Apparently, Mitt Romney pays “about 15% in taxes” and Newt Gingrich pays around 32%. Quelle Horreur! Apparently, this is big, important news on the campaign trail. Said Newt Gingrich (to paraphrase), “I am a superior candidate to you, Mitt Romney, because you utilized more completely legal and above-board tax planning strategies than I did last year.” Color me impressed!

Why Do People Care?

Newt is right, after all. Not intentionally paying more taxes than you legally owe is both immoral and stupid. All moral people, both rich and poor, always pay more taxes than they legally owe. Have you ever heard of anybody ever going to any amount of effort to claim all the credits and deductions to which they were entitled? Me neither. It’s unheard of because everybody knows the only ethical course of action is to overpay your taxes.

I mean, it’s much worse than that ethics violation Newt was reprimanded for, becoming the first Speaker of the House to ever be disciplined for ethics violations. Besides, Newt paid $300,000 in fines for that little issue. All’s well that ends well, right? The fact that Mitt Romney didn’t cheat on his taxes in the past gives we the people a lot of insight into how horrible of a president he will be. What a slimeball! Newt’s ethics violations, however, are completely irrelevant. Once an abuser of power, always an abuser of power? Please. That’s racist talk! Romney legally paid all the taxes he was required to pay and not a penny more! That bastard!

People Don’t Really Care, Which Brings Me To My Point…

In case you couldn’t tell, I was being sarcastic above (and yes, I have to explicitly state that because I’ll get angry email otherwise). I don’t care what either candidate has paid in taxes, so long as they did so legally. And despite all the vitriol, neither does anybody else. Newt’s supporters (and Obama’s by extension: just wait and see) don’t care that Romney only paid 15% in federal taxes. What they care about is that it gives them an opportunity to take a jab at him in order to support their own side. Some of them have probably even managed to convince themselves that Romney’s tax rate is a big deal. It’s not. How many truly independent voters have complained about Romney’s tax rate? None. It’s all partisan squabbling (and yes, it can be partisan squabbling even though it is within the Republican party.

Do You Care About Romney’s Tax Rate?

I’d like to issue a challenge to anybody who actually believes Romney’s tax rate is an important issue. Why do you think this? Is it because you believe it makes him greedy? If so, you’d better be able to produce your own tax return showing the extra amount of tax you paid to the IRS beyond what you legitimately owed.

Do you think it makes him a tax dodger? Again, present your own tax return showing excess tax paid before you make this argument.

Do you think it means he’s not paying your fair share?

What is it? Why does it matter to you? Give me specifics, not meaningless BS generalities like “oh, well it shows his lack of character and that he’s out of touch and that he hates puppies.”

Can anybody give me a legitimate reason why I or anybody else should care?

Oh well. I’m voting for Obama anyway.

Greetings! Lots of craziness on the gridiron this week. Packers lost. Stupid crappy Saints lost. And the best football franchise in the history of the world, my beloved Falcons, were defeated last week. I suspect cheating was involved with that one. Any bets on who will end up in the Super Bowl? Could we possibly be in for a Patriots-Giants rematch?

On to the links!

I Was Interviewed By Credit Card Assist!

First of all, I’d like to think Bill over at Credit Card Assist for interviewing me for their Best of the Blogger series. Go check it out if you’d like to hear some of my thoughts on blogging. Or if you want to know my last name.

Less Awesome But Still Pretty Awesome Links

Oh boy, was there a flame war on twitter last week between Suze Orman and some bloggers I know. Jeremy at Gen X Finance shares his unfavorable opinion of her new prepaid debit card. Kevin at Thousandaire.com shares his opinion, as well. Naturally, I have my own opinion on the matter which I’ll be writing about soon. My opinion is actually a bit more favorable than most others. I’ll explain why in the post.

Speaking of opinions on the internet, Mike at Money Smarts Blog gives his opinion on online opinions. And no, this one isn’t related to Suze Orman.

Ever wonder why everybody else always seems to have more money than you do?  The Finance Buff ruminates on a few reasons this may seem to be so when it isn’t really true.

Paula’s tenant got kidnapped in midtown Atlanta. It’s pretty funny how incompetent the kidnappers turned out to be. There’s also a follow-up post with more details.

JD at Get Rich Slowly reposted one from the archives I actually hadn’t read before called How to Fend Off Financial Trolls, or Haters Gonna Hate. You know those annoying people who have nothing positive to say about money, rich people, banks, or whatever else and constantly tell your goals and ideas are stupid and won’t work? Yeah, I don’t like hanging out with them either.

