Bob Gillingham’s
Investment Program
1/27/2023
How To Become A Millionaire!
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Compound Interest
OR – In simpler terms…
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Compound Interest & Time Value of Money
Compound Interest
Compound Interest & Time Value of Money
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5
HOW MUCH TIME
DOUBLE YOUR
TO
$
JUST DIVIDE
BY THE INTEREST RATE
Rule of 72
72
FORMULA
72
% RATE OF RETURN
__________
=
YEARS
DOUBLE
TO
6
INITIAL $5000 INVESTMENT
COMPOUNDED AFTER 48 YEARS
Rule of 72
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The Power of Compounding
Assumptions:
1) A single $2,000.00 investment in S&P 500
2) 10% annual return (app. average ann. return over 100 yrs.)
3) Hold investment until age 65
Age Balance at age 65 Age Balance at 65 Age Balance at 65
15 $ 296,623.12 25 $ 109,136.49 35 $ 40,154.57
16 $ 268,399.37 26 $ 98,752.14 36 $ 36,333.86
17 $ 242,861.12 27 $ 89,355.85 37 $ 32,867.68
18 $ 219,752.84 28 $ 80,853.63 38 $ 29,748.46
19 $ 198,843.32 29 $ 73,160.39 39 $ 26,917.89
20 $ 179,923.34 30 $ 66,199.16 40 $ 24,356.65
21 $ 162,803.60 31 $ 59,900.30 41 $ 22,039.11
22 $ 147,312.80 32 $ 54,200.78 42 $ 19,942.08
23 $ 133,295.96 33 $ 49,043.56 43 $ 18,044.59
24 $ 120,612.83 34 $ 44,377.06 44 $ 16,327.64
Total $ 1,970,428.30 Total $724,979.36 Total $244,715.42
Financial Terminology
3. Stocks (aka Equities): Owning a piece of a company
2. Bonds (aka Fixed Income): Loan to a company, municipality, or government
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SAVINGS ACCOUNT
BONDS
EQUITIES (aka STOCKS)
1. Savings Account: Loan to a bank
Investment Asset Types
Investment Asset Types
Risk vs. Return
RISK
RETURN
?
?
?
AVG RETURN = 0.01 %
AVG RETURN = 4 %
AVG RETURN = 9 %
TIME TO DOUBLE INVESTMENT
18 Years
7200 Years
8 Years
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Dow Jones Industrial Average�from 1790 to 2018
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NOTE: Y-Axis Doubles!
Stock Market Crash – 1929
*Worst in history*
Market never drops to, or even approaches, zero
Bull & Bear Markets
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Ben & Arthur
Ben’s rate of return is 12%
Arthur’s
return is also 12%
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Meet
BEN
Ben started investing at age 19
He invested $2,000 per year
That is $16,000 of his own money
He invested for 8 years (and then STOPPED)
Now, Meet
ARTHUR
Arthur started investing at age 27
He invested $2,000 per year
That’s $78,000 of his own money
He invested every year through age 65
Twins Ben and Arthur are alike in many ways, aside from their investing strategy…
Ben & Arthur
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If you said Ben - you are correct!
Ben & Arthur – Ref. Table
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Ben & Arthur – Ref. Table
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Ben & Arthur – Ref. Table
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Ben & Arthur – Ref. Table
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Financial Terminology
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Mutual Fund Benefits
Management
Diversification
Tailored Investment Objectives
Market Capitalizations
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Market Capitalizations - Examples
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Investment Asset Types
Risk vs. Return
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Evaluating a Mutual Fund
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Evaluating a Mutual Fund - Instructions
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The table in the previous slide will help with evaluating and comparing different mutual funds. The bulleted letters listed below (A through L) can be found on www.Morningstar.com, and represent the respective column field to be completed:
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Evaluating a Mutual Fund - Instructions
E. Expense ratio is the percentage of fund assets paid for operating expenses and management fees. It usually ranges from 0% (best) to 3% (worst) and tells us how much the fund charges us annually. Our recommendation is to invest in funds with an expense ratio of 1% or less. This value is also found in the Price tab, under ongoing fee level (specifically below ‘Fund’). Enter the expense ratio in Column E.
