Three Financial Pioneers Create the Power of Index Investing

Posted on May 5, 2011 by James Lange in Economy, IRAs, The Lange Money Hour and tagged Dimentional Fund Advisors, Index Investing, John Bogle, Performace, Roger Ibbotson.

The Conception of Index Investing

In 1974 John Bogle founded and created The Vanguard Group – now one the world’s largest mutual fund companies offering 120 different mutual funds holding over $1 trillion. In 1975, Mr. Bogle championed the first low-cost, index fund which transformed the mutual fund industry crediting him with the title “Father of Index Investing”. His investment philosophy was simple; it advocated capturing market returns by investing in broad-based index mutual funds that are characterized as no-load, low-cost, low-turnover and passively managed.

Bogle felt that indexing was a logically compelling method of investing. “In the world of investing, there are very, very few sure things. But the closest thing to a sure thing is that the Wilshire 5000 index will outperform actively-managed funds by 1.5 to 2 percentage points a year over a sustained period. The logic behind this startling fact is as follows: all mutual fund managers together provide average investment performance, but in fact, investing in an index fund that matches the average market return can be your best chance of getting an above average return compared to other non-indexing investors.

His theory was supported by three crucial points: superior diversification/allocation, lower annual operating expenses and lower taxes. Bogle felt that indexers had the advantage of these three things plus steady, cumulative power of broad diversification and lower expenses, not just short pockets of strong investment performance such as in 1995, 1996 and 1997.

People Begin to Take Notice

After 3 years of excellent performance, two the world’s most respected financial experts took notice and began to research Bogle’s theories – they wanted to take an acadeic approach to proving his theories. Rex Sinquefield and Roger Ibbotson sought out to create strong theoretical support for indexing and they did just that. In 1979 they published Stocks, Bonds, Bills and Inflation (SSBI) which is now updated annually and serves as the standard reference for informaiton on investment market returns. Together Sinquefield and Ibbotson executed a large volume of academic studies examining the performances of mutual funds under actual market conditions establishing, very convincingly, that the ‘beat the market’ efforts of investors who pick stocks and time markets are impressively and overwhelmingly negative. In contrast, they found that indexing stands on solid theoretical grounds, has enormous empirical support and works very well for investors. The message ofindexing is therefore unmistakably obvious: they found that the only consistent superior performer is the market itself and the only way to capture that superior consistency is to invest in a properly diversified portfolio of index funds.

After publishing their study, Sinquefield became the co-chairman for Dimentional Fund Advisors, an index mutual fund manager that began in 1981 – a company that now holds $227.6 billion in assets. Roger Ibbotson, who was already a professor at Yale, founded Ibbotson and Associates which continued to focus on bridging the gap between academic knowledge and industry practice on asset allocation. For over 30 years Roger Ibbotson has been committed to delivering innovative asset allocation solutions, helping investors reach their financial goals and providing asset allocation thought leadership to money managers, mutual fund companies and other investors all over the globe. Still today, Ibbotson supports his roots and is a Board Member, one of 9 “Academic Leaders”, which advises Dimentional Fund Avisors – the world’s leading index mutual fund manager.

You owe it to yourself to check out the benefits of index investing…

Deadline is Nearing for the First-Time Homebuyer Tax Credit

Posted on October 5, 2009 by James Lange in Home Buyer, Roth IRA Conversions and tagged First-Time Homebuyer Tax Credit.

Even though the First-Time Homebuyer Tax Credit deadline is November 30th, the real deadline is upon us. That’s because the November 30th deadline refers to the closing date. Since most home purchases take between 45 to 60 days between contract signing and the closing date, you need to start house hunting in earnest in order to take advantage of this tax credit.

Qualifying taxpayers who buy a home by November 30th can get up to $8,000, or $4,000 if married filing separately. Even better news — this credit does not have to be repaid as long as the home remains the main residence for 36 months after the purchase date.

Taxpayers can claim 10 percent of the purchase price up to $8,000, but the credit amount starts to phase out for taxpayers whose modified adjusted gross income (MAGI) is more than $75,000 ($150,000 filing jointly). If you do qualify for this tax credit, think about how you want to use it. You can use it towards a nice tax refund – or – use the benefit of the tax credit to make a Roth IRA conversion if eligible.

Technically, you don’t have to actually be a first-time homebuyer to qualify for this credit. If you did not own any other main home during the three-year period ending on the date of purchase, you will be considered a first-time homebuyer.