I invest my own portfolio in index funds whenever possible and suggest most other investors do as well. That their long-term performance records dominate the average actively-managed fund is the stuff of legend at this point. The primary reason index funds make such good long-term investments, of course, is their low costs. Yeah, there are some high-cost index funds out there, but most index funds offered by reputable firms such as Vanguard, Fidelity, and Charles Schwab are dirt cheap. Costs matter, and index funds dominate in this regard.

Other Advantages Of Index Funds

But it’s not just a cost story. Yes, costs are important and probably constitute 95% of the advantage the average index fund has over the average actively-managed fund, but there are plenty of quality low-cost active funds around, especially from companies like Vanguard and Dodge & Cox. So are there other inherent advantages to indexing over active management? I believe so, but they are admittedly small.  Still, over the long term every little bit counts. Here are a few of those advantages.

Index Funds Avoid Style Drift

Style drift happens when a mutual fund shifts from its stated (or simply prior in the case of so-called “go anywhere” funds) investment style or objective. For example, consider the case of an actively-managed large-cap value fund in the late 90′s when growth stocks were all the rage. Many value managers at the time were tempted to delve a bit into growthier issues in an attempt to keep up with their peers. As it turns out, mutual fund managers aren’t any better at market timing than retail investors. In an industry where focus and discipline are absolutely necessary to succeed, style drift kills.

Besides, when you deploy a portion of your money, don’t you want to know which specific asset class that money will be invested in? I do.

Index Funds Avoid Management Risk

There is no better example of management risk rising up to smack investors in the face than the famous case of the Fidelity Magellan fund (FMAGX). After putting up absolutely insane performance numbers throughout the 80′s (averaging 29.2% from 1977-1990), Peter Lynch retired and the fund promptly returned to churning out more mediocre returns. Magellan’s stellar long-term track record in the early 1990′s was primarily due to Peter Lynch and a few previous managers, not whomever the current manager was (and there was significant turnover for a while). Thus, the past record was almost completely irrelevant when evaluating the fund with respect to its probable future performance.

When a star manager leaves a fund, performance can often change dramatically. Since they merely follow a passive benchmark, index funds don’t have any management risk. They will match the market, minus expenses, ad infinitum. Hot active funds? Probably not.

Index Funds Avoid The “Closet Indexing” Problem

This one is mostly a cost issue, albeit indirectly. The larger actively-managed funds have such  large asset bases that their portfolios tend to become “closet index funds” over time, meaning they closely mimic the performance of their target benchmark. Asset bloat is a serious problem with actively-managed mutual funds and really, when you think about it, how could things be any different? Due to various rules restricting what percentage of a company’s shares any given mutual fund is legally allowed to own as well as what percentage of a fund’s portfolio is allowed to be invested in any one company, large mutual funds end up having to own hundreds of stocks. It stands to reason that the greater the percentage of the companies in a given index a fund owns, the closer that fund’s performance will track the benchmark.

As an example, suppose there are 1000 stocks in a particular value index (a typical amount). Assume also that a large-cap value fund with, say, $30 billion in assets owns approximately 250 of those stocks (also a typical amount). That means the fund owns a full 25% of the stocks in the index, which from a statistical perspective is a sizable sample. Statistically, we would expect the fund to closely mimic the movements of its target benchmark. Smaller funds are able to get away with owning a much smaller percentage of the stocks in their target markets, of course, but strong performance also stimulates strong asset growth as new investors pile into the hot-performing fund.

But wait, isn’t indexing desirable? Well yes, but only if it’s also cheap. The problem with closet indexing is that all but completely lose the possibility of out-performing its index fund counterpart. After all, a bloated active fund that basically owns the entire index can’t very well beat that index, can it? And the real index fund has a significant advantage: it has much, much lowers costs. For bloated funds, the cost disadvantage is pretty much impossible to overcome.

Sign up for a free Morningstar account for access to a variety of portfolio tools and a plethora of information on almost any mutual fund or ETF in existence.

I recently wrote a post outlining what I believe are the best Vanguard index funds in each major asset class. While I favor index funds for my own investment portfolio (see my IRA allocation), many investors prefer the thrill of potentially beating the market that comes with actively-managed mutual funds.  While the odds are definitely against you, they are not overwhelmingly so if you keep a few key concepts in mind.

Anatomy Of Good Active Fund

I’ve written on this subject previously so I’ll keep it short here. To have a realistic shot at beating or at least matching its benchmark, an active fund should look something like this:

1. Have Low Costs – The main advantage index funds have over actively-managed funds is that they tend to be much, much less costly. While there are other advantages of owning index funds (avoiding style drift, manager risk, etc), the cost advantage is by far the dominant one. The best-performing active funds, on average, also tend to be the lowest-cost active funds. This is no coincidence. Fortunately, Vanguard’s active funds have extraordinarily low expense ratios relative to their peers, giving them a serious long-term advantage.
2. Stable Management – This isn’t nearly as important as the cost issue, but it still factors in. A fund whose manager changes every other year is likely not going to post top-decile performance numbers over the long term.

