Q: How much further can this bull market go?

A:  Many – if not most – investors don’t trust it can go much further.  As of April 21, 2014, it was up 206% (total return) since the bottom of the bear market on March 9 2009.  I don’t know how much further it will go up, nor how far down the next bear market will take us. I do know that five of the last 10 bull markets lasted more than five years.  I also trust that my portfolio is built to limit my losses in the next bear market.


Q: I just finished reading First-Time Investor and am planning to set up a retirement portfolio in my Vanaguard account. I am 66 years old, retired and financially in great shape, with a defined pension plan and no debt. I am wondering if the portfolio for a retired person should be similar to the one you suggested in this book, or if you have advice about another book to read for retirement portfolios. 

A: First Time Investor was written with the beginning investor in mind.  Financial Fitness Forever includes a lot more on retirement decisions.  If you want a free source of info check out my articles on MarketWatch.com.  Here is an article that links you to a group that will be of help.  http://www.marketwatch.com/story/my-10-best-retirement-advice-articles-2013-11-06.

Q: Years ago I heard you when you came to Southern California to give a seminar on investing, and was impressed. Now that I am retired and you are not actively working at Merriman, are your principles better realized by an investor by themselves? Or are your ways of diversifying best handled at the company that bears your name? I bring this question to you because I see some of the recommendations on this site as it was years ago.  These recommendations are absent on the Merriman.com site.

A: The company is doing everything they were doing for clients when you saw me speak, and a whole lot more.  In fact, I have all of my own money managed by the company that still bears by name. I loved giving workshops and I felt a drive to do all I could to help everyone who might listen—even if they only had $1000 to invest. I believe I was born to teach. I just ended up teaching people about investing, instead of teaching high school kids about history or math.

When the company knew I was going to retire, they realized they had to build a different business model as they didn’t have anybody to travel all over the country giving free workshops. Their focus changed from trying to served everyone to serving their clients, an approach I heartily endorse.  Truthfully, as much as I want to educate as many investors as possible, I want my advisor at the office taking care of me and the rest of his or her clients. I don’t want them spending all their time writing articles, doing workshops, interviews with financial publications, going on TV, etc.  In that transition the company smartly made the decision to let me take care of all the education (without a penny of compensation) for do-it-yourself investors, and let them concentrate on what they do so well.
So, if you are a do-it-yourself investor, I am still here to help. I am not an advisor anymore, but I am a very dedicated educator.  If you want professional help there are many firms that do a good job with buy and hold.  What I built at my old firm is an approach for investors who may be best suited for only buy and hold, as well as for those who might be better suited for market timing.  And, for those like me, the firm manages accounts that are a combination of buy and hold as well as market timing.  I honestly don’t know another firm in the industry that offers all of these services.
When I am in conversations with people I will often refer to the company in terms of “our firm” or  what “we” do at the firm.  When my wife is within hearing distance she is quick to remind me that it is no longer “our firm” or what “we” do because I have no ownership or involvement in the firm.  But it is my baby, and anyone who has started and built a successful firm probably feels as I do. I also know that when people sell their firm and the new owners make terrible decisions, it can be a very frustrating feeling and it is easy to lose the feeling of pride.
I can say, without reservation, that my old company has only gotten better over time.  If I didn’t like what was going on I would move my investments somewhere else.  In fact, I have a list of old clients that I have promised to tell if I make the change.  If you liked my recommendation many years ago, you can still access them through paulmerriman.com.  Plus, I have set up a financial education foundation that is presently supporting personal investing classes at Western Washington University as well as the costs of my website.  At my death the foundation gets even more money to continue the work I have been doing for the last 30 years.

Q:  You mentioned in your newsletter that DFA Funds are significantly better performers then Vanguard Funds. So why you recommend in your column only Vanguard funds and ETFs without a word of better DFA funds?

A:  Great question.  It is relatively easy for me to make recommendations at Vanguard, Fidelity, Schwab and T. Rowe Price, but DFA funds are much more complex. They have several ways (and different funds) to manage value, small cap, international, global diversification, REITs and emerging markets. To recommend the best combination of DFA funds requires all lot of information about a client.

