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Selling our home was the best financial decision we have ever made

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Hello! My name is Wendy Mays, and I’m super happy to share a bit of my story. In the past couple of years, my husband and I have taken several big steps to change our financial future.

From the outside looking in, it appeared we had it all: a perfect family in a beautiful, Pinterest-worthy home in sunny San Diego, California. We’d reached the pinnacle. We were living the American Dream.

The reality, however, was that we were drowning in debt, burned out, and coming to terms with the fact that if things didn’t change, we’d carry our debt to our graves. As we explored changes we could make to improve our financial situation, we realized that the biggest and best move we could make was to sell our dream home.

Turns out that selling our home was the best financial decision we have ever made.

Given the long trail of money mistakes my husband have made in the past, some who know us might be skeptical that this choice was the right one. But if you’ll indulge me for a few minutes, I hope to dispel the belief that owning your own home is always best.

The American Dream

Home ownership is part of the American Dream. It’s something most folks look forward to accomplishing. It’s a rite of passage. It’s how we show the world we’ve “made it”. We’re constantly bombarded by messages that home ownership is something successful people “should” do, the same as going to college, getting married, and having children.

Too, most people have a personal attachment to their homes. We understand this. Emotional investment was a big barrier for us too. My family had put our hearts and souls into our home. On every wall, there was something our hands had touched.

We had planned to make the place into our dream home, to stay there indefinitely. It was the first home we owned in San Diego, the first home we owned after adopting our boys. Our house meant something to us. It was sentimental.

But after attending last year’s FI Chautauqua in Greece, my husband and I agreed that becoming financially independent was an important goal for both of us. At age 46, we were late to discover the world of early retirement, but we knew if we implemented a few strategies we could change our lives — and the lives of our children.

We began to envision the legacy we could leave our children, the generational wealth we could begin to build.

The Problem with the American Dream

But there was a problem. We were broke. More than broke. We were in debt, including the house, by almost one million dollars. We didn’t discriminate when it came to debt. We had it all! We had a mortgage. We had car loans. We had credit-card debt. We had revolving debt. We had tax bills.

When we crunched the numbers, we decided we had two choices to change our money situation.

  1. Cut expenses, then work our way out of the mess we’d created.
  2. Liquidate the only asset we had access to: our home. (All of our other money was in retirement accounts.) We could use the equity to pay off a good portion of our debt.

While we recognized that we absolutely should work to cut costs and build income, the latter option made the most financial sense. Really, it was a no-brainer. But homeownership isn’t a decision we make only with our brains; our hearts have to be considered as well.

It took us about six months to arrive at a decision. For weeks, we wavered back and forth about what to do. We didn’t want to sell our house. We loved the home we had created.

Inside Wendy's dream home

Making the Decision

Ultimately, it was our children that allowed us to align our heads with our hearts. We asked ourselves, “Why do we want to achieve financial independence?” It was for our kids, to change our family tree.

We decided that “home” would be wherever we were. Home was a meal at our dinner table. It was game night. Home was watching the Littles ride their scooters in the front sidewalk and family movie night in the drive-way.

Our home wasn’t limited by four walls. It wasn’t defined by a specific house.

Once we agreed to sell our house, there was another decision to make. We would capture enough money from the sale to not only pay all of off our consumer debt, but have some left over to put into another home.

We weighed the pros and cons of renting versus purchasing another home. We ran the numbers through several different “buy vs. rent” calculators – and in each one, renting came out ahead. In fact, renting could save us anywhere between $800 and $1200 each month

Not only that, but by not buying another primary residence we’d have a significant amount of money left over that could be used for something else, such as investing in out-of-state rental properties.

We decided to rent.

Soon, we found a nice home in our current neighborhood (which was important for us). We were able to rent the place for $1100 less than our previous mortgage.

Crunching the Numbers

For my family, letting go of the attachment to our home allowed us to do some amazing things.

