Financial Knowledge All Adults Should Know?

[jtbell]

I know it's easy to find free historic data for the major stock market indices but can anyone point me to a free source of "Total Return" data? I'm looking for data for any of the major indices back to 2003 or earlier.

On Morningstar, use the search box at the top to get a quote for a fund that tracks the desired index. Then click the "Chart" tab. By default, it gives you a "Growth" chart which tracks an initial investment of $10,000 with dividends reinvested. For example, here's VFINX, Vanguard's S&P 500 index fund.

http://quotes.morningstar.com/chart/fund/chart?t=VFINX&region=usa&culture=en_US

 

[Vanadium 50]

On Morningstar,

The founder of Morningstar is the brother-in-law of a physicist. :)

 

[NTL2009]

The founder of Morningstar is the brother-in-law of a physicist. :)

I did not know that. I guess I could put this in the TIL thread. From wiki:

Morningstar was subsequently founded in 1984 from his one-bedroom Chicago apartment with an initial investment of US$80,000.[5] The name Morningstar is taken from the last sentence in Walden, a book by Henry David Thoreau; "the sun is but a morning star"

IIRC, you are from the Chicago area (as am I, but far NW 'burbs). I guess I can put 2 and 2 together? Interesting.

 

[Demystifier]

My favorite advice along these lines is "Buy a stock. When it goes up, sell it. If it doesn't go up, don't buy it."

I think it's a bit self-contradictory. From the 3rd statement it follows that you buy it only when it goes up. Then from the 2nd statement it follows that you have to sell it when you buy it. In this way you cannot make any profit, so what's the point?

 

[NTL2009]

I think it's a bit self-contradictory. From the 3rd statement it follows that you buy it only when it goes up. Then from the 2nd statement it follows that you have to sell it when you buy it. In this way you cannot make any profit, so what's the point?

Humor is the point :)

https://www.brainyquote.com/quotes/will_rogers_161236

Don't gamble; take all your savings and buy some good stock and hold it till it goes up, then sell it. If it don't go up, don't buy it.
- Will Rogers

https://en.wikipedia.org/wiki/Will_Rogers < humorist

And another I like, from Mark Twain:

OCTOBER: This is one of the peculiarly dangerous months to speculate in stocks in.

The other are July, January, September, April, November, May, March, June, December, August, and February.

- Pudd'nhead Wilson's Calendar

 

[Demystifier]

3. Marry someone who earns (or can earn) a decent salary, and is at least as thrifty as you are.

Applying this to both partners, it follows that they should marry only if they are equally thrifty, which in practice is impossible to achieve.

 

[NTL2009]

Applying this to both partners, it follows that they should marry only if they are equally thrifty, which in practice is impossible to achieve.

This is harder than we thought! :)

Similarly, a recent Dilbert was about how you should always hang around with people who are smarter than you. But then, they have to not be so smart that they know they are supposed to hang with people smarter than them, or they would not hang with you!

 

[jtbell]

The founder of Morningstar is the brother-in-law of a physicist. :)

Anyone want to take bets on which one makes more money?

 

[Vanadium 50]

You would be hard pressed to find any respected independent source recommend paying a front-end load (that just takes away money for growth, forever).

In principle, I wouldn't be averse to paying a front load if that reduced my fees (or increased my returns) - assuming the numbers worked out. It's no worse (and no better) than paying points on a mortgage. In practice, AIVSX has a front-end load, and higher fees, and lower returns. Hard to see much good in that.

 

[mheslep]

Anyone want to take bets on which one makes more money?

Remember Musk has a BS Physics, and was accepted to Stanford's Phd program. Maybe Musk succeeds with PayPal without a physics degree, but I doubt he builds SpaceX from scratch without one.

 

[Vanadium 50]

To get back on track, I would say everyone needs to know:

1. Nobody is as motivated as you with respect to your finances. They may do well if you do well. Maybe.
2. Understand compound interest. This is important for its own sake, but it's also important to understand that if some charlatan tells you he can get 12% on your money, and has since 1934, this means he is claiming to do fifty times better than the stock market.
3. Know what a prospectus is, and why if there's a difference between what the salesperson is saying and what's in the prospectus that the prospectus is always right. Same for a loan contract.
4. Set goals and a plan to reach them. If you don't know where you're going, any road will take you there.

 

[Ucha]

Whatever income you make, always put aside money for that month's rent/bills in an envelope and do not touch it until you pay off that month's rent and or bills.

If you live in a house, same goes for mortgage payments. If the house is paid off, the same concept can apply but for other things, you might need to definitely save for.

An even better option is to do this with multiple savings accounts, each designated for a specific use. But some might find the lure of convenience to be too strong.

 

[Stephen Tashi]

We should consider: "Don't take out student loans", at least in the USA.

 

[BWV]

We should consider: "Don't take out student loans", at least in the USA.

