All posts by Dollars and Saints

Personal Finance Foundation – Part 1 – Know Where You’re Starting (Calculating Net Worth)

So you’re on the journey to get your financial house in order.  You first need to know where you’re starting.  You do this by measuring your net worth.  Net worth is calculated by adding up your assets and then subtracting your liabilities.  A very, very simple example: You have a savings account balance of $10,000 and have a credit card balance of $2,000.  You’re net worth would be $8,000 ($10,000 in assets minus $2,000 in liabilities).  It’s certainly possible to have a negative net worth (think of the recent college graduate with student loan debt but no assets to their name), too.

As you can see, one way to increase your net worth is to increase the value of your assets.  Another way to increase your net worth is to decrease the value of your liabilities.  Often, though, and especially in the world of personal finance loud mouths, an extreme emphasis is placed on either increasing assets or decreasing liabilities, as if both can’t be accomplished simultaneously.  Both can be accomplished together and you’ll find positive movement in your net worth by focusing on both initially in your journey to a healthier financial state.

Here is a screen clip of an Excel spreadsheet I use to track my net worth:

Net Worth Spreadsheet
Net Worth Spreadsheet

You can download the spreadsheet here.  As you enter assets and liabilities, the spreadsheet automatically adds up both categories and automatically updates the resulting net worth value.  I update my spreadsheet monthly in order to keep tabs on my financial health and, more importantly, to see if something is out of whack and needs to be addressed.  Frequently updating your net worth will provide you with encouragement when you’re taking the right steps and seeing net worth grow, but it will also alert you if you’re slipping into bad habits.  It’s better to catch a bad habit a month or two in rather than realizing years later that the bad habit has caused you major financial damage.

Here are some challenges I’ve encountered while tracking net worth:

Challenge 1:  Accurately valuing certain assets and liabilities.  The value of a given asset or liability may not be black and white.  For example, when including a home’s value in net worth calculations, you should use the going market price for your home and avoid using values that may inaccurately inflate or undershoot the actual value.  This means that your home’s taxable appraised value may or may not be near the home’s market price (i.e., what you’d get if you sold the home).

Challenge 2:  If you have an asset that you’re financing, like a home or a car, make sure to include both the asset and the accompanying loan on your net worth statement.  Again, make sure you’re valuing the asset accurately (hint:  Kelley Blue Book is a great way to value cars).

Challenge 3:  Even though you’re enthusiastic about a collection you have (American Girl dolls, stamps, coins, etc.), they may not be nearly as liquid (i.e., easy to sell) as you think, and they may not be worth nearly as much as you envision.  I don’t include collectibles or jewelry in my net worth statement because I don’t see them as liquid assets.  This is an arguable point, though.  If you choose to include collectibles or hard-to-value items on your net worth statement, try to be accurate with their valuation.

Challenge 4:  You’ll encounter ups and downs in your net worth if a sizeable portion of your asses are in volatile categories, like stocks.  You’ll notice the ups and downs even more if you track your net worth monthly.  This is OK, as stocks (I’m thinking index funds when I say “stocks”) appreciate over long (10+ years) periods of time.  Just make sure that if you’re net worth is declining in value that you’re not contributing to this with reckless spending, overloading credit cards, or buying that Corvette you probably can’t afford right now.

Now that you know your net worth, you have a baseline from which to measure progress or regression.  If your net worth increases, this shows financial progress.  If your net worth decreases, this shows regression, and you should be especially aware of what’s causing the decline.  Your goal should be to increase your net worth over time.

Personal Finance Foundation – Part 2 – Coming Soon!

What Can You Learn from the Subprime Mortgage Crisis?

It’s hard to believe time has passed so quickly.  Ten years ago the subprime mortgage crisis led the U.S. economy into a severe recession and carnage ensued.   Many people lost their homes along with huge portions of their retirement savings.  Credit markets froze and taxpayer money was used to purchase toxic assets from the very banks that facilitated the crisis.

A decade removed from the great recession, what takeaways can help you succeed financially and prepare you for the next economic downturn or recession?

