I finally caved and added an Oblivious Investor Facebook page.

The truth is, I put off doing this for years because I’m not entirely comfortable with the whole Facebook concept. I created an account back in 2005 or so, but I rarely use it, I have very little information in my profile, and I have the privacy settings as tight as I know how to make them. I’m just not thrilled about the idea of having my personal information online.

I understand that this likely sounds strange coming from somebody who writes online for a living. For clarification, when it comes to sharing information online, I’m more comfortable discussing my income, our net worth, and what’s in our portfolio than publishing pictures of what I did last Friday night. (Not that it’s anything particularly embarrassing. We went to the climbing gym, then got Indian takeout. But you get the idea.)

In any event, some readers have asked for a way to show their support for the blog by sharing it with friends. And I certainly do appreciate it when you folks share the blog with people you care about. If that’s something you’d like to do, you can visit the Facebook page and click the “like” button.

Investing Articles

• Harvesting Gains from a TIPS Ladder from Wade Pfau
• When Will Your Index Fund Buy Facebook Stock? from The Finance Buff
• New 401(k) Fee Disclosure Rules from Matthew Amster-Burton
• How to Hedge Your Portfolio Against Inflation from Amateur Asset Allocator
• Are Stocks Set to Plummet This Summer? from Allan Roth
• The Reason Behind the Market’s Rise from Larry Swedroe
• Chasing Yield May Be Tempting, But the Hazards Are Real from Vanguard

Other Money-Related Articles

• I was interviewed about investing and blogging by Credit Card Assist this week
• Missing Tax Paperwork? from Five Cent Nickel
• What Happens if Your Insurance Company Fails? from Steve Vernon
• 3 Tax Deductions You Can Never Take from Wise Bread
• Basic Financial Frameworks from Get Rich Slowly
• 75 Ways to Make Money on the Side from Dough Roller

Thanks for reading!

Retiring Soon? Pick Up a Copy of My Book:

Treasury Circular 230 Notice: Any U.S. tax advice on this blog is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing, or recommending to another party any transaction or matter addressed on this blog.

Aside from the usual tax and investing-related questions, the most common thing readers ask me about is self-publishing — how to do it, how to get a book on Amazon, which printing company to use, how to market books, etc.

What follows are the answer to the questions I’m asked most often. If you have any questions left unanswered, feel free to ask.

Quick note #1: For those of you with no interest in self-publishing, don’t worry. I have no intention of writing about this on a regular basis. In fact, I don’t anticipate writing about it again at any point. Rather, my intention is simply to update this post as things change and as people ask additional questions.

Quick note #2: This article is written for writers whose goal is to publish a book as an entrepreneurial endeavor. If your goal is simply to publish a book, and you have no goal of any financial reward, you can read the first FAQ below and ignore everything else.

Print Publishing

Which printing company do you use?

CreateSpace. Their costs are low, and they’re very easy to use.

For a couple reasons, I also have printing set up with a second company (Lightning Source). But for somebody just getting started, I’d suggest sticking with CreateSpace alone. If that goes well, it may make sense to add another printing company a few months down the line.

What do you have to do to get a book selling on Amazon?

If you’re using CreateSpace, it’s easy:

1. Create an account (takes 5 minutes),
2. Send them a pdf of the cover and a pdf of the interior,
3. Order a proof copy and check it over,
4. Submit necessary revisions,
5. Repeat steps 3 and 4 as necessary, then
6. Approve the proof.

After you’ve approved your proof copy and checked the box for distribution via Amazon, it will automatically be available for sale within a couple days.

How much money do you make from a book sale?

With CreateSpace your margin per book will be calculated as follows:
60% of the book’s list price (which you set)
-$0.85
-$0.012 per page

So, for example, for a book with 150 pages and a $15 list price, you’d receive:
$9.00 (60% of $15)
-$0.85
-$1.80 (150 pages x $0.012 per page)
$6.35 profit margin per book

By also using Lightning Source, you can substantially increase your profit margin for sales on Amazon. The reason this works is rather complicated though. For a full explanation, see this blog post by self-publishing expert Aaron Shepard.