If I were your DFA advisor, I would want you to own approximately half of your equities in U.S and international, half of each the U.S. and international in large and small, and more than half in value with the balance in growth in the U.S. and international portions. That’s my DFA recommendation.
If a DFA advisor agrees with that portfolio, it would be up to him to decide which DFA funds should be used to accomplish that asset allocation.  What I suspect you will find is the advisor won’t agree with my basic recommendation, as every DFA advisor is free to use the DFA funds the way they want.  DFA educates advisors how to use their funds, but they do not dictate a particular asset allocation or particular DFA funds.  In fact, some DFA advisors use only one DFA fund, which I think robs investors of the return they could have achieved with a larger group of funds.  As an advisor, if I only use one fund, it makes my work very easy but it isn’t in the interest of most clients.

Q: Why do you always allocate to large and small cap stocks but never mention the mid-cap tier? What is your  reasoning for the omission of this capitalizationsize tier from your recommendations?

A: The process of rebalancing is more impactful if you invest on the large and small extremes. If you would like to see the differences between the small, mid and large cap returns, get a copy of Live It Up Without Outliving Your Money from your local library or Amazon.  Chapter 7 has some great graphs that show the impact of returns of small to large cap asset classes.

Q: There has been a change at Vanguard that changes our status on the Developed Markets Fund.  The question I have been getting is: What do you recommend now that the Vanguard  Developed Markets Fund is closed?

A:  In April it is expected that the Developed Markets Fund and Tax Managed International Fund will merge.  When the merger was announced Vanguard stopped offering new shareholders the Developed Markets Fund but still offered the Tax Managed International Fund.  That’s the good news!  The bad news?  The minimum investment was $10,000.  As of today Vanguard has established an Investor Share class of the tax managed fund so it has a minimum of $3,000, the same as the Developed Markets Fund.  Investors who own the Developed Markets Funds should stay put as the fund is supposed to be open again in April.  We shall see.

Q:  i recently read some of your articles and noted the Fidelity buy and hold ETF portfolios. How often do you update those portfolios?

A:  When I owned an investment advisory firm I had access to some of the brightest minds in the business. I also had access to their time.  Now that I am retired I am on my own, so my efforts are compromised by my old mind and body. I expect to update my Fidelity portfolio once a year.  I don’t believe you will see many changes because my asset allocation is based on 80 years of market returns, not the last few years as many other advisors use. I hope my advice is helpful. Let me know if you have questions.

Q:  How can a beginning investor get started with little to invest?

 I’m a college freshman and ever since I heard your podcasts in my senior year of high school, I’ve wanted to start investing my money for retirement. Now that I’m 18, I’m able to open a retirement account, but I currently only have around $250 to invest because I come from a low-income family. I remember, from one of your podcasts, that you recommend ETFs for college students because they have no minimum.  I tried to open an account with Vanguard, but it said that I need a minimum of $3,000 to put in the prime money market to open an account before I can begin to buy ETFs. I’d really like to invest in Vanguard because of your recommendation. How might I buy a Vanguard ETF without having $3,000?

 A:  Wow! How did you know about my podcasts at such a young age? I’m happy to learn you are ready to start investing at age 18. There is a way to start with as little as you wish. You can open an account with any amount at share builder.com. They are owned by Capital One. There is a $6.95 charge per trade. I suggest you put the first $250 in a small cap value ETF and add another asset class as you make your new contributions. At some point you will be able to meet the higher minimums of other providers.

For example, a Schwab account that allows you to invest in their commission-free ETFs requires $1,000. If you plan to make the move as soon as possible, you may want to put the first $1,000 in one ETF, so the commissions to liquidate is only $6.95. From what little I know about you, I believe you will be there in a couple of years. It gives me a great deal of pleasure to know that I had a part in helping you get started. I suspect your parents are very proud of the step you are taking.  I have a hunch you will be helping others do the same before your investing career is over.

Q: My question regards REIT funds. I’d like to diversify my portfolio to include some real estate. You recommend in your books to open this asset class as an IRA (traditional or Roth). However, for my case this may not work. I am a US citizen living and working overseas. My income falls below the Foreign Earned Income Exclusion amount, and so I am unable to open/contribute to an IRA in the US. So, if I diversify into an REIT fund, I will have to accept the higher tax burden that comes with these accounts. My question is: do you think that it is worth it, in the long run? (I plan on working overseas for the next 4-5 years at least) Or should I skip on diversifying into real estate until I am able to do so in an IRA? Would an REIT ETF fund be a better move over an REIT mutual fund?