The Best Actively-Managed Vanguard Funds

While the distinction between funds dedicated to various asset classes isn’t quite as clear with active funds as it is with index fund due to issues like style drift and loose portfolio mandates, I think it’s still a useful classification criteria. After all, a large-cap value fund is still going to invest predominantly in large-cap value stocks even if they do occasionally delve into smaller and/or growthier issues.

Best Domestic Stock Fund

And The Winner Is: Vanguard Selected Value (VASVX) - I almost chose the PRIMECAP Fund (VPMAX), but that fund is closed to new investors (unless you have a ton of money, that is). The Selected Value fund has reasonably low expenses, focuses on the smaller end of the market cap spectrum (it’s classified as a mid-cap value fund), and still has a smallish asset base. At $3.9 billion in assets at the time of this writing, the fund could probably more than double in size until it started having trouble staying within its mandate. And its primary manager, James Barrow, is one of the best and most experienced managers Vanguard has to offer. According to Morningstar (I recommend you sign up for a free Morningstar account if you don’t already have one), the fund is in the top 18% of its category over the last 10 years.

Best International Stock Fund

And The Winner Is: International Explorer (VINEX) - Here’s an actively-managed small/mid-cap international fund cheaper than its index equivalent! International Explorer currently charges an expense ratio of just 0.42% compared to 0.55% for the Vanguard FTSE All-World ex US Small Cap Index Fund (VSFVX). It has only a slightly higher average market cap (~$1.2 billion vs ~$1 billion) as well, making it a viable, less costly alternative to the foreign small cap index fund. Oh yeah, and it’s performance numbers aren’t too bad either, although it has been by no means dominant in its category.

Best Bond Fund

And The Winner Is: Vanguard Inflation Protected Securities (VIPSX) - This one wasn’t even close. Thought this was an index fund? It’s not. But it is dirt cheap and many (including me) consider TIPS to be an important alternative asset class. Some experts even go so far as to recommend holding TIPS instead of nominal bonds rather than in addition to them. I don’t quite go that far, but I do highly recommend this fund.

Best Non-Core Fund

And The Winner Is: Vanguard Health Care (VGHCX) - I hesitate to recommend such a narrow sector fund here, but the Health Care fund has been pretty spectacular over the long term. Since opening in 1984, this fund has returned 16.30% per year. Yeah, plenty of that has to do with the fact that the health care sector has been on fire since then, but low expenses and a veteran management team certainly haven’t hurt. It goes without saying you should allocate only a very small percentage of your portfolio to any narrow sector fund, preferably no more than 5% (although 10% might be acceptable for some investors).

Best Balanced Fund

And The Winner Is: Vanguard Wellington Fund (VWELX) - Yes, Wellesley Income (VWINX) is a superb fund, but how could I not go with Wellington here? It’s one of the oldest and most respected mutual funds in existence. Since opening in 1929, Wellington fund has returned 8.12% per year. That record includes not only the latest economic collapse but also the Great Depression. Not bad, huh? Plenty of people have retired, sent their children to college, or otherwise gotten filthy rich investing for long periods of time only in Wellington fund. It embodies everything that’s right in the mutual fund world: extremely low costs, stable management, and a disciplined, conservative investment approach.

Best Alternative Asset Class Fund

And The Winner Is: Can I choose the Vanguard Inflation Protected Securities Fund (VIPSX) again for this category? Yes? Okay, then I choose that one. The Precious Metals And Mining Fund (VGPMX) comes in second.

Most of the statistics in this article were collected using Morningstar. Sign up for a free Morningstar account for access to a variety of portfolio tools and a plethora of information on almost any mutual fund or ETF in existence.

* All figures and numbers accurate as of the date of publication

I didn’t set any goals for 2011, at least not publicly. And that’s a shame because studies have shown there are clear benefits both for writing goals down and being held accountable for them publicly. Since I probably need all the help I can get, I’m going to broadly outline a few personal finance and business goals for myself in 2012. I’m not going to get too terribly specific because I don’ t want to reveal too much personal information, but you’ll get the gist of it.

