Not long ago, I wrote an article really breaking down everything that you might want to know about the Stash app .  As I was writing the article, a lot of the benefits of Stash sounded like a popular app called Acorns, so I really wanted to break down the two different applications and do a comparison, Stash vs. Acorns.

As I mentioned, I recently wrote a really in-depth article about Stash, so I want to focus more on the Acorns app and then do a pros and cons in this article.  So, let’s go!

I first heard about the app for Acorns when I was watching an episode of Shark Tank and I thought it was a genius idea. 

Essentially what happens is that if you purchase something for $3.20, then Acorns (and Stash) can round up that purchase so it costs $4, and they put that extra $.80 into an account that you can invest in. 

I think it is truly amazing.  You are forcing people to invest that clearly want to invest (because they’ve downloaded the app) but they might not be good at sticking to a budget, so they have no money at the end of the month to invest.

Personally, I didn’t think that it would benefit myself at all, because I am the person that has a very strict budget, and at the end of the month, that leftover money will be redistributed into either savings or investment accounts, so taking out change here and there throughout the month doesn’t really benefit me, because I do that already. 

The person that this really does benefit is the person that thinks whatever is left in their bank account is how much money they have to spend.  And then they literally spend everything that’s in their account. 

So, what do people really get with Acorns, and how much does it cost?  Let’s take a look below:

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In the insurance industry, “other people’s money” is known as float. In a shareholder letter, Warren Buffett once said that that float “had cost us nothing, and in fact has made us money. Therein lies an accounting irony: Though our float is shown on our balance sheet as a liability, it has had value to Berkshire greater than an equal amount of net worth would have had.” Translation: Float is good.

Mentioned more than once in Warren Buffett’s shareholder letters, insurance float is the bread and butter of his wealth. He has used these monies to create his vast empire and allow him to invest in or buy outright great companies like Geico, American Express, Coca-Cola, Wells Fargo and recently, Apple.

What exactly is insurance float and how do we find such a thing, and what does it mean to us as investors? And why does Warren Buffett like it so much?

In today’s post, we will discuss that and much more.

What is Insurance Float?

We are all familiar by now with the terms premiums and claims, they are both the money that we pay every year for an insurance policy, and the money paid back to us when we have an accident, medical, or other circumstances.

But do you know what happens to the premiums once sent to the insurance company?

Insurers don’t pay out all the money right away. Instead, an insurance company will collect money in premiums, invest that money, and pay out claims as needed in the future.

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Chances are, you might be familiar with the term ‘Backdoor Roth IRA’, but what if I told you that there was a MEGA Backdoor Roth IRA? 

WOAH! 

Doesn’t that sound just so much better?  I’m having flashbacks to middle school where everything I described started with mega, super, enormous, or another adjective where you were about to hear a hyperbole.

But this is different!  This actually is a mega backdoor Roth IRA.

So, let’s start with some of the basics – first, what is a Roth IRA? 

Personally, I am a huge fan of a Roth IRA as you will probably be able to pick up by the end of this post.  Hell, you could even call me a ‘stan’ if you wanted to, since that’s what all of the kids say nowadays, which is essentially just a superfan, but I digress. 

A Roth IRA is a form of a retirement account where you can input post-tax dollars that will compound interest free and then you can withdrawal them at the age of 59.5 without any penalty and tax-free. 

If you want to compare some of the differences for an IRA and a 401K, you can read about that here.  A Roth IRA does have some stipulations though, like you can only input $6000/year (as of 2019) and that there is a maximum amount of earned income that a person can have to be eligible to contribute to the IRA. 

For instance, in 2019, this limit was $122,000 for an individual for full contribution, anything $122,000 – $136,999 was a partial contribution, and anything $137,000+ was ineligible to contribute. 

But – what if there still was a way that you can contribute? 

Spoiler – it’s called a backdoor Roth IRA.

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Announcer:                        00:00                     You’re tuned in to the Investing for Beginners podcast. Finally, step-by-step premium investment guidance for beginners led by Andrew Sather and Dave Ahern, to decode industry jargon, silence crippling confusion and help you overcome emotions by looking at the numbers, your path to financial freedom starts now.

Dave:                                    00:37                     All right folks, well welcome to Investing for Beginners podcast. This is episode 120 tonight Andrew and I are going to talk about about the dividend aristocrat list, and there were four new companies added in 2019, and we wanted to take a little brief overview of those four companies to kind of fill you in on some of the companies are added to that list. So for those of you who are not familiar with what a dividend aristocrat is, a dividend aristocrat is a company that has been paying a growing very key growing dividend for 25 years is listed in the s and p 500 and has met certain liquidity and market cap restrictions. And there are 57 companies I believe, that are considered dividend aristocrats right now. And there are also dividend kings, but where those are 50 years or more. But tonight we’re going to talk about dividend aristocrats. These are the more popular ones, and these include companies like Disney, Hormel, things of that nature.

