Finance 101: May 2022
In May the financial advisors at Ruedi Wealth Management wrote 5 more “Finance 101” columns for The News-Gazette’s Business Extra section. Make sure to look for them every Sunday, but in case you missed the columns in May all five are below.
Net Worth
Paul R. Ruedi, CFP®
Most people live with financial situations that are complicated, to say the least. Most often have a myriad of accounts and physical assets. They may have some student loans, a personal loan, or some credit card debt. Perhaps they even own a house but owe a substantial amount of the value of that house to a bank. With your financial life spread out among so many places, how can you possibly tell if you are moving forward or backward?
Tracking your net worth can be a way to zoom out and see how the all these different pieces of the puzzle add up. Calculated as your assets minus your liabilities, it is a measure of the total wealth of an individual or household. This can help you get a sense of the changes in your wealth over time, and hopefully confirm you are making the right financial choices.
To calculate your net worth you will want to start by getting a list of all your assets. Anything you own that is of value can be included as an asset. This includes physical assets like cars, trucks, motorcycles, but also any financial assets like savings accounts, checking accounts, any investment accounts. You may also want to include the value of any business interests, and your personal residence as well.
Once you have an understanding of the total amount of your assets, you will want to subtract any liabilities from that number. That could be any student debt, credit card debt, car loans, a mortgage – really any money you owe and need to pay back at some point. Once you have subtracted all those liabilities from your assets, you have arrived at your net worth. Though it isn’t a perfect description of your financial health, it does provide a quick summary of your total wealth. This can be helpful to track over time to make sure it is moving in the right direction.
One of the limitations of calculating net worth is that it is just a snapshot at this moment and doesn’t tell you about where you are going. A person with a net worth made up entirely of depreciating items like boats and cars will technically have the same net worth as a person whose entire net worth is in investments. Obviously the first person is heading towards a much different outcome than the second. Knowing your net worth now is great, but it is only half the battle. Understanding where you are heading is equally important. If you need help with that, you may want to talk to a financial advisor.
Paul R. Ruedi is a Certified Financial Planner™ professional with Ruedi Wealth Management in Champaign, Illinois.
The Rest of The Story
Paul A. Ruedi
Temporary declines in the stock market are common throughout a lifetime of investing. When one inevitably comes along, the financial media always try to convince us a 100-year storm has hit us. I call it the "apocalypse du jour" syndrome.
The S&P 500 saw a drop of just under 9% in April. Numerous headlines pointed out that it was "the worst April in 50 years." Clickbait at its worst. Paul Harvey was famous for his "rest of the story" radio segments, and I enjoyed the mystery of the complete story. Unfortunately, we never get the rest of the story from the financial media.
April 2022 was the worst monthly return for the broad US stock market in the past 50 years. When I look back over that time period, I find a story that should have been written about, but was not. So I will do my best Paul Harvey “rest of the story” imitation.
In April 1972, the Standard and Poor's 500 Index stood at 109 rounded up. Today, that index stands at 4,300—40 times higher. The dividends paid were $3.07, and the most recent number was $62.35—20 times higher. Inflation is seven times higher. $10,000 invested in that index is worth $1,634,048 today.1 As Paul Harvey would say, "and now…you know the rest of the story."
Of course, you won't find that information anywhere near the negative headlines. I believe the financial media's goal is to eliminate your lifetime historical perspective. Armed with no long-term historical perspective (plan A), all that's left is chaos—"this thing could burst at the seams at any time, so check back with us every half-hour to tell you what to do." Good grief. How do you make an investment policy out of that? You can't. Period.
The next time you see a headline, "Worst _____ in X number of years," head to the page “The S&P 500 at Your Fingertips” on politicalcalculations.com and enter the time frame to see what has happened to the stock market, dividends, and inflation. I do that frequently, which helps me practice "rationality under uncertainty" for my clients and my family.
Ignore the clickbait. If the negative headlines don't scare you out, they will wear you out, as they say.
Paul Ruedi is the CEO of Ruedi Wealth Management in Champaign, Illinois.
Financial Canaries
Paul R. Ruedi, CFP®
People often dig themselves into holes financially, but it usually doesn’t happen overnight. Overspending or an out-of-control debt situation usually creeps up slowly over years, until one day a person finally recognizes there is a problem. But by that point, it is often very difficult to unwind the financial problems that have been created as a result.
But is there a way for people to notice financial problems before they spiral out of control? Miners used to take canaries down in mines as they would pass away from carbon monoxide and warn the miners of impending danger. So I couldn’t help but thinking: are there any financial canaries that warn people that they have a problem on the horizon?
I would say the most common financial canary that warns of impending danger is an inability to pay off credit card debt in full each month. This means at one point or another you have spent too much. It is important to recognize this spending imbalance immediately before it spirals into thousands of dollars of high-interest credit card debt, which can be very difficult to dig out of.