Personal Finance Goals

• Increase my net worth by $60,000 - This is a pretty aggressive goal based on my savings rate. I say “based on my savings rate” because I don’t think setting a goal based on earning a positive return on my investments is all that useful. I can’t control what the market does, but I can control how much money I save. If my business does well over the next year and I hit at least 100% of my bonus at work, I just might be able to hit this target. Of course, if the market crashes it probably won’t matter how much I save. On the other hand, if the market shoots up 20% next year, I will hit this goal easily. But I’m not going to worry about that either way. I won’t feel bad if I miss my goal solely because of an uncooperative stock market.
• Fully fund both my 401k and SEP IRA next year - I’ve been fortunate enough to be able to max out my company’s 401k plan both of the last two years and expect to be able to do so in 2012 as well. I will only be able to defer 20% of my self-employment income into my recently-opened SEP IRA, which will put me absolutely nowhere near the maximum contribution for that type of account. So when I say “fully fund my SEP IRA” I mean defer 20% of my self-employment income. This should be a gimme barring any unforeseen disaster I would need to funnel my secondary income towards.
• Fix up the ol’ homestead to prepare it for sale or rental - I want to move. I don’t necessarily see myself being able to sell my condo for a reasonable amount in this market, but I’d like it at least to be in saleable (or rentable) shape by the end of the year. Best case scenario would be to lease it sometime in 2013 while I move to my favorite part of town.

Personal Goals

• Spend at a very minimum 2 weeks this year on another continent – Preferably Asia or South America, but I’m not going to be picky. In reality, I’d rather spend more like an entire month abroad. We’ll see how this goes.
• Do some sort of exercise at least 5 days per week – I’m already doing pretty well on the personal fitness front. I work out at least 2-3 days per week and sometimes hit 4 or even 5. But I’d like to get to the point where I’m working out 5 days per week consistently. This isn’t really a particularly aggressive goal, because even something as quick as an intense 10 minute interval session would count. The point is to do something every day. Walking doesn’t count, but things like playing soccer or basketball after work do.
• Eat better – I already eat a ton of fruits and vegetables, so overall macro nutrition isn’t a problem for me. But I also eat far more junk food than I should, and often after a long day at work I’ll just order a pizza for dinner. I have to cut back on that significantly.

Business Goals

• Break 1,000 RSS subscribers – I’ve been hovering around the 600 RSS subscriber count for almost 6 months now. Most of this is due to the fact that I didn’t aggressively pursue RSS readers in 2011 coupled with not doing any guest posts on larger blogs, which in my experience is one of the best way to build loyal readership. Wanna help me out? Subscribe to my RSS feed!
• Consistently post about 3 times per week – My posting slowed down considerably in the second half of 2011 due to some personal things I won’t get into. But that’s really no excuse. I’m going to post more regularly in 2012. You guys deserve it.
• Write at least 1 quality guest post per month for a popular blog in my niche – Guest posts can be a time sink, but they are still the most effective way I know of to build domain authority, search traffic, and most importantly readership.
• Start a mailing list – Everybody else does this. Why don’t I? Because I’ve been lazy.
• Increase business income by 50% – There’s absolutely no way this is going to happen without creating my own product. I’ve had a few ideas for an ebook I’ve been kicking around in my head for a while now. Speaking of which…
• Write an ebook – I’m just going to do it this year. I may even decide to give it away for free to loyal readers instead of selling it. But I can worry about that after I’ve actually written the damn thing.

Vanguard recently announced some significant improvements to their Vanguard Total World Stock Market Index Fund (VTWSX) that deserve mention. As you may recall, I wrote a short piece on the fund when it was first released and concluded that while the fund held promise, I wouldn’t be buying it for my own portfolio due to two main reasons, neither of which have changed.

Still, recent improvements at the fund have made it significantly more desirable. I still won’t be buying it for myself, but that doesn’t mean you shouldn’t. In fact, these changes may make the fund near ideal for some investors.

Tracking A New Benchmark

The Total World Stock Market Index Fund originally tracked the FTSE All-World Index but will soon switch to tracking the FTSE Global All Cap Index. What does this mean for investors? More small-caps! The old index contained the largest 2,800 global stocks, covering 90-95% of the investable global equity universe. The new index contains over 8,000 securities across all market caps and contains more than 98% of the investable global equity universe. An additional 3-8% may not sound like much, but it is significant since that additional exposure comes at the bottom of the market cap range.

Eliminating Purchase Fees

While the inclusion of small caps is pretty cool, a far more exciting development is the elimination of purchase fees for this fund. Vanguard has a long history of reducing costs and eliminating fees when a fund grows large enough to stand on its own. Evidently, Vanguard has decided that the 0.25% purchase fee on new shares is no longer necessary, which is obviously a good development for new investors since every reduction in cost results in a corresponding increase in future returns.

The fund still retains its 2% redemption fee, but only for shares sold within 2 months of purchase. For long-term investors, this shouldn’t be an issue.

Should You Buy This Fund?

