My results from the third month of my Passive Versus Active Portfolio Experiment have been in for a while, but I’m just now getting around to publishing them.  They are as follows:

Month 3 Results

Passive: I had one transactions this month; a dividend reinvestment. My passive portfolio increased by a total of 6.20%. This gain includes the commission that would have been charged had I liquidated my position at the end of the month.  My dividend reinvestment is not subject to a commission.

Active: I had three transactions this month; 1 purchase, 1 dividend, and 1 sale. My active portfolio increased by a total of 0.88%. This gain includes commissions.

Benchmark: During the same time period, the S&P 500 increased by 3.62%.  For the second time, one of my investment portfolios (active) failed to beat the benchmark for the month.  My passive portfolio significantly outperformed the benchmark this past month.

Overall Results to Date

After three months, my passive investments have grown their lead

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My results from the second month of my Passive Versus Active Portfolio Experiment are now in.  They are as follows:

Month 2 Results

Passive: I had one transactions this month; a dividend reinvestment. My passive portfolio increased by a total of 10.32%. This gain includes the commission that would have been charged had I liquidated my position at the end of the month.  My dividend reinvestment is not subject to a commission.

Active: I had five transactions this month; 3 purchases and 2 sales. My active portfolio increased by a total of 1.91%. This gain includes commissions, including the one I would have been charged had I liquidated my third position at the end of the month.

Benchmark: During the same time period, the S&P 500 increased by 1.97%.  For the first time, one of my investment portfolios (active) failed to beat the benchmark for the month.  My passive portfolio significantly outperformed the benchmark this past month.

Overall Results to Date

After two months, my passive investments have taken the lead in profitability.  Both my passive and active investments have beaten the benchmark return of the S&P 500.

Passive Return to Date:  21.56%

Active Return to Date:   13.99%

Benchmark Return to Date:  10.69%

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Traditionally, investment clubs were used as a way to learn about the seemingly complex and complicated world of investing.  Though the internet and other educational resources have grown to fill this role, you may still find considerable value in joining an investment club.

Investment clubs are groups that meet regularly to discuss investment opportunities.  Members contribute money to the club so that investments can be made.  At each meeting, members may report on a company, review an investment book, host a guest speaker, or simply discuss different strategies.  In the beginning, basic investment concepts may be covered as well.  Particularly in the early stages, many investment clubs focus on member education.  For more information on investment clubs and general investing events in your area, visit the National Association of Investors Corp. (NAIC).

Investment clubs do much more than simply improve your financial literacy.  They allow you to

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Look to nearly any personal finance blog or advice column and you’re likely to hear similar advice regarding investments.  It generally goes something like this: “Very few investors (and probably zero novices) can successfully time the market to get better returns.”  I myself have made the statement many times.  The concluding advice is to invest passively in low cost index funds and be satisfied to match the market, since the probable alternative of active investing is to under-perform the market.

Though I genuinely believe this prevailing wisdom, I wanted to ensure that it’s the case not for the average investor, but for me as an investor.  I’m not suggesting that I’m better or worse than average, but my performance is really the only one that matters to me and yours should be the only one that matters to you.

Setting Up The Experiment

I created and funded a new brokerage account for the sole purpose of comparing the two investment methods.  I intended to use half of my money passively and the other half actively.

Background Info

My passive investment would be a

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For anyone who missed the announcement on their blog, Lending Club is hosting a free 30-minute online webinar this Thursday, June 11th.

The webinar is designed to show you

“How to Put Your Cash to Work with Lending Club. We’ll provide an overview of how Lending Club eliminates the high cost and complexity of traditional banks and offers investors the opportunity for returns that average over 9% annually.”

Space is Limited so register now

Date and Time:  Thursday, June 11, 2009   Noon PT/3:00pm ET

Location: Online

It seems as though many in the personal finance blogging community enjoying playing disc golf, and I am no exception.  I am blessed to live in one of the greatest small cities in the country for disc golfers, with many beautiful, free, and challenging courses.  In fact, the disc golf courses here helped my wife to sell me on the idea of relocating.

As I was playing last week, it crossed my mind that many of the lessons I’ve learned playing disc golf are highly applicable to personal finance.  Here are some that come to mind:

Until It’s in the Basket, The Hole Isn’t Done

It’s easy to lose focus on short putts, because they seem so easy.  What happens as a result?  Some easy birdies become pars and some sure pars become bogies.

Finance Implications: You can’t half-heartedly track your finances and assume everything will be OK, stop managing your investment as retirement nears, or count your profits before you sell a stock.  Losing focus before any of these tasks is fully complete could allow things to quickly get out of control.  In that sense, as the end of an effort approaches, we should focus on it even more intensely.