How much money can I make by self-publishing a book?

There’s no way to know ahead of time how much a given book will make. I’m happy to share my own figures though, because I know it’s helpful to at least have some idea. For 2011, my worst-selling book generated less than $3,000 in revenue. The best-selling resulted in a little over $23,000. The other books were somewhere in between.

From what I’ve heard from other nonfiction self-publishers, that range is fairly typical, subject to the following caveats:

Caveat #1: If you make a book about a topic that very few people have an existing interest in, or if you don’t bother putting in the time to market your book, your sales will probably be much lower.

Caveat #2: These figures include both a print edition and a Kindle edition for each book. As of the end of 2011, Kindle sales were responsible for approximately 30% of my monthly sales revenue. (This figure grew quickly over the first half of 2011, but it seems to have leveled off in the last few months.)

Caveat #3: As mentioned above, I use two printing companies in order to maximize my margin per book. If I were only using CreateSpace for the print books, my total revenue numbers would be about 30% lower.

How much does it cost to get started?

With CreateSpace, the cost is negligible. Setting up a book is free. Each proof copy costs about $20 including shipping. That’s it.

If you want to sign up with Lightning Source, there are more upfront costs involved. Plan on spending a few hundred dollars to get the book into distribution.

You may also want to buy an ISBN for the book rather than using one from your printing company. This will allow you to choose your own publisher name. (Otherwise, the printing company will appear as the publisher.) In the U.S., one ISBN costs $125. A block of ten costs $250.

That’s it as far as costs for the actual printing. However, I’d definitely encourage you to budget for professional editing help as well.

Why sell a book on Amazon rather than direct-selling ebooks to visitors?

The primary reason is that you get to take advantage of Amazon’s millions of visitors. This allows you to be successful with less of your own traffic, and without having to get other bloggers to promote your book.

Also, once the Amazon marketing engine starts promoting your book, it generally continues to do so. (My understanding is that with the direct-sales model, sales tend to decline dramatically after the first couple months of promotional effort.)

Finally, there’s no need to handle any sort of customer interaction at all. It’s truly passive income once the book is selling.

That said, those are just the advantages. There are disadvantages too. For example, you’re unlikely to get away with charging $30+ for a book on Amazon. In addition, you’re not in control of what people say. If people don’t like your book, you’ll end up with negative reviews on the book’s sales page.

Do you have to keep a lot of inventory on hand? Is it a hassle to mail books out all the time?

No, and no. You don’t have to do anything involving inventory or shipping. Amazon and the printing company handle all of it.

Kindle Publishing

How do you make a Kindle book?

For the most part, a Kindle book is just plain old HTML: <b> tags for bold, <i> tags for italics, etc.

That said, rather than create the Kindle files yourself, it likely makes sense to outsource the conversion process. Because conversion from a Word document to an HTML document is a commodity-esque task, you can get it pretty cheap. (I was able to find somebody on Elance who did it for $70 per book.)

If you want to do it yourself, I’d recommend Derek Canyon’s book, How to Format Your eBook for Kindle in One Hour.

How much do you make per Kindle book sale?

If you set the list price for your Kindle book between $2.99 and $9.99, your margin per book will be 70% of the list price, minus a “delivery fee” for the cost of transmitting the data. This fee is quite small. ($0.05 is typical for my books.)

If you set the list price for your Kindle book below $2.99 or above $9.99, your margin per book will be 35% of the list price, minus the data delivery fee.

Book Marketing

What’s your most important marketing tip?

Make a book that satisfies a need that people already know they have. Consider a few of my book titles as examples:

• Can I Retire? How Much Money You Need to Retire and How to Manage Your Retirement Savings, Explained in 100 Pages or Less
• Independent Contractor, Sole Proprietor, and LLC Taxes Explained in 100 Pages or Less
• LLC vs. S-Corp vs. C-Corp Explained in 100 Pages or Less
• Oblivious Investing: Building Wealth by Ignoring the Noise.

