qanda

As a dedicated financial educator and retired investment advisor, Paul Merriman welcomes questions from his readers and listeners. Please email your questions (stated as succinctly as possible) to info@paulmerriman.com. Title the subject line: ASK PAUL.  Be sure to include your name and phone number so Paul can reach you if further discussion is required. While time does not permit Paul to answer every question personally, or even specifically, we do our best to address common questions. We may post your question and Paul‘s answer here on this site. We will not post your name or personal information. Thank you!

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Q: What is your view regarding equal-weighted ETFs?

A: I think equal-weighted ETFs are a legitimate way to build a portfolio. We have tried to replicate the concept of equal weighting by recommending a balance of large, small, value, growth, U.S., international and emerging markets asset classes. If you created the same group of asset classes but used equal-weighted ETFs, the average size company will be smaller, there will be more value and the expenses will probably be higher. When large and growth are doing better than small and value, you should expect lower rates of return. There will be many periods you will underperform, but your long-term returns should be at least slightly higher over the long term.

Q: Should I be following your Ultimate Buy and Hold Portfolio or Fine Tuning Tables?
I have been following you for several years and have modeled both my IRA and brokerage accounts on your Ultimate Buy and Hold Strategy. In your original Ultimate buy and hold Strategy you used 60% stocks and 40% bonds, which is to say that 60% of the portfolio in equity would be the ultimate buy-and-hold portfolio. Now your Ultimate Buy and Hold Strategy is 100% in equities. I’d appreciate it if you could help clear this up for me.

A: For many years I updated a portfolio we called the Ultimate Buy and Hold Strategy or Portfolio. I suspect that is the original article you read. The problem with that title was it suggested the ultimate asset allocation was 60% equity and 40% fixed income. If a reader also read “Fine Tuning Your Asset Allocation they found that the best ultimate combination should be based on your need for return, and willingness to accept an expected level of risk.

My reason for converting to an all-equity portfolio was the hope that our readers would understand that we were not recommending an all-equity portfolio as the ultimate personal asset allocation for all investors. The key is to determine the right balance of equity and fixed income bases on need for return and risk tolerance. I think hope our readers understand the importance of combining the two articles in the process of determining the right balance of equity and fixed income asset classes.

Q: Which Fidelity ETFs do you recommend for emergency funds?
In a recent podcast you suggested 50% Vanguard Wellesley and 50% in an investment-grade bond fund at Vanguard.

A: It’s important to note that the Wellesley and investment-grade bond fund were recommended for investors who want to take more risk than an almost guaranteed short-term bond fund. The Wellesley Fund is 40% equity and 60% fixed income. In order to build a portfolio at Fidelity, you would use a combination of equity and bond ETFs. For the equity portion you could use a dividend-based ETF for 20% and a short-to-intermediate term corporate bond fund for the bond portion. I think it will be a good exercise for you sort through their offerings. It should be obvious. Let me know if you are not able to figure it out.

Q: Would you allow us to publish your videos on our website?

A: Thanks for asking, Bob. My hope is everyone will find a way to take advantage of the videos, which are available on my YouTube channel

For individuals, I am hoping the videos will be shared with family and friends. For people in the industry, especially those like Advisor Perspectives that reach others in the industry, I am thrilled to have you include them on your site. And finally, I hope we can figure out a way to get the videos used in financial literacy classes in high schools and institutions of higher education.

Q:  What do you think of the disappointing returns of the small cap value ETFs I recently purchased?

It’s particularly frustrating as I have a history of getting in too late and it has evidently happened again.

A:  I think what has been difficult about the recent performance of small cap value is that its performance is lagging the S&P 500 by so much this year. As of July 17 the S&P is up 11.1% while the average small cap value fund is up 1.6%. I am working on an article about what we should expect from the small and large value asset classes.  It may be the most important piece of information, after the long-term returns of these asset classes, is how different the returns of small cap value have been from the S&P 500. If you intend to use the S&P 500 as the benchmark for small cap value finds or ETFs, you may be surprised at how different their one year returns have been. Over the last 50 years ending 2016, small cap value’s return has produced an average difference of 17%. Plus, in 6 of those years the S&P 500 made money while small cap value lost money.

My hope is you have made this investment for the long term. If you judge it over a short period of time you will probably move on to another investment that is more like the S&P. In fact, if your benchmark is the S&P 500, I suggest that’s where you put your long-term investments. I hope to release the special value report in the next month.