That is horrible advice! An education is about the best investment anyone can make

Average annual earnings for Bachelors Degree:
$59,124, unemployment rate 2.8%

Average annual earnings for High School Degree
$35,256, unemployment rate 5.4%

That is roughly a $24K difference, making a few thousand dollars a year in debt service well worth the investment, esp with the interest tax-deductible at that income level

https://smartasset.com/retirement/the-average-salary-by-education-level

 

[Stephen Tashi]

That is horrible advice! An education is about the best investment anyone can make

However, student loans may be the worst way to make such an investment. They have a different legal status than other types of loans.

 

[BWV]

However, student loans may be the worst way to make such an investment. They have a different legal status than other types of loans.

So how else can someone finance their education? While they cannot be discharged in bankruptcy, which could be a problem, this fact also allows for lower interest rates than other forms of unsecured consumer credit.

 

[Stephen Tashi]

So how else can someone finance their education?

The typical decision about financing education involves considering whether a student will have part time jobs, how many hours they will work, whether they will formally take out a loan from their parents or other relatives and sometimes whether they have assets that can be used to obtain a secured loan. Student loans are promoted by staff at universities, but they aren't always the best choice. I'd say they are a bad choice for people on financially risky paths , such as majoring in art or pursuing an education while in poor physical or mental health.

 

[NTL2009]

We should consider: "Don't take out student loans", at least in the USA.

... Student loans are promoted by staff at universities, but they aren't always the best choice. I'd say they are a bad choice for people on financially risky paths , such as majoring in art or pursuing an education while in poor physical or mental health.

Your first statement, IMO, is far too broad brush. The second is better, but more generally, don't take on more debt than you can reasonably expect to repay. Think long and hard about the debt versus the increased opportunity it will provide. Try to minimize debt through choice of the institution (maybe a less prestigious, but still very good school will provide more tuition assistance?), part time work, etc.

It doesn't need to be completely financial either. If a person needs to go into debt for a degree that doesn't pay well, but they are sure that is what they would enjoy, and are willing to get by with less disposable income for years while they pay off that student loan, who am I to say that isn't a good choice for that individual?

 

[Mark44]

If a person needs to go into debt for a degree that doesn't pay well, but they are sure that is what they would enjoy, and are willing to get by with less disposable income for years while they pay off that student loan, who am I to say that isn't a good choice for that individual?

That's a big if. There are many students who go into debt for many thousands of dollars, and aren't really sure about how enjoyable that career path will be, but don't consider that they will have to get by on less money for many years.

 

[NTL2009]

That's a big if. There are many students who go into debt for many thousands of dollars, and aren't really sure about how enjoyable that career path will be, but don't consider that they will have to get by on less money for many years.

Agreed it is a big 'if'. But (I think) we are talking about what people should do/know, not what they are doing.

 

[Stephen Tashi]

But (I think) we are talking about what people should do/know, not what they are doing.

Much of the conventional financial advice on the internet seems to be written by someone who is in reasonably good health and whose long term financial plans visualize years of retirement in the same physical state. One thing people should know is the odds of this happening.

I don't know the odds. I'm curious how many people do not eventually end up in a nursing home - i.e. are "lucky" and die before they become debilitated.

In the USA, typical sound planning for retirement won't fund long term care in a nursing home. (For example, typical "long term" care insurance pays for 2 to 4 years of care.) In the USA, the financial advice for nursing home residents is antithetical to conventional planning for retirement. You are advised to "spend down" your assets until you qualify for Medicaid.

 

[CWatters]

Much the same applies in the UK. Typical care home fees are between £700 and £1100 a week and having visited a few for a relative I wouldn't want to live in one currently charging less than about £1000 a week. More if any kind of medical/nursing care is required.

 

[Vanadium 50]

If a person needs to go into debt for a degree that doesn't pay well, but they are sure that is what they would enjoy, and are willing to get by with less disposable income for years while they pay off that student loan, who am I to say that isn't a good choice for that individual?

There is a school of thought, ascendant during the last two Progressive eras, that it's the government's job to protect us from our own bad decisions. (A recent example is the erstwhile NYC soda ban)

If a student has decided he wants to buy the college experience and doesn't have the money, he has two choices. A student loan costs about 5%, and an unsecured personal loan costs substantially more than that - probably around 20%. It is not irrational to take on debt that is substantially harder to discharge in bankruptcy if you can take on substantially less of it. I think the better question is what you are spending it on: four years of work or four years of parties? One forum member has called college "young adult day care". Colleges claim that classes+studying for a full load is 48-60 hours per week. The actual average is 29.

 

[russ_watters]

If a person needs to go into debt for a degree that doesn't pay well, but they are sure that is what they would enjoy, and are willing to get by with less disposable income for years while they pay off that student loan, who am I to say that isn't a good choice for that individual?

There is a school of thought, ascendant during the last two Progressive eras, that it's the government's job to protect us from our own bad decisions. (A recent example is the erstwhile NYC soda ban).

Hopefully I won't push this too much into policy, since we can advise on "good" advice regardless of policy. However...

Even if a person is "willing to get by with less" when they accept the loan;
1. They might think that when they accept the loan and think differently when it comes time to repay.
2. Statistics will probably tell us they are more likely to default.