The first three books sell very nicely. The fourth book hardly sells at all. The first three titles all address specific questions that some people have. The last book doesn’t do that. In fact, for most potential buyers, it’s not even obvious what the book is about. (Whoops!)

My most successful approach for book creation and marketing has been to:

1. Find a specific question that people are asking. (Even better: Check your blog’s analytics to see what questions you’re already getting traffic for.)
2. Answer that question as a chapter in a book.
3. Answer several related questions as your other chapters. (Bonus points if you’re already getting traffic for these questions too.)

How do you promote your books on your site?

For me, by far the most successful spot for book promotion has been right at the bottom of each post. I simply have a paragraph that says, “for more information about [topic of book], consider picking up a copy of my book: [title].” Then it has an image of the book cover and several links to the sales page on Amazon. (See the bottom of this post for an example.)

I also use a widget that promotes my most-related book in the sidebar of every post. But it gets a much lower conversion rate than the end-of-post promo.

How do you get book reviews?

It depends which type of review you’re talking about.

Surprisingly, in my experience, reviews from bloggers are only of minor importance. It would be typical for a very positive review to sell just a few copies of your book.

Conversely, positive customer reviews on Amazon are tremendously helpful. My most successful method of getting customer reviews has been to include a prominent section at the front of the book requesting feedback from readers. When you get compliments, thank the person, and ask if they’d be so kind as to copy/paste the compliment into a review on Amazon. (Though admittedly, I’ve gotten lazy with this recently.)

Again, if you have other questions, please feel free to ask.

Retiring Soon? Pick Up a Copy of My Book:

Treasury Circular 230 Notice: Any U.S. tax advice on this blog is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing, or recommending to another party any transaction or matter addressed on this blog.

Natalie writes in to ask,

“In your book Can I Retire you wrote about single premium immediate annuities being useful as a way to increase the amount a retiree can spend each year relative to a portfolio without annuities. But with the way annuity rates have declined over the last year, has that advice changed at all? Do annuities still make sense?”

It’s true that lifetime annuities have lower payouts than they did when I wrote the book. But the yields on other low-risk investments have declined as well.

So, overall, the same basic analysis still applies: Lifetime inflation-adjusted annuities allow you to safely spend more money than a diversified stock/bond portfolio does.

In fact, because of the way lifetime annuities work (that is, with annuitants who live beyond their life expectancy getting to spend the money of those who don’t make it to their life expectancy), they should always allow you to safely spend more money than a non-annuitized portfolio — regardless of current interest rates.

Some people might bring up the “4% rule” here, arguing that historically a 4% withdrawal rate has been mostly safe from a non-annuitized portfolio, whereas, depending on your age and gender, lifetime inflation-adjusted annuities aren’t even paying that much. (For example, according to Vanguard’s quote system, a 60-year-old female would only get 3.9% from a single premium immediate inflation-adjusted lifetime annuity today.)

But the problem with that argument is that when interest rates are well below their historical norms, a withdrawal rate based on historical returns isn’t exactly a safe bet. Said differently, it’s true that depending on your age and gender, a lifetime inflation-adjusted annuity may not even pay out 4% right now, but the flip side is that, with today’s low bond yields, a 4% inflation-adjusted withdrawal rate strategy from a non-annuitized portfolio is currently looking more dangerous than it has in the past.

Should You Delay Purchasing an Annuity?

And, for those who think an annuity does make sense for part of their portfolio, the same general analysis I provided for when to buy a lifetime annuity still applies. That is, the answer still depends on:

1. The rate of return you think you can get from safe non-annuity investments while you delay your annuity purchase, and
2. What direction you think interest rates will move while you delay your annuity purchase.

The more quickly and the more dramatically you expect interest rates to rise, the more sense it makes to delay purchasing an annuity. (In other words, if you expect rates to rise sharply in the near future, locking in currently-low rates for the rest of your life is probably not a great idea.)

Personally, I have no predictions as to how rates will change over any particular period of time.

Retiring Soon? Pick Up a Copy of My Book:

Treasury Circular 230 Notice: Any U.S. tax advice on this blog is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing, or recommending to another party any transaction or matter addressed on this blog.