  • We paid off all of our consumer debt. Gone are two car payments and several credit-card balances. This is a savings of about $1600 a month. ($900 in car payments and the rest in credit-card payments.)
  • By renting — and downsizing slightly — we save about $1100 per month in housing payments.
  • Selling our home provided seed money to begin real-estate investing, which will add $1000 of positive cash flow into our budget per month.

That’s a grand total of $3700 per month that we put back into our budget. That equates to about $44,000 each year.

Let that sink in for second. Millions of people live on less than this amount comfortably. (What could you do with an extra $44,000 per year?) It’s the equivalent of a modest income in the United States.

In fact, freeing up this money allowed me to quit my career as a lawyer and close my practice. For the first time in our lives, my husband and I can live on one income!

Wendy, Curtis, and the kids

After the Sale

Now, several months after selling our home, we can say without hesitation that it was the best thing we’ve ever done with our money.

This one move has not only decreased our monthly expenses, but it also allowed us to pay off a lot of debt. Plus, we’ve start investing in real estate, which has also increased our monthly income.

Last year — 365 days ago — we had almost $1,000,000 in debt. Through this one unconventional move, we’ve gotten rid of almost $700,000 of that debt.

We still have about $350,000 of student loan debt to go – but we have a plan in place to attack that as well.

Once you allow yourself to think outside the box, give yourself permission to make unconventional moves with money, you can do amazing things. Housing is the biggest expense for most Americans. It almost always makes sense to seek ways to decrease that expense. Doing so can bring about all sorts of opportunities.

I encourage you to do consider the possibilities.

The post Selling our home was the best financial decision we have ever made appeared first on Get Rich Slowly.



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Why Save Money Now? 9 Reasons That Will Help You Start Saving

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Learning to save money is one of the best things you can do for yourself. 

Saving money can help you prepare for emergencies, start a business, retire, and more.

Financial security is one of the best reasons for why you should save money, and being prepared financially is one of the best feelings in the world. You can travel more, pursue your passions, quit a job you don’t love, try new things, and more.

But, I hear over and over again from people that they don’t want to save money now because they think they have the rest of their life to do so.

However, that’s far from true, especially if you want to be prepared for emergencies or retire.

When you decide to start saving money now, you will be ready to live the rest of your life. 

You can take chances, try new things, and be ready in case something awful were to happen. Saving money gives you the freedom to worry less and live more.

Now, there are some situations when people do have a harder time saving money. Maybe you are living paycheck to paycheck, are working to eliminate high amounts of debt, etc. 

Even though learning to save money can be hard, small amounts of money add up over time, and this is very true when you start now. Plus, there are lots of great ways to make extra money to make saving now easier.

Saving money takes discipline and some people may need to take extreme measures, but starting to save money now is one of the best things you can do for yourself.

Related content:

Below is why you should save money even if you think you have the rest of your life to do so.

 

Learning a good savings routine now will help you later.

One of the top reasons for why many don’t start saving now and/or invest for retirement is because they claim that they don’t know how. Yes, it might feel overwhelming in the beginning – how to start investing, where to save your money, etc. But, these are things you can learn so it doesn’t have to be hard.

Once you get over the hump of getting started, you can create a routine where you regularly make contributions to a savings account or a retirement account. There are even investing and savings apps available to automate the process for you.

Acorns is a popular micro investing app that you can use to schedule deposits into your investment account – even just $5 at a time. You can also set up Acorns to round up transactions from a linked card to invest passively.

However you start to save and invest now and the sooner you do it, the more it becomes a habit and the easier it will become. By saving money as soon as you can, you will learn good financial habits that will help you well into the future.

Learn how to start investing at How To Start Investing With Little Money

 

You don’t need as much money as you think.

More and more people are choosing to live a minimalist lifestyle because they have realized that less is more. These people are living in smaller houses, not buying as much stuff, and being more thoughtful when they do make purchases.

These choices can lead to significantly spending less money on things, which makes it easier to save your money.

Now, leading a minimalist lifestyle isn’t for everyone. But, material items do not always equal happiness. Sometimes they just add stress, debt, and more. Think about it – the more stuff you have, the more likely that something will break, something will get lost or tossed to the side, and so on.

