The Bogleheads Meet

Investors who follow Vanguard founder John Bogle's investment advice are often referred to as "Bogleheads". There have been books written by Bogleheads, and the faithful followers even congregate at an online message board - www.bogleheads.org - which was an offshoot of the original Morningstar.com "Vanguard Diehards" message board.

Forbes has a great article from Laura Dogu, a writer and leader on the online Bogleheads' forum, which recounts the recent gathering the group had in Pennsylvania. The Bogleheads' are a great group of people following the excellent advice given by one of the champions of the individual investor - John Bogle. The article is worth reading because Bogle's advice is so worth following.

Bad Advice: Creating Your Own Hedge Fund

CNBC has an article on how to build your own hedge fund which tops the list of potentially devastating investment decisions you can make. Hedge funds are investment vehicles typically limited to high net worth investors which can use a variety of investment strategies that the average investment fund cannot. These funds can employ large amounts of leverage, short stock and trade derivatives, among many other things. While we have all heard of the wildly successful funds like Ken Griffin's Citadel Investments or John Paulson's Paulson & Co, there are thousands of funds that fail for each one that revels in exorbitant returns.

Retail investors are at a disadvantage to hedge funds and other institutions because those firms typically have large amounts of capital to move around and with that capital comes speed, efficiency and information flow which helps them make money on their trades. Secondly, the people who run hedge funds are typically brilliant financial minds, and while brilliance does not equate to consistently posting market beating returns, the minds at hedge funds usually understand the nuances of the securities and markets in which they trade.

All of these reasons make CNBC's article - how to start a "poor man's" hedge fund - ridiculously bad. After all, if the financial crisis saw many of the aforementioned brilliant managers blow up given large derivatives exposure, how can the average retail investor navigate the derivatives market successfully? In short, we can but the odds are against us. More importantly, who has the time to bother to trade and understand currencies, commodities and long and short positions? The pros at the large hedge funds do - they employ thousands of experts in each market - but the average investor like you and I certainly have more important things to be doing.

Sure, creating your own hedge fund sounds like a neat idea. The thrill of beating the market as well as the pros at their own game, certainly holds a lot of appeal. However, when you realize that the odds of this occurring, especially with any consistency, are slim to none, why not save yourself the time and aggravation involved in this endeavor and instead just buy index funds?

Are Allocation Funds a Good Option?

Morningstar.com has a very good article on Vanguard's allocation funds - mutual funds that strive to maintain a set asset allocation over the life of the fund, or tweak it according to the fund's mandate. For example, Vanguard has a series of "LifeStrategy" funds which invest in other Vanguard index funds to achieve a stated goal. The Vanguard LifeStrategy Growth Fund (VASGX) therefore has roughly 85% of its assets in stocks and 15% in bonds and is aimed at investors who have investment horizons greater than 5 years. These funds have grown in prominence because all of the work is done for you at a minimal fee - the fund rebalances itself according to its stated objective and you get the added diversification of owning a fund of funds - yes, a mutual fund that owns more mutual funds.

The Vanguard LifeStrategy Growth Fund owns four separate Vanguard index funds in varying proportions and only has an expense ratio of 0.23%. The risk with allocation funds are that you view them too much as a one stop shop and pin all of your investment goals and expectations upon the fund, which otherwise may be unrealistic. Yes, allocation funds can be a great start but make sure you do the legwork to understand the fund's fee structure, rebalancing policy and what it actually owns. The potential for overlap - owning a fund that's already owned elsewhere - is a lot higher when dealing with a fund of funds - people may not realize what that fund owns in its entirety.

Take the Free Money!

It's been said that there are "no free lunches on Wall Street" and that is indeed very true...except in one circumstance. Granted, this isn't a "fully" free lunch - you're not getting something for nothing - but it's basically free money. So what am I talking about? The answer: taking advantage of your employer's matching 401(k) contribution policy. If your employer matches your 401(k) contribution, you're basically receiving free money. While you do have to contribute something to be eligible to be matched (hence why it's not entirely "free"), there isn't a single sound argument out there as to why you should avoid contributing so as to receive the match.