V50, you and I tend to be well aligned on such issues, but I would say for this one that since at least part of it is already a federal program, it would be reasonable for the government to ensure it's not being misused -- if for no other reason than to prevent it from collapsing under its own unrealistic assumptions. But I suspect many of the same people who think they would be willing to accept less and later change their minds are also the same people who would oppose having their loan capped due to their choice of major; in principle and in practice.

Regardless, my general advice is this:
-Before you accept a loan, make sure you have a realistic plan for how you will pay it back.

 

[StoneTemplePython]

If a student has decided he wants to buy the college experience and doesn't have the money, he has two choices. A student loan costs about 5%, and an unsecured personal loan costs substantially more than that - probably around 20%. It is not irrational to take on debt that is substantially harder to discharge in bankruptcy if you can take on substantially less of it...

This reminds me:

Financial knowledge all adults should know: Rule of 72. This is very useful for back of the envelope estimates involving small to moderate positive growth rates. A $20\%$ growth rate / interest rate (assuming people PIK /roll the interest while studying and without much income) means that the principal will double in about $3.8$ years. I used a calculator for this.

Rule of 72 says I can estimate the time till doubling as $\frac{72}{20} =3.6$ and in my head I said $\frac{72}{20} \approx \frac{70}{20} = 3.5$. So somewhere in the neighborhood of 3.5 years, maybe 4 years, for the initial principal amount to double. That is quite fast, and it gets worse if people take a long time to graduate, or go to grad school, etc. (The flip side is it gives a good estimate on how compounding can work in your favor with investments over time.)

- - - -
Back of the envelope estimates can be very useful in eyeballing extreme events -- in particular highlighting extremely good opportunities (probably rare) and red flagging extremely bad ideas (probably not so uncommon).

 

[Vanadium 50]

I;m going to disagree that the Rule of 72 is something every adult needs to know. It's like knowing how to cast out nines - a product of a different time. Today a calculator that will do this for you exactly - no need for approximation - costs about $6. The average adult doesn't need to make a decision faster than he can punch it into a calculator. (And if asked to, he should run the other way!)

 

[StoneTemplePython]

The average adult doesn't need to make a decision faster than he can punch it into a calculator. (And if asked to, he should run the other way!)

I liked this quite a bit btw.

It is an old-school approximation... my sense however is that most people are really bad at interpreting geometric growth (decay) and ways to think in terms of doubling times (half lives) tends to be quite useful for intuition. Rule of 72 strips away logarithms or opaque buttons on a financial calculator app to make doubling times more easily accessible.

But yea, these days it probably doesn't quite belong in the bucket of "financial knowledge all adults should know".

I am a bigger proponent of back of the envelope estimates than most.

 

[Imager]

Today a calculator that will do this for you exactly

I wonder how many people could do an interest calculation on a calculator without the manual? My time in Finance was all spreadsheets, my HP12c sat in the desk for months at a time.

 

[russ_watters]

I;m going to disagree that the Rule of 72 is something every adult needs to know. It's like knowing how to cast out nines - a product of a different time. Today a calculator that will do this for you exactly...

I wonder how many people could do an interest calculation on a calculator without the manual? My time in Finance was all spreadsheets, my HP12c sat in the desk for months at a time.

Manual? Calculator in a desk? No, I just typed "investment ret-" [autofill] and hit enter and google gave me web based investment return calculators where I could just plug in some numbers.

...I do still track my 401k in a spreadsheet though...

 

[Vanadium 50]

I will agree there are ways to go beyond the calculator approach I suggested. But that just takes my point further along. Technology has moved to the point where the consumer has the ability to calculate it themselves and not rely on what they are told. I think that's a good thing,

 

[Chris Riccard]

But to know why digital roots work, I think it's interesting.

 

[Vanadium 50]

But just because something is interesting does not mean it's "financial knowledge all adults should know"

 

[mheslep]

That is horrible advice! An education is about the best investment anyone can make

Average annual earnings for Bachelors Degree:
$59,124, unemployment rate 2.8%

Average annual earnings for High School Degree
$35,256, unemployment rate 5.4%

That is roughly a $24K difference, making a few thousand dollars a year in debt service well worth the investment, esp with the interest tax-deductible at that income level

https://smartasset.com/retirement/the-average-salary-by-education-level

What applies for the "average" by definition does not apply to "anyone", i.e everyone. Moreover, those average results are skewed upwards by outcomes based on degrees in the sciences and the better schools. A degree in pseudo humanities studies from lower ranked schools, is a much diffetent proposition especially if obtained by student loans upon which no payments are made for a half dozen years.

 

[mheslep]

So how else can someone finance their education? While they cannot be discharged in bankruptcy, which could be a problem, this fact also allows for lower interest rates than other forms of unsecured consumer credit.

At the same time, increasing the demand for student loans against the available loan capital (currently about $1T in the US) and increasing the number of those marginally likely to pay back the loans will tend to increase rates.

 

[russ_watters]

The thread is re-opened.

Further discussion of Dave Ramsey will not be permitted and new posts about him or his methods or claims are subject to deletion. Thanks to everyone for the thorough debunking and exposure of his claims as fraudulent.