It’s no secret that I think individual stocks have no place in most investors’ portfolios. I think most investors are far better served by a simple portfolio of low-cost index funds or ETFs.

That’s why I was intrigued to hear from Kathy Kristof (Contributing Editor at Kiplinger’s Personal Finance, a self-described “moderately lethargic investor,” and somebody who is perfectly well informed about the benefits of index funds) about an experiment she’s trying with her own money. She’s taking $200,000 of her own retirement portfolio, putting part of it into Vanguard’s Total Stock Market ETF and the rest into a portfolio of individual stocks that she’s put together.

She’s reporting her results in an ongoing column: Our Practical Investor’s Portfolio.

I wish her a successful combination of luck and/or skill.

Investing Articles

• Rethinking CDs from Matthew Amster-Burton
• The Silliness of the Dow Jones Industrial Average from Allan Roth
• Why Facebook’s IPO Shouldn’t Excite You from Larry Swedroe
• Will the IRS Disallow Backdoor Roth Contributions? from Five Cent Nickel
• Recharacterizing a Backdoor Roth from The Finance Buff
• Will Actively Managed Funds Ever Go Away? from Canadian Finance Blog

Other Money-Related Articles

• Registration is Now Open for Financial Blogger Conference 2012
• How and Why I Sold Get Rich Slowly from Get Rich Slowly
• Private Equity and “Job Creation” from The Baseline Scenario
• 16 Part-Time Jobs with Benefits from PT Money
• Do Single People Need Life Insurance? from Amateur Asset Allocator
• The 6-Figure Mistake on My 1099 from Len Penzo

Thanks for reading!

Retiring Soon? Pick Up a Copy of My Book:

Treasury Circular 230 Notice: Any U.S. tax advice on this blog is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing, or recommending to another party any transaction or matter addressed on this blog.

A reader writes in, asking:

“Because of our income level and because my wife and I both have qualified plans at work, we can neither contribute to Roth IRAs, nor make deductible contributions to traditional IRAs. But for years we have been following what I’ve always seen as the accepted wisdom of making maximum contributions to our IRAs anyway, in order to get the value of tax deferral on the growth and earnings within the IRA.

But I’m now questioning whether we’ve been doing the right thing. When we take distributions, the growth on our nondeductible IRA will be taxed as ordinary income (at rates that will likely be 25% or more given the magnitude of our distributions at retirement age), whereas the capital gains and dividends on the assets we purchase would be taxed at only a 15% rate if we kept them in a taxable account instead.”

Is the “Back Door Roth” an Option?

First, I think it would be a good idea to back up a step and ask if the “back door Roth” strategy is a good option here. In brief, under that approach, you make a nondeductible IRA contribution, then do a Roth conversion.

If you don’t have any IRAs that include deductible contributions or earnings, the conversion would be nontaxable — essentially allowing you to make a Roth contribution even though you’re over the income limit. If, however, you do have IRAs that include deductible contributions or earnings, the conversion will be at least partially taxable, thereby making the strategy less appealing.

Nondeductible IRA or Taxable Account

If the back door Roth is not suitable, I think the question of whether to use a nondeductible IRA or a taxable account depends largely on what will be held in the account. If the account will hold tax-efficient stock index funds or ETFs, then I think I would usually opt for a taxable account for the reasons you mentioned (i.e., the advantageous tax rates on long-term capital gains and qualified dividends as compared to ordinary income tax rates).

But if the account will hold something less tax-efficient (REITs or taxable bonds, for instance), then I think a nondeductible IRA can make a lot of sense.

From what I’ve seen though, for most investors, there’s enough space in other tax-advantaged accounts (employer-sponsored retirement plans, rolled over IRAs, etc.) to tax-shelter all of tax-inefficient asset classes — thereby making it possible to arrange the portfolio so that the only thing that would have to go into a taxable account would be something that’s already tax-efficient.

Retiring Soon? Pick Up a Copy of My Book:

Treasury Circular 230 Notice: Any U.S. tax advice on this blog is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing, or recommending to another party any transaction or matter addressed on this blog.

