Stocks vs. bonds: What’s the difference?

If you’re a newbie investor, you may have no idea what you’re doing when it comes to investing in the stock market. If so, don’t feel bad - you’re not alone. According to Gallup, in 2019, only a little over half of all Americans were invested in the stock market. But this is a huge mistake.

If you want to build wealth, especially long-term wealth, investing in the stock market is a necessity.

But why? Couldn’t you just invest in real estate, or precious metals like silver and gold, or even a new-fangled investment like cryptocurrency to reach your financial goals? While you could, you’d be missing out on one of the greatest (if not the best) wealth creators of all time.

If y

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What are dividends, and how do they work?

If you’re a stockholder, you’ve likely felt the rush of adrenaline as you watch the value of your portfolio surge.

But the market doesn’t always go up. Sometimes it goes up and then spikes down, and other times it’s like riding a violently rocky ship, crashing through the waves. If the rocky waters scare you, you may decide that focusing on dividends, rather than capital gains, as a source of return may make more sense for you.

But what exactly are dividends, and how does this source of income work?

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Betterment Review

Algorithms seem to be in control of everything these days, from the ads we see on Facebook, the shows we watch on Netflix, to what we find when we search on Google.

But what if there were an algorithm that could help you invest smarter? Something that could maximize returns and minimize risk, while possessing smart features such as automatic rebalancing and tax-loss harvesting?

Especially for new investors, wouldn’t it make sense to give this a try? Continue reading...

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Wealthfront Review

Robo advisors are still a relatively new product, and yet every year they seem to grow in popularity. One such advisor, called Wealthfront, is one of the largest automatic investment and financial planning services out there.

It’s also one of the most decorated, winning the “Best Robo Advisor of 2019” award, and the “Best Robo Advisor, December 2019” award.

But robo advisors are a dime a dozen these days. Why should you Wealthfront over another company like Betterment?

W

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What is a robo-advisor? An introduction to automated investment tools

One of the joys of writing a money blog like Get Rich Slowly is the continuing self-education. I'm always reading and learning about personal finance. A lot of the times -- as in the past month -- this education is about esoteric topics. I'm currently diving deep into the history of personal finance, a subject that's interesting to me but admittedly not of much practical use in the modern world. (Today in the mail, I got a book about advertising and the use of credit during the 1920s. How's that for esoteric?)

But sometimes, this self-education does have practical uses, and it's stuff that I can share with you folks so that you too can become better educated.

For instance, I have a huge blind spot when it comes to so-called "robo-advisors". When I stopped writing here in 2012, robo-advisors existed but they hadn't yet become a Big Deal. By the time I re-purchased this site in 2017, things had changed. Robo-advisors had become a major force in the investment industry -- and I was clueless about what they were.

I've remained (mostly) clueless for almost three years now. I have a general idea of what robo-advisors are and how they operate, but only in the broadest sense. During our weekly planning call on Monday, I mentioned this blind spot to my business partner, Tom.

"You should write about robo-advisors," Tom said. "If you don't know what they are, I'll bet there are plenty of readers who don't know either. Do some research, write it up, and then everybody benefits."

Tom is a smart man.

Here then is my research into the world of robo-advisors. What are they? How do they work? And who should use them? Let's find out.

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Who invented the index fund? A brief (true) history of index funds

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!

John Bogle did not invent index funds

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.

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What’s the best long-term investment?

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

Americans' views on 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.)

Long-term returns on certain asset classes

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.)

Equity returns vs. real-estate returns

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.

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All that glitters: Why I’m not investing in gold

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.

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What to do when the stock market crashes

Can you feel it? There's panic in the streets! We're in the middle of a stock market crash and the hysteria is starting again. As I write this, the S&P 500 is down six percent today -- and 17.3% off its record high of 3386.15 on February 19th.

S&P 500 status

Media outlets everywhere are sharing panicked headlines.

Panicked headlines

All over the TV and internet, other financial reporters are filing similar stories. And why not? This stuff sells. It's the financial equivalent of the old reporter's adage: "If it bleeds, it leads."

Here's the top story at USA Today at this very moment:

USA Today headline

But here's the thing: To succeed at investing, you have to pull yourself away from the financial news. You have to ignore it. All it'll do is make you crazy.

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Passive income ideas you can try today

Earlier this week, J.D. wrote about what he calls the biggest truth in personal finance: You can't get rich through frugality alone. As Liz at Frugalwoods says, "You can't frugalize income you don't earn." Income is one-half the fundamental personal-finance equation, and it's probably the most important half.

J.D. advocates a three-pronged attack for boosting income: becoming better educated, becoming a more valuable worker, and learning to negotiate salary. But I think he's missing a fourth important income source: the proverbial "passive income".

I know, I know. Passive income has a bad reputation. Actually, passive income has a terrible reputation. And deservedly so. The Land of Passive Income is populated by scammers, hucksters, and charlatans. "Hey, little boy, wanna buy my course?" (Sorry, no links. They're easy enough to find without us helping them.) That's too bad because legit sources of passive income can be a great way to make more money.

What is Passive Income?

First up, let's be clear: Actual passive "passive income" (as pitched by the scammers) is a lie. It doesn't exist. When we talk about passive income, we're talking about ways to make minimal money with minimal effort. Does that make sense? And it's a supplement to your main income, not the primary source.

To me, passive income is money that’s earned, usually on a recurring basis, without a significant time investment.

For example, if you own a rental property that brings in $1500 each month, but only requires two or three hours of time to manage, that's (mostly) passive income. Most nine-to-five jobs are the opposite of this. The income you earn is tied closely to the amount of time you spend at the office.

That’s not to say that passive income doesn’t require effort, though.

Often, there’s a lot of upfront work required before income can become passive. Using the same rental property example, before you can make any money, you have to purchase and renovate the property, and spend time advertising and interviewing potential tenants. All of that takes time and money.

Or, take J.D.'s book as an example. When I asked, he told me that he spent four months working full-time in 2009 and 2010 to write Your Money: The Missing Manual. That's not passive! But he hasn't touched the thing since then, and he continues to receive $50 checks every month. That is passive.

Passive Income Ideas You Can Try Today

Some degree of passive income is possible -- and without shyster shenanigans. In this article, I’ve compiled 40 passive income ideas for you to consider. Not all of these passive income ideas will be right for you. In fact, maybe none of them will fit you. That's okay. But I'm willing to bet that many GRS readers will find at least one source of inspiration here that they can use to help increase their income...even if it's only a few dollars per month.

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