  • Only you have your best financial interests in mind.  Banks were more than willing to lend money to under-qualified borrowers, and this resulted in skyrocketing foreclosures when interest rates increased on adjustable rate mortgages (ARMs).  Some argue that banks were negligent in persuading under-qualified buyers into taking on supersized mortgages.  This certainly could be the case, but it hammers home an important lesson:  Understand your financial choices and don’t rely solely on someone else’s opinion to guide you, especially if they are in a position to make money off of you.  Educate yourself before you pay someone for their financial guidance, as this will better allow you to see if your adviser is pursuing your best interests or his.
  • Diversify your investments.  Plenty of folks who planned to retire in 2008-2010 had to delay retirement due to seeing their 401(k) plans shrink drastically as the equity markets plunged.  This meant several more years of work for this group.  What if, though, this group had rental property as an additional source of income for their retirements?  The recession economy saw an increase in renters, resulting in increased income for rental property investors.  These rental property investors could choose to withdraw a smaller amount from their 401(k) plans while relying more on the increased cash flow from rental property investments.  While I’m not advocating only for rental property investments as a source of retirement income (it certainly is a great option), I am advocating for a multiple-legged stool for your retirement portfolio that does not leave you in an anxious place should an investment class take a plunge.
  • Invest more than you need.  I’ve never heard anyone complain that they invested too much.  In the case of workers who had to postpone retirement due to the Great Recession, many of them could have continued with their retirement plans had their nest eggs been larger.  While this may go into the “thanks for the insight, buddy” category, your savings and investment rate is a better determinant for your success than rate of return:  http://www.thesimpledollar.com/five-most-important-factors-for-investment-success/
  • Follow your plan, not your emotions.  The S&P 500 lost about 57% of its value from October 9, 2007 to March 9, 2009, the day the index bottomed out during the Great Recession.  Thankfully, I didn’t check my retirement account balances much during this time, mainly because I had barely entered the workforce after graduating from college.  My plan, though, was to continue working for at least three, if not four, decades more until I retired, and equities with all of their volatility were the foundation for growing a large enough nest egg.  The S&P 500 took four years to reach its value on October 9, 2007 and has grown much more in the current bull market.  Investors who made an emotional decision to sell during the recession likely missed much of the growth during the subsequent recovery and likely missed the opportunity to purchase shares of the S&P 500 while they were on sale.  Recessions and downturns in the economy can be very anxiety inducing if you don’t remember that these are terrific opportunities to buy shares on the cheap and that the market provides substantial returns in the long run.  The past 30 years saw the S&P 500 return 11.66% (10.19% geometric return) with dividends reinvested.
The S&P 500 has returned 11.66% (arithmetic) and 10.19% (geometric) the past 30 years.  Courtesy of http://www.moneychimp.com/features/market_cagr.htm

For a terrific read about the subprime mortgage crisis and its causes, read The Big Short by Michael Lewis.  The book will hammer home my first point regarding educating yourself on financial decisions, especially major ones like taking out a mortgage.  While I think the majority of people in finance are well-intentioned, great people, The Big Short shows that there are individuals who will seek to take advantage of you (as there are in any industry).  While the financial industry may or may not be in a better position to avoid a similar crisis, you can certainly prepare yourself to not only avoid making bad decisions during a recession, but to take advantage of the opportunities presented by an economic downturn.

Lending Money – Advice from Scripture and the Catechism

At Mass on last Sunday, February 19th, the following passage from the Gospel of Matthew caught my ear:

Give to the one who asks of you,
and do not turn your back on one who wants to borrow.

This passage stood out to me because at first glance it stands in contradiction to another passage, Proverbs 22:7, I’m relatively familiar with due to Dave Ramsey quoting this passage:

The rich rule over the poor,
and the borrower is the slave of the lender.

I’ve adopted Dave Ramsey’s advice regarding lending money to others:  Mainly, I prefer to give, rather than lend, money to family, relatives, or friends who are in need, as I don’t want to create an obligation for them and have them indebted to me.  Note that I have to see a strong need present in order to consider giving money to friends, family, or relatives.  Dave often sites the “Thanksgiving dinner situation” where one relative owes money to another, resulting in increased tension between the two due to debt.  I want to avoid this situation in relationships with people I care about.  Proverbs 22:7 certainly supports this philosophy.

Given that Matthew 5:42, though, exhorts us not to turn our backs on the one who wants to borrow from us, how does this not create a contradiction, and where does this leave us when someone wants to borrow from you?  When I need clarification on scripture, I go to the Catechism of the Catholic Church, and it provides some clarity in this case.

