What Vanguard Gets Right (and Wrong) About the 4% Rule

Retirement

Vanguard has always been one of the most respected voices in the investing industry, and its values have defined a whole generation of DIY investors. Jack Bogle started the first index fund in 1976 and took a lot of heat for that decision among his contemporaries who felt that “Bogle’s Folly” was destined to fail. But he was a true visionary, and his dedication to low costs and customer-centric business practices helped build the company into the financial titan it is today. So when Vanguard speaks, people listen.

Open Your Eyes to the Power of Helpful History

Psychology

As an engineer by training, I’ve always been comfortable with the use of historical numbers in decision making. From empirically tested yield strengths that inform design specifications to segmented sales numbers that inspire new product ideas, making wise choices is all about putting good data to productive use. And as one can see by perusing the deep data focus of Portfolio Charts, I naturally apply that same mindset to investing.

So one of the things I admit I’ve had to adjust to over the years is something that I never really experienced in my engineering career. When it comes to finance, some people are just really dismissive of historical data.

It’s common in some circles for people to quickly shut down any discussion of past returns as the foolish discussion of unrepeatable events. Some reflexively point to specific timeframes that surely skewed the numbers in deceptive ways. Others explain how current events are very different than the past and proclaim that the old results are ancient history. And a surprising number have developed an outright distrust of math and statistics as the tools of unsophisticated investors and financial snake oil salesmen.

To be fair, these opinions are often born of legitimate examples of data abuse. Lots of people misuse statistics all the time or naively apply them out of context, and I totally understand how backtesting gets a bad name. But in my experience, the problem is not with backtesting but with backtesters. It’s super valuable when done correctly, but you have to know what you’re doing and approach it in the right way.

So to cut through the financial cynicism, I’d like to share three short stories about real-world situations where the use of historical data is widely accepted. By exploring how data is used well, perhaps we can learn a thing or two about how to also apply it effectively it in our personal portfolio decisions.

Find the Right Funds to Build a Great Portfolio

Beginner, Tools

When looking for opportunities to make new connections, there’s something to be said for looking like you know what you’re doing. One time when I was browsing the produce section of the local grocery store for a few peaches to add to the basket, a young kid sheepishly approached and asked for some friendly advice.

“Could you please explain how to find a good peach? I’m supposed to get some but have no idea what to look for.”

Now I realize people strike up random conversations at the store for all sorts of reasons, but I could tell he was out of his element. I got the impression he was under orders to bring home a certain list of items and was truly lacking the knowledge to do it correctly, and I was particularly impressed that he took the initiative to ask for help. I’m no chef by any means, but I was happy to offer my own experience of selecting them by feel and smell and letting any peach that is a little hard ripen for a few days before eating. With a few nice ones in-hand, we went our separate ways to enjoy a future sunny afternoon with a really tasty fruit.

Thinking back on that experience, I’ve always been keenly aware of how important it is to not only suggest an idea but to also offer enough information to make it actionable. So many financial voices lecture about investing concepts only to stop at the theoretical stage without bridging the gap to how normal people can act on those ideas. Sometimes it’s out of self-interest when their end goal is to drive readers to hire them for their financial services. Occasionally you run across a noble but detached research type who revels in unraveling the data but never actually makes the connection to anything that applies in the real world. And of course some people just like to talk without always fully understanding what they’re talking about. But regardless of the motivation, truly helping people is about so much more than simply convincing them that they should buy peaches without explaining how to actually do it. You have to take that next step.

In that same practical spirit, I’m really excited to share a new tool that I’ve been working on for a long time. If you’ve ever explored Portfolio Charts and found an asset allocation that looks perfect for you but struggled to figure out how to act on that knowledge, I now have just the thing to help. I call it the Fund Finder.

A Big Remodel Starts With the Simplest Idea

Updates

After one of our regular springtime walks through the neighborhood enjoying the flowering trees, neighborly hellos, and the smell of freshly mowed grass, my wife and I arrived back at our front porch. As I fumbled for the keys, she was clearly still thinking of the many beautiful homes we saw and had a moment of inspiration. “You know, we should really update our porch light. It’s completely rusted and the glass is cracked!” She had a point — it had definitely seen better days. So we hopped in the car and made a trip to the local hardware store. And that’s when things started to go downhill.