These financial canaries can really be anything. I’ll even pick on myself. My wife and I recently put a lot of our financial resources towards the purchase of an investment property. This has left us a little tight on cash temporarily, which is no small concern with a baby on the way in 6 weeks! I do not regret taking a calculated risk as an entrepreneur, but I have to honestly accept our cash situation is different now than it was even a few months ago, and live accordingly. Things like repairing our fence have been put off in favor of keeping more cash on hand for emergencies.
So this past weekend, when I was considering purchasing a pay-per-view UFC fight, I had to take an honest look at myself. Though it didn’t feel like a major expenditure, I had to ask myself, do you really feel within your right to spend money on something completely unnecessary when your fence still needs to be repaired? My fence was my canary and I had to recognize it. I skipped purchasing the fight as a result.
If you find you are unable to maintain your lifestyle without skipping important expenditures or going into credit card debt to make ends meet, you should probably make a course adjustment immediately. If you don’t, you may find yourself working much harder to deal with even bigger problems down the road.
Paul R. Ruedi is a CERTIFIED FINANCIAL PLANNER™ professional with Ruedi Wealth Management in Champaign, Illinois.
The Four Noble Truths of Investing
Paul R. Ruedi, CFP®
Philosophers have tried to distill universal truths into an easily digestible format for thousands of years. The lessons that often had the most success persisting through time were stripped down to a short list of bullet points that only contained the most important information. I couldn’t help but wonder if the same could be done for investing. Below is my attempt with the four “noble truths” of investing.
The first noble truth is that risk and return are related. If you want higher returns, you must take more risk. If you want lower risk, you must accept lower returns. I’d be skeptical of any investment product that claims to defy this noble truth.
The second noble truth is that discipline is essential. You aren’t likely to beat the market, so stick to your investments over time rather than chasing the investment fad of the day. Don’t attempt to outguess the market by picking stocks or jumping in and out of the market at certain times. Don’t go crazy on risk taking during market euphoria. Don’t panic and sell during the tough times.
The third noble truth is that diversification is key. It is wise not to put all your eggs in one basket. Diversification prevents a single investment from completely destroying your finances. Owning a multitude of investments also increases the chance of owning one that does particularly well.
The fourth noble truth is that investing takes time. True wealth is built by investing over decades, not years. Make sure to start early and give compounding time to work its magic. Don’t get impatient and interrupt that process.
We invest in diversified stock and bond portfolios at Ruedi Wealth Management, but I believe this list of truths applies to whatever type of investing a person happens to be doing. If investors understand that risk and return are related, remain disciplined and diversified, and give their investments decades to play out, they are likely to have a successful investment experience. It they attempt to bend the rules or defy one of these noble truths, they set themselves up for trouble. If you aren’t sure if you are following the path set out by these noble truths in your investment portfolio, you may want to talk to a financial advisor.
Paul R. Ruedi is a CERTIFIED FINANCIAL PLANNER™ professional with Ruedi Wealth Management in Champaign, Illinois.
The Triumph of Indexing
Paul A. Ruedi
When the first index fund was launched by Vanguard in 1976, nobody would have guessed it would spark an investing revolution in favor of the small investor. In fact, the idea was originally dismissed as “un-American” because, “who would want to settle for average?” The idea of passively matching an index instead of trying to beat the market wasn’t immediately well received or widely adopted. But this year, for the first time ever, the amount of money invested in passively-managed index funds has eclipsed the total amount held in actively-managed funds according to data from Morningstar.
I originally made the switch to index funds in the early 1990s. When Morningstar first started tracking the amount in index funds vs. active funds around that time, active funds held roughly 60 times the amount of money held in index funds. Switching to index funds was a bold move at a time when many financial folks were still selling investment performance.
But when faced with an overwhelming amount of data that passively-managed index funds were a better solution for investors, I felt it was a change I had to make. Not much has changed since then, and more and more people have seen the evidence and made the switch to index funds. But what are the key factors driving that switch?
The first is the lower fees of index funds. The return you receive as an investor is the return of your investments minus your costs. Lower costs, all things equal, result in more money going into your pocket. That is just simple arithmetic.
The second is an increasing awareness that most actively-managed funds fail to deliver the performance they promise. Study after study continue to show that the vast majority of active managers, around 80% depending on the study and asset class, underperform their benchmarks. Their higher fees would be forgivable if they delivered better performance, but they rarely do.
With these two forces still at work, I don’t think the shift to passively-managed index funds will slow down anytime soon. I feel this is a good thing for investors, who benefit from the lower costs of index funds and avoid the disappointment of manager underperformance. Index funds are widely available, and most 401k or other retirement plans have several index fund options to choose from. If you aren’t sure how to build an investment portfolio using index funds yourself, you may want to talk to a financial advisor.
Paul Ruedi is the CEO of Ruedi Wealth Management in Champaign, Illinois.
1: You can't buy an unmanaged index--you can buy an index fund with meager fees.
Disclaimer: Past performance is no indication of future results. You should not make any investment decisions without first performing your own due diligence and consulting your financial advisor.