Passive Money Management

By Dylan GussFinance Club 4 10 11

Why bother?

The Intelligent Asset Allocator by William J. Bernstein

With minimal effort, you can take advantage of the market in the long run

Risk and return Standard Deviation

A measure of fluctuation

Standard Deviation

Standard Deviations (of annual returns) (6)

Domestic stocks (conservative), 10%-14% Domestic stocks (aggressive), 15%-25% Emerging market stocks, 25%-35%

Ex. A fund with an expected return of 15% and a Standard Deviation of 35% (8)

So, there is a statistically expected loss of 20% or worse every 6 years, a loss worse than 55% every 44 years, and a loss of 90% or worse every 740 years

Diversification

By diversifying, you can lower the SD of your portfolio (or increase it)

By country/region Sectors

ex. Financials, Commodities Asset Classes

ex. Small Cap (Value & Growth), Large Cap (Value & Growth), Corporate Bonds

Why passive management?

Passive versus active management performance

A portfolio of 25% U.S. Large cap, 25% U.S. Small cap, 25% Foreign stocks, 25% Bonds (short term) beat 75% of all actively managed funds in a 20 year period (roughly 1975-1995) (Preface ix)

Little effort for a large, positive impact on your finances in the long run

Who are the major players?

Charles Schwab Fidelity Vanguard E*Trade Scottrade

How to pick?

Account minimums Sometimes minimum is waived if you

deposit consistently Costs

ex. Inactivity fee Products and features

ex. Bonds, Financial planning Reputation Accessibility of information online

Where to start?

What is an index? ex. S&P 500

An index fund? Why trade your own broker's funds?

Lower costs

ETFs....Why are they popular?

Low expense ratios Passive and active varieties Trade like stocks Very particular exposure

Usually indexed Tax friendly