What to invest in specific funds

““Thank you for all of your hard work and reassurance. Your teachings have helped me a great deal in my financial journey and I find the sound of your voice comforting.” —Ann S. In This Edition Introducing a New Investor ToolWhat Our Lifetime Calculator Can Do For YouSummer Musings About InvestingThe Problems with Reverse MortgagesWhat To Do […]

The post What to invest in specific funds appeared first on Paul Merriman.

““Thank you for all of your hard work and reassurance. Your teachings have helped me a great deal in my financial journey and I find the sound of your voice comforting.” —Ann S.

In This Edition

Introducing a New Investor Tool
What Our Lifetime Calculator Can Do For You
Summer Musings About Investing
The Problems with Reverse Mortgages
What To Do with Money You Don’t Need in Retirement 
Q&A with Chris Pedersen

It’s always my great pleasure to spend time with Chris Pedersen, our Director of Research, and Daryl Bahls, our Director of Analytics. Both are brilliant and stalwart volunteers whose research and analysis have added immeasurably to providing you with an abundance of educational tools to make better investment decisions.

This past week, we got together on a Zoom call to discuss the new “Fixed Allocation Portfolio Configurator.” This new tool, developed by Chris, helps investors figure out how to implement the portfolios we analyze using different fund families. 

The process is simple, involving four choices: portfolio strategy (e.g., Ultimate Buy and Hold, Worldwide 4-Fund, All-Value, etc.), account tax status, fixed income percentage, and fund family (e.g., Best-in-Class ETFs, Vanguard Mutual Funds, etc.).  You can see our “Sound Investing Portfolios Chart” here:

https://paulmerriman.com/wp-content/uploads/2022/07/Sound-Investing-Portfolio-Chart.pdf

Once selected, the configurator shows the required percentage investments in particular funds and several characteristics of the resulting portfolio, such as expense ratio and geographic distribution.

In this week’s video and podcast, we discuss this new Configurator and you’ll find a number of useful links in the notes. We also ask for your feedback, and answer several listener questions.  

 

What Our Lifetime Calculator Can Do For You

In addition to our new “Fixed Allocation Portfolio Configurator,” I want to remind your about our free Lifetime Investment Calculator, created with the help of a talented volunteer, Craig Appl. This calculator allows you to slice and dice the past 52 years of investment results in millions of combinations. 

With it, you can “try out” almost unlimited variations of 12 equity strategies we recommend (in addition to the Standard & Poor’s 500 Index by itself) and see how they would have performed year-by-year since 1970.

You choose the strategy, the number of years, and the contributions and/or distributions you want to assume. You set the starting year, the initial investment and the time period you want to measure.

Want to see the results of saving more? Check. 
Want the results of taking out more (or less)? Check.
Want the numbers adjusted for inflation? Check.
Want to know about different equity/bond ratios? Check.

It’s a fascinating tool, and not hard to use. One interesting feature lets you try out a scenario with different starting years. 

Imagine, for example, an initial one-time investment of $10,000 in the U.S. four-fund strategy, without any bonds and without any additions or subtractions. How would that have performed if left alone for 20 years?

If you were lucky enough to start in 1975, after 20 years you’d have $1,007,473. But had you started 15 years later, in 1990, your portfolio would have grown to only $284,068 in 15 years. The only change: the timing. The lesson is that the sequence of returns has a huge effect on ultimate investment performance. STRANGE THAT THE FIRST # IS FOR 20 YEARS AND THE SECOND IS FOR 15 YEARS

This calculator is useful for many things, but unfortunately, it’s limited to revealing returns from the past. Still, if you’re curious enough, this tool has many fascinating lessons to teach. Check it out here.

 

Summer Musings About Investing

George Sisti, CFP, is one of our Truth Tellers. A former Air Force pilot with a long career as a pilot for United Airlines, he is the founder and president of On Course Financial Planning, a fee-only Registered Investment Advisor firm. George publishes a free monthly newsletter and I find value in every one of them.

I know he will always include a couple of great lessons and debunk something that is being pushed by Wall Street and/or the media. I like that George is anti-Wall Street and reminds us how we should act in our own best interest. Also, he is not accepting any new clients but continues to share his knowledge and wisdom with all investors.

Here is an excerpt from George’s latest newsletter, “Summer musings about investing,” in which he considers inflation, recession and human nature:

There’s nothing new in investing, which would be good news if not for the fact that few investors know anything about stock market history. The flaws in our human nature that create manias and bubbles will always be with us.

Many investors have treated crypto as if it wasn’t a classic mania – irrational pricing fueled by debt, social media hype and a host of greater fools eager to jump on the gravy train. Speculative manias always end badly. Almost no one gets in early and gets out near the top because the top is where things are too good to leave, and speculators’ hubris is at its peak.

You’re better off appearing foolish for not seeing that “this time it’s different” and not owning the latest fad investment than to join the crowd, be proven a fool and sufferer severe loss. One of the common sermons I’ve heard from zealots is that cryptocurrencies are a hedge against inflation. 2022 provided a prime opportunity for this hedge to play out, but the most popular cryptocurrency, bitcoin, has turned $1 into 52 cents year-to-date through July 30th . 

The worst thing about foolish investment ideas is that they can look brilliant for extended periods of time. But it is foolish to ignore common sense, the fundamental realities of math, logic, business, finance, and economics in pursuit of a speculative return. Foolish investment ideas can seem brilliant as long as new “fools” join the party. Wealth management firms jump on the bandwagon because fad investments are easy to sell and come with high fees. Once all the fools are on board, the entry door and overhead bins have been closed, and the jetway has been pulled away, the only thing left is the inevitable crash and destruction of capital. 