F-J The returns for various lengths of time can help show the volatility of the mutual fund. Click on the Performance tab and scroll down to trailing returns. We want to take note of the following returns: 1-month, 1-year, 3-year, 5-year, and 10-year. Enter these returns in Columns F through J.
K. Morningstar rates mutual funds for investor reference using a star rating. This scale ranges from 1 star (worst) to 5 stars (best). When viewing a specific mutual fund on their website, this is shown as the quantity of stars displayed next to the ticker symbol at the top of the Performance tab. Enter the star rating in Column K.
L. Historical Sustainability Score Percentile Ranking (on the Sustainability tab) is a value which generally refers to the Environmental, Social, and Governance (ESG) rating. This is based on 1-100 percentile scale – with 1 being a negligible risk to a company’s economic value; to 100, an extremely high-risk exposure to a company. A company’s ethics, sustainability, and carbon footprint (among other measures), will impact this value. In short, the lower the percentile, the lower the negative effect to the economic performance of the fund. This value is located in the Sustainability tab within the Sustainability Rating section, noted as ‘Historical Sustainability Score Percent Rank’. Enter the Historical Sustainability Score Percentile Ranking in Column L.
Evaluating a Mutual Fund - Instructions
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The letters listed below (M through O) can be found on money.usnews.com/funds, and represent the respective column to be completed:
Finding a Good Mutual Fund
Steps for finding a good mutual fund:
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Three Errors Investors Make
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Chasing Sector Performance
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Sector returns can vary widely – over the last 10+ years the average difference between the best performing and worst performing sectors has been more than 30% per year. Investors can moderate this volatility by owning each sector in equal proportions .
* 2018 data is for January 1, 2018 to March 31, 2018.
Index Fund Advantages
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(PASSIVE INVESTING)
S&P 500 Heat Map (Finviz.com)
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S&P 500 Index Funds
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35
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DCA = Dollar Cost Average
Invest equal dollar amounts
at regular time intervals.
Two Ways to Reduce Risk
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(Stocks)
(Bonds)
Two Ways to Reduce Risk
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(Stocks)
(Bonds)
Dow Jones Industrial Average�from 1790 to 2018
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S&P 500 �from 1926 to 2019
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Why You Should Keep a Long Term Perspective
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S&P 500 – Long Term Perspective
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Note the data is from 1970 to 2019 (~50 years)
Note that the S&P 500 is not positive every year!
*Within the timeline below, the S&P 500 was positive 40 years and negative 10 years
S&P 500 – Long Term Perspective
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In Summary: Short term money is not for investing in the stock market as it is too risky!
Look at time period from 2000 – 2002. If you invested your money and expected it to increase in value, to be used in 2003. then you would have actually lost money as the market declined 3 years in a row.
Small Cap Value – Long Term Perspective
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The Power of Compounding
Assumptions:
1) A single $2,000.00 investment in S&P 500
2) 10% annual return (app. average ann. return over 100 yrs.)
Age Balance at age 65 Age Balance at 65 Age Balance at 65
15 $ 296,623.12 25 $ 109,136.49 35 $ 40,154.57
16 $ 268,399.37 26 $ 98,752.14 36 $ 36,333.86
17 $ 242,861.12 27 $ 89,355.85 37 $ 32,867.68
18 $ 219,752.84 28 $ 80,853.63 38 $ 29,748.46
19 $ 198,843.32 29 $ 73,160.39 39 $ 26,917.89
20 $ 179,923.34 30 $ 66,199.16 40 $ 24,356.65
21 $ 162,803.60 31 $ 59,900.30 41 $ 22,039.11
22 $ 147,312.80 32 $ 54,200.78 42 $ 19,942.08
23 $ 133,295.96 33 $ 49,043.56 43 $ 18,044.59
24 $ 120,612.83 34 $ 44,377.06 44 $ 16,327.64
Total $ 1,970,428.30 Total $724,979.36 Total $244,715.42
Opening an IRA account
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1) Do you want to open a Brokerage account or a Retirement account?