And if you think about the fact that the average household has 300,000 items (not a typo), that’s a lot of money spent on stuff.

However, do we actually need all of that stuff?

Probably not.

Spending money on a bunch of unnecessary stuff does not mean that you will have a higher level of happiness than someone else.

When you learn to live with less, you will find that you don’t need as much money as you thought.

Related: How A Minimalist Lifestyle Can Bring You Happiness 

 

An enjoyable life doesn’t have to be expensive.

One of the other things I hear about saving money is that it’s boring.

Yes, I have heard that if you are saving your money that you’re having no fun. In fact, here are a few myths I’ve heard about saving:

  • “I can’t save money because that means I’ll just be eating rice and beans and sitting on my couch all day long.”
  • “That person is only able to save money because they have a boring life.”
  • “I’d rather enjoy my life now and worry about saving money when I’m old.”

These are not true, at all. You know what they say when a person complains about being bored – that they are actually a boring person.

If you think spending money rather than saving money will lead to happiness, then you need to change your mindset.

Life is all about a comfortable balance. You can save money, spend money, and have an enjoyable life. It’s not one or the other. And, really, it’s all about knowing what you can actually afford and thinking about whether buying something will actually benefit your life.

There are plenty of ways to live an awesome life while saving money. Yes, you can still see your friends, have fun with your loved ones, go on vacations, and more, all while staying on a realistic budget.

Instead of going out to eat three to four times a week, you can prepare meals with friends or family or host a potluck.

Instead of taking an expensive vacation, you can do a roadtrip or plan a staycation.

Instead of spending lots of money on an expensive weekend out with your friends or significant other, you can go for a hike, bike ride, and more.

There are so many ways to have fun for free or cheap, and finding new ideas now can help you start to save money.

Related: 

 

Compound interest matters.

Learning how to save your money is a wonderful thing, especially if you start investing. When it comes to investing, time is on your side because of the powerful impact of compound interest.

Compound interest is one important reason for why you should start to save your money now instead of waiting until you are older.

To put it simply, compound interest is when your interest is earning interest. This can then turn the amount of money you have saved into a much larger amount years later.

This is important to note because of inflation – $100 today will not be worth $100 in the future if you just let it sit under a mattress or in a checking account. However, if you invest, you can actually turn your $100 into something more. Investing for the long term means your money is working for you, potentially earning you an income.

For example: If you put $1,000 into a retirement account that has an annual 8% return, 40 years later that would turn into $21,724. If you started with that same $1,000 and put an extra $1,000 in it for the next 40 years at an annual 8% return, that would then turn into $301,505. If you started with $10,000 and put an extra $10,000 in it for the next 40 years at that same percentage rate, that would then turn into $3,015,055.

Side note: I recommend you check out Personal Capital if you are interested in gaining control of your financial situation. Personal Capital is similar to Mint.com, but much better. Personal Capital is free and it allows you to aggregate your financial accounts so that you can easily see your whole financial situation, including investments.

Related content:

 

There’s no need to waste money just because you can.

There is no reason to spend all of your money just because you are able to. In my opinion, finding ways to save money will bring you greater security and peace of mind.

I’ve heard of people (even many who are close to me) say, “If I have money, I’ll spend all of it.”

If you decided to save your money rather than spend the last bits of it until your next paycheck, you will be on the road to saving more in the long run, meaning you can start to break free from a paycheck to paycheck lifestyle.

Even if you are only able to save a small amount, that is much better than not saving anything.

Like I said above, time and compound interest are both on your side, and this can turn the small amount of money you have saved into a much larger amount.

Related: 16 Alternatives To Cable TV That WILL Save You Money

 

Stop letting others dictate how you live your life.

One of the reasons that people spend more than they should (and save less now) is because it looks like that is what everyone else is doing.