The financial media firms don’t care if they’re giving you worthwhile guidance or leading you astray. And why should they? They are never held accountable for the consequences of any foolish ideas that they promote. The function of the financial media is to generate more eyeballs, ears and clicks to increase their advertising revenue. And nothing attracts attention better than fear mongering. 

AND THIS:  The more you follow and try to make sense of the stock market’s day-to-day activity, the more it will drive you crazy. There’s no way to avoid bear markets; you must learn to endure and survive the years in which your portfolio loses money. Our emotions are unreliable when it comes to investing. That’s why you should think twice before abandoning a prudent investment strategy in a bear market. Investing is about attaining your financial goals, not increasing your net worth every year, or becoming as rich as possible. The best way to manage your portfolio is to focus on your goals, anchor your portfolio to your financial plan, and stick to that plan. Nothing goes up forever and nothing goes down forever. Thus, when possible, invest in mean-reversion – the one ongoing constant in investing.   

You can access this month’s newsletter by George here.  Feel free to forward it to anyone who you think would be interested in receiving it, and subscribe for future issues.

 

The Problems with Reverse Mortgages

This article by Dr. James M. Dahle, founder of White Coat Investor and one of our Truth Tellers, is one of the best I’ve read on the subject of reverse mortgages. It begins like this:

You need not assume by this post that I have anything against you using a reverse mortgage or that I think they are a bad product and those who sell them should get some cement shoes. If you truly understand how a reverse mortgage works and still want to use one, I don’t have a problem with that. But one of the best ways to understand something is to see the problems with it. Then you can decide if those issues are a big deal to you or not.

Today, let’s talk about reverse mortgages, the problems with them, and if they could be right for you. [Continue reading…]

 

What To Do with Money You Don’t Need in Retirement 

This is one of those “happy problems” that I wish more people had. In our work we try to help you make decisions throughout your life that will lead to retirement with “more than enough.” Addressing the question of how to spend money you don’t need, Rich Buck and I wrote this article recently published in “MarketWatch.”

 

Q&A with Chris Pedersen
See our extensive Q&A archive at https://paulmerriman.com/ask-paul/

Q:  If someone only has access to funds with very high expense ratios/fees (e.g. 0.5% or more) in their retirement account, is it still worth investing there with a 2 Fund for Life approach?

A:  This isn’t easy to answer without knowing the specifics of the funds and whether there’s an employer match or not.  If there’s an employer match for employee contributions, it’s probably still worthwhile investing in the retirement account’s target-date fund to the point that maximizes the match.  It takes a lot of years of 0.5% expenses to offset free money.  You could then use a simple 2 Fund for Life approach that invests in the small-cap value fund in a different account.  That way, you get to choose a low-cost fund with deep exposure to the small and value parts of the market, so you maximize expected return premiums and diversification.  And, since the simple approach doesn’t involve rebalancing, you could put it on autopilot with automatic withdrawals and purchases in both accounts.

 

Q:  I recently read a “Wall Street Journal” article titled, “What Private Equity’s Rise Could Mean for Your Money” that detailed how promising small-cap companies are waiting for their initial public offering until they have outgrown even mid-cap status to become large-cap companies. Would this change the thesis of small-cap investing over the next 30 years if things continued trending that way? 

A:  It might or might not.  Historically, small-cap growth companies have had some of the worst long-term returns while small-cap value companies have had some of the best.  If the companies attracting the venture capital are growth companies, then we might just say “good riddance.”  If the companies attracting the venture capital are truly value companies, then the retail investor’s lack of access would indeed lower returns.  This quote from the article suggests that we might not be missing out on that much.  “As more asset managers seek to build a presence in private markets, some will invariably chase some of the same deals—driving up purchase prices and lowering their ultimate returns.”

 

Q: How do I combine these 2 strategies:

 Implement the 2-funds for life plan with Target date fund (VTTHX) 90%, VSIAX (10%) until retirement (~13 years away).Apply the bucket strategy upon retirement: use saved up cash for the first 3 years, sell bond portions for the next 5 to fill up the cash bucket, all the while letting the stock portion grow for the long-term/legacy. Since selling target date fund involves selling stocks/bonds/cash proportionally, to make the bucket strategy work, is my only option to hold the same proportions of VTI/VXUS/BND/BNDX as the target date fund (individually) still following the glide path, so I can sell s/b/c as needed.

A:  As much as I love the ideas behind the bucket strategy, and I think it’s a very rational way to decide how much to have in fixed income, I don’t think it’s a good framework for managing withdrawals. There are just too many moving parts. It seems like you’d want to take spending money from the 1-3 year bucket, but then you have to refill it from the 3-8 year bucket and then refill the 3-8 year bucket from long-term equity investments. On top of that, you’ve got portfolio rebalancing.

That’s why I recommend using “nudge withdrawals” as part of my 2 Funds for Life strategies. Instead of worrying about all the buckets, you just take your annual withdrawals from the part of your portfolio that has gotten bigger than it’s supposed to be. In your case, that will most likely involve selling some of your VSIAX to fund your withdrawals. The results are similar, but it’s much easier to do. If you want more detail, you can see several backtests comparing nudge withdrawals to withdrawals plus annual rebalancing in Appendix 10 of my book, 2 Funds for Life.   

Helping you build a better financial future,
Paul

 

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