Never Grab a Strange Cat

Beginner, Psychology

A loved one passed away recently, leaving the rest of the family scrambling to deal with all of the things nobody is ever truly prepared for — funerals, estates, and caring for other family members affected by the loss. Everyone gets their turn eventually, but you’re never truly ready. It just happens, and you’re thrown in the deep end to sink or swim.

This particular family member had a lot of pets, and one of the responsibilities that fell on my brother and me was the job of rounding them up and taking them to a local adoption center to help them find new homes. Dealing with cute cuddly animals surely was more joyful than coping with the hard realities of death, so we happily took the job. Arriving at the home with a sense of purpose, we opened the door expecting a gaggle of furry creatures excited to be held and fed.

The dogs were naturally suspicious at first, but once the food came out they softened up and were as sweet as can be. A few belly rubs and a short ride later, and they were well cared for and ready for adoption.

And then there were the cats.

Small Improvements Make a Big Difference

Updates

When working on something new, sometimes it’s easy to fall into the trap of putting off small incremental improvements while holding out for the next big idea. We’ve all been there. Maybe you’re avoiding boring tasks at work while spending all of your energy on something more interesting that probably won’t go anywhere. Perhaps you feel disconnected from other people because of the pandemic but spend your time fantasizing about a future party or thinking about moving rather than simply picking up the phone. And we probably all know someone who likes to talk about saving the environment but who can’t be bothered to pick up the litter in their own back yard.

Thinking big sometimes blinds us to the opportunities around us that are small in isolation but can cumulatively make a big difference.

Me? As a designer at heart, I definitely have a tendency to get caught so deep in new idea exploration that time flies and my everyday to-do list falls behind. But the little details really do matter, and I recently made a couple of small changes that I’d like to point out.

Bookmark Your Portfolio and Share It With a Friend

Updates

Late last year I introduced a fancy new feature called shortcodes that made it possible to save portfolio information. My implementation admittedly pushed the limits of Excel beyond the original design intent, so honestly it wasn’t a huge surprise when it eventually broke after Microsoft changed some things. But while technical constraints forced me to disable the shortcodes for a while, I really like the concept and I’ve never given up on finding a way to make it work.

After a ton of experiments and a lot of trial and error, I’m happy to announce that shortcodes are back! But rather than just resurrecting an old feature, I’ve also been able to finally figure out how to offer a useful site capability that always felt missing.

How to Survive and Make Money in the Matrix

Beginner, Featured

There must be a lot of anti-bond sentiment circulating these days, as my inbox has been lighting up lately with questions about whether bonds still make sense to investors. It started last year when Ray Dalio got on a roll and made a series of rather provocative comments about how he thinks you’d be crazy to hold government bonds and how cash is trash, too. It accelerated as interest rates continued to drop to new lows. And it has reached a bit of an apex as bond returns have taken a pretty decent hit in the last few months. Was he right? Should you sell all your bonds now before it’s too late?

How To Play the Game and Live to Tell the Tale

Beginner, Goals

Unless you’ve been living out in the wilderness for the last few weeks, there’s a pretty good chance you’ve heard about the recent events with GameStop. The idea of everyday people using social media to band together and soak predatory hedge funds makes for a great story, and it has already driven a crazy amount of previously uninterested investors towards exploring what it would take to ride the same wave.

One such inquiry from a good friend was a bit of of a wakeup call. The same person who never before expressed the slightest interest in investing suddenly wants to know how to buy the next potential short squeeze stock he saw people talking about online. This article is not only for him, but also for the many other people new to investing who are wondering the exact same thing.

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Contrary to what you might expect from a guy who writes extensively about low-risk index investing, I’m not going to try to talk you out of it. It’s your money, I’m sympathetic to the underlying motivation that goes way beyond making a quick buck, and some investing lessons are best learned through good old-fashioned experience. But there are definitely some massive risks lurking in the shadows just waiting to take down naΓ―ve investors who may not fully understand what they’re getting into. So if you’re following the GameStop news and considering getting in on the action, here’s how you can do it responsibly without going full Leeroy Jenkins.

A Rewarding Journey Starts With Good Data

Updates

When going on a hike in uncharted territory, even the best weather forecast can be pretty spotty. So to choose whether to wear shorts or heavy snow gear, a rational first step is often to check the historical averages. What’s the typical temperature and precipitation in January? The future may be unknown, but good data can help us make educated decisions.

In that same spirit of wisely preparing for an unknown future by becoming students of history, I spend a lot of time collecting portfolio data from all around the world. The final 2020 numbers are starting to trickle in, so let’s talk for just a minute about what that means.