We’ve all seen the pictures on Facebook or Instagram of a friend with their brand new car, someone on an amazing vacation, or in brand new clothes. But, just because other people have something, that doesn’t mean you need to as well.

You have no idea how someone paid for those things. Maybe they make more than you think, maybe it was a gift, or maybe they are going into debt to “afford” things.

You are the only one who gets to dictate how to spend your money. And you can choose to save instead of spending money on things to keep up with others.

In 10, 20, 30, or 40 years, you could be living a comfortable life without debt, not stuck in a job you hate, and be pursuing your passions. Doesn’t that sound so much better than a life of debt and comparison?

 

The less money you spend now, the less you need in the future.

By spending less money, you’ll decrease the amount of money you need in the future. This includes money for emergency funds, retirement, and more.

This will help you build your emergency fund quicker and reach retirement sooner.

Just think about it: If you are already living a frugal lifestyle, then you will be used to living on less in the future. This means your retirement savings doesn’t need to be as large, which means it may be easier to reach that savings goal.

Also, if you spend less money, you probably won’t need as much in your emergency fund, which can also help you fund that sooner!

When you spend less money now, you can save at a higher rate, and that means you can reach your goals that much faster!

For example, Mr. Money Mustache has a great graphic in his blog post The Shockingly Simple Math Behind Early Retirement that shows you how your savings rate can dramatically impact when you’ll retire. For example:

  • Saving at the average personal savings rate of 5%, it will take you 66 working years until you reach retirement.
  • A 25% savings rate means it will take you 32 working years to retire.
  • A 50% savings rate means it will take you 17 working years to retire.
  • A 75% savings rate means it will take you 7 working years to retire.

So, by saving more of your money, you are likely to retire sooner. Sounds amazing, right?

 

There’s no guarantee that you’ll always have that income stream.

Time and time again, I hear from people that say they don’t need to save money now because they have a job.

Yes, you may feel safe and secure in your job, but the truth is that you never really know how long you’ll be making money or how long that job will last.

Many other people think, “But, I enjoy my job!”

While it’s great that you enjoy your job, you should still learn to save your money. Too many people think they can work forever because they love their job.

However, what happens when you can no longer work? You don’t know what the future will bring – you may encounter a medical problem, a serious life event, you may hate your job 20 years from now, and so on.

Why do people save money? One reason is because nothing is guaranteed.

So, instead of spending every last penny that you have, you should find ways to save more money.

Related: 12 Passive Income Ideas That Will Let You Enjoy Life More

 

 

The best things in life are free.

Stop for a second and think about your life. Do you have a friend you can count on? A family member who cares for you? A significant other to share your life with? Did a stranger hold the door open or offer you a smile? None of those things cost a dime.

Even if you just have one of these, you are still experiencing the happiness in life that comes free of charge.

There are so many free things in life to enjoy!

There are libraries, parks, free concerts, music on the radio, and more.

All of these amazing free things mean that you can stop spending as much and start to save money now.

Living a frugal life means you are taking advantage of what’s already around you. For some, this can be a hard mindset to get into, but when you realize you already have the most important things in life, you will realize that money isn’t the be all and end all.

There are many reasons to save money, and it’s never too late to start.

 

Starting to save money now will change your life.

Saving money is a mindset that you have to put yourself into. You have to make routines, make sacrifices, and change the way you spend money.

I know all of that is hard to do, but there is no greater feeling than being prepared.

And please don’t think that it’s too late to start saving. It’s never too late!

By learning to save at any age or stage of your life, you are making one of the smartest decisions you can for your future, even just a month or five years down the line.

What do you think? Do you think you should save money now? Or enjoy life and save later?

The post Why Save Money Now? 9 Reasons That Will Help You Start Saving appeared first on Making Sense Of Cents.



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What To Do With That Last Little Bit Left in the Container

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We’ve all been there. You have a container of something and it’s almost used up. There’s just a little bit left in the container, but that little bit is hard to access. How far should you go to access that little bit? How much effort is worth it? Even better, is there anything creative you can do in that situation that minimizes effort and time and maximizes return?