The question is, do these changes make this fund desirable enough to be worth owning? For many investors, the answer is yes. If you value simplicity, there’s nothing quite so simple as owning every significant stock in the world in one fund. It’s still true this fun is more expensive than holding the components of this fund separately (the total stock market index and the total international stock market index), but that’s the price you pay for convenience. Besides, the expense difference isn’t enough to really be troublesome in the long term, especially since expenses will likely come down in the next few years as fund assets grow.

But I still won’t be buying this fund, for the following reasons.

1. It’s still more expensive than its components – But didn’t I just dismiss this issue by saying “…but that’s the price you pay for convenience?” Yep. And it’s a price well-paid for some investors. But not for me. Since I qualify for admiral shares of the other two funds, I am seeing a substantial expense advantage. If I had less money to invest or didn’t enjoy managing my portfolio as much as I do, I might see things differently. But as it stands, I’ll take the lower cost option. Your mileage may vary, but you shouldn’t feel like what works best for me will necessarily work best for you.
2. Still can’t rebalance – This isn’t so much a downside of the fund as a quirk of my chosen investment style. I’m a slice and dicer and a tilter, meaning I choose not to hold assets in their market weight. Rather, I prefer to remain agnostic about these sorts of things and thus tend to split things 50/50 when it comes to this sort of decision. That is, I don’t know whether domestic or foreign stocks will outperform going forward, so I will just hold them in equal amounts. That way, I win either way. There are a lot of experts who disagree with this approach, however. In fact, most investors are probably better just sticking to market weights without a compelling reason to do otherwise.

Vanguard being my favorite mutual fund company, I tend to own Vanguard mutual funds whenever I can. Indeed, if you look at my Roth IRA asset allocation you won’t find a single non-Vanguard fund. Currently, I exclusively hold Vanguard funds everywhere but in my 401k plan at work, where they unfortunately aren’t offered in preference to higher-fee investment options.

In light of my love of Vanguard mutual funds, I’ve decided to put together this list of the Best Vanguard Mutual Funds* in each of a variety of relevant categories. The end goal is that simply building a portfolio out of the following Vanguard index funds should allow you to cover all the major asset classes. Since Vanguard is known primarily for its index funds and since I promote index investing whenever possible, I won’t be including any active funds in this list. I plan on writing about the best active Vanguard funds soon.

The Best Vanguard Mutual Funds

Best Domestic Stock Fund

And The Winner Is: Vanguard Total Stock Market Index Fund (VTSMX) – This fund gets the nod over the perhaps more popular S&P 500 index fund for several reasons, namely the fact that it holds small- and mid-cap stocks in addition to just mega- and large-cap stocks, is likely to be ever-so-slightly more tax-efficient going forward, and isn’t subject to index front-running (since it’s a total market index). Over time, the two funds should track each other very closely, but why take the chance that they won’t? The Total Stock Market Index Fund is guaranteed to track the market closely. The 500 index fund probably will, but perhaps not as closely as you might wish. If you’re only going to own one domestic stock fund, this is the one you should own. Hands down.

Best International Stock Fund

And The Winner Is: Vanguard Total International Stock Market Index Fund (VGTSX) - Even a year ago, this would have been a much more difficult choice. However, since Vanguard’s most recent improvements, the Total International Stock Market Index Fund has become the clear champion of the foreign index fund competition. In fact, I can think of no reason to own the FTSE all-world ex US fund at all anymore, except perhaps to avoid a wash  sale or some other tax complication. The Total International Fund is dirt cheap, diversified, eligible for the foreign tax credit, contains small cap stocks, and owns Canadian shares. What else could you possibly want in a core international fund? Again, if you only own one international stock fund, it should probably be this one.

Best Bond Fund

And The Winner Is: Vanguard Intermediate Term Bond Index Fund (VBIIX) – This was a tough one, coming down to this fund and the more popular Total Bond Market Index Fund (VBMFX). In the end, I may be going against the grain a bit in preferring the intermediate term bond index fund over the total bond market index fund, so let me explain. First off, these two funds have somewhat similar average effective durations, and important measure of bond interest rate sensitivity. Furthermore, they both concentrate on high-grade bonds with a healthy allocation to ultra-safe government issues. So why choose one over the other? Simple: the Total Bond Market Index Fund invests almost 30% of cash into Mortgage-related securities, which it turns out are a bit less safe than previously anticipated (remember 2008?). Is this a big deal? No. Did the total bond market fund perform well in the recent crash? Yes. But since I have to pick one, I give an ever-so-slight edge to the intermediate term bond index fund in this case. In reality, both funds are excellent and you couldn’t go wrong owning either. The Short Term Bond Index Fund (VBISX) also receives honorable mention (and is the one I personally own).

Best Non-Core Fund

First, an explanation. I am defining a “non-core fund” as any fund investing in a non-core asset class. This could be a sub-division of a larger asset class (value stocks, emerging market bonds, etc) or it could invest in an alternative asset class (commodities, real estate, etc).