 

Q:  What is the definition of “All Value” vs. “Worldwide” in your fixed distribution schedule tables?

A:  The All-Value portfolio is a combination of 25% U.S. Large Cap Value, 25% U.S. Small Cap Value, 20% International Large Cap Value, 20% International Small Cap Value and 10% Emerging Markets Value. There is no way to invest in 100% of any of the asset classes, as the funds that give us access to those asset classes almost always have a small percentage of either mid-cap and/or growth in the portfolio.

 

Q:  How do you recommend I use your 5 Fund All-Value portfolio for the equity portion of my portfolio? 

I currently have funds held at Fidelity but am willing to use other companies’ ETFs or mutual funds, or move our funds to Vanguard if this would be beneficial.

A:  You can construct the portfolio using Fidelity or Vanguard commission-free ETFs but you will have to pick up a couple of funds outside the commission-free group to get access to all the asset classes in the All-Value portfolio. Check out these recommendations in the All-Value Best in Class group.

 

Q:  Do you know how bad the service is at Motif Investing?

I very much appreciate all that you do for your readers, including the Buy-and-Hold portfolio at Motif. However, you can’t control their bad customer service, or lack of it! I have attempted three times to get assistance to no avail. I will be transferring my funds somewhere else. Hopefully I’m an anomaly since you attached your name to this company. Again thanks for all you do! 

A:  I think it’s important that our readers who are considering using Motif see your comment. I too have had periods of slow responses. I find if I send them an email they respond within 24 hours.  As I mentioned in a recent podcast, Chris Pedersen and I will be doing a special report on Motif. I think there are very specific investors who will get the best out of Motif. Without getting into details, I think the best fit is with IRAs. Let me know if they respond to an email. More later.

 

Q:  Could you confirm that you recommend a tax-managed fund in a tax-deferred portfolio?  

It has been a while since I have rebalanced my Vanguard Tax-Deferred portfolio (my bad). You now recommend Vanguard Tax-Managed Small-Cap Admiral Shares instead of Vanguard Small-Cap Index Fund Admiral Shares. When I attempted to create the Vanguard Tax-Managed Small-Cap Admiral Shares account I received a warning from Vanguard that these funds are usually not part of a retirement account.

I could not find anything on your website that explains why it is okay to have a tax-management fund in a tax-deferred portfolio. I was not confortable moving forward on my rebalancing without confirmation from you that you do, in fact, recommend a tax-managed fund in a tax-deferred portfolio.  

A:  I think it’s great they are doing their best to make sure you are doing what’s in your best interest. My focus is the size of the companies and the relationship of price-to-book. In both cases the tax-managed fund is better. Plus the operating expenses in the tax-managed fund are only .09%. The 15-year performance of the tax-managed fund is about .5% a year better than the traditional small-cap fund.

Q:  How often are the portfolios re-balanced?

Your recent AAII article, “Power your portfolio with value,” was very interesting. I see that you have factored in 1% management fees. Is management necessary? 

A:  For purposes of tracking the worst rolling periods (12, 36 and 60 months) the portfolio is rebalanced monthly. I don’t recommend rebalancing any more often than once a year. If the portfolio had been rebalanced annually the return would have been higher.

There are several reasons I have added the 1% management fee. The database that has been used to create the returns is based on the research of Dimensional Fund Advisors (DFA). Their returns are based on small cap and value companies that are specific to the DFA method of identifying those important asset classes. While small cap and value asset classes are well defined, they are not the same as those Vanguard uses to build their index funds. Since DFA funds are only available through DFA approved advisors, I think some management fee has to be applied. While some charge less than 1%, many charge more. I think most charge 1%, depending on the account size.

Also, I have found most investors simply don’t want to do the work to maintain the strategy I recommend, so adding the 1% fee created a more realistic outcome for those who don’t want to manage the process.

Finally, I think the reduction in returns, from imposing the 1% fee, makes the outcome more realistic. When I was an advisor I used a similar table and suggested building a plan based on applying the 1% management fee less another 2%. It was my way of trying to get investors to prepare for the worst while hoping for the best.

 

Q:  Do you have an updated recommendation for an emergency fund? 

In your book, “101 Investment Decisions”, the recommendation for emergency funds – that I plan to never touch – is Vanguard’s Wellesley Income fund. Since the book is from 2012, do you have an updated recommendation? I’m saving for a home down payment and estimate it will take at least 2 years until I have enough.