I’ve written several times about how much I enjoy the Bogleheads forum. While there’s a wide variety of investing-related discussion there, my favorite posts are the simple nuts and bolts ones in which an investor outlines his/her portfolio and other forum members give feedback.

I think it’s fun to see a jumbled mess of a portfolio get cleaned up into something that’s more diversified, lower-cost, and easier to manage. That’s why, when I’m checking out a portfolio, there are three questions I seek to answer:

1. Is the overall asset allocation appropriate?
2. Are there any opportunities to cut costs (including taxes)?
3. Are there any opportunities to simplify?

When answering these three questions, it’s important to remember is that it’s all one portfolio. By implementing your desired asset allocation at the portfolio level (as opposed to in each individual account), you often create opportunities for cost savings and simplification.

Checking the Asset Allocation

As we’ve discussed before, asset allocation is not a precise sort of thing (nor, for that matter, is the concept of risk tolerance, on which an investor’s allocation should be based). As a result, for a given investor, there are countless possible allocations that could be acceptable.

So, for the most part, this step is just a quick check to make sure that there’s nothing that’s clearly wrong (such as a very large allocation to one individual stock or an extremely stock-heavy allocation when the investor has provided no information that would indicate that he/she has a super-high risk tolerance).

Cutting Costs: Start with the 401(k)

When searching for cost saving opportunities, the first place to look is your 401(k). The reason to start here is that all your other accounts (that is, IRAs and regular brokerage accounts) can be held at your brokerage firm of choice, thereby giving you access to low-cost investments in each asset class in these accounts, whereas you don’t always have great options in a 401(k).

So we start with the lowest-cost fund in the 401(k) and allocate as much as possible to that fund without messing up the desired overall allocation. For example, if:

• an investor’s 401(k) makes up 25% of her portfolio,
• the lowest-cost fund in the plan is a diversified U.S. stock fund, and
• her desired asset allocation necessitates holding 30% of her portfolio in U.S. stocks,

…then we’d allocate the entire 401(k) to that U.S. stock fund, and then use the other accounts to fill in the other necessary portions of the desired allocation.

In contrast, if we change the above example so that the investor’s 401(k) made up 40% of her total portfolio, then we would no longer want to allocate the entire 401(k) to the U.S. stock fund (because she only wants 30% of her portfolio in U.S. stocks). Instead, we’d allocate 3/4 of the 401(k) — or 30% of her total portfolio — to that fund in order to achieve her desired U.S. stock allocation. Then we would look for the next-lowest-cost fund in the plan and proceed from there.

Cost Savings: Tax-Efficiency

After doing everything possible to use low-cost investment choices, the next way to look for savings is to try to make things as tax-efficient as possible. The overall goal is to tax-shelter your least tax-efficient assets (REITs, high-yield bonds, and other taxable bonds) by putting them in your tax-sheltered accounts (IRA, 401(k), etc.) before tax-sheltering your more tax-efficient assets.

For most index fund or ETF portfolios, the most tax-efficient asset class is international stocks, so if you only need to leave one asset class in a taxable account, that’s likely to be your best bet.

Simplifying

With regard to simplification, the first and most obvious step is to minimize the number of accounts involved — combining all your non-401(k) accounts at one brokerage firm. (Personally, I like Vanguard. But they’re not the only good choice.)

The next step is to work to reduce the number of funds involved. In many cases this means using just 1 or 2 funds in each account, with the exception of one account (often the biggest one) in which you would hold each asset class and in which the necessary rebalancing would take place to keep the entire portfolio in line with the desired allocation.

Retiring Soon? Pick Up a Copy of My Book:

Treasury Circular 230 Notice: Any U.S. tax advice on this blog is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing, or recommending to another party any transaction or matter addressed on this blog.

As you might have guessed based on the fact that I don’t make video posts, I learn better by reading about a topic than I do by watching a video. Of course, many people’s preferences are just the opposite.

That’s why I’ve been meaning to mention a series of videos made by Boglehead forum member Rick Van Ness (username “stickman” on the forum). The videos provide 10 rules (one video for each rule — most of them just under 5 minutes) that can help new investors get started on the right path.