And The Winner Is: Vanguard Small Cap Value Index Fund (VISVX) - Alas, I could choose only one non-core fund out of a stable of several top-notch options. I chose the small-cap value fund mostly due to personal preference. I am a big believer in the slice n’ dice approach to indexing and believe the small-cap value premium is here to stay. That said, this Vanguard fund isn’t as small or value-y as it could be, so it doesn’t capture nearly as much of the small and value factor premiums as it could. I actually prefer the DFA fund to its Vanguard counterpart. Unfortunately, DFA requires you to work with a financial advisor in order to have access to their funds. Since I don’t work with an advisor and don’t think it’s worth the cost just to gain access to one non-core fund, I think the Vanguard fund is a reasonable alternative. For those of you who already work with an advisor, the DFA alternative is definitely worth a look.

The REIT index fund came in a close second in this category. Speaking of which…

Best Alternative Asset Class Fund

And The Winner Is: Vanguard REIT Index Fund (VGSIX) – Vanguard’s index fund line-up is a bit light on alternative asset classes. In fact, the REIT index fund is the only one I can think of. Sure, there’s the Energy Index ETF (VDE), but that’s about it. And the precious metals fund, being actively-managed, doesn’t qualify. Besides, real estate is one of those alternative asset classes that has become so mainstream it might also be considered a core asset class by some. I allocate 10% of my portfolio to REITs and some experts would argue I should allocate more like double that.

Most of the statistics in this article were collected using Morningstar. Sign up for a free Morningstar account for access to a variety of portfolio tools and a plethora of information on almost any mutual fund or ETF in existence.

* As defined by me and my own subjective judgement/criteria.

All figures and numbers accurate as of the date of publication

Occupy Wall Street has going on for a while now, around 6 weeks or so, I believe. Unfortunately, I do not believe it has accomplished much. I don’t even think it has shed much media attention on the relevant issues or sparked much debate. That’s unfortunate, because I do believe the OWS movement has some legitimate complaints, though they aren’t expressed especially well. What I don’t like, however, is how so many of the protesters scream “we are the 99%” as if they are speaking for all of us. They most certainly are not.

I’m All For The 99%

I certainly don’t make anywhere near enough money to be part of the 1%, so in that sense, I am definitely a 99 percenter. I am for things like universal health care, restoring reasonable financial regulations such as the old Glass-Steagall Act (although I think it should be reworked and not merely reinstated), limiting the influence of capital on the political process, etc. So yeah, I agree with some of what many of the protesters are after. However, there are a few things I am adamantly against.

• Putting the “criminals” in jail - This is straight up childish and I hear it repeatedly. Perhaps some of the bankers didn’t make the wisest decisions, but with a few glaring exceptions, they aren’t criminals. And hey, it’s not like you’ve never made a mistake yourself. All this rabble-rousing for “throwing the criminals in jail” is silly and it’s rooted in revenge, not justice. I’ve even heard people seriously call for some of these bankers to be executed a few more times than I’m comfortable with. Seriously, people? Grow up.
• Ending free trade - It very well may be that free trade has been eroding American living standards, but guess what? Americans don’t have any more right to a high-paying job than anybody else. The poor need those jobs way more than we do. I’m fine with it and you should be too. Think of it as repaying the rest of the world for centuries of exploitation.
• Mandating a guaranteed living wage – I’m not sure exactly what this means, but it’s a stupid idea. Stop screaming about it and claiming you’re doing it for the 99% (of which I’m a part). No you’re not. You’re doing it for you.

So yes, I am a 99 percenter. We may be in the same boat, but you do NOT speak for me. I and I alone speak for myself and I resent you representing your movement as if you do. Let me repeat: you do not speak for me nor do you speak for anybody else. And I’m not the only one who feel this way.

Enter The 53% Movement

First let me state I do not back the 53% movement specifically. Just because you don’t earn enough to pay taxes every year doesn’t mean you are lazy or don’t deserve a say in how you are governed. That said, I can appreciate the sentiment they are expressing. Whilst many on the interwebs have dismissed the movement as a mere right-wing wingnut response to the Occupy Wall Street movement, I have seen no evidence this is the case. Hell, nobody would ever confuse me with a conservative and I love it! Specifically, what I like is the fact that a certain segment of the population is standing up and saying “wait a minute, I’m not rich but I don’t believe you represent my beliefs or best interest.” Bravo.

We can argue endlessly over which side is right and which side is wrong*, but that would miss the point. The point is, 99% of America is a massively heterogeneous group. No single movement could ever hope to represent the best interests of a group that large and diverse. In fact, I find it downright insulting that anyone would actually try. You are not the 99%. At most, you are the 0.000099%. Please don’t pretend you are something more, because it’s really annoying.