VI. LOVE FOR THE POOR

2443 God blesses those who come to the aid of the poor and rebukes those who turn away from them: “Give to him who begs from you, do not refuse him who would borrow from you”; “you received without pay, give without pay.” It is by what they have done for the poor that Jesus Christ will recognize his chosen ones. When “the poor have the good news preached to them,” it is the sign of Christ’s presence.

We are called to help the poor and give and lend to them.  The Catechism also calls us to be prudent in giving and lending:

1806 Prudence is the virtue that disposes practical reason to discern our true good in every circumstance and to choose the right means of achieving it; “the prudent man looks where he is going.”  “Keep sane and sober for your prayers.”  Prudence is “right reason in action,” writes St. Thomas Aquinas, following Aristotle.  It is not to be confused with timidity or fear, nor with duplicity or dissimulation. It is called auriga virtutum (the charioteer of the virtues); it guides the other virtues by setting rule and measure. It is prudence that immediately guides the judgment of conscience. The prudent man determines and directs his conduct in accordance with this judgment. With the help of this virtue we apply moral principles to particular cases without error and overcome doubts about the good to achieve and the evil to avoid.

San Damiano Cross

In my multiple years of serving dinner at a local homeless shelter, l learned that the Dallas/Fort Worth homeless population struggles mightily with mental illness and associated alcohol and drug addictions.  Although these homeless certainly are poor, prudence has us put “right reason in action” and consider that our giving and lending could potentially enable their addictions.  As a result when interacting with the homeless, I prefer to give them food or supplies, or offer to take them to buy a meal.  Further, I give monthly to Catholic Charities, who has expertise in providing services to the homeless while not enabling bad behaviors.

Matters are more complicated, though, when considering lending to family and friends.  As I mentioned before, I have to see a significant need (major health issues, hunger, etc.) as well as effort to improve financial habits that may have placed them in their precarious situation.  A friend recently asked to borrow money from me in order to take a vacation, saying “I would have my money back in five days, so what’s the difference?”  I didn’t lend them money, and certainly didn’t give them money, as I reasoned she should be a good enough steward of her money so that she isn’t living paycheck to paycheck.  More to the point, a vacation isn’t a need.

As in many cases where scripture is difficult to interpret, seeking the guidance of the Church will provide clarity.  The virtue of prudence provides further clarity in this case, as well.

Is College Worth It?

The cost of a college education and the associated debt that often accompany a college degree were both hot topics during the recent presidential election cycle.  The price of college tuition has soared and greatly outpaced both incomes and inflation.  One fringe presidential candidate even campaigned on promises of “free” college education for all (rant:  We’ll be taxed all the more to pay for this “free” college).

There is a camp that believes all people should go to college no matter the circumstance.  This view, though, doesn’t address the financial implications of attending college and also discounts various nuances, including whether a person would like to pursue a trade or career that does not require a college education. Additionally, some individuals may not succeed in a traditional classroom or school environment. They may benefit much more from an apprenticeship or hands-on training environment where substantial education costs are not incurred.

Tradesman can expect to make respectable salaries, too. Salary.com indicates a plumber earns, on average, in the range of $36,568 to $51,610 annually as of January 30, 2017. Welders make on average $32,409 to $42,798 as of January 30, 2017 according to salary.com. US median household income is $55,775 as of 2015 according to census.gov, the United States Census Bureau, so these salaries are certainly competitive when considering they are earned by individuals (as opposed to households).

I have an undergraduate degree in a STEM major and a Masters in Business Administration with an emphasis in finance and real estate.  My undergraduate college was a liberal arts college and, while as a student I questioned the value of all those “useless” electives, I now value all the writing practice, communications skills, and soft skills I gained.  My MBA was 85% paid for by my employer and provided me with a ton of business, finance, and investing knowledge that I am leveraging to continue investing in equities, start real estate investing, and potentially start a business with a colleague.  Was an MBA needed to continue investing in index funds, start investing in real estate, and open a business?  Certainly not.  Having the MBA 85% paid for, though, by my employer made this a great opportunity and helps me understand most aspects of running a business, and this knowledge was conveyed to me by terrific professors and the learning was facilitated by classmates who had expertise in many fields, including investment banking, real estate, energy, supply chain management, and management.