A: The long term return and risk of REITs are very similar to the returns and risk of value stocks. My suggestion is you put the REIT money into a split of small cap and large cap U.S. value funds. When you are back in the U.S. you can start making IRA investments in REITs. Thanks for your kind comments about my books.  I hope you will encourage others to read them.  I would also be grateful if you would review them at Amazon.

Q: Thank you so much for your MarketWatch article about “The Ultimate Buy & Hold Strategy“. I was wondering: Should I wait for a pull-back in the market before switching our retirement funds to your strategy?

A: This is a question that needs a lot more information before being answered. If the investments are already in the market and you simply intend to sell your present holdings and reinvest, I would see no reason not to move from one set of equities to what I hope will be better returns and less risk. If you are moving from cash into the new portfolio, I am concerned that you could be taking more risk than you expect. “The Ultimate Buy & Hold Strategy” article should not be the only basis of your move. The buy and hold article uses a 60% equity and 40% fixed income asset allocation. That may be too risky. I strongly recommend that you review the podcast, article and table that compare many different balances of equity and fixed income. Here are three links so you can use all three presentations.

Article:  http://paulmerriman.com/fine-tuning-retirement-portfolio-allocations/

Table:  http://paulmerriman.com/fine-tuning-asset-allocations/

Podcast:  http://paulmerriman.com/2013/08/21/fine-tuning-your-asset-allocations-qas/

After you are sure you have the right balance of equity and fixed income funds or ETFs, you have to figure out how to get invested. My experience is that conservative investors rarely feel comfortable investing all at one time. If you are in cash, I suggest you spread the investment out over a period of months. For very large amounts of money it might be over 24 months. The dollar cost averaging approach does not protect you from getting burned after all the money is committed but it does keep you from putting it all in at the top of the market. This may be a case to hire professional guidance to help you get the money invested, and then you can take over from there. Before you hire a professional, I suggest you read “Get Smart or Get Screwed: How To Select The Best and Get The Most From Your Financial Advisor“.

Investing is quite simple. It’s just not easy!

Q:  I have reached the point now where I can invest more heavily into mutual funds and plan to follow your asset mix. I am reluctant to do so now as the market is so high. Should I wait or dollar-cost-average and move forward? There are so many different opinions as to whether the bull market will continue it gets confusing.

A: This is probably the most common question I get. It’s interesting to note that there is a similar feeling after the market has gone down 20 to 30 percent. Investors don’t like to invest when the market is in decline as they sense it will probably keep going down. In other words, there may not be a time it is easy for most investors to invest. I suspect that for many investors dollar cost averaging is the only way they can comfortably put their money to work.

Let me suggest a couple of ways to use dollar cost averaging.  As I know nothing about your personal situation, these ideas may not be appropriate for you. One approach is to put half your money to work immediately and spread the balance over an extended period of time. Twelve months is not uncommon, but I’ve seen people spread it over 36 months. Another approach is to dollar cost average over 12 to 36 months or until the market is down a specific percentage – like 20 or 30 percent. Or you could use a combination of the two strategies.

You might put 25 percent in immediately and spread the balance over 24 months or until the market is down 25 percent. There are dozens of possible combinations, but the fact is you might invest dutifully for whatever period you choose and have everything go just fine. And then when all the money is invested, the market takes a nosedive. So, one of the most important decisions you will make is how much in fixed income to cushion the downside risk when things go wrong?… and they will go wrong. I guarantee it!

Q: What is the differences between Index Funds and ETFs? The strengths and weaknesses of each? And in particular, how should people go about choosing one over the other?
A:  I suggest you visit the websites of the three ETF groups I recommend. They each have a slightly different way of discussing the topic.  Here are links to the Vanguard, Fidelity and Schwab ETF pages: This is a very good comparison of mutual funds and ETFs from Vanguard.  https://investor.vanguard.com/what-we-offer/etfs/compare-etfs-and-index-funds   Here is a good article by Fidelity on why most  ETFs are more tax efficient than most mutual funds.  https://www.fidelity.com/learning-center/etf/etfs-tax-efficiency  All three companies have commission-free ETFs.  Here is the information on the Schwab commission free offerings.  http://www.schwab.com/public/schwab/investing/accounts_products/investment/etfs/schwab_etf_onesource

If you want more details on the pricing differences between mutual funds and ETFs, I suggest you read the following 10 page white paper entitled, “ETFs: are they the right choice?”  http://www.greycourt.com/wp-content/uploads/2012/01/White_Paper001-Exh-TradedFunds-CRP.pdf

I use both ETFs and no load mutual funds in my accounts.