You can see the videos here.

There’s also an accompanying book, which I just got the chance to read this last week: Common Sense Investing: Ten Simple Rules to Finance Your Dreams. Like the books I write, this book is brief and to the point. And the advice is solid and easy to understand.

Investing Related Articles

• Meet Suze Orman’s Newsletter Guru from Jason Zweig (Perhaps I’m naive, but this article shocked me.)
• Lazy Returns: My Nano Portfolio from John Wasik
• Guarantees vs. Control from Wade Pfau
• John C. Bogle: The $24 Billion Man from Allan Roth
• Your Advisor’s Fee Matters from Rick Ferri
• Why We Love the One We’re With from Canadian Couch Potato

Other Money-Related Articles

• High Deductible Health Plans and Major Medical Bills from Five Cent Nickel
• Time Value of Money vs. Money Value of Time from Matthew Amster-Burton
• How to Live as Long as the Rich from Steve Vernon
• Finding a Bargain when Apartment Hunting from Free From Broke
• When Will I Get My Tax Refund? from Cash Money Life
• Bragging About What You’re Going to Buy is Super Lame from Len Penzo

Blog Carnivals

• Road to Financial Independence hosted by One Family’s Blog

Thanks for reading!

Retiring Soon? Pick Up a Copy of My Book:

Treasury Circular 230 Notice: Any U.S. tax advice on this blog is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing, or recommending to another party any transaction or matter addressed on this blog.

A quick tax season reader question for today:

“I’m a little confused about exemptions. When you start a new job, you’re required to complete a W-4. Don’t you have the option to claim how many exemptions you want? For example, when I started my job a few years ago, I claimed “0″ so that I’d get more taxes taken out and then get a refund at tax season (rather than possibly owe more at tax time).

However, I’m married and have a son. Should I be claiming “3,” or is that automatically done by my tax preparer when doing my taxes? In other words, am I missing out on my 3 exemptions because I didn’t claim them on my W-4?”

You’re confusing two separate concepts: exemptions and allowances.

Exemptions are claimed on your Form 1040. They reduce your taxable income and, therefore, your income tax. You are allowed one exemption for yourself, one for your spouse, and one for each qualifying dependent.

Allowances are claimed on Form W-4 — when you start a new job, for instance. Each allowance you claim reduces the amount of your income that is withheld for taxes. The point of Form W-4 is to help your employer estimate how much tax you’ll owe on the wages they pay to you, so that they can withhold the appropriate amount from your paychecks.

The link between the two concepts is that the maximum number of allowances you can claim depends on (among other things) the number of exemptions you’re allowed to claim — though, if you want, you can choose to claim fewer allowances than the amount to which you’re entitled.

In other words, choosing not to claim the maximum number of allowances on your W-4 will only increase the amount of income tax withheld from your paychecks. It will not have any effect on your ability to claim the appropriate number of exemptions on your Form 1040.

Retiring Soon? Pick Up a Copy of My Book:

Treasury Circular 230 Notice: Any U.S. tax advice on this blog is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing, or recommending to another party any transaction or matter addressed on this blog.

Housekeeping note: Last Wednesday, I upgraded the hosting service for this site. Unfortunately, I messed up the email server in the process and didn’t notice it until Friday. So if you sent me an email last week and did not get a reply, please accept my apologies and resend the email, as I probably never received it.

When it comes to mutual funds, as we all know, past performance is not indicative of future results.

But past performance can still be useful information. One of my favorite ways to use such data is to get a quick, first-glance look at how similar two funds are.

For example, a reader recently asked about whether Fidelity Total Bond Fund (FTBFX) would be a suitable replacement for Vanguard Total Bond Market Index Fund (VBMFX) — he had wanted to use the Vanguard fund, but the Fidelity fund appeared to be the best bond fund available in his 401(k).

The following chart (produced via Fidelity’s website — see the end of this article for instructions on making similar charts) shows us how an investment of $10,000 in each of the funds would have done over the last 10 years.