So, is college worth it?  It depends on many factors.

If you’re going to college, here’s how you can increase your return on investment:

  • Advanced Placement Exams.  Take advanced placement (AP) courses while in high school. You can then sit for AP exams in various subjects.  Depending on how well you score you will earn a corresponding amount of college credit.  Each hour of credit you earn will save you hundreds of thousands of dollars.
  • CLEP Exams.  College Level Advanced Placement (CLEP) exams function similarly to AP exams and allow you to earn college credit.  As with AP exams, CLEP exams can save you hundreds or thousands of dollars in tuition.
  • Get Community College Credit.  Community colleges have tuition that is much cheaper than 4 year universities.  If you’re already attending a 4 year institution, look into their transfer credit policy and see which hours (especially basic credits) can be taken at the local community college and transferred.
  • Finish College.  According to a recent LinkedIn article, graduates with a bachelor’s degree earn over $1 million more in their lifetimes relative to those who only hold high school diplomas.  If you start college but don’t finish, and if you also incur student debt, you’re putting yourself in a hole that will be difficult to escape.
  • Choose Your Major Carefully.  Certain majors are more in demand by employers and certain majors typically result in higher starting pay.  It’s one thing to finish school with $200,000 in debt but a $100,000 starting salary as an analyst at an investment bank.  It’s a completely different ball game finishing school with $200,000 in debt but starting your career making $30,000 as a social worker.  Notice that I’m *not* saying don’t become a social worker (or any other major, for that matter).  Before you choose a given major, know reasonable starting salaries and how long it would take to pay off debt if you choose to carry debt. Educating yourself on your degree’s financial ROI will help you save yourself from the potential surprise and grief of monster debt when you graduate.
  • Have Your Employer Pay For It.  Many employers will subsidize part of your college education, especially if it relates directly to your job, while other employers, especially universities, will pay for your entire education.
  • Choose a College with Successful Career Placement.  I credit esimoney.com for this great, and often overlooked, idea.  A college education is a step toward employment, so visit the career services offices at your prospective school and ask the placement rate for students in general and, more importantly, for students in your major.

There’s no easy answer regarding whether college is worth it for a given individual.  If you’re considering a trade as a profession, college may not be the route you choose.  If you decide to attend a college or university, there are many factors to consider that can help you increase your return on investment.

Three Lessons from The Millionaire Next Door

The Millionaire Next Door is my favorite personal finance book because of three life-changing lessons it imparts, all supported by mountains of research data gathered and analyzed by two professors, Thomas Stanley and William Danko.  These lessons provided me with a financial enlightenment when I was first learning the basics of personal finance, and I suspect many of you will find at least one of them encouraging, challenging, or both.  These lessons taught me to have a new attitude regarding personal finance, and I hope they do the same for you or your loved ones.

Lesson 1:  The majority of millionaires differ radically from what the media and marketers have you believe.

I grew up on a steady diet of TV and, as you know, advertisers and marketers feed you a stream of images and depicting what the rich are supposed to look like.  Of course, their message equates buying their products and increasing consumption with living like a millionaire.  The Millionaire Next Door shatters the notion that the average millionaire consumes the latest and greatest.

In reality, the average millionaire lives a nondescript life and lives in an average neighborhood. This is logical, as over-consuming would lead one to have less money to save an invest.  Stanley and Danko acknowledge that deca-millionaires, the extremely rich, can afford to consume and live up to the images portrayed by advertisers, but this segment of the population is extremely small.  You are more likely to find the ex-millionaire who has spent their fortune away than you are to find a deca-millionaire who can afford to live an extravagant lifestyle.

Lesson 2:  You will not acquire financial independence as long as your sole source of income involves trading time for money.

Many Americans grow up with the idea that working an 8-to-5 is the only way to pay for life. This mentality is one I grew up with and fails to consider what happens if injury, chronic illness, or another circumstance interrupts your employment.  More importantly, this mentality forgoes any consideration of financial independence, as it assumes one must be an employee their entire life in order to sustain a lifestyle.

You will never acquire financial independence without acquiring assets that appreciate without realized income.

