Invest easily, simply and effectively

“I’m a huge fan of Paul and the gang and have gotten so much out of your podcasts and articles. It’s motivated me greatly to get some basic advisor credentials so I can volunteer at my local Navy Marine Corps Relief Society to help junior servicemembers budget and plan for their futures.” – Aaron W. In This […]

The post Invest easily, simply and effectively appeared first on Paul Merriman.

“I’m a huge fan of Paul and the gang and have gotten so much out of your podcasts and articles. It’s motivated me greatly to get some basic advisor credentials so I can volunteer at my local Navy Marine Corps Relief Society to help junior servicemembers budget and plan for their futures.” – Aaron W.

In This Edition

Why Two Funds is a Great Strategy
The Journey of a Successful Investor
About Long-Term Care Insurance
Real Estate vs. Stocks vs. Bonds vs. Inflation
Questions & Answers
Personal Story

Dear friends,

Chris Pedersen was interviewed about Two Funds for Life by Katie Gatti of “Money With Katie.” Katie’s audience tends to be young women who want to become savvy investors. Brava, Katie!

I found Chris’ answers to her questions to be among the clearest, most succinct explanation of the simplicity and effectiveness of the two funds lifetime strategies, which Chris developed. He makes the case for both young and older investors and I encourage you to watch the YouTube or listen to the podcast, and share it with those you think might benefit from it.

You may also enjoy reading Katie’s article, “Two funds are better than one,” in which she honors and delights me with this opening paragraph, “Paul Merriman is one of my favorite financial educators. I love him for three reasons: First, he gives gentle Money Santa vibes (and who doesn’t love that?). Second, his advice is backed by data. And third, he takes financial advice a step further than the usual maxim of “Just buy the Total (US) Stock Market and call it a day!”

If you haven’t yet considered the two funds for life strategies, for yourself or someone in your life, Chris’ Book, Two Funds For Life, provides a deep dive into the subject and is available at Amazon (https://amzn.to/3BxTFoM) and other online booksellers.

Here’s feedback from a reader of the book: “Chris, Thanks so much for continuing Paul’s great work and building on another alternative for us do-it-yourselfers.  I consumed your book and am reading it again to ensure I didn’t miss anything (I’m sure I did).” —Jim C.

For a simple explanation of the Two Funds for Life strategy, read We’re Talking Millions—12 Simple Ways to Supercharge Your Retirement. Available in print at Amazon, as an audio book on Audible, and as a Free pdf download on our website. Your purchase of our books helps support our Foundation’s financial education outreach.

 

Jonathan Clements’ “My Money Journey: Now and Then”

I have great affection and admiration for Jonathan. Not because I am a personal friend, but because I feel so comfortable with his work. It’s about trust. He is open, self-deprecating, funny, and I agree with most of what he says.

The journey of a successful investor can be unbelievably bumpy. And there is no question that, for most of us, our personal journeys are much more challenging than the market’s gyrations.

In the coming months I will be sharing a real life story about how I hope to make a completely unsuspecting young person the recipient of an annual retirement income of over $1,000,000 a year. That’s the upside. The downside is she may face forces that leave her with little to nothing.

In this article Jonathan lays his bumpy financial and personal path wide open for the reader to understand the difference between the courtship, the honeymoon and reality. The good news is he made it. Read it here.

 

About Long-Term Care Insurance

Mary Beth Franklin’s article about long-term care insurance will be helpful to many in our audience. Click to read “Long-term care premium hike: Round Three”.

Mary Beth is one of our Truth Tellers, an expert in personal finance specializing in Social Security and income planning for Retirement. I think you will also appreciate this podcast at her “Retirement Repair Shop”:  “Help!  Health-care costs are stealing my nest egg.” 

She is author of the eBook, Maximizing Social Security Benefits (2022), and was a featured presenter on Social Security matters at the Literacy Month events this past April, hosted by The Merriman Financial Education Foundation and Bainbridge Community Foundation. Watch “What’s New for Social Security 2022.”

 

Real Estate vs. Stocks vs. Bonds vs. Inflation

In this article of the above title, Ben Carlson, another of our Truth Tellers, examines the idea of “safe returns.” It’s important to remember that each category covered is theoretical and the variables of “real life” make nothing predictable, certain or “absolutely safe.”

For example, regarding real estate, you have to factor cost of improvements, maintenance, mortgage, commissions to sell, cost to rent, inflation, insurance, property taxes, tax rates, liquidity, and costs to prepare house for sale, plus the consideration of market value fluctuations. Ben is level headed in his analysis.

Read his article here: https://awealthofcommonsense.com/2022/07/real-estate-vs-stocks-vs-bonds-vs-inflation/

 

Questions & Answers

Q:  What fixed income vehicle you recommend for my 75-year-old father?

