
On this episode of “On the Money,” the Ruedi Wealth Management financial advisor team discusses John Bogle, index funds, and how to accomplish financial New Year’s resolutions.
1:34 Economic News: China Slowdown
5:30 - John Bogle and Index Funds
"Back before index funds existed pretty much the only option for investors was either try to pick individual stocks on their own or hire a professional to basically pick stocks and time when to get in and out of the market for them. The thought process was a really smart person should be able to take advantage of any inefficiencies in the market or be able to predict market movements and outperform someone who took a naive approach and bought and owned an entire market.
But what happened is research came out, I think it was in the 60s or early 70s; basically, they got more and more data available to them and the computing power to analyze this stuff and what they found is most of the professional active money managers actually underperformed just the market as a whole.
So what happened is a few really smart people said you know we should invent some sort of investment vehicle that just matches the returns of the overall market. So instead of trying to take the best companies or jump in and out of the market, we're just going to own basically the entire market. I think they started with the Standard & Poor's 500 Index Fund which is basically the 500 largest companies in the US in their natural market cap weighting, and just delivered that return. It sounds like such a common-sense idea today because it's catching on, but at the time it was kind of blasphemous."
- David Ruedi, CFP®, RICP®
10:29 - Caller question on S&P 500: Does the biggest company have a bigger impact on returns than the smallest?
"The bigger company is going to have a bigger impact because everything's market-cap-weighted - so what that means is basically if you take the number of shares outstanding and you multiply that by the value of each share of stock that's going to give you a value of the market capitalization of that company's stock. If you think of a company like Apple, their market cap is like enormous and I don't know the smallest company in the S&P 500 would be, but my guess is it's much, much smaller than that. So large companies like Apple are driving the returns of the Standard & Poor's 500 Index a lot more than the 500th largest company."
- David Ruedi, CFP®, RICP®
13:00 – Caller Question: What do you add by going to a total stock market fund vs the S&P 500?
"Not much. I'll give you a technical side and just a basic side. To me, whether you own the Standard & Poor's 500 index or the total US Stock Market you are almost identical twins, but not quite. The total US market fund is going to have a slight effect from smaller companies and a little more of a value impact perhaps. The difference in expected return is about a quarter of a percent per year so I say flip a coin. I don't really get too caught up in whether a person buy an S&P 500 Index or a total stock market index."
- Paul A. Ruedi.
21:43 – Financial New Year’s Resolutions
How to Save More:
"A lot of saving comes down to clarifying your priorities. If you prioritize the things that saving will get you, so maybe it's paying for your child's college in the future, or being able to retire, or at least reach financial independence so you have more flexibility over what you do - all of a sudden it becomes a lot easier to control your spending on other things because you've decided that it's worth it to forego those other things to achieve your higher priorities in your life. So that's something that you can do right off the bat - is first and foremost clarify why you're saving, why is it worth it to you to forego consumption today for future consumption."
- David Ruedi, CFP®, RICP®
"To the extent possible to automate your savings; so if you can withhold it from your paycheck and put it right in your 401k - that seems to work the best for people. I think most people have heard that advice but when you hear it so often it’s because it works."
- David Ruedi, CFP®, RICP®
"If your employer is giving you a match, invest the amount of money on your side to at least get the match. You're getting a double up on your investment because your employer is putting in a certain percentage of retirement money for you. Some folks don't even know that's an option. If you can contribute 3% of your paycheck and your employer matches that, now you have a 6% contribution rate for the year."
- Ryan Repko
30:00 – The Importance of Financial Planning
"Somebody with a plan has better odds of success – they have a reason for their money and what they are doing, and when you put a reason behind a task like saving more money or spending less you have a better chance of achieving that goal."
- Ryan Repko
"One of the key assets of a plan is you can price what you are doing. Until you understand the cost in real life terms it's really impossible to make decisions. I talk about this a lot with clients – we just price decisions. For example, if a client asks should I work two more years - I'm going to price it. Here’s the extra you get – maybe another $200 a month for life if he retired two years later than we’re talking about. Only the client can value whether that’s worth it."
- Paul A. Ruedi
Disclaimer: Past performance is not an indication of future results. You should not make any investment decisions without first consulting your own financial advisor and conducting your own research and due diligence.