Dave:                                    01:36                     So these are great companies that have been paying a dividend and growing dividend for 25 years. And these are some companies that could be fantastic investments for you if you know when to get into them and what to look for in the companies. Now keep in mind, these are, some of these companies are not always going to be great investments. They could be overvalued at a particular time. So they may not be the right thing for you to invest in, but they certainly would be worthy of putting on a waitlist or a watch list to keep your eye on in case the market takes a downturn, and you would have an opportunity to buy into some of these when they would be cheaper for you. So without any further ado, why don’t we go ahead and chat. Andrew, why don’t you talk about one of the first companies?

Andrew:                              02:21                     Yeah. So what, so first of all, what I find interesting about like the dividend aristocrats lists in general, you mentioned there’s 57 of them. So if we do some quick back of the Napkin math on that, there’s what, 500 companies in the s and p 500 now? I don’t know if all of the dividend aristocrats. Oh, they are. Okay. So first off, dividend, the rest of [inaudible]. That term itself is kind of, and there’s no like official thing behind it. It’s just something that kind of got popular. Secondly, I believe that the definition based on what my sources here say they are s and p 500 companies. So if you kind of think about that, that math 50 out of 500 we’re talking about 10% of the s and p 500 give or take is a dividend aristocrat. So I find that to be very inspiring because it kind of shows that it’s not this mythical creature.

Andrew:                              03:18                     It’s not like a year Unicorn. The these are though it’s not every company like Dave said, and though, you know, some of this, yeah, we’re looking at it with hindsight, and so it might’ve been better to buy these earlier than later. The fact that such a large portion of it, relatively of stocks we’re able to do this I think is very, very encouraging. I think it’s very reasonable to think that as an investor and the average investor who, who’s looking at stocks, that you could have a couple of these in your portfolio. You could maybe pick one that continues to be on that list 10, 20, 30 years from now and pick stocks that haven’t made it yet. But we’ll make it Disney is one of those or they; they’re, they’re not on the list, just so we’re clear. But a Hormel Coca-Cola, Proctor, and Gamble, the kind of stocks we do talk about all the time, those are on the list and have crane of fantastic rewards for shareholders.

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Coming into this post, I generally viewed all of the total Market ETF funds as one in the same.  While they are similar, when I was digging in further, the Vanguard Total Stock Market ETF (VTI) really stuck out to me, especially the VTI dividend history.

One thing that I do, for better or for worse, is that I am ALWAYS trying to optimize my life – and I mean that quite literally in every single aspect. 

Whether it’s my investing, saving, planning my errands, spacing out chores around the house, planning work travel, or anything else you can even imagine – I want to do it in the most efficient way possible. 

Does this mean that sometimes I will voluntarily take myself down a rabbit hole to nothingness?  YUP! 

But it also means that sometimes I will find things that really help improve the quality of my life. 

Lucky for you, you get the pleasure (and I mean that in all some sincerity 😉) of reading about my rabbit hole to find the most effective total stock market ETF…but, there actually is a little carrot at the end of this rabbit hole!

So, total stock market ETFs – what are they?

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Being able to attribute the sources of portfolio return is an important aspect in the decision making process surrounding portfolio management. The process of return attribution revolves around comparing portfolio performance to that of a specific benchmark and dissecting which aspects of the portfolio’s many allocation decisions improved or hampered returns.

This lesson will discuss the theory and important uses of return attribution as well as the technical formulas used to attribute portfolio return.

What Return Attribution Can Be Used For?

For institutional investors, such as pension plans and investment funds, the return attribution process can be used for everything from selecting and choosing to retain which 3^rd party fund managers, to compensating and retaining internal management.

When making such decisions, it is important that fund managers should only be held accountable for the allocation decisions that are under their control. Managers need to be judged based on portfolio performance against their specific benchmark and the allocation decisions that were responsible for that performance.

For the retail investor, the amount of data needed to properly attribute portfolio return is daunting (especially in terms of micro attribution as will be discussed later).

Nevertheless, the knowledge about what return attribution is and how to calculate it can still help retail investors in their decision making process for their own portfolio in a general estimation sense. Understanding performance attribution can also help retail investors in their decision making process for selecting 3^rd party investment funds and asset managers to manage their money.