Q: Good article. I like the small value stock analysis and comparison to other ways of investing in stock. What is the best strategy to avoid market loss and invest defensively?
A:  Thanks! For most, the only defensive strategy to protect against loss is the addition of fixed income securities.  For a very small fraction of investors market timing can work.  I have half my own portfolio defended with fixed income and the other half using trend-following market timing strategies.  I will write more about the timing in future articles and podcasts.

Q: Don’t you think you are suggest too many funds? I think all the portfolio needs is emerging markets, International markets and US REITs.These 3 essential troika asset classes will do well.
A:  I’m not trying to get you to do unnecessary work, but I think you should break down the asset classes a bit more. In the international markets, the large cap index has way under-performed the international value and small cap asset classes. In the U.S., the small cap and value asset classes have made more than the REITs. I don’t recommend any of the asset classes without either adding return or reducing risk.  On the other hand, I know what I suggest is a lot more work than your three fund portfolio. I am fighting for another 1% and I want you to fight for it too. By the way, we never KNOW what asset classes will do well, but we do know which ones did well in the past. There is no risk in the past. More diversification protects you from your threesome under performing the rest of the major asset classes. Of course, your three could be the cream of the crop. We never know!

Q: I have a Vanguard account and have been following your recommendations with the nine different asset classes that you recommend in Financial Fitness Forever. This year I noticed the Emerging Markets Fund VEIEX has not done very well but every other fund has had a good return. I’m just wondering, do you still recommend VEIEX as part of your Vanguard recommendations? I am a long time listener of your podcasts and reader of your books. Thanks for giving me the knowledge and confidence to take on my own investments!
A: The best approach to diversification is to build a portfolio of asset classes that have a long history of good returns (none of them are without long periods of under performance) but don’t go up and down together.

In 2003 the Vanguard Emerging Market Fund was up 57.7%  and up 13.3 % for the last 12 months. During 2003 the Vanguard S&P 500 was up 28.5% and it was up 24.4% for the last 12 months. We should not expect these great asset classes to move up and down together or at the same rates.  I still think emerging markets will have a good long term record but I don’t expect them to go up and down at the same time as the other asset classes in your portfolio. If we sell out once an asset class when it doesn’t do what we expect, we will eventually end up with a portfolio of money market funds, as all asset classes have periods of disappointing returns.

Q: Would you recommend anything different for our 60% in Vanguard? Seems lots of advice, including from Pimco, to get out of bonds. I’ve been following your diversified Vanguard portfolio at 60/40 for some years. Do you see the coming downturn as any more significant? Would you recommend anything different for our 60%?

A: I always assume the market is going to do something horrible. That is the nature of the market. Every 5 years, on average, the S&P 500 falls about 30%. My own portfolio is built to lose less than that because I am 50% in bond funds. Yours will lose more than mine because you are 60% in equities. But yours will probably make more than mine over time. You can either listen to others, and use that information to become a market timer or be a buy and holder, ready, at all times for a major market decline. Of course when people fear the market is about to tank, and they should get out and don’t, they vow not to let that happen again. It’s a trap! Maybe you should have more fixed income in your portfolio, not just for the present, but for the long term.

Q:  Why no bucket of commodities in your portfolio recommendations?
A: On a long-term basis, commodity returns are about the same as long-term bonds… with a lot more risk. If you take money out of the asset classes I have recommended in The Ultimate Buy and Hold article and podcast, and put the proceeds in commodities, you should expect lower long-term returns. Of course people who sell commodities would disagree loudly.

Q;  I follow your recommended Vanguard portfolios and wonder what you think about the recent addition of two International Bond funds – the Vanguard Total International Bond Index Fund and the Emerging Markets Government Index Fund?

A:  I do not recommend international bond funds for the Vanguard portfolios.  The purpose of the bond funds is to reduce the volatility of a portfolio. Bonds for stability and stocks for growth. Due to the currency differences, the international bonds will increase the volatility of the bond portion of the portfolio. Of course, as you know, half of the equity portion of the portfolios is in international stocks, and that is enough currency diversification. In fact, adding international equities reduces the equity volatility, while adding international bonds increases volatility.