-The Millionaire Next Door

Having assets (savings, investments, businesses, etc.) work for you allows you to achieve financial independence as these assets working for you reduce or remove your dependence on realized income (income you earn via employment).  The more assets you have working for you, the more likely you are to achieve financial independence more quickly.  Think of Dave Ramsey’s debt snowball here, but instead of debt, consider an “asset snowball.”

Lesson 3:  The American dream is alive and well.

We’ve all heard in the media many times that it’s impossible for the little man to get ahead, with stagnant wages, a tepid economy, and any number of other reasons.  The Millionaire Next Door provides all Americans with hope:  The vast majority of millionaires are first generation millionaires, having built their fortunes without the benefit of an inheritance.  That’s right, most people who become millionaires are not trust fund babies and do not have a leg up on the rest of us.  The majority of them live below their means, save, and then invest their way to wealth. The American dream is indeed alive!

Psychology and Fear in Personal Finance

Be fearful when others are greedy.  Be greedy when others are fearful.

-Warren Buffet

Warren Buffet is one of the most successful investors of recent times and provided this great quote in 2008 during the height of the subprime mortgage crisis.  During the 2007-2009 bear market, the S&P 500 lost over 50% of its value and many people close to retirement had to delay their exit from the 9 to 5.  In hindsight, as we sit in the middle of a bull market in 2016, Buffet’s quote is great advice, but how are you supposed to separate yourself from emotion when your nest egg loses over 50% of its value?

S&P 500 2007 - 2009 Bear Market
S&P 500 2007 – 2009 Bear Market (courtesy of Yahoo Finance)

There is no easy answer here, as personal finance is indeed personal, but you can certainly make good, informed decisions in the middle of emotionally charged circumstances.  Buffet was right about the subprime mortgage crisis and the need to buy while prices were low (i.e., while the market had lost lots of its value).  He likely looked at the history of the market and understood that it would bounce back.  As of September 16, 2016, the S&P 500 sat at 2,139.16 versus its lowest value during the subprime mortgage crisis of 676.53 on March 9, 2009.  As you can see, the market has more than returned.

S&P 500 - 2007-September 16, 2016
S&P 500 – 2007-September 16, 2016 (courtesy of Yahoo Finance)

How do you disarm fear and anxiety in personal finance?  Educate yourself.

Peace I leave with you; my peace I give to you. Not as the world gives do I give it to you. Do not let your hearts be troubled or afraid.

John 14:27

How should you manage fear and anxiety when making financial decisions?  Start with education, then don’t stop educating yourself.  Read personal finance books (I highly recommend The Millionaire Next Door), visit personal finance blogs (Afford Anything is my current favorite), and listen to personal finance podcasts (Marketplace is great for keeping up with current financial events; Afford Anything has a great podcast, too).  I’ve found that I pull pieces of information from each of these sources and, as a result, have molded a personal philosophy.

The key lesson here is that education will help you see that American equity markets have more than recovered from the multitude of previous crashes and bear markets.  Buffet understood this and saw that equities were simply on sale.

How else do you disarm fear and anxiety?  Understand risk and reward.

I recently listened to a personal finance podcast where I heard an interesting anecdote involving fear.  A caller indicated they hadn’t invested in the stock market for retirement due to their fear of losing money.  While the caller certainly is correct that avoiding the stock market and investing in something safer, like CDs or cash, will help you avoid risk and the large losses that can accompany risk, he is also missing the other half of the equation:  In finance risk is necessary for growth.

While the caller will seemingly preserve capital by avoiding the volatility of the stock market, their capital will erode over time due to the effects of inflation.  The eroding power of inflation will decrease buying power if not offset by gains.  One option for generating more gains than cash but experiencing less volatility than the stock market is the bond market.  The bond market, though, experiences a good amount of volatility, too.

While someone can certainly go to sleep peacefully knowing they will avoid the volatility of the stock market and keep their money safe (at least until inflation eats away at it), it would be rash to do so without being aware of the rewards that accompany carrying risk.  Over the past 30 years (specifically from January 1, 1985 through December 31, 2015), the compound annual growth rate of the S&P 500 was 8.2% with dividends reinvested and adjusted for inflation.