One side note for those who purchased homes between April 8, 2008 and December 31, 2008 – you do not qualify for this tax credit, but you may qualify for a different tax credit which amounts to 10 percent of the purchase price up to $7,500 ($3,750 for married individuals filing separately). The big difference is that this tax credit must be repaid in 15 equal installments over 15 years beginning with the 2010 tax year.

With the success of the First-Time Homebuyer Tax Credit program – over 1.4 million homebuyers have used this credit so far – there is talk of extending the November 30th deadline. However, Congress has yet to make a decision on an extension. In the meantime, good luck house hunting! If you would like more details on this tax credit and to see if you qualify, visit www.irs.gov.

Don’t Become a Victim of a Financial Scam

Posted on September 14, 2009 by James Lange in Financial Scandals and tagged Blaine Aikin, Fiduciary standard, Fiduciary360.

Special thanks to our latest radio guest, President and CEO of fiduciary360 (fi360), Blaine Aikin, for taking the time to give us insight into several of the proposals currently before Congress dealing with regulatory reform. Blaine gave up his time during an especially busy week – he joined us on Wednesday night (9/9) and then traveled to Washington, D.C. for a scheduled meeting on Friday (9/11) with SEC Chairperson Mary Shapiro.

The trip to D.C. was taken with members of the Committee for the Fiduciary Standard – a group that was formed to draw the public’s attention to the movement to create a unified fiduciary standard. Fiduciaries are people who manage money on behalf of others and stand in a special relationship of trust and legal and ethical responsibility – including CPAs, CFPs, stock brokers and insurance brokers.

Currently, some fiduciaries are held to a fiduciary standard while others are held to a suitability standard. It is the goal of the Committee for the Fiduciary Standard that the fiduciary standard apply to all fiduciaries and that disclosures become crystal clear. (For more on this effort, visit fi360’s website at www.fi360.com).

During the second half of the show, Blaine took a close look at some of the recent financial scams and scandals (including the Bernie Madoff scandal) and what the average investor should be doing to avoid becoming a victim of such a scandal.

Blaine’s advice was excellent and taking a minute to review his suggestions could save you financial heartbreak in the future. For starters, Blaine recommends that investors rely on RFPs (requests for proposals) instead of third party testimonials. Do a background check – read the fine print in disclosures.

Don’t work with people who don’t have time to answer your questions or tell you that you don’t really need to know. This is one of the ways that Bernie Madoff was able to avoid detection for so long.

Make sure that your advisor uses a system of checks and balances. For instance, Bernie wore four hats – broker, advisor, manager and custodian. Included in this system of checks and balances is making sure that your advisor does not take custody of your assets directly.

Do your homework – look for 3rd party verification – audited financials, GIPS certified performance standards, CEFEX.

Finally, keep in mind the old adage – if something seems to good to be true, it probably is.

If you missed the show with Blaine Aikin and you’d like to hear either the entire show or portions of the show – check back to this website soon. Audio will be posted by next week (the week of September 21st).

Positive Market News

Posted on August 27, 2009 by James Lange in Market News and tagged Economy, Financial Markets, S&P 500 Index.

In the latest issue of The Lange Report, we finally had a chance to share some positive market news. In fact, the second quarter of the year turned out to be the first positive quarter in a year.

Continuing the upturn, the market also had a great July. The S&P 500 reached its low on March 9, 2009 closing at 676.53. On August 3, 2009, it closed at 1002.63. This is a return of 48.2% off the March 9th bottom. The second quarter performance of the S&P 500 – an increase of 15.9% for the quarter – was its best quarterly performance in over 10 years.

Even though the market is still well off the highs that we experienced in 2008, the latest market news is certainly promising. Many of our clients continue to ask what’s going to happen to the market in the next 3 to 6 months or even in the next year. The truth is – we don’t know. Nobody knows.

However, it is interesting to take a look at historical trends. From 1926 (before the depression) to the second quarter of 2009, the S&P 500 Index has generated an average annual return of 9.6% (compared to government bonds which have averaged 5.5%). Let’s say that you invested $1 in 1926. If you had invested in government bonds, you would have roughly $100 today. If you had invested in the S&P 500 Index, you would have roughly $2,000 today.

Of course, individual circumstances play a critical role in determining what asset allocation is appropriate for you. At Lange Financial Group we continue to be believers in well diversified portfolios with some representation in most asset categories.

If you’d like to take a look at a more detailed analysis of the latest market figures as well as other economic indicators including international markets, emerging markets, interest rate changes and unemployment figures – it’s all available in the latest edition of The Lange Report. For a copy, please contact the office at 1-800-387-1129 or sign up for our e-mails on the home page of this website.