Over the last year or so, I’ve been trying different techniques to figure out how to get the last little bit out of different containers, and I’ve figured out a few things that work well and quite a few things that don’t.

Let’s dig into that last little bit left behind in the containers in our lives.

It’s probably not worth it to put in significant effort to get out the last little bit.

In general, the value you get from extracting the small amount of remaining… stuff in the container isn’t worth it if it requires a lot more effort than the normal ways in which you use the product.

For example, with a tube of toothpaste, each use uses up perhaps two cents of toothpaste, so cutting open the tube to get one to three more uses out of it will only save you a nickel or perhaps a dime.

The only real reason to put in much effort to get that last little bit out is if it psychologically bothers you to waste it, in which case the sheer sense of feeling good about getting that last bit out is the reason to do it. Some people get a lot of personal value out of knowing that they used it all up. (I’m not really in that group, though I certainly sympathize with that kind of feeling.)

The best solution for toothpaste tubes is to start from the end and empty it gradually throughout usage.

Rather than having to force the last bit out of the tube at the end or try to mangle the toothpaste tube, a much better approach is to use a clip throughout the entire time you use the tube. Squeeze from the bottom of the tube each time and then roll up the tube every few uses, applying a clip to the bottom of the tube to hold it in place. That way, when you do get to the end, the tube is really empty.

This is a far more efficient way of getting every bit out of the toothpaste tube than cutting it apart or exerting a lot of force near the end.

(While we’re talking toothpaste, anything more than a pea-sized amount on your toothbrush is wasted. Get used to just getting an amount on there that’s the size of a pea and your toothpaste will last way longer. Ignore the ads that show a huge line of toothpaste on the brush – they want you to use far too much so you’ll buy tubes more frequently.)

For peanut butter jars, use the remaining bits as an ingredient in something you make in the jar.

For example, if you really like making cookies with a hint of peanut butter in the dough, literally make some of the dough inside the peanut butter jar, adding flour and water until you have a dough ball that will take all of the peanut butter right off the sides of the jar as you mix it.

If you like Thai food, you can use the jar to make a wonderful sauce right in the jar, with some great peanut flavor. Here’s a nice recipe, where you just mix everything in the jar and then dump it out, leaving very little of anything in the jar.

As an aside, my youngest son will take a nearly-empty jar of peanut butter and stick a slice of bread in there with his small hands, rubbing it around the inside, so he can have half a peanut butter sandwich. I’m not sure it’s particularly efficient, but it does get most of the remaining peanut butter out and it seems to make him pretty happy!

For many bottles, simply invert them.

If you notice that your bottle of shampoo or body wash or lotion is mostly empty, simply turn the thing upside down and leave it until your next use. This will allow all of that extra stuff to collect at the top of the bottle and usually get you one final nice use out of the contents.

For me, this is the easiest way to get the last bit out of a bottle. It doesn’t involve cutting anything and lets gravity do the work.

I don’t find it useful to add (much) water to the bottle. It usually dilutes whatever is inside to the point where it doesn’t work particularly well. Watered-down shampoo is pretty difficult to use well, in particular. It’s much better to use a small shot of gravity-collected shampoo built up from inverting the bottle. If the liquid or gel in the bottle is really thick, you can add a tiny bit of water before inverting it; just shake it really well before flipping it over.

This also works well for condiments and salad dressing. Just put the cap on well and store it in the fridge upside down. You’ll almost always get one more use out of the item before it’s truly empty.

If you have an almost-empty bottle of olive oil, make salad dressing right in the bottle.

If there’s a small amount left in a bottle of olive oil, it’s perfect for just making a salad dressing or marinade right in the bottle. Just mix in the other ingredients you need directly in the bottle, add a bit more olive oil from a new bottle if needed, then you can just shake it thoroughly in that old bottle and dispense it right from that bottle.

This not only gets almost all of the remaining oil out of the bottle, but it also saves you from having to dirty up another container for your olive oil for that meal.