S&P 500 - CAGR for past 30 Years
S&P 500 – CAGR for past 30 Years (courtesy of MoneyChimp.com)

As you can see, $1 invested in an S&P 500 index fund on January 1, 1985 would have returned over 1,100% in 30 years.  While I can see how avoiding significant losses would allow someone to sleep peacefully, avoiding a significant amount of the S&P’s gains during this time period would cause me to lose sleep at night.  My advice to the caller:  Educate yourself about risk and reward, then understand how accepting additional risk could result in your nest egg multiplying in size.

Investment+Savings Challenge

One of my personal financial goals is to become financially independent.  For those unfamiliar with the term, I define financial independence as follows:  A state in which financial assets generate sufficient income to pay for a chosen lifestyle.  In layman’s terms:  More assets = good, combined with fewer expenses = better.

Financial Independence = Passive Income Generated by Assets > Expenses

I am seeking financial independence so that I will have the freedom to walk away from my current or future job should I need or want to in the future.  One example of when I would potentially want to walk away from my job:  My spouse and I have a baby and we decide that my staying home with the child is our preferred option for care taking.  While I absolutely love my job and my career, financial independence allows for many options in the future that being tied to a 9 to 5 does not.

One key step in achieving financial independence is increasing investment and savings rates. Not only does this increase the amount of assets you have working for you by generating passive income, but you decrease your expenses, thereby accelerating the journey to financial independence.

I’m going to start tracking my investment and savings rate on this site, starting with August 2016.  My investment+savings rate is based on my *gross* income.  Also, I’m including in gross income my employer’s 401(k) contribution, as they give me a portion of my salary each month.  This isn’t a match, but a contribution to my 401(k), so I view it as income and include it in my gross income so that my savings+investment rate isn’t disproportionately inflated by this contribution.

August 2016:  40.29%

 

 

Considerations for Investing as a Catholic, Part 2

In my previous post regarding things Catholics should consider when investing, I spoke about one mutual fund family (Ave Maria Mutual Funds) as an example of a fund family that offers investments that abide by United States Council of Catholic Bishops (USCCB) guidelines.  There are certainly other fund families that abide by USCCB guidelines and I wanted to mention some of them here.

Note:  I do not currently have money invested in Ave Maria funds nor in any of the other fund families I am about to mention.  Yes, you’re right:  As a good Catholic, I should strongly consider moving my money to somewhere other than the Vanguard funds where my IRA money currently sits.  I am searching for a good Catholic mutual fund with low fees, so if you know of any, let me know!

Luther King Capital Management (LKCM) has the LKCM Aquinas Catholic Equity Fund (AQEIX) that abides by USCCB investment guidelines.  The fund, though, has consistently under performed its category average.  Its expense ratio of 1.50% makes it a very expensive fund to hold.

Epiphany Funds has three funds to choose from, all of which have high total expenses.  These funds are very small and this is likely the reason for the high expenses.  The Epiphany Fund family

Index Fund Advisors provides a list of Catholic index funds on its web site.  I do not see ticker symbols for these, so I am not able to judge their performance very well, although they appear to perform relatively well.  The expenses for investing with IFA appear to be significant (0.90% annually for accounts with less than $500,000, plus quarterly fees), so be aware.  I like the variety of target date funds IFA provides, as this makes it easier for investors of any age to find an index fund suitable for their stage of life and risk tolerance.

As I mentioned in Part 1, high expenses are the norm for Catholic mutual funds and are the price we pay, at least for now, to abide by USCCB guidelines. Until these Catholic funds gain more assets under management, these high expenses will likely continue.  In the meantime, if you choose to invest in any of these funds, give yourself a pat on the back.

USCCB Socially Responsible Investment Guidelines:  http://www.usccb.org/about/financial-reporting/socially-responsible-investment-guidelines.cfm

Considerations for Investing as a Catholic

In a previous post I recommended investing in index funds in order to minimize expenses and better increase your nest egg.  Unfortunately, though, many of the companies contained within a standard index fund conduct activities that are in opposition to Catholic teaching.  For example, the owner of Rick’s Cabaret strip clubs, RCI Hospitality Holdings (RICK stock ticker), is held by, among others, Vanguard Total Stock Market Index Fund (VTSMX and VTSAX).  When you purchase shares in VTSMX or VTSAX, you purchase fractions of shares in the owner of Rick’s Cabaret.  So what is a Catholic to do?