A:  When you know you will need the money within 2 years, I don’t think you should take any more risk than a short-term investment grade bond fund.  Updating books and popular articles is a big project. If I had thought ahead, we would have suggested readers check the recommendations pages on our website for updates. The “recommendations” tab will lead to my latest recommendations for Vanguard, Fidelity, Schwab, T Rowe Price and TD Ameritrade mutual funds and ETF portfolios. They are usually updated the first quarter of each year. Some of our portfolios have not been updated since early 2016. We hope to have them all updated to 2017 very soon.

 

Q:  Why did you write that an S&P 500 fund is a poor long-term investment?

In your MarketWatch article, (Jan. 14, 2015) you also mentioned Vanguard Index Funds as a group of asset classes that you recommend. Is it still possible to get this information? 

A:  Check out my Vanguard Index recommendations. This page includes taxable, tax-deferred, emergency and monthly income portfolios. 

 

Q:  Do you think that value stocks are worth all the work I’d have to go through, in Australia, to gain exposure to value stocks, including US and international large and small cap value indices?

Given our stock market is quite small, there are no current offerings of ETFs or index funds for large and small value stocks for global or US stocks here, we’re planning to buy these ETFs on the New York stock exchange instead. We already have an international brokerage account set up to do this, and have considered the tax implications. 

A:  Of all the asset classes, value has produced the best premium. The small cap premium is also meaningful but the addition of value to small cap has had the biggest additional return. As you may have noticed we now offer all-value portfolio ETF recommendations. 

 

Q:  Do you set the amount to be distributed based on the balance at the beginning of each year?

I enjoyed your video and plan to implement the flexible distribution plan you outlined, as I am in the distribution phase of my life. I am also curious: do you break it down into smaller chunks so that if the market turns south, you adjust your budget quicker (e.g. 1% of your balance each quarter instead of 4% of the yearly beginning balance)?

A:  First of all, my wife and I take our distributions the first of the year to eliminate watching the market during the year. We would likely make more taking the money monthly or quarterly as it allows additional money to compound before it’s distributed. In fact, if you can delay the first year’s distribution, and take the money at the end of the year, it adds a lot more to what your heirs will have.  Check out tables 47 and 54. Notice the 50% stocks/50% bonds portfolio in each table. In table 47 the distribution was taken at the first of the year. In Table 54 the distribution was taken at the end of the year. The difference is more than $2,000,000 by waiting until the end of the year based on an initial $40,000 distribution.

 

Q:  For a do-it-yourselfer like me who has enough money and can’t get into DFA funds, are the Admiral Shares the next best thing?

In your recent podcast with Rob Berger, as you were discussing Motif Investing, you said, “…you should be at Vanguard because there are a lot of advantages once you have a certain amount of money to be in their Admiral Shares.” All of my money is at TD Ameritrade, but your statement concerning the Admiral shares is so strong that I’m thinking about putting all of money there.

A:  I prefer Admiral shares over ETFs, when they are both available in the same asset class. Mutual funds are easier to trade and can be bought and sold without commissions and spreads. ETFs shares all have a bid-ask spread when traded and in some cases there are commissions. The Admiral Shares at Vanguard have very low expenses, but there are some great asset classes not represented by the Admiral Shares. I think most of the DFA equity funds, for those who qualify, are going to produce better returns than similar Admiral Shares. There is no secret to the DFA advantage – smaller companies and more deeply discounted value.

Q:  To work out what I can expect with compounding of my mutual funds at Vanguard, at what intervals does a compound occur – daily, monthly, bi-annually or annually? I am making fortnightly investments of the same amount.

A:  My source of mutual fund results is Morningstar.com.  It reports daily year-to-date (YTD) returns.  At the end of the year, the return includes the increase or decrease in price plus reinvestment of all dividends and capital gains. The reinvestment of dividends and capital gains are tracked based on reinvesting on a day dictated by the fund. That final annual number becomes the annual return from which the long-term compound rate of return is determined.  Morningstaralso reports 10 short-to-long-term compound rates of return (from one day to 15 years) on a daily basis. 

Q:  How can I plan for the long term if I have no idea what rate of return I can expect?  What rate of return would you use to build a investment plan for a 27-year-old investor?

A:  I hope you will listen to my upcoming podcast on this topic. The answer could be a range of returns, or the worst expected outcome.  I favor the approach of “hope for the best but prepare for the worst.”  If you are building a long-term “glide path,” your return will be based on both the equity and fixed income portions of your portfolio. The return also will be impacted by assumed expenses. In my Fine Tuning Tables I have built-in a 1% management fee, on top of the assumed expenses of managing the mutual funds.  For planning purposes you might use the returns in the Fine Tuning Tables, less 2%.  That’s probably not the worst long-term return, but close to it.