Turning Children Into Financially Responsible Adults

Posted on July 31, 2009 by James Lange in Economy, Life Insurance and tagged Children's Financial Network, Jim Lange, Neale Godfrey.

A huge thanks to Neale S. Godfrey, best-selling author and founder of The Children’s Financial Network, for sharing her incredible ideas for raising financially responsible children on the July 29th edition of The Lange Money Hour. Neale was a great guest — full of tips for parents and grandparents on how to make sure that children are financially fluent.

A couple of her strategies are particularly timely given the economy and the time of the year. For instance, many parents and grandparents are busy doing back-to-school shopping right now and we all know that shopping with tweens and teens can get ugly. Neale offered a practical solution to avoid arguments and overspending. For kids age eleven and up, Neale suggests giving them a budget and letting them make their own decisions. You can set up a bank account or give them pre-paid debit cards, but in the end, putting them in control of their finances forces them to make budgetary choices.

The recession has also forced a lot of adult children to fly back to the nest and Neale recommends hammering out the details of the arrangement before they move back in. How long do you expect them to stay? What financial obligations do you want them to take care of? Having these discussions in advance avoids problems later. Neale even suggests taking the extra step of drawing up a lease with all of the terms defined.

In addition to setting up a trust, one of Jim Lange’s chief concerns when it comes to minors is the naming of a guardian. Neale agreed that naming a guardian for your children is absolutely critical and she also recommends sharing the details of the arrangement with your children.

Notice, though, that the key element in all of these situations is communication — full disclosure of the family’s finances. The problem for many families is that money is a taboo topic. If this is the case in your family, one of Neale’s books might help.

Her #1 New York Times best-seller, Money Doesn’t Grow on Trees: A Parent’s Guide to Raising Financially Responsible Children is an excellent choice for adults and Ultimate Kids Money Book is perfect for elementary school age children. Both are available on Neale’s website www.childrensfinancialnetwork.com.

Encouraging Economic News

Posted on April 19, 2009 by James Lange in Economy and tagged James Lange, the economy, Tom Gau.

The Lange team just received Tom Gau’s latest quarterly newsletter and, as always, it is filled with wonderful information. Tom is not only a CPA and a CFP, he is also a renowned educator. In fact, Jim Lange is headed to Chicago at the end of this week to participate in Tom’s 2-day educational boot-camp. Unlike many other advisors, Tom has a number of encouraging things to say about the current economic situation. Since we could all use some good news, we wanted to share — with Tom’s permission — some of the highlights of his 1st Quarter 2009 Update.

While there seems to be no end of frustrating economic news, Tom points out that we are finally starting to see some positive signs. For starters, March’s three-week stock rally was brought on by unexpected good news from banks. Citigroup, Bank of America and JP Morgan Chase all announced that they were profitable during the first two months of the year. In addition, home sales rose unexpectedly in February, many companies are reducing costs and improving processes and strategies, and the U.S. and foreign governments have implemented programs to support the world economy.

Tom also notes that while the current recession has been painful in many ways, it should be regarded as part of a normal business cycle. Business progress is never conducted in an orderly fashion. Typically, recessions pave the way for business revivals, revivals develop into booms, booms breed crises and crises very often turn into recessions. This is the way the business cycle has worked for generations and there is no reason to expect otherwise now.

That leads us to the big question – are we in a recession or, as some analysts suggest, a depression? According to Tom, most economists believe that a recession becomes a depression when it stretches out for 36 months. Therefore, we have until January 2011 before we get to that point. On top of that, a replay of the Great Depression (1930-1941) is very unlikely thanks to many safeguards now in place that did not exist during the Depression – including deposit insurance and unemployment insurance. It is also helpful to note that unemployment in 1933 jumped to 25% (we are currently at 8.5%).

To help bring the recession to an end before it has a chance to turn into a depression, Tom’s suggestion is to stop saving now. That may seem like an odd piece of advice coming from a financial professional, but if an economic recovery is to actually take hold, consumers around the world will need to start spending instead of saving.

One more great piece of advice from Tom – to survive in this market, rely on logic and not your emotions. In a chaotic market like this one, it is very easy for investors to fall into one of three traps: searching for a miracle stock that will recoup all of their losses, making trades based on the latest news reports instead of long-term trends and being so paralyzed with fear that they don’t do anything at all.

A bit of common sense can help you avoid these traps – as can a bit of professional help. It is always important before making any financial move to seek the advice of a financial professional. If you think the Lange team can be of service, please call the office at 1-800-387-1129.