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August, 2016


Applying simple math can work wonders for one's net worth. If a person merely gets an 8% annual price gain on investments that also pay 2% overall in yearly dividends and then increases the nest egg by a further 10% each 12 months, i.e. less than $200 a week on a starting portfolio of $100,000, reinvests everything, and preserves the results via tax-deferred accounts, he or she will increase the holdings by a not too shabby 20% in the average year, enough to double one's money around every four years.

Easy arithmetic shows us as well that in 20 years that $100,000 initial portfolio would become nearly $4,000,000, in 40, well over $100,000,000. All this is without having to be a good stock picker. A single fairly low risk mutual fund will do nicely. The trick is coming up each year with that 10% of an ever ballooning principal. (Also, sooner or later one will likely have to pay Uncle Sam.) Yet, for the first several hundred thousand it might not be that hard. 10% of $250,000 would be a hefty $25,000 a year of new investing, of course, but on a weekly basis that's still only $481, often doable for a two-income family.

The pain of such new investing can be made more bearable if one has the "tithe" taken out before ever seeing the paycheck, put automatically into a 401k for instance. If at some point we have reached our limit for new investment growth, though, the results are nonetheless striking for fixed amounts of new stock fund share purchases. Say one cannot come up with more than an extra $10,000 annually for additional shares of a good mutual fund, but it averages 8% in per share price increases before a 2% dividend. Per Money Chimp's calculators, after 20 years a beginning $100,000 nest egg at those rates still becomes over $1.2 million if the money is not taken out, and after 40, almost $9.0 million.

Back to that single low risk mutual fund, if you could love only one here is a good stock vehicle that seems worthy of a recommendation, though it comes with a major hurdle: Vanguard Utility Index Fund Admiral Shares (VUIAX) has provided an annual total return since its 4/28/04 inception of 10.71%. In the same period the S&P 500 Index was up just 5.43% in the average year. At 8.60% its 10-year total return (through 7/31/16) is not as good, but this has been a difficult decade. The mutual fund also has a very low expense ratio, just 0.10%, so almost all of one's money can be working for the investor. By contrast, a brokerage or other financial firm will typically charge 1.00%-3.00% a year plus commissions for professional money management.

Low-Cost Mutual Funds with Decent Returns
FundFidelity Low-Priced
Stock Fund
Vanguard 500 Index
Fund Investor Shares
Vanguard Equity Income
Fund Investor Shares
Recent Price$50.03$202.39$32.25
Minimum Initial
Expense Ratio0.79%0.16%0.26%
10-Year Annual Return*8.28%7.62%8.15%
Total Annual Return
Since Inception
Date Fund Began12/27/898/31/764/28/04
Toll-free Number1-800-343-35481-877-527-49421-877-527-4942
(*Through 7/31/16))

Beta is a measure of how sensitive an investment is to market fluctuations. The average stock in the S&P 500 Index has a beta of 1.00, meaning it moves up or down at the market rate. If there is a crash in stocks and they fall 30%, a stock, mutual fund, or index with a beta of 1.00 will fall just that, 30%. One with a significantly lower beta will fall a lot less. VUIAX, for instance, has a beta of just 0.32. Thus, comparing the return of this mutual fund with that of the S&P 500 Index and then also the beta, we see that in the period since its inception Vanguard Utility Index Fund Admiral Shares nearly doubled the index return with only about a third of the risk.

If I were not around to help manage things, this would be a fund in which I think my wife would be wise to invest. She could arrange with Vanguard to provide her with a monthly income from the annual 3.13% dividend and need never touch the principal, so it could continue to grow in case of any large future emergency need.

A big obstacle to many younger investors taking advantage of VUIAX's virtues is that it requires an initial investment of $100,000. So, what about alternative mutual funds with some of the benefits of VUIAX yet without its big starting outlay? At the table are a few. My favorite among them is Fidelity Low-Priced Stock Fund (FLPSX). It has a good long-term record, better than that of the S&P 500, and about four-fifths the risk of that stock index.

With the market currently somewhat overpriced, one might be better off accepting a bit lower long-term return for greater safety. There are quite a number of mutual funds with better annual returns than any of the funds noted above, yet few with better risk-adjusted performance plus income than these, especially when one considers how long they have managed other people's money in comparison to most of the more sterling performers. When a bear market occurs, one wants some security. Funds that have only performed well in the past 5 years or that specialize in a particular sector and have a beta substantially higher than that of the S&P 500 will probably not then serve one so well. It is a lot easier to stick with one's boat in a storm when it is really seaworthy and stable. A flashier craft may not get him or her so securely back to dry land.


Larry is not a professional. Don't take him seriously!

Actually, the investment article provided here is for general information only and should not be considered as professional advice, a solicitation to buy or sell any security, or the Word of God. Investors are encouraged to do their own research while considering their personal goals and circumstances, or consult their own professional financial advisors, before making investment decisions. Neither Larry nor LARVALBUG will be liable for any losses sustained by any visitor to this site.

(Disclosure statement: Larry and Val have holdings in some of the suggested assets but do not "make a market" in any of them and do not derive any direct benefit from recommending them, except perhaps for a bit of smug self-satisfaction.)

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