A:  Please note our bond recommendations in the portfolios section at Vanguard. 
https://paulmerriman.com/vanguard-latest-recommendations/

Some recommendations are for taxable and tax-deferred.  Those recommendations are for people who are using fixed income to stabilize the portfolio.  We also have recommendations for those interested in the income from bond funds. I’m not in a position to go any further in giving personal advice.

 

Chris Pedersen answers these questions:

Q:  Given the rising interest rates have you noted (like MarketWatch) that small-cap growth stocks present unprecedented opportunities?  

A:  This sounds like a question about market timing, which I try to avoid. The only thing I know about the future is that it’s unpredictable.  Broad brush patterns may persist, but whether the market conditions that favor one asset class over another will last a month, a year, or a decade is the kind of detail that seems left to chance.  Historically, small-cap growth is one of the worst-performing equity asset classes, so I wouldn’t buy it.  I’m much more comfortable just holding a mix of small-cap blend and small-cap value for the long term. 

 

Q:  How does one park money in a safe spot to obtain a small return while all these “fixed income” Vanguard funds are losing money in the first half of 2022?

A:  2022 has been a tough year for stocks and bonds due to rising interest rates.  Bonds have reduced portfolio drawdowns a little, but not as much as we usually expect.  One silver lining is that the initial interest rate on new Series I savings bonds is 9.62 percent. (See “The Balance” article, “Learn How I Bonds Work”). You can only purchase $10,000 per person annually, but it’s a great return for a low-risk asset.  Also, as you point out, a stable value fund at another institution might be an option.  

 

Q:  Am I too late to fully take advantage of some of the compounding potential that your 2 Fund approach allows? 
I am 36 years old and wonder if my current age changes anything in regards to beginning my journey with the 5 years of Avantis Small Cap Value in a Roth IRA. Is 36 too far along for that type of investment strategy where maybe a target date fund approach would be more appropriate?

A:  Although it’s true that small-cap value can lag the market for a very long time, your expected return for holding small-cap value is still higher than the market overall for every year you hold it.  History tells us the odds of a small-cap value investment beating the market at different time horizons.  At 5 years, small-cap value outperformed about 60% of the time.  At 10 years, it was 70%.  At 15 years, it was 80%, and at 20 years, it was 99%.  So, no, I don’t think you’re too late.

 

Q:  How do the 2 Funds for Life strategies perform compared to the 4-Fund Combo portfolios?

A:  In some ways, this is an unfair comparison as the 2 Funds for Life approaches include a bond allocation that automatically adjusts to lower risk with age. The 4-Fund Combos are all equities all the time. If we assume someone using a 4-Fund combo would add a similar amount of bonds over time, then the comparison would be fair, and I’d expect them to perform similarly since they have a lot in common. Both approaches are massively diversified across thousands of companies and international geographies and tilt meaningfully towards small and value. 

 

Q:  How often does one rebalance the four-fund portfolio?

A:  We recommend yearly rebalancing for most investors using a fixed allocation portfolio such as the 4-Fund combination. More frequent rebalancing will reduce portfolio allocation drift at the expense of some return. Less frequent rebalancing allows more allocation drift and increases expected returns. Those higher returns come with increased volatility which we sometimes experience as deeper dips in our account balance. The differences aren’t as big as you might expect. Running a quick test of a 4-fund All-US portfolio going back to 2006, I see less than a 0.3% difference in returns and worst drawdowns for monthly vs. annual or even no rebalancing.

 

Personal Story

Paul and Chris, I can’t thank you enough for walking through the Portfolio Visualizer factor regression analysis and how to apply those results to generate expected returns.  I’m a huge fan of your work, investing in a globally diversified portfolio tilted towards small & value. Thanks much to both of you and the rest of your team.  I’ve often run funds through the factor regression tool in order to compare their factor loadings, but never understood how to draw conclusions from those results beyond which fund had higher loadings.  Now, being able to put expected returns behind those loadings, is a huge help in allowing me to better understand and make my own educated decisions! —Christopher S.

My response: Thank you for your kind comments. I’m learning from Chris as well. If you have friends who might benefit from our work, we would appreciate you sharing some of our work with them.

 

Helping you build a better financial future,
Paul

 

Call To Action!

Here are a few simple ways to support the financial education work of The Merriman Financial Education Foundation, a registered 501(c)3. In so doing you help better the lives of individuals, families and  communities, creating more opportunities for all.

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Thank you!

 

The Merriman Financial Education Foundation is a 501(c)3 organization operating since 2012 to provide free financial education to investors at all stages of life. If you find our information useful, we welcome your donation, and heartily thank our donors for helping support our mission and expand our outreach.

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