Q: How can you write, “dont pay a commission for a fund blah blah blah”? Why don’t you just write, “Please get a wrap account with my firm so I can get paid to do nothing by swiping a cool 1% of your assets each year”? Oh, I guess you forgot that little rule, lol. You are just like the rest of them. Yeah, I am the only poor advisor because I’m not able to just tell little lies. I don’t expect a reply, you guys never do.

A:  I enjoyed your email. I am completely retired and have spent my retirement trying to help investors take better care of their investments, which includes underwriting a university course helping college students do the right thing as they make their first investments.  I have been helping do-it-yourself investors use the best asset allocation I know, with the Vanguard funds, for over 15 years. What do I get out of this?  A sense of helping others improve their financial future.  

For every email like yours, I get hundreds thanking me for my effort and I appreciate every one. I cannot accomplish what I want if my readers conclude I’m getting something out of this. Go to my website – no advertisements.  Go to my website – free books for simply signing up for my bi-weekly newsletter that you can unsubscribe from anytime. My suspicion is you have not looked at any of my free books. Please take a look and let me know if you still think I’m a fake. I could use your closing sentence, “I don’t expect a reply, you guys never do,” but I think this might be the exception. I look forward to hearing from you.

Q: Wow, you are extrapolating the past into the future there. Very creative analysis! Or wait… wait a second! Wasn’t all this extrapolating the past into future one of the behaviors that led to massive losses during the financial crisis?

A:  I can guarantee the future will not look like the past. Not the next week, month, year or decade. If I could guarantee the future would look like the past, I would recommend investors put all their money in small cap value. Better yet, let’s go back to 1986 and put all of our money in Microsoft. There is no risk in the past. We all know exactly what we should have done. 

I know what small cap value has done in the past. I know if from all of the tedious work done by the academic community. I don’t trust Wall Street, I don’t trust Main Street (friends and family) but I do accept the hard work done by the academic community (I call University Street), which gives us the best sense of relative returns. The academics are very clear about the expected returns of small cap value. 

They believe small cap value is very likely to make more than small cap growth (over 4% more per year since 1927) but they refuse to say what the return will be. They also believe small cap value will make more than large cap value (over 2% per year since 1927) but they refuse to predict what the future return will be. Their belief is that investors should get a premium for stocks over bonds, small stocks over large, and value over growth. They make no attempt to tell you what future returns will be, but are willing to report on what they have been. 

Most people think that recent returns (one, five, 10, maybe even 20 years) are meaningful. I like 50 to 80 years. In fact, if investors had used 50 to 80 years they would not have been surprised by the losses in the bear markets of 1973-1974, 2000-2002 or 2007-2009. They all looked very much like the past.  

The purpose of my article was simply to suggest that small cap value should be one of many asset classes in a properly diversified portfolio. Yes, I like having the past on my side, but my own portfolio is a combination of over 12,000 stocks (through index funds) – approximately half in stocks,  half in bonds, half in growth, half in value, half in large, half in small, half in international, half in U.S. half in buy and hold and half in market timing. Your comment is exactly the thinking that led me to this massively diversified portfolio. I don’t trust the future to look like the past.  

Question: I’m assisting my parents with their retirement. They have Traditional IRA’s and Roth IRA’s. They both also have pensions and will collect Social Security in two years and receive a monthly royalty from an inherited oil partnership. Their pensions and the royalty cover their living expenses, my father’s pension decreases by 10% when he starts collecting social security. My question is, what’s the most tax efficient strategy to withdrawal from their IRA and ROTH?

Answer: I do not give tax advice, so I hesitate to answer your question. Here’s what I suggest you and your parents do to consider the best tax approach: consult an online search for “tax efficient withdrawals from regular and Roth IRAs.”  Here are a couple of the articles that seem worth reading, and If you don’t find what you need in these articles please let me know.

Question: What would happen if I did the exact opposite of what you recommend? 

Answer: You would invest in loaded funds, with high expenses, high turnover and little diversification.  Better yet, you would put all of your money in one company that has a great future because diversification is for dummies.  And you wouldn’t want to start investing early because it’s better to have fun when you’re young and leave the investing until later.  And since you will do the opposite of what I suggest, you will work with a great stockbroker who will let in on some of his firms most exciting investment opportunities.  And here is the best part:  you will encourage your children to follow in your footsteps.  I have one change to recommend.  