Does The 99% Movement Speak For You?

I have no doubt there are some people out there who completely agree with everything the 99% movement stands for. Good for you. But I also have no doubt that 99.999% people people don’t. Most people may agree with a few of the fundamental  tenants of the movement and disagree with others. And yes, there are fundamental tenants despite a lot of protesting to the contrary. Which side do you come down on? Or, if you’re like me, perhaps you come down on no side at all! There’s no wrong answer to this questions and, so long as we can keep it civil**, I think we can all learn a lot from each other.

* Oh, and for the record, both sides are full of crap. Now that we’ve settled that argument once and for all, let’s all do something productive with our time.

** I’m fully aware this isn’t possible on the internet, but it’s nice to pretend.

I’m a bit late to the party, but Vanguard has recently announced that it will launch two new international bond index funds: a Total International Bond Index Fund and an Emerging Markets Government Bond Index Fund. I’m a fan of diversification in general (and hence alternative asset classes like foreign bonds in particular), but I’m not entirely sure I will be buying these international bond index funds anytime soon for reasons I’ll discuss in a bit.

Should You Own These New International Bond Index Funds?

There are some compelling reasons to own international bonds. However, since these two funds are very, very different they should be evaluated separately. One important consideration is that both of these funds are partially hedged against currency fluctuations. So far so good. Hedging isn’t free, however, so those hedging costs can reasonably be considered an additional cost of owning this asset class, just like costs like taxes, brokerage commissions, bid/ask spreads, etc. Note that hedging costs, like those mentioned above, are not reflected in a fund’s expense ratio. I’m not sure if this additional cost is significant, but it’s not zero, so buyer beware.

Total International Bond Index Fund

Jack Bogle was for years an adamantly opposed to international bonds (although he has now reportedly changed his mind). Many investors however, especially slice ‘n dice investors like me, consider foreign bonds to be an asset class unto itself, just like international stocks and small-cap value stocks. It seems like Vanguard has now come along to this point of view.

In a study published earlier this year, Vanguard came out in saying allocating between 20-40% of your total bond allocation to foreign bond funds yielded modest but not-insignificant diversification benefits. For investors willing to accept slightly higher costs, this new Total International Bond Index Fund seems like the ideal way to gain foreign bond exposure. It is broadly diversified (holding over 7,000 bonds from all over the world), very inexpensive (relative to its peers), and only moderately correlated with the domestic bond market (albeit this is based on very limited data).

This fund deserves serious consideration from slice ‘n dice investors; however, the vast majority of individual investors probably needn’t bother. International bonds almost certainly fall into the “nice to have” and not “got to have” category.

Fund Expenses:
Investor Shares: 0.40%
Admiral Shares: 0.30%
ETF: 0.30%

Emerging Markets Government Bond Index Fund

Emerging market sovereign debt is a different animal. Emerging market bonds can be quite volatile: far more volatile than what most people would expect when they think of bonds. In that regard, they probably have more in common with junk bonds than any other asset class.

I’m going to go out on a limb and say 99% of investors should not own this fund. Very sophisticated investors with large portfolios will probably benefit from the additional diversification benefit emerging market bonds can provide, but most of us just don’t have large enough portfolios to justify slicing and dicing our portfolios down into such small market segments.

That said, the fun does have a few pros. It is extraordinarily inexpensive for an emerging market debt fund, and the fact that it’s run by Vanguard means it will probably stick to the more highly-rated segment of that particular market. Still, the rewards don’t seem to outweigh the risks of owning this asset class, at least not for investors of modest means. Then again, I’m not bond expert so I reserve the right to change my mind later.

Fund Expenses:
Investor Shares: 0.50%
Admiral Shares: 0.35%
ETF: 0.35%

I Intend To Buy The Total International Bond Index Fund…Eventually

(Here’s Why You Should Wait Too)

I fully intend to diversify into international bonds in the future. I think they are a good secondary asset class to own and will probably be a moderately-effective diversifier. I don’t think I will buy them anytime soon, however, and my reasons are actually fairly similar to those of Mike Piper over at Oblivious Investor.