In a weekend article in The Atlantic, Daniel Indiviglio points out the following:

"When your company promises to match some contribution to a 401(k), it's like giving you a raise. Refusing the match is like telling your company that you don't want extra money. Imagine an example where you make $1,000 per paycheck. Now imagine if your company agrees to match 50 cents per dollar up to 6% of your 401(k) contribution per paycheck. That means you can put up to $60 per paycheck into your 401(k) and your company will also contribute $30."

If your employer offered you free money, wouldn't you take it? If your employer does indeed match your 401(k) contributes, you should max out your contributions so as to receive the highest employer match possible. In doing this, you'll be well rewarded in the future when your retirement goal is attainable at a younger age.

Avoiding 10 Dumb Money Moves

Stacy Johnson at MoneyTalksNews has a great list of "10 dumb money moves". All of them have merit in one way or another but #5 in particular stood out to me:

5. Starting to save large and late rather than small and soon

If you're 25 and you save just 5 bucks every day ... call it $150 a month ... and earn 10 percent, by the time you're 55, you'll have $340,000. If you wait till you're 45 to start accumulating that same 340 grand, you'll have to save $1,700 every month for 10 years. True, you can't earn 10 percent today, at least without risk. But over time and by taking a measured amount of risk, you can.

I can't emphasize enough have important starting early is. Most people don't realize that even if you start with a small amount now, you'll have plenty of years to watch that money compound and you'll ultimately wind up with a lot more than you started with. For example, if you start with $1,000 at age 25 and add $5,000 yearly at an average return of 7% until you retire in 40 years, you'll wind up with $1,013,150.02 - yes, you'll be a millionaire! Granted, that calculation doesn't take into account the effects of inflation, but building a million dollar nest egg to retire on while only starting with $1,000 is quite impressive. The list may point out "dumb money moves" but all of them are easy to learn from and to correct.

Gen Y and "The Scarring Effect"

During recessions, Gen Y college graduates are likely to make 5%-15% less than those starting out during a better economy. A recent Wall Street Journal article noted that, "Notre Dame labor economist Abigail Wozniak calls it 'the scarring effect.' If you graduate in a good year, your career may get off to a strong start. But if it's a bad year, you are essentially scarred in the labor market for years to come."

This is indeed very scary for Gen Y because it means that we as individuals simply cannot control our own destiny. Growing up, we are taught that we can accomplish any goal that we set our mind to. When we are preparing for college, we get to pick our university, our degree program and the types of people that we associate with during those years. What this research is telling us, is that regardless of how hard we work and how many connections we make, it all may not be good enough if the job market is poor when we graduate and we either don't get a job or make substantially less than we would have had the economy been growing.

Unfortunately, this is the state of the labor market for recent college graduates. However, when the economy starts to hum again, it's likely that salaries will increase across the board because the same companies who weren't looking to hire when we graduated will then have to raise their price of labor in order to reach a supply/demand equilibrium.

Pfizer Keeps Making Deals

Mergers and acquisitions always interest me because I like to see the structure of the deal - how much stock and cash are involved, who's acquiring who and why and also because such deals also tend to indicate economic strength or weakness. This morning, drug giant Pfizer (PFE) has announced plans to acquire King Pharmaceuticals (KG) for $3.6 billion in cash. Amazingly, this comes exactly a year since Pfizer's deal to acquire Wyeth last year for $68 billion closed.

Companies that are flush with cash - particularly those involved in health care related fields - are putting more money to work to grow their portfolio of products to cope with the sour economy. In acquiring King, Pfizer gains venerable products in Avinza, a pain drug, and EpiPen the well-known injection used to treat allergic reactions. Interestingly, pharmaceutical companies have worked hard on acquiring both established players (Pfizer buying Wyeth) and biotech firms who may have potential blockbusters waiting in the pipeline (Sanofi-Aventis bidding on Genzyme). Since bringing a new drug to market is quite costly, many times it's easier buying a biotech firm who's already involved in extensive clinical testing of their potential drugs.

This news may seem like your run of the mill big pharma deal, but it also shows that the most cash-flush companies are willing to put large amounts of capital on the line to better position themselves for an economic turnaround.