Conclusion: They’re certainly not the same thing, but they don’t appear to be wildly different either. It’s at least close enough to merit further research (like comparing the funds’ holdings by looking up each fund on Morningstar and viewing the “portfolio” tab).

Or what if your 401(k) had access to Vanguard’s Large-Cap Index Fund (VLACX), rather than a total stock market fund? The following chart compares the fund’s performance since inception to the performance of Vanguard Total Stock Market Index Fund (VTSMX) over the same period.

Conclusion: “High correlation” would be an understatement. In terms of performance, these two funds are virtually identical — which makes sense, given the degree of overlap between the funds’ holdings.

Or what if you’re feeling tempted to switch from a short-term treasury fund to a long-term treasury fund in order to grab a couple extra percentage points of yield, but you want to get a quick feel for how much additional risk you’d be taking on? The following chart compares the 10-year performance of Vanguard’s Short-Term Treasury Fund (VFISX) to that of Vanguard’s Long-Term Treasury Fund (VUSTX).

Conclusion: These two funds are very meaningfully different. By reaching for that additional yield, you take on a pile of additional risk. (Remember how we discussed that the volatility of a bond fund is proportional to its average duration? This picture shows the difference between a 2-year average duration and a 15-year average duration.)

Important Caveats

Of course, the above past-performance-based comparisons come with some important caveats.

First and most importantly, this is just a first-glance sort of analysis. Before investing in a fund, you’d want to actually take a look at its expenses and its portfolio makeup.

Second, the more actively-managed a fund is, the less reliable this sort of comparison will be. For example, an actively managed stock fund could have performed very similarly to the S&P 500 in the past, but there’s no guarantee that would be the case going forward.

Finally, for index funds, such comparisons become much less meaningful if the fund has switched the index it tracks over the course of the period in question — like Vanguard Total International Stock Index Fund, for example. And the same goes for “funds of funds” that have changed their composition (like the Vanguard LifeStrategy funds and Target Retirement funds).

To make such charts on your own: Visit Fidelity’s website, then click “research,” then “mutual funds.” Then enter the ticker symbol for one of the funds in question. Then, under the resulting chart, enter the ticker symbol for the second fund in the field for “compare funds.”

Credit where credit is due: Boglehead forum member nisiprius has been using such visual comparisons in his posts for years. I’ve often found them to be quite enlightening, so I thought I’d share the idea with you.

Retiring Soon? Pick Up a Copy of My Book:

Treasury Circular 230 Notice: Any U.S. tax advice on this blog is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing, or recommending to another party any transaction or matter addressed on this blog.

The one aspect of investing that I hear more and more about every year is ETFs. More investors are using them. More fund companies are offering them. And more writers are writing about them. This week I particularly enjoyed two such articles:

• Are ETFs Growing for the Wrong Reasons? from Canadian Couch Potato
• ETF Industry Stricken with Beta Diarrhea from Rick Ferri

Investing Articles

• Spain’s Bond Market Ignores the Downgrade from Larry Swedroe
• Should You Invest in DFA Funds? from Allan Roth
• Gen Y: Plenty of Time, Little Appetite for Risk from Karen Risi of Vanguard
• Seeking the Inefficient Asset Class from Eugene Fama and Kenneth French
• Interview with Behavior Gap Author Carl Richards from Matthew Amster-Burton

Other Money-Related Articles

• Safe Withdrawal Rates: Am I Barking Up the Wrong Tree? from Wade Pfau
• How to Save and Invest on a Weeny Budget from Monevator
• Who Uses Prepaid Debit Cards? from The Finance Buff

Blog Carnivals

• Wealth Builder Carnival hosted by My Wealth Builder
• Carnival of Financial Planning hosted by The Skilled Investor
• Carnival of Personal Finance hosted by Diva in Debt
• Top Personal Finance Posts hosted by Personal Finance Whiz

Thanks for reading!

Retiring Soon? Pick Up a Copy of My Book:

Treasury Circular 230 Notice: Any U.S. tax advice on this blog is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing, or recommending to another party any transaction or matter addressed on this blog.