The Importance of an Appropriate Benchmark

When thinking about return attribution, the benchmark to which the portfolio’s performance is being compared to is of utmost importance.

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A listener to the IFB podcast recently was asking for some advice on investing inheritance money and some good tips and things to think about.

Andrew and Dave shared their thoughts on the show, which you can also listen to below. Having listened to the episode, and being a young investor myself, I have some thoughts to add as well.

Let’s take a look at the big picture…

In general, you’re going to want to make sure that you’re investing inheritance money in a diversified manner. 

What do I mean by that? 

Well, you’re going to spread your investment among 15-20 different stocks that are all types of different industries, sizes, sectors, etc., which is going to help limit your risk of investing and will make investing as safe as possible. 

It’s important to note that if you get above 30 stocks your returns will start to mimic the stock market, so it diminishes the value of picking stocks over simply investing in an ETF.  Not to mention that a lot of ETFs can be commission free depending on your brokerage firm.

So – 20 stocks – seems easy, right?  Doubt it.

Chances are, you’re not going to be able to find 15-20 undervalued stocks in a month to invest in. 

But even if you do, I wouldn’t recommend dropping all of your money into those stocks all that one time. 

If you just throw all of your cash in at the same time, your risk is going to be inherently higher than if you would dollar-cost average over the course of some time to help minimize your risk of the stock immediately dropping and you drastically losing a lot of your investment.

So, what should I actually do then?

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Similar, but in the complete opposite of my most recent blog about Phillip Fisher’s 15 Points to Look for in a Common Stock, Fisher also outlines a list of 10 “do nots” when it comes to an investor’s checklist between Chapters 8 & 9 in his extremely popular book, Common Stocks and Uncommon Profits. 

I’ve gone through the two chapters and highlighted the key takeaways below.  I highly encourage you that when you read this, try to apply it to your personal life and think about if you have ever done, or currently do, any of these things and try to reflect on how you can get out of these bad habits.

1 – Don’t Buy into Promotional Companies

If I was to say to describe a company as “no profit, growing sales, unproven track record, promising future”, would you know what company I was talking about? 

Odds are, we can all think of at least one, if not many, of these so-called promotional companies that are all speculation and really haven’t proven anything at this point. 

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Announcer:                        00:00                     You’re tuned in to the Investing for Beginners podcast. Finally, step by step premium investment guidance for beginners led by Andrew Sather and Dave Ahern to decode industry jargon, silence crippling confusion and help you overcome emotions by looking at the numbers, your path to financial freedom starts now.

Dave:                                    00:36                     All right folks, we’ll welcome to the Investing for Beginners podcast. This is episode 119, tonight, Andrew and I are going to talk a little bit about the companies that have helped Warren Buffet grow all of his wealth the most. And what we’re going to focus on today is, you guessed it, insurance companies who, who exciting. Fun. It is interesting, and it is fun. I promise you Andrew, and I always bring the fun. So this will be interesting, and we’ll come at this from a beginner’s aspects. So we’ll talk a little bit about what an insurance company is, what they do, how they make money. Maybe a little bit of accounting, not too much cause I don’t want to put you to sleep. And then we’ll also talk a little bit about some valuation metrics. So we’ll go ahead and start a little bit. Andrew, did you want to say hi?

Andrew:                              01:24                     I did want to say hi. I think this is a very interesting topic to me because, do you think about Warren Buffet, what makes him so great? He’s, he’s a cool people person, he’s probably a great manager, all of those things. But his biggest strength is his ability to allocate capital. And so in a lot of different businesses, you have CEOs who have to make those type of decisions with their capital. You know, we’ve talked about that before. It’s like, do I want to pay out a dividend? Do I want to buy back shares? I want to reinvest in the business in Buffett’s case. And the way that they structured Berkshire, they buy these businesses and then have the business buffets. So Buffett will buy like Geico. So I think we’ll talk about that a little bit. They’re an insurance company.

Andrew:                              02:17                     And so basically what Buffet and Munger do is they buy these businesses with good management, and they say, you guys take care of the business. You guys do what you do best, and then all you do is you give us the cash. And as, as the capital allocators of Berkshire Hathaway, they’re going to take the profits from each business that they own and then it’s their responsibility to invest that. And so obviously we see Buffett’s track record. We see how great he was at doing that. Buying stocks like coca-cola buying stocks, as you know, I’m blanking. Great, I’m blanking. But you know, See’s Candies and all these other businesses that they bought outright. And a lot of that was made possible because Berkshire is an insurance company. And so they have, the way an insurance company is structured, you have more capital available to allocate.

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