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  • Who invented the index fund? A brief (true) history of index funds
    by J.D. Roth on 05/21/2020 at 6:30 pm

    Pop quiz! If I asked you, “Who invented the index fund?” what would your answer be? I’ll bet most of you don’t know and don’t care. But those who do care would probably answer, “John Bogle, founder of The Vanguard Group.” And that’s what I would have answered too until a few weeks ago. But, it turns out, this answer is false. Yes, Bogle founded the first publicly-available index fund. And yes, Bogle is responsible for popularizing and promoting index funds as the “common sense” investment answer for the average person. For this, he deserves much praise. But Bogle did not invent index funds. In fact, for a long time he was opposed to the very idea of them! Recently, while writing the investing lesson for my upcoming Audible course about the basics of financial independence, I found myself deep down a rabbit hole. What started as a simple Google search to verify that Bogle was indeed the creator of index funds led me to a “secret history” of which I’d been completely unaware. In this article, I’ve done my best to assemble the bits and pieces I discovered while tracking down the origins of index funds. I’m sure I’ve made some mistakes here. (If you spot an error or know of additional info that should be included, drop me a line.) Here then, is a brief history of index funds.

  • Great lessons from great women
    by Tanja Hester on 05/10/2020 at 7:30 am

    A decade ago, J.D. shared some great lessons from great men. He had a wealth of material to draw from: biographies of historical figures from centuries ago, classic business texts, and the earliest self-help books. If you want to compile lessons from great women, however, you don’t have the same sources, because women have not been considered “great” for much of history, and thus they’ve not been asked for their opinions on most things — certainly not financial matters! Multiply that times ten for women of color. Today, I’d like to share some great lessons from great women. But the wisdom I’ve collected here comes primarily from media sources and speeches. It’s no less wise than the wisdom from books written by great men, and it applies to everyone of all genders, although it’s informed in many cases by much tougher life circumstances than the white men who lent their thoughts to this post’s counterpart. Here are t

  • What’s the best long-term investment?
    by J.D. Roth on 05/04/2020 at 7:30 am

    What’s the best long-term investment? Because you’re a money nerd (and a GRS reader), I hope your answer to this question was, “Stocks!” If the future is anything like the past, that’s the correct answer. History has shown that stocks are the best long-term investment — and by a wide margin. Unfortunately, most Americans believe otherwise. As a part of its annual Economy and Personal Finance survey (conducted during the first two weeks of April), Gallup News asked 1017 American adults, “Which of the following do you think is the best long-term investment: bonds, real estate, savings accounts or CDs, stocks or mutual funds, or gold?” Here’s how people answered: 35% of respondents said that real estate is the best-long term investment 21% said that stocks or mutual funds are the best long-term investment 17% said that savings accounts or certificates of deposit are the best long-term investment 16% said gold is the best long-term investment 8% said bonds are the best long-term investment While acknowledging that past results are no guarantee of future performance — let’s take a look at why I think Americans haven’t got a clue when it comes to figuring out the best long-term investment strategy. The Rate of Return on Everything The August 2019 issue of The Quarterly Journal of Economics included a paper entitled “The Rate of Return on Everything, 1870-2015”. Over an astounding 74 pages of discussion, the authors attempt to analyze the long-term (145-year) rate of return on a variety of assets around the world. The paper examines four popular investment vehicles: Bills, by which the authors mean Treasury bills, are short-term government bonds. At present, these are a good proxy for the rates you can earn with a high-yield savings account. (I don’t think this is always the case, though.) Bonds, which in this case refers to ten-year government bonds (such as a 10-year Treasury note). Equity, which is another way to describe common stock. Here, the authors are measuring overall stock market performance. Housing, including rental properties. We’ll look at each of these in greater detail in a moment (and we’ll look at gold too), but for now let’s look at this paper’s overall findings. While the authors looked at data for many countries, I’m only going to share results for the U.S. The following table shows the rates of return for these different asset classes over three different time periods. (Remember that, for our purposes, Bills are a stand-in for savings accounts.) From this table, it’s clear that equities (i.e., stocks) have been the highest return investments over long periods of time. Nothing else comes close. (Outside the U.S., this isn’t always true.) Now, while stocks provide the best long-term returns, they also come with the greatest volatility. Here’s a a chart (Figure VII) from the paper that shows just how crazy the ride with stocks can be. (Also note how closely equities and real estate tracked each other until the Great Depression.) It’s this volatility that scares so many people away from the stock market. They’re afraid that a sharp decline can come at any time. And that’s true. But what’s also true is that a prolonged bull market can occur at anytime, as we experienced from March 2009 to February 2020! If you’re a long-term investor, you don’t give a fig about short-term market movement. Let’s dive deeper into the long-term investment returns provided by the asset classes in the Gallup poll: real estate, stocks, savings accounts, gold, and bonds.

  • All that glitters: Why I’m not investing in gold
    by J.D. Roth on 04/28/2020 at 7:45 pm

    Over the past month, I’ve read a lot of articles about the virtues of investing in gold. Especially in Facebook forums, there’s a lot of talk about how gold makes a great long-term investment. (Fortunately, I haven’t seen any comments like this in the GRS community on Facebook.) Whenever the economy gets turbulent, the goldbugs come out in force. They shout from the hilltops that the world is doomed and that the only safe haven is gold. And I’ll admit, their arguments can sound pretty convincing. When I started this site in 2006, I felt unqualified to comment on gold. I hadn’t read much about it, and I didn’t feel educated enough to offer an opinion. That’s changed. Now, after fifteen years of reading and writing about money, I know enough about economic history and I know enough about gold as an investment to have what I believe is a (somewhat) educated response to this subject. And that response is this: Gold makes a lousy long-term investment. Today, let’s have a discussion about the pros and cons of investing in gold while using my own opinion as a starting point. (And note that this article contains my opinion. It’s backed up by some facts, but it’s still my opinion. Don’t take everything that follows as gospel.) Put simply: I’m not a fan of precious metals. I have 0% of my investment dollars in gold and silver, and I expect that to hold true for the foreseeable future. It’s my opinion that gold is a bad investment right now. Let me explain my reasoning. Before we dive into the meat of this article, it’s important to understand that I’m not an economist, and I’m not a gold expert. But for the past fifteen years, I’ve made a career out of personal finance, and gold is one tiny part of that subject. The core of this article was originally published here on 10 May 2011, the last time the goldbugs were out in force. This update contains substantial revisions. Also, please note that many of the comments on this article are from its original publication in 2011.

  • How to get started with difficult tasks
    by J.D. Roth on 04/23/2020 at 6:20 pm

    Yesterday in the /r/financialindependence community on Reddit, /u/mkengland asked a seemingly innocent question: What made you stop planning/researching financial independence and actually start? Was there a tipping point for you where you finally felt ready to start your FI journey? What made you finally take the plunge, open that first IRA/brokerage account/etc., and throw your money into the market? […] I’m waffling over details, though…and can’t seem to just DO IT. This question seems innocuous, right? Yet, I’ve been thinking about it for the past 24 hours. I hear questions like this relatively often. People want to know how to get started with saving and investing. Or with debt reduction. Or they want to know how to get started with budgeting. And, in fact, it’s the sort of question I had too back when I started my own journey away from debt and toward financial freedom. It all seems so overwhelming! Where do you begin? Trust me, I know how easy it is to over-complicate things. My ex-wife used to call me Overanalytical Man due to my superhuman ability to overthink even the simplest subject. Although I do this less often (and less severely) than I used to, it’s still a problem that plagues me. Today, let’s talk about what I’ve learned about how to get started with difficult tasks.

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