This really means -> Do you want to pay taxes on your account, defer taxes
to a later date or pay no taxes at all?
- A Brokerage account is a taxable account so taxes have to be paid annually.
2) There are two types of Retirement accounts. Do you want a Traditional IRA
(Individual Retirement Account) or a Roth IRA?
- If you use a Traditional IRA the taxes paid to the government are deferred until the money is withdrawn from the account.
- With a Roth IRA the money contributed to the account by you is “after tax dollars from Earned Income” so there will be no taxes paid when the funds are withdrawn after age 59½.
- This is asking if you want to buy stocks, bonds or a mutual fund? We suggest investing in an S&P 500 Index fund with a high historical Rate of Return and the very low Expense Ratio.
- A Balanced fund could also be used by investors who want to take less risk than investing in an all stock/equities fund.
Three questions you will be asked when you open an account and the meaning of these questions:
S&P 500 Index Funds (No Load)
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Fund | Local Office Location 1 | Local Office Location 2 | Ticker Symbol | Expense Ratio / Min. Investment | 10 Year Return % | Morning Star Rating |
FIDELITY www.fidelity.com | CLEVELAND WEST 1800 Crocker Rd. Westlake, OH 44145 (800) 418-6591 | AKRON 3750 W. Market St. Unit A Fairlawn, OH 44333 | FNILX | 0.00% / $0 | 14.44%* (as of May 15, 2022) *Since Inception | 4 STARS
*Fund started in late 2018 |
CHARLES SCHWAB www.schwab.com | CLEVELAND WEST 2211 Crocker Rd. Suite 100 Westlake, OH 44145 (440) 617-2301 | AKRON 3067 W. Market St. Suite 2 & 3 Fairlawn, OH 44333 (330) 835-5348 | SWPPX | 0.02% / $0 | 13.66% (as of May 15, 2022) | 4 STARS |
T ROWE PRICE www.troweprice.com | CORPORATE P.O. Box 17300 Baltimore, MD 21297-1300 (888) 285-2612 | | PREIX | 0.15% / $2500 | 13.48% (as of May 15, 2022) | 4 STARS |
VANGUARD www.vanguard.com | CORPORATE P.O. Box 2600 Valley Forge, PA 19482 (800) 888-3751 | | VFIAX | 0.04% / $3000 | 13.49% (as of May 15, 2022) | 5 STARS |
Investment offices in the�Cleveland and Akron areas
Westlake office:
2211 Crocker Rd., Suite #100
Westlake, OH 44145
440 – 617 - 2311
Akron office:
3067 W. Market St., Ste. 2 & 3�Fairlawn, OH 44333
330 – 835 – 5348
Cleveland East side - Pinecrest
511 Park Ave., Suite 145�Orange Village, OH 44122
216 – 291 – 9333
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Schwab Offices
Westlake office:
1800 Crocker Road
Westlake, OH 44145
800 – 418 - 6591
Akron office:
3750 W Market Street, Unit A
Fairlawn, OH 44333
800 – 476 - 4735
Cleveland East side
28699 Chagrin Boulevard
Woodmere Village, OH 44122
800 – 432 - 8359
Fidelity Offices
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What’s a better investment? Bitcoin or a Roth IRA?
Reprinted courtesy of MarketWatch.com Published: June 3, 2021
More and more these days, I’m getting questions — mostly from young people — about investing in bitcoin and similar products.
They hear about quick, huge profits. They think they should hop on board. Of course they have also heard of huge losses in cryptocurrency.
But for many young people, the lure of fast, easy money is much more compelling than the risk of losing your shirt.
I understand. More than half a century ago I was just getting my feet wet in the investment business. I made what I thought was an investment (now I realize it was really a speculation) on a commodities futures contract.
I doubled my money in less than a week. Man, did I feel smart! I had started to understand (I thought) how investing worked.