You do what you think is right and encourage your children to get a free copy of “First Time Investor:  Grow and Protect Your Money.”  They can get their free copy at paulmerriman.com.  While they are there they can also download, “Get Smart or Get Screwed” and “101 Investment Decisions Guaranteed to Change Your Financial Future.”  By the way, in “101” you will have the chance to see the impact of doing the exact opposite of what I recommend.  Good Luck!

Question: Your recommended bond funds include Tips and Treasuries. What do you think about allocation to foreign bonds, such as Australia or Brazil? Some even recommend bank loans, e.g., BKLN. Or am I just reaching for yield?

Answer: The reason I recommend the Tips and Treasuries is to minimize (or reduce) volatility in the portfolio – bonds for stability and equities for growth. If you add foreign bonds, it will add to volatility and I would then reduce the exposure to equities.

Once adjustments are made to reach for yield, we get into a market timing decision as to when to get out of those instruments and into something with less risk and greater fixed-income return. Half of my own retirement investments are in buy and hold (50% equities and 50% low risk bonds). The other half is managed with timing (70% equities and 30% fixed income). In this part of my portfolio I use more risky fixed-income securities, as there is a defensive strategy to address the higher volatility of the high-yield and other more risky bond funds.

Question:  Should my retirement funds should be in my taxable or 401(k) accounts?

Answer:  Mutual funds that pay out interest, dividends and capital gains are considered less tax efficient. In theory, you should have your tax-efficient funds in your taxable account and the tax-inefficient funds in your 401(k) or IRA, if you have one.  If you are following my recommendations your portfolio is made up of index funds that have very little turnover, so most of the stock funds are relatively tax efficient. Taxable bond funds, Treasury inflation-protected securities, real estate investment trusts (REITs), small cap and value funds will tend to pay out more tax-triggering events than large cap U.S. and international stock funds. Some fund families (e.g., Vanguard and Dimensional) offer tax-managed funds to minimize the taxable events in typically less tax-efficient asset classes.

QuestionDid they pay this guy, Paul Merriman, for this MarketWatch article on asset allocation? It’s NOT a new idea.

Answer:  First of all, I am a retired investment advisor and when I retired I promised my wife I will never work for money again. So everything I do at MarketWatch.com is 100% for the reader, I am not paid me a cent. You are correct, there is nothing new about asset allocation, but I find that most investors do not do a very good job of diversifying their portfolios. My intention with this article was to present such overwhelming evidence that it would be difficult to ignore the asset classes I recommend. If readers want more evidence, I hope they will read my book “101 Investment Decisions Guaranteed to Change Your Financial Future.”  It is available free at paulmerriman.com.  One more thing, I didn’t just recommend these asset classes. I recommended them over 10 years ago and the Vanguard all equity portfolio has compounded (according to The Hulbertt Financial Digest) at 10.3% a year for the 10 years ending Dec. 31, 2012.

Question: Is it possible to put money into our IRA account after retirement?

Answer: Anyone can contribute to an IRA but you have to have earned taxable income and be  under age 70-1/2.  Social Security, dividends, interest and capital gains do not qualify as earned income.

Question: Now that Apple is down to $450, is it time to purchase again?

Answer:  What I am about to tell you is the truth, the whole truth and nothing but the truth. I know exactly what to buy, when to buy it, and when to sell it.  My problem is I don’t know what will happen after I tell you what to buy or sell. My other challenge is that I only feel confident in recommending broadly diversified asset class index funds. While I find it very comfortable to recommend asset classes (particularly low-cost index funds), I am totally out of my comfort level suggesting a good time to buy or sell individual securities. That is an exercise for speculators and traders, neither of which I could ever do with other peoples’ money.

Question: If you were leery about investing in foreign markets, like I am, what one fund would you suggest?

Answer:  If you are nervous about international asset classes, I assume you will be interested in the fund with the least risk, and therefore lowest expected return. The Vanguard Developed Markets Index is the international equivalent to the S&P 500 domestically. The portfolio is comprised of large, mostly growth companies. I hope you will become comfortable adding the small cap, value and emerging markets components. Remember, over the last 40-plus years, the portfolio I recommend would have added over 2% a year compared to the S&P 500, at virtually the same risk. Most of the extra return came from the small cap and value components.