If you have a bottle of honey or molasses, just run it under hot water for a while.

Just put the whole container in the sink under hot water for 15 or 30 seconds (perhaps while you’re doing something else) and the honey or molasses will suddenly be a whole lot runnier and will easily pour out of the container.

I often do this while running hot water for some other purpose, like filling up a pot for boiling or filling a sink basin for washing dishes, so the hot water isn’t wasted.

If you have a thick canned good, like tomato paste or cranberry sauce, cut the bottom off the can at the start.

This allows you to slide one of the can lids right through the can, pushing the stuff inside right out the other side and leaving almost nothing in the can.

Many cans with thick liquids in them, like tomato paste, come predesigned so that you can open both ends easily.

If you don’t need a full can of tomato paste, put the extra paste into a small container in the fridge. It’ll last a long time in there (tomato is acidic and the fridge is cool), so you can use the rest later on.

If you have expensive lotions and moisturizers in a tube, squeeze the bottom half (flat end) of the tube’s contents into the top half, cut off the bottom half of the tube, and use a cotton swab to remove the remaining contents.

Lotion tubes are pretty much the only containers I’ll bother destroying to get more material out, simply because the contents of those tubes are usually pretty expensive and there can actually be a lot of lotion in the tube when it feels “empty.”

The way that seems most effective in my trials (and many errors) is to squeeze the flat end of the tube thoroughly toward the cap, then cut off the flat end about a third of the way down the tube, and discard that flat end. The remaining tube usually has a fair amount of lotion/cream still in there, which you can remove with your fingers or a cotton swab. You can then cover that open end with a small bag or pinch the tube shut with a clip.

This seems to do a really good job of getting several more uses out of a lotion/cream/moisturizer tube.

Getting the last little bit out isn’t a big deal, but if you can do it efficiently, it spreads out your purchases a little.

If you can get another 5% of value out of a container without much additional effort or just by using a bit of creativity, that means you’re waiting just a little longer to replace that item, and over time, it builds up to a free container. Plus, you’re filling up the trash a little more slowly than before.

It’s not a big thing, obviously. Rather, it’s something very tiny you can do, and if you find lots of tiny things in your life, they add up to something surprisingly big. If you can save a quarter a month with little effort, that’s not a big deal. If you can find 50 of those things, you save $150 a year, and that’s half of a car payment.

Good luck!

The post What To Do With That Last Little Bit Left in the Container appeared first on The Simple Dollar.



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Who invented the index fund? A brief (true) history of index funds

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Pop quiz! If I asked you, “Who invented the index fund?” what would your answer be? I’ll bet most of you don’t know and don’t care. But those who do care would probably answer, “John Bogle, founder of The Vanguard Group.” And that’s what I would have answered too until a few weeks ago.

But, it turns out, this answer is false.

Yes, Bogle founded the first publicly-available index fund. And yes, Bogle is responsible for popularizing and promoting index funds as the “common sense” investment answer for the average person. For this, he deserves much praise.

But Bogle did not invent index funds. In fact, for a long time he was opposed to the very idea of them!

Recently, while writing the investing lesson for my upcoming Audible course about the basics of financial independence, I found myself deep down a rabbit hole. What started as a simple Google search to verify that Bogle was indeed the creator of index funds led me to a “secret history” of which I’d been completely unaware.

In this article, I’ve done my best to assemble the bits and pieces I discovered while tracking down the origins of index funds. I’m sure I’ve made some mistakes here. (If you spot an error or know of additional info that should be included, drop me a line.)

Here then, is a brief history of index funds.

What are index funds? An index fund is a low-cost, low-maintenance mutual fund designed to follow the price fluctuations of a stock-market index, such as the S&P 500. They’re an excellent choice for the average investor.

The Case for an Unmanaged Investment Company

In the January 1960 issue of the Financial Analysts Journal, Edward Renshaw and Paul Feldstein published an article entitled, “The Case for an Unmanaged Investment Company.”