1. Bonds only make up 10% of my portfolio – Since bonds comprise such a small part of my portfolio, there really isn’t that much practical benefit to subdividing them further. Any diversification benefit gained by allocating half my bonds overseas would be totally insignificant in the context of my overall portfolio. Were bonds to make up 30% or 40% of my portfolio, I would almost certainly own the Total International Bond Index Fund.
2. Diversifying into TIPS is a higher priority – While I like international bonds, I like TIPS even more. I think TIPS give more bang for the diversification buck, so to speak. When I increase my bond allocation from 10% to 20% in a couple of years, I’m going to allocate that additional 10% to TIPS and not foreign bonds. As my bond allocation (and account balance) grows over the years, I will begin easing into international bonds. But not until my account balance justifies such a move.
3. The expenses will come down – Vanguard is very good at regularly lowering the expense ratios on its funds as they grow. While 0.40-50% isn’t that much compared to the rest of the industry, it’s quite high compared to the average Vanguard fund. I fully expect the expense ratios on these funds to come down significantly as they attract assets.
4. We don’t REALLY know how correlated to domestic bonds they will be – Foreign bonds have been only moderately correlated with domestic bonds in the past; however, they have also never been easier or cheaper to own than they are right now with the introduction of these new funds. As more investors diversify into this asset class, correlations could rise. Additionally, we have limited data to begin with, so future correlations could be higher (and diversification benefits lower) than we expect. Again, there’s no rush!

I’m a strong believer that with a little research, common sense, and discipline almost anybody can manage their own investments at least as well as the pros. For those who prefer to go the DIY route, investing in index funds, keeping costs low, and owning a variety of asset classes (not just stocks and bonds but also alternative asset classes like real estate, commodities, TIPS, etc) will serve you well; well enough to match or beat the performance of most professional financial planners.

But many (if not most) people just don’t want to go it alone for whatever reason. Maybe you don’t trust your judgement or know you’ll probably do something stupid when the market tanks. Or maybe you just don’t care about investing and doing the necessary research sounds worse than a trip to the dentist for you. Fair enough.

I Recommend Fee Only Financial Planners

There are a few different kinds of financial advisors. For reasons I could write a whole series of articles about (and probably will), I mostly just recommend using a fee only financial planner. Fee only financial advisors aren’t compensated with commissions so they have less of an incentive to put you into inappropriate investments just to make a quick buck. There are still conflicts of interests, of course, but they tend to be less several with a fee only financial planner than commission-based planners.

5 Questions To Ask A Prospect Fee Only Financial Planner

So how does one choose between all the fee only financial planners out there? A lot of it comes down to finding somebody you can trust and are personally comfortable with. At a minimum, that means you should do a background check on any advisor you’re thinking of hiring. But besides the basics, here are a few questions I think everybody should ask when interview financial planners in order to get a feel for how well the planner’s approach jives with common-sense investing best practices.

1.) How long have you been in the business?

You want a financial advisor with experience across a wide range of market conditions. Somebody who started their financial planning practice during the last great market crash may be overly-conservative with their asset allocation strategies while somebody who has been around mostly during bull markets might be overly optimistic about future returns. At a minimum, I would want to work with somebody with at least 10 years experience. That’s not to say a less-experienced advisor wouldn’t do just as well, but you have to draw the line somewhere.

2.) What certifications do you have?

There are a ton of different certifications in the financial planning business, some of them more useful than others. One of the most rigorous certifications out there is the Certified Financial Planner (cfp.net) designation. Planners with a CFP designation had to demonstrate their knowledge by years of dedicated study and by passing some pretty difficult tests. Other worthwhile designations are Certified Financial Consultant (ChFC), Chartered Investment Counselor (CIC), and Chartered Financial Analyst (CFA). This is not a complete list, so you should always research the designations earned by every fee only financial planner you interview and then verify with the appropriate designating authority they actually earned the designation they claim to have earned.

3.) How important is controlling investment costs to your investing approach?

If their response is anything other than “very important” run away as fast as you can. All else being equal, a lower-cost mutual fund will beat a comparable higher-cost mutual fund and low-cost diversification is as close to the optimal investment approach as you can get. Any sales pitch along the lines of “costs shouldn’t matter because I can choose superior mutual fund managers and beat the market” is a huge red flag.

4.) What’s your track record?

I prefer index funds, but plenty of individuals and many financial planners prefer active funds. And there’s nothing inherently wrong with that. But if your financial advisor insists on recommending actively managed funds, don’t you want to compare how their picks have panned out in the past? If your financial planner hasn’t been able to at least approximately match the performance of a basket of broad market indices in the past, what makes you think they will be able to do so going forward? And if they can’t do so going forward, you’d be better off in index funds.

5.) How does your investment approach account for taxes?

This isn’t a big deal if all your money is locked away in a 401k, IRA, or other tax-deferred account. But if you’ve got a lot of money in taxable accounts, you’re going to want to make sure your financial planner is investing in the most tax-efficient way possible. Furthermore, you want to make sure your planner is looking at your portfolio as a whole and not just a collection of different budgets. Proper asset location can make a big difference come April 15th.

Obviously, this isn’t an exhaustive list of questions you should ask. For more general info, check out the National Association Of Personal Finance Advisors (NAPFA) and their list of tough questions to ask.