A popular question from my friends is “Where do I go for income in this low-yield environment?” There isn’t an easy answer.
Here’s why: Yields on money market funds are near 0%, and long-term Treasury bond funds are yielding below 3%. Vanguard’s Total Bond Market Index Fund is currently yielding 2.4%*, as of November 3, 2011. And for muni bond investors, our Vanguard Intermediate-Term Tax-Exempt Fund has an SEC yield of 2.55%* as of November 3, 2011, based on its current holdings.
There continues to be a lot of focus on the consequences of today’s low-rate environment. In such an environment, one of the most important things an investor can do is economize on the cost of the financial services they’re buying (translation: find lower expense ratio funds!).
Still, it never ceases to amaze me how much people continue to neglect the “silent killer” of long-term returns—high investment costs. Every now and then, I see articles that talk about the bite that investment costs can take out of a portfolio over time. But many times, these articles talk about how much of your “returns” an investment manager takes via fees. For example, if a fund charges a 1% fee and you anticipate a 5% gross return, it’s often observed that you’re giving up “20% of your return” (1% of the 5%) to costs. Jack Bogle likes to point out that the cost is dramatically higher when thought of as a percentage of after-inflation, after-tax returns: accounting for inflation of 2% and effective taxes of (say) 20% on the total return, your after-tax, “real” return is reduced to 2%, and a 1% fee is 50% of that!
Yesterday, I pulled up to an automated teller machine (ATM) in my automatic-transmission car, opened my automatic car windows, and withdrew cash that had been automatically deposited in my bank account on payday. I then used some of the cash to take my car through an automatic car wash, and when I arrived home, I used the automatic garage door button to close the door behind me. Then I walked into the house just in time to hear the dishwasher beep to let me know it had automatically shut off after automatically drying my dishes. (I just wish it would automatically empty itself.)
We live in a set-it-and-forget-it world, and in most cases, the convenience of automation is fantastic. But, when it comes to money, I’m a proponent of thoughtful automation, or “thoughtomation.” What I mean by thoughtomation is simple: Use automated investment and payment systems, but keep track of them and routinely reassess whether they’re working well for your financial goals. In other words, when it comes to your money, set it, but don’t forget it.
Global aging is a familiar idea. Not only are populations in the advanced economies aging rapidly, but so are those in emerging countries. For investors, the aging trend poses a number of broad, sometimes philosophical questions—the sustainability of public benefit promises to the aged, the impact of aging on markets, and expected investment returns.
But one issue is much more personal: the impact of aging on our own abilities (and the ability of our loved ones) to make informed financial decisions.
In the past, I have expressed frustration with the financial press’s coverage of investment topics (Clearing the air on target date performance), and I’ve also blogged about how I feel investors are best served by ignoring financial pundits (Listening to the markets—not the pundits).
But occasionally, a fleeting glimpse of a longer-term, clearer reality is visible beneath the smoke and ashes of the “financial catastrophe of the week” featured in the headlines. It’s worth pointing it out when it happens—such as in the article Mixed emotions on our anniversary, which ran in the September 11 edition of the Wall Street Journal. The article offered a real-life example of what a long-term investment strategy can mean for an employee who makes a biweekly contribution of $250 to their 401(k) and gets a $125 employer match.