The case for an unmanaged investment company

Here’s how the paper began:

“The problem of choice and supervision which originally created a need for investment companies has so mushroomed these institutions that today a case can be made for creating a new investment institution, what we have chosen to call an “unmanaged investment company” — in other words a company dedicated to the task of following a representative average.”

The fundamental problem facing individual investors in 1960 was that there were too many mutual-fund companies: over 250 of them. “Given so much choice,” the authors wrote, “it does not seem likely that the inexperienced investor or the person who lacks time and information to supervise his own portfolio will be any better able to choose a better than average portfolio of investment company stocks.”

Mutual funds (or “investment companies”) were created to make things easier for average people like you and me. They provided easy diversification, simplifying the entire investment process. Individual investors no longer had to build a portfolio of stocks. They could buy mutual fund shares instead, and the mutual-fund manager would take care of everything else. So convenient!

But with 250 funds to choose from in 1960, the paradox of choice was rearing its head once more. How could the average person know which fund to buy?

When this paper was published in 1960, there were approximately 250 mutual funds for investors to choose from. Today, there are nearly 10,000.

The solution suggested in this paper was an “unmanaged investment company”, one that didn’t try to beat the market but only tried to match it. “While investing in the Dow Jones Industrial average, for instance, would mean foregoing the possibility of doing better than average,” the authors wrote, “it would also mean tha the investor would be assured of never doing significantly worse.”

The paper also pointed out that an unmanaged fund would offer other benefits, including lower costs and psychological comfort.

The authors’ conclusion will sound familiar to anyone who has ever read an article or book praising the virtues of index funds.

“The evidence presented in this paper supports the view that the average investors in investment companies would be better off if a representative market average were followed. The perplexing question that must be raised is why has the unmanaged investment company not come into being?”

The Case for Mutual Fund Management

With the benefit of hindsight, we know that Renshaw and Feldstein were prescient. They were on to something. At the time, though, their idea seemed far-fetched. Rebuttals weren’t long in coming.

The May 1960 issue of the Financial Analysts Journal included a counter-point from John B. Armstrong, “the pen-name of a man who has spent many years in the security field and in the study and analysis of mutual funds.” Armstrong’s article — entitled “The Case for Mutual Fund Management” argued vehemently against the notion of unmanaged investment companies.

The case for mutual fund management

“Market averages can be a dangerous instrument for evaluating investment management results,” Armstrong wrote.

What’s more, he said, even if we were to grant the premise of the earlier paper — which he wasn’t prepared to do — “this argument appears to be fallacious on practical grounds.” The bookkeeping and logistics for maintaining an unmanaged mutual fund would be a nightmare. The costs would be high. And besides, the technology (in 1960) to run such a fund didn’t exist.

And besides, Armstrong said, “the idea of an ‘unmanaged fund’ has been tried before, and found unsuccessful.” In the early 1930s, a type of proto-index fund was popular for a short time (accounting for 80% of all mutual fund investments in 1931!) before being abandoned as “undesirable”.

“The careful and prudent Financial Analyst, moreover, realizes full well that investing is an art — not a science,” Armstrong concluded. For this reason — and many others — individual investors should be confident to buy into managed mutual funds.

So, just who was the author of this piece? Who was John B. Armstrong? His real name was John Bogle, and he was an assistant manager for Wellington Management Company. Bogle’s article was nominated for industry awards in 1960. People loved it.

The Secret History of Index Funds

Bogle may not have liked the idea of unmanaged investment companies, but other people did. A handful of visionaries saw the promise — but they couldn’t see how to put that promise into action. In his Investment News article about the secret history of index mutual funds, Stephen Mihm describes how the dream of an unmanaged fund became reality.

In 1964, mechanical engineer John Andrew McQuown took a job with Wells Fargo heading up the “Investment Decision Making Project”, an attempt to apply scientific principles to investing. (Remember: Just four years earlier, Bogle had written that “investing is an art — not a science”.) McQuown and his team — which included a slew of folks now famous in investing circles — spent years trying to puzzle out the science of investing. But they kept reaching dead ends.

