The difference in performance is profound. $1 invested in non-dividend payers in … [Read more...]
How to Boost the Yield on Your Portfolio
January 22, 2010 Punishing yields of 0.05% on three-month T-bills and .85% on short-term Treasury notes are devastating to the millions of investors who rely on income from their portfolios to fund living expenses. The temptation for many of these investors is to reach for yield. Some investors are loading up on long bonds. You can pick up an additional 3% in yield by moving into long bonds, but you also add an extraordinary amount of risk. If rates move up, investors in long bonds will get creamed. I’m talking about losses that dwarf what many investors experienced in the recent bear market … [Read more...]
Top 10 Mistakes #2
October 30, 2009 The #2 item on my list of the ten most common mistakes investors make is discounting the importance of compound interest. Albert Einstein described compound interest as the greatest mathematical discovery of all time. Charlie Munger, Warren Buffett’s longtime partner, said: “Understanding the power of compound return and the difficulty getting it is the heart and soul of understanding a lot of things.” My son, Matthew Young, puts it this way: “Compound interest is your silent warrior for long-term investing.” The key to compound interest is not interest, but interest on … [Read more...]
Learn an Investment Lesson from an Ivy League’s Mistakes
Your debt load in retirement will determine who's in control, you or someone else. My father taught us that lesson. I remember when he brought my sister and me as kids to the bank to set up a savings account. The teller politely counted our money and printed the sum on the first page of the passbook. It wasn't much, of course, but it was a beginning, and that was what was important to my dad. Through the years, we continued to save, and over time the numbers began to add up. This was in the late '70s, so interest rates were much higher than they are today. By adding up all the interest lines, … [Read more...]
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