When Conditions Change, So Too Must Your Approach

I’ve played the same hole a hundred different ways based on the time of year, wind, how I’m feeling that day, or simply due to the fact that my capabilities change as I age.  A hole in one is so hard to repeat because even if we do everything the same internally, external forces are at work.  Understanding those factors, and modifying your approach, is essential to finding continued success.

Finance Implications: Managing your money in a bubble doesn’t make sense either.  You may choose to increase your emergency fund as unemployment rates fluctuate , invest more when market conditions are favorable, prepay your mortgage when alternative investments are less favorable, or reallocate your portfolio as you age.  There may be times when you cut your budget to the bone and others when a little luxury spending will be allowed in.  Learning to see that conditions have changed, and adapting your strategy for the new reality, will help to keep your finances on track.

Don’t use a Hydra on water holes

The Hydra is one of the few discs with the apparently desirable ability to float.  This makes it the perfect disc for holes with large water hazards, right?  Wrong!  Using a disc that floats

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This week’s book review is Right on the Money by Pat Robertson.

The first thing many readers would probably want to know about Right on the Money is the amount of spiritual influence found in its pages.  Author Pat Robertson gained fame as a televangelist, founding the Christian Broadcasting Network and hosting The 700 Club.  Right on the Money is not at all preachy.  While Robertson’s beliefs are certainly evident within the book (particularly in the introduction and the chapter on families), the book reads much more like it was written by a true financial expert with strong spiritual beliefs rather than a preacher who also knows something about finances.  Robertson balances his actions (”In my financial planning, giving takes precedence”) with the caveat that you may have different priorities and should tweak his generalized advice to your particular situation.  In one part, he specifically states that an implementation strategy is intentionally omitted, since you’ll need to tailor that to your situation.

The book starts with a concise summary of how the financial crisis occurred. So few people realize the chain of events that led to our current economic state that many would be well serve to read the book just for this point. I liked this book right from the start.  To paraphrase an early excerpt: “Ignorance is no excuse….nor has it served finances well.”  I couldn’t agree more.

Robertson advocates using the

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With all of the many dates surrounding dividend payments, it can get a little confusing.  Here’s the full rundown.

When a company declares a dividend on their stock, they are agreeing to pay a set amount of money to each shareholder.  They set a specific date to use to determine who their shareholders are.  That eliminates the confusion of who is entitled to the dividend for shares that are bought and sold between the announcement and the payout.  So you might expect three dates to be given: the announcement date, the payout date, and the date used for determining shareholders.  Since stock transactions take three business days to settle, a fourth date is also given. Here’s what each of the dates mean:

Declaration Date - This is the date the dividend is declared, usually announced in a press release.

Ex-Dividend Date - The date on which purchasing the security no longer includes it’s dividend.  Buying on or after this date will cause the transaction to settle after shareholders are determined, so you’ll miss out on the announced dividend.

Record Date - The date shareholders are determined. Purchases must be settled by this date to be eligible for dividend payouts.

Payable Date - The date the dividend is actually paid.

Since settlement takes three business days, the ex-dividend date is typically

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Buy and Hold is Dead.  So reads the headline across blogs, discussion boards, and print media.  Before you send your condolences, let’s take a closer look at the rationalization driving the obituary and whether or not it warrants acceptance.

First, we have to remember that Buy and Hold means different things to different people.  For some, it means buying a stock you like and never selling it.  For others it means buy and homework (a Cramerism) meaning buy a stock you like and hold it until the reasons you liked it have changed.  Still others concede that since they can’t beat the market, they’ll buy low cost index funds to match the market for as long as they hold them.

With market indexes hovering around 10 year lows, I suspect that many people who say that Buy and Hold is dead mean that this last definition of Buy and Hold is dead.  Of course, using that definition, Buy and Hold can never be dead because even with the terrible performance of late, index investors still achieved their goal of matching the market.  Even so, let’s look a little more closely.

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Even with the gains in the stock market over the past week or two, we are still down considerably from the October 2007 peak and basically flat for many companies over the past decade plus.  This, coupled with the sagging economy and irrational pessimism towards the stock market, has caused some to claim that buy and hold is dead as an investment strategy.  I want to remind everyone of a common flaw in comparing recent performance to historical returns.

As John Bogle reminded us late last year, roughly half of the commonly touted 10% historical return of the stock market is comprised of dividend income.  You might look back on the last 10 years and say that we’re under-performing historical returns by 10% per annum, but when dividends are considered we’re not nearly that bad.

Consider the case of General Electric, a favorite among large-cap dividend investors.  GE has recently been trading around $10 a share.  It last traded around a split-adjusted price of $10 in September of 1995.  So you might conclude that an investment in GE for the last 13.5 years earned you a big fat 0% per annum.  Considering dividends changes that conclusion entirely.  Each share you bought for $10 in September of 1995 would have paid you

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