Educate yourself regarding Catholic investing guidelines and make informed decisions.  The United States Council of Catholic Bishops (USCCB) released “Socially Responsible Investment Guidelines” in order to provide guidance on this topic:

USCCBhttp://www.usccb.org/about/financial-reporting/socially-responsible-investment-guidelines.cfm

In summary, we have a moral responsibility to avoid investing in organizations that operate in opposition to Catholic teaching.

But, how is a person supposed to navigate through the hundreds or thousands of funds an index fund, much less multiple index funds, invest in?  Thankfully, Catholic mutual funds exist and do this work for us.  Ave Maria Mutual Funds is an example of one of these companies and Ave Maria has two funds, the Ave Maria Rising Dividend Fund (AVEDX) and the Ave Maria Growth Fund (AVEGX), that are rated well by Morningstar.  The 0.92% expense ratio for AVEDX and the 1.17% expense ratio for AVEGX are very high, though, in comparison to Vanguard’s fund lines.  Working against Ave Maria in this case are the active management they have to perform for both funds, as fund managers must weed out non-Catholic organizations, and the sheer size of Vanguard funds, as Vanguard can drive their expense ratios lower (VTSAX has an extremely low expense ratio of 0.05%!!!) due to VTSAX’s $141 billion in holdings versus AVEDX’s $789 million in holdings.

Catholic investors can look at the 0.85% difference in expense ratios between VTSAX and AVEDX and know that the extra money they are paying is helping to build the kingdom.  That being said, I really wish Ave Maria would consider lowering their expense ratios, as the extra 0.85% in expense makes a huge difference over time.

If you were to invest $10,000 into VTSAX with no future investments, a 7% rate of return, and the 0.05% expense ratio, in 30 years you would have $74,989.  (Calculations done on calcxml.com)

Investing in VTSAX

 

If you were to invest the same $10,000 in AVEDX with no future investments, a 7% rate of return, and the 0.92% expense ratio, in 30 years you would have $57,689.  That’s a difference of $17,300 when your investment compounds over 30 years.  That extra 0.85% in expenses wasn’t so small after all.

Investing in AVEDX

 

Unfortunately, until Ave Maria Mutual Funds has more money under management, it will likely not be able to leverage economies of scale in order to reduce expenses.  We meet our initial goal, though, of putting our money into investments that comply with Catholic social teaching, and this is certainly worth some extra expense.

Why You Should Use Index Funds in Your Retirement Accounts

When I first started learning about investing and retirement accounts, I struggled to determine where I should invest my money.  Thankfully, several great personal finance web sites (including Motley Fool and Bogleheads) agreed that investing in index funds led to the most benefit for most people.  Index funds are mutual funds that track what is called a market index, like the Standard and Poor’s 500, and maintain small slices of companies in proportion to the companies’ share of the index.  For example, if Apple currently makes up 2% of the S&P 500, an S&P 500 index fund would place 2% of its holdings in Apple.

Why is indexing preferred over investing in actively managed funds, where fund managers buy and sell stocks on a frequent basis?  The frequent buying and selling of stocks generates commissions for the fund managers and their companies (this is your money going to pay the fund managers).  Additionally, there are often fees associated with the initial purchase of actively managed funds.  At the end of the day, actively managed funds must increase in value not only to match the gains of index funds, but also to cover actively managed funds’ much higher expenses.

Study after study indicates that index funds outperform actively managed funds:

http://www.cnbc.com/2015/06/26/index-funds-trounce-actively-managed-funds-study.html

http://www.usatoday.com/story/money/personalfinance/2016/03/14/66-fund-managers-cant-match-sp-results/81644182/

https://www.bogleheads.org/forum/viewtopic.php?f=10&t=88005

I recommend Vanguard Funds (www.vanguard.com) for index funds, as Vanguard’s funds have the lowest expense ratios.  One fund that is highly recommended by many proponents of indexing is Vanguard’s Total Stock Market Index Fund (VTSAX), which has an extremely low expense ratio of 0.05%.  In comparison, many actively managed funds have expense ratios of over 1.00%.  While this extra percentage point may not seem like a lot, when compounded over time, this extra 1.00% may result in you paying fund managers tens of thousands, if not hundreds of thousands, of dollars that could have been used to grow your retirement nest egg.