I knew what to do: I took all that money and reinvested in another contract. And quickly lost it all. In the process, I learned a more valuable lesson about how investing really works: Losses can come as quickly and easily as profits.
I remembered all this recently as I was talking (separately) with a couple of investors who seemed about to take the plunge into cryptocurrency. One was 28, the other 30.
The amounts of money they proposed to invest were relatively small — $40 in one case and $400 in the other. Each one told me it was money they could afford to lose.
To get a handle on their mind-set, I listened to an interview with an investor in dogecoin who said he parlayed his first investment into several million dollars.
As I listened, part of my mind became anxious about the losses he could encounter; another part of my mind wanted to cheer him on as he fought what he regarded as a battle against Wall Street.
The two investors I spoke to each seemed to want to show Wall Street how investing should really work. I recognized that feeling.
I knew better than to tell these two what to do. Instead, I tried to educate them.
Bitcoin, dogecoin and many other varieties of digital currencies don’t have any long-term histories. They aren’t regulated. They aren’t legal tender. Their value is determined purely by supply and demand. Both of these young people have jobs. Neither had set aside any money in an IRA, which would certainly save them taxes. So I painted an alternate picture: Inside a Roth IRA, their money could grow tax-free. I described an established investment with a history of above-average long-term returns: small-cap value companies. As an asset class, small-cap value has some of the volatility these young people crave. But it also has a history of rewarding investors with patience.
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When you examine the U.S. small-cap value stock index back to 1928, you will find that the average 40-year compound return was 16.2%. (The best 40-year period’s return was 19%; the worst was 11.6%.)
Toward the low end of that scale, at 12% a one-time investment of $400 would become $37,220 if it were left alone for 40 years.
Over the years, most young people could afford to invest much more than $400, of course. But let’s trace the results of just this very modest one-time investment.
If you retired with $37,220 in a Roth IRA and began taking 5% annual withdrawals, you’d have $1,861 to spend in your first year of retirement.
If the investment continued to earn 12% and you continued to take out 5% a year based on the increasing balance, you would have $8,248 to spend in your 25th (and perhaps final) year of retirement.
During 25 years of retirement you would have taken out $108,045. Your account at that point would be worth about $156,712, which presumably would go to whatever individuals or entities you designated as beneficiaries in your IRA.
The math in this scenario is impressive. For only $400 (probably less than the cost of a weekend beach getaway) you would have generated $264,757 — all of it tax-free.
Just imagine what would be possible if you did that with $400 every year before you retired.
Of course there’s a downside to this plan compared with putting $400 into a cryptocurrency.
The Roth IRA I described won’t dazzle your friends or give you bragging rights. It won’t let you thumb your nose at Wall Street or old guys who think people should be sensible with their money. It won’t make you a quick millionaire or let you lose a fortune overnight.
In short, it’s pretty boring. Worse still, it requires a lot of patience. What a drag.
I think there’s a middle ground that could make sense for many people.
Start by maximizing your Roth IRA at $6,000 for one year. (Multiply the numbers above by 15 and you’ll see the impressive payoff.)
After that, if you can still “afford to lose” $400, go ahead and invest it in cryptocurrency and see what happens. Better still, sock that $400 away toward next year’s Roth IRA contribution.
Like many people, I’ve been curious about cryptocurrencies, and I have talked to many investing experts. Not even one has been able to explain why it could make a lot of money for me over the long term. The best rationale I’ve heard for investing in bitcoin is some variation of “It’s going up.”
This reminds me of a quote often attributed to Will Rogers: “Don’t gamble. Take all your savings and buy some good stock and hold it till it goes up, then sell it. If it don’t go up, don’t buy it.” For more on this topic, here’s a recent podcast I recorded called “Sex, food, money… and the impact of emotional decisions.”
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Active vs. Passive Investing: Which Approach Offers Better Returns?
In the past couple of decades, index-style investing has become the strategy of choice for millions of investors who are satisfied by duplicating market returns instead of trying to beat them. Research by Wharton faculty and others has shown that, in many cases, “active” investment managers are not able to pick enough winners to justify their high fees.