Question:  If everyone believes that small-cap index funds will outperform and have better results, won’t everyone invest in them until they become overvalued and not such an amazing deal anymore? 

Answer:  There are times when that happens to all asset classes. In the 1995 through 1999 period, the S&P 500 became way over priced. That period was followed by a 10-year period of under performance. This is where rebalancing goes to work. 

As the S&P was compounding at 28.5% a year (1995-99), our firm was rebalancing the excess returns to small cap, value, and international asset classes. This is a strategy that guarantees you sell asset classes while they are high (part of them) and buy asset classes that are not as popular. Our clients were frustrated we only had 10% of our equities in the S&P 500 during the 1995-1999 period… but very happy we only had 10% of our portfolio in the same asset class during the 10 years of under performance.  

Once an investor gets past trying to guess what is going to be the better performer, and builds their portfolio with asset classes that are likely to be great performers over the long term, managing a portfolio becomes very easy. I suggest that you take a look at my recommended asset allocation and recommended funds, at paulmerriman.com.

Question:  Do you have an opinion on the Vanguard Managed Payout Funds as a way to tap portfolio income in retirement, as opposed to the usual 4% of assets at retirement date, and adjusted for inflation every year after that? I’m a regular listener to your podcasts and enjoy all the advice you’ve provided over the years.

Answer: I am retired and living off my investments, using the 4% variable distribution strategy. (If you don’t know what I mean by variable distribution I suggest you read Appendix H of “Financial Fitness Forever,”  “Withdrawing Money When You’re Retired”). I would not use the Vanguard Managed Payout fund (VPGDX) as it isn’t close to what I want for my asset allocation.  It is overweighted to U.S. equities, overweighted to large cap growth, underweighted to bonds (I have 50% of my portfolio in bonds), and holds asset classes I don’t think help – and may even hurt – your returns.  I’m not a fan of commodities or long short hedge funds. Their market neutral fund lost 1.4% last year and compounded at 1% a year for the 10 years ending Dec. 31, 2012.

Question:   I read “Live It Up Without Outliving Your Money” in 2008. You were very high on DFA.  Are you still as high as you were when you wrote the book?

Answer:  I am even higher today than I was when I wrote “Live It Up”.  For Do-It-Yourself investors I am a Vanguard fan, but for those using an advisor, Dimensional Fund Advisors has distinct advantages over Vanguard. DFA funds are constructed to use less turnover than Vanguard, give access to more deeply discounted value than Vanguard, offers asset classes that are not available at Vanguard, and offer higher tax efficiency than using Vanguard funds.  I have my own buy-and-hold investments almost entirely invested with DFA funds. DFA no load funds are only available through advisors, and each advisor will have a custom asset allocation. So, the long term success of DFA funds is a combination of the DFA funds with a savvy advisor. If you want to make sure you get a great advisor I suggest you read, “Get Smart or Get Screwed:  How to Select the Best and Get the Most from Your Financial Advisor.”

Question:  Is there a reason to wait until after year end distributions are paid at Vanguard before I re-balancy my funds?
Answer:    As there are no tax consequences, it doesn’t matter whether you do it before or after the first of the year. I do think once a year is enough.

Question:  I have Vanguard funds and was analyzing the Short-Term and Intermediate-Term Treasury Bond Funds that you recommend (VFISX) and (VFITX). Both bond funds have high turnover rates (273% and 302%). I currently have the Vanguard Total Bond Index Fund (VBMFX) and it only has a turnover rate of 73%.  I don’t think turnover rates mean as much for bonds as equities, but should I even be looking at turnover rates of bonds? 

Answer:  The management of a bond fund may lead to high turnover as the manager is able to find very small advantages in moving within the market. Vanguard  knows the return of these government guaranteed securities you mention, and if they can trade for very small additional profits (after trading costs), they will.  On the other hand, notice the turnover of the Vanguard High Yield Bond Fund is only 26%.  The cost of buying and selling in that asset class is much higher and the outcome is less guaranteed, so keeping the turnover low is important. I think the Total Bond Index is fine. I sometimes worry that the desire to squeeze every last ounce of profit causes investors too much work. 