After six years of work, the team’s biggest insight was this: Not a single professional portfolio manager could consistently beat the S&P 500.

Mihm writes:

As Mr. McQuown’s team hammered out ways of tracking the index without incurring heavy fees, another University of Chicago professor, Keith Shwayder, approached the team at Wells Fargo in the hopes they could create a portfolio that tracked the entire market. This wasn’t academic: Mr. Shwayder was part of the family that owned Samsonite Luggage, and he wanted to put $6 million of the company’s pension assets in a new index fund.

This was 1971. At first, the team at Wells Fargo crafted a fund that tracked all stocks traded on the New York Stock Exchange. This proved impractical — “a nightmare,” one team member later recalled — and eventually they created a fund that simply tracked the Standard & Poor’s 500. Two other institutional index funds popped up around this time: Batterymarch Financial Management; American National Bank. These other companies helped promote the idea of sampling: holding a selection of representative stocks in a particular index rather than every single stock.

Much to the surprise and dismay of skeptics, these early index funds worked. They did what they were designed to do. Big institutional investors such as Ford, Exxon, and AT&T began shifting pension money to index funds. But despite their promise, these new funds remained inaccessible to the average investor.

In the meantime, John Bogle had become even more enmeshed in the world of active fund management.

In a Forbes article about John Bogle’s epiphany, Rick Ferri writes that during the 1960s, Bogle bought into Go-Go investing, the aggressive pursuit of outsized gains. Eventually, he was promoted to CEO of Wellington Management as he led the company’s quest to make money through active trading.

The boom years soon passed, however, and the market sank into recession. Bogle lost his power and his position. He convinced Wellington Management to form a new company — The Vanguard Group — to handle day-to-day administrative tasks for the larger firm. In the beginning, Vanguard was explicitly not allowed to get into the mutual fund game.

About this time, Bogle dug deeper into unmanaged funds. He started to question his assumptions about the value of active management.

During the fifteen years since he’d argued “the case for mutual fund management”, Bogle had been an ardent, active fund manager. But in the mid-1970s, as he started Vanguard, he was analyzing mutual fund performance, and he came to the realization that “active funds underperformed the S&P 500 index on an average pre-tax margin by 1.5 percent. He also found that this shortfall was virtually identical to the costs incurred by fund investors during that period.”

This was Bogle’s a-ha moment.

Although Vanguard wasn’t allowed to manage its own mutual fund, Bogle found a loophole. He convinced the Wellington board to allow him to create an index fund, one that would be managed by an outside group of firms. On 31 December 1975, paperwork was filed with the S.E.C. to create the Vanguard First Index Investment Trust. Eight months later, on 31 August 1976, the world’s first public index fund was launched.

Bogle’s Folly

At the time, most investment professionals believed index funds were a foolish mistake. In fact, the First Index Investment Trust was derisively called “Bogle’s folly”. Nearly fifty years of history have proven otherwise. Warren Buffett – perhaps the world’s greatest investor – once said, “If a statue is ever erected to honor the person who has done the most for American investors, the hands-down choice should be Jack Bogle.”

In reality, Bogle’s folly was ignoring the idea of index funds — even arguing against the idea — for fifteen years. (In another article for Forbes, Rick Ferri interviewed Bogle about what he was thinking back then.)

Now, it’s perfectly possible that this “secret history” isn’t so secret, that it’s well-known among educated investors. Perhaps I’ve simply been blind to this info. It’s certainly true that I haven’t read any of Bogle’s books, so maybe he wrote about this and I simply missed it. But I don’t think so.

I do know this, however: On blogs and in the mass media, Bogle is usually touted as the “inventor” of index funds, and that simply isn’t true. That’s too bad. I think the facts — “Bogle opposed index funds, then became their greatest champion” — are more compelling than the apocryphal stories we keep parroting.

Note: I don’t doubt that I have some errors in this piece — and that I’ve left things out. If you have corrections, please let me know so that I can revise the article accordingly.



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