But does active investing become more appealing for high net worth investors, who have opportunities that small investors do not?
Wharton faculty members with in-depth knowledge of portfolio management explore topics including Modern portfolio theory; Behavioral finance; Passive and active vehicles; Performance measurement; Use of alternative investments such as hedge funds, derivatives, and real estate
While actively managed assets can play an important role in a diverse portfolio, Wharton faculty involved in the program say that even large investors often do best using passive investments for the bulk of their holdings. Active investing, they say, can nonetheless be useful with certain portions of the portfolio, such as those invested in illiquid or little known securities, or holdings tailored to a specific purpose such as minimizing losses in a down market.
“Passive” Strengths: Even for wealthy investors, passive holdings have a strong appeal, says Christopher C. Geczy, Wharton adjunct professor of finance and academic director of the Wharton Wealth Management Initiative. “The big issue still applies,” he says. “That’s the issue of whether you believe in trying to beat the market or whether you believe in [minimizing] costs. Some of the most successful entrepreneurs I know think about costs.”
Passive, or index-style investments, buy and hold the stocks or bonds in a market index such as the Standard & Poor’s 500 or the Dow Jones Industrial Average. A vast array of indexed mutual funds and exchange-traded funds track the broad market as well as narrower sectors such as small-company stocks, foreign stocks and bonds, and stocks in specific industries.
Among the benefits of passive investing, say Geczy and others:
Actively managed investments charge larger fees to pay for the extensive research and analysis required to beat index returns. But although many managers succeed in this goal each year, few are able to beat the markets consistently, Wharton faculty members say.
Over a recent 10-year period, active mutual fund managers’ returns trailed passive funds consistently, says Kent Smetters, professor of business economics at Wharton.
On an after-tax basis, managers of stock funds for large- and mid-sized companies produced lower returns than their index-style competitors 97% of the time, while managers of small-cap stocks trailed 77% of the time.
“In case you are curious, those very few investment managers that outperformed the passive index were still likely to underperform in the future,” Smetters says. “In fact, outperformers had only a 20% chance of repeating the following year, and … just a 10% chance of outperforming three years in a row.”
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Most experts and experienced investors know the reason: It’s just too hard for an asset manager to pick a portfolio that outperforms the market by enough to make up for the 1, 2 or 3% fee that must be charged to support the stock and bond picking operation. Many index-style mutual funds and exchange-traded funds charge less than 0.2%, some less than 0.1%, giving them a huge cost advantage.
“Active” Advantages: Still, many financial advisers recommend actively managed investments for significant portions of their clients’ portfolios. Active management includes mutual funds and exchange-traded funds, as well as portfolios of stocks, bonds and other holdings managed by financial advisers. Among the benefits they see:
Wharton finance professor Jeremy Siegel is a strong believer in passive investing, but he recognizes that high-net-worth investors do have access to advisers with stronger track records. In that case, a management fee is not as burdensome.
“Obviously, the more money you have the more elite personal-finance advisers you have access to,” Siegel says. “You get more for your 1% because you are going to get better people.”
How does the investor find a top-quality adviser? That’s one of the issues explored in Investment Strategies and Portfolio Management, which also covers topics such as fund evaluation and selecting appropriate performance benchmarks.
As a rule of thumb, says Siegel, a manager must produce 10 years of market-beating performance to make a convincing case for skill over luck.
Selection Strategies: The choice between active and passive investing can also hinge on the type of investments one chooses.
Passive management generally works best for easily traded, well-known holdings like stocks in large U.S. corporations, says Smetters, because so much is known about those firms that active managers are unlikely to gain any special insight. “You should almost never pay for active management for those things.”
But in certain niche markets, he adds, like emerging-market and small-company stocks, where assets are less liquid and fewer people are watching, it is possible for an active manager to spot diamonds in the rough.
It’s a complex subject, especially for high net worth investors with access to hedge funds, private equity funds, and other alternative investments, most of which are actively managed. Participants in the Investment Strategies and Portfolio Management program get a deep exposure to active and passive strategies, and how to combine them for the best results