Question: You recommend people hire an advisor who uses Dimensional funds.  Are there advisors who offer Dimensional funds in Canada? And are they no-load?
Answer: The best way to find an advisor who uses Dimensional Funds in Canada is to visit http://www.dfaca.com/ and follow the link to “individual investor,” and a second link to “find an advisor.”  They will normally give you three names.  I hope you take the time to meet with all three.  In my new book, “Get Smart or Get Screwed” I include a long list of questions you might ask, as well as a list of services you should expect from a professional advisor.  I also offer a very long list of reasons you should not work with a commission based advisor.

Question: I have followed your investment recommendations for years and I’ve fared better than most during the 2009 downturn. However, I’ve noticed that my recent investment performance has been significantly lower than the recent performance of the S&P 500. Does it still make sense to stick with your recommended Vanguard Index Funds vs. the simple Vanguard S&P 500 Index?

Answer: Your question is a great one. How important is short term performance?  How do we know when historical trends have changed?  Should the recent out-performance of the S&P 500 be enough evidence to put all of your money in this fund?  I will do a podcast on the topic, but the bottom line is absolutely not

What is happening is normal based on the past. For the 42 years ending 2011, the S&P 500 out-produced my suggested group of asset classes in 17 years, or about 40% of the years. The difference in return was 2.2 percent a year. In other words, a $10,000 investment in the S&P 500 turned into $507,339 (9.8%) vs. $1.167.231 (12%) for the diversified portfolio.  Stay tuned for my podcast!

Question:  I am meeting with a new investment advisor next week.  What should I ask them about their track record?
Answer:  This can be a difficult question to get answered.  Most brokers will not tell you how their client’s accounts have performed.  They take the position that every client is a custom account and not representative of your situation.  Also, most brokers have accounts that are made up a combination of holdings they recommended and holding the client asked the broker to buy.  So, in reality the results are relatively meaningless.  It is possible the stocks or funds the broker recommended did poorly and the ones selected by the client performed well.  It’s also possible the account contained holdings that the client had when they opened the account with the broker.  But how can you judge their expertise (or luck) without a genuine track record?

On the other hand, most registered investment advisors have returns of their strategies so it should be possible to get actual returns that can be used to see how you would have done, based on the risk you were willing to take.  For example, my own portfolio is 50% in equity funds and 50% in bond funds.  My advisor and his firm can produce returns for the average of all 50/50 accounts for the last 10 years.  They also have returns for more aggressive as well as more conservative strategies.  The key is for you to compare the returns of strategies that have a similar risk as yours.

But, as every investor knows, any strategy has a risk of loss that goes hand in hand with the expected gains.  It is imperative you know the expected loss as well as the expected gain.  The last 10 years will certainly give you several examples of what a strategy could look like in the worst of times.  One of the reasons I am only willing to hold 50% in equities is that combination produced losses that represent the worst I’m willing to accept and not panic.  I believe if every investment recommendation came with an expected long term gain and expected short-term loss, most of the terrible losses of the past would not have been experienced by investors.  If I told you a diversified all equity portfolio is expected to lose 50 to 60 of it’s value from time to time, can you imagine making that decision?

I can accept hypothetical returns as long as the period of time includes a long enough period to expose likely losses you are likely to experience during the worst of times.  When I was an advisor, I thought it was necessary to review the returns, and losses necessary to get the long term return, going back to 1970.  It was not unusual for advisors to start their hypothetical performance starting in 1975, which eliminated the horrible losses of 1973 and 1974.

Here’s what I won’t accept.  If someone tries to sell you the performance of a handful of actively managed funds that have out performed the market, you should start by asking if these were the funds they were recommending 10 years ago.  If they say yes, ask them to put that in writing.  Anyone can tell you which funds had the best performance over a period of time.  Unfortunately there is very low correlation with that past performance and the future.  But it’s a great sales pitch because everyone would like to invest in yesteryears best performers, if they would reproduce the past. 

Never forget, there is no risk in the past.  Everyone in the industry knows what he/she should have done.  And if you ignored your spouse’s suggestion to buy Microsoft in 1986, it’s possible he/she is still reminding you how your life would be different if you had just listeneda to them.

Also, I suggest you ask them about their commitment to low expenses, low turnover and high tax efficiency.  All of those forces that will have an impact on your future results.