Q:  I have two questions as they relate to my annual investment into a Vanguard Roth IRA I just started for my 22-year-old daughter: 1) for the 2-value fund portfolio, do you recommend 50-50 small cap to large cap or some other ratio? 2) Thinking of this for the next 20-30 years, would you recommend (as of now – I know things can change) VIOV or VISVX (for small) and VONV or VIVAX (for large) or perhaps a fund and ETF for both caps?

A:  I prefer VIOV over VISIX, as the average size company in VIOV is half the size company as VISIX and they both have the same ratio of Price-to-Book.  I prefer VIOV over VIVAX as it has a lower Price-to-Book (more value orientation) and a smaller average size company. I think a 50/50 small and large value allocation will produce a 10 to 12 percent return over the long term.

Q:  What do you suggest as a mechanism of dollar-cost averaging with ongoing ETF purchases in a brokerage account?

I would like to move about $36K from my Roth IRA with Vanguard into brokerage ETF’s using your best of class recommendations. (Since I don’t have enough invested in this account yet to purchase Admiral Shares of the recommended mutual funds). Might it be simpler to contribute the annual allowance of $5,500 and buy shares as a lump sum during a yearly rebalance?

A: Your idea to fund your Roth IRA at the first of the year is the best approach. Making your contribution the first of the year is the best dollar-cost-average discipline I know.  It keeps your commissions to a minimum and your investment starts growing the first day of the year.  If you want to make a monthly contribution, I suggest you purchase one ETF each month.  

Q:  Which state’s 529 Plan do you recommend? 

The whole family (grandmas, grandpas, aunts and uncles) are going to put money into a 529 plan for our new daughter.

A:  I’m pleased you are making this a family project. Doing this once may encourage the family members to use this account for special occasions.  New York and Utah are both good choices, but the state you reside in might make a difference in terms of tax implications.  Check out savingforcollege.comdetails. This site will personalize information for several important variables.

Q:  What is your definition of risk?

You, like others, talk a lot about risk but few rarely seem to define it in the same way. It doesn’t make sense to eliminate all risk but do you have a simple list of steps to take to keep the risks of investing to a minimum?

A: I love the question as it can open a discussion that could go on for hours. Of course you probably don’t want my answer to go on for hours, so here is as short as I can make it. First the definition from Merriam-Webster: Risk is the possibility of loss or injury. Here is the BusinessDictionary.com definition of risk: A probability or threat of damage, injury, liability, loss, or any other negative occurrence that is caused by external or internal vulnerabilities, and that may be avoided through preemptive action. 

The risks I want to address are the risks we take in the process of investing.  While risk can be the loss from not doing something (sin of omission), most of us experience risk when we lose money (sin of commission).  So my definition of risk is anything that leads to a loss during the steps taken to manage ones investments. 

In my article, “The best investment advice ever!” I conclude the best advice I know is, “Never take an investment risk that doesn’t pay a premium for taking that risk over the long term.”

In other words, if you know you are exposing yourself to a loss of money, make sure you can expect an additional return (no guarantees of course) for having taken the risk.  y the way, the list of ways to lose money is long. The good news is there is a way to manage almost every one of those losses. Here is a short list of ways guaranteed to cost you money and what you can do about it:

• Paying a commission to buy a mutual fund: Buy a no-load fund where the investor doesn’t pay a commission.

• Paying high expenses to manage a mutual fund: Buy a fund with low operating expenses.

• Putting all your money in one company that can go down or even out of business: Buy a portfolio of many companies. This is also called diversification.

• Putting all your money in one asset class: NASDAQ lost 73% from 2000 to 2002.  Buy many different asset classes.

• Paying more in taxes than necessary: Use tax-deferred or tax-free investment vehicles like Roth IRAs and Roth 401ks.

• Putting your money into Ponzi or other fraudulent schemes: Restrict your investments to heavily regulated investments like mutual funds or ETFs.

• Paying the additional expenses of actively managed mutual funds: Restrict your investments to inexpensive index funds.

• Paying for an investment advisor to take care of your investments: Some investors enjoy the process of managing their own money… others don’t. For those who don’t want to take care of the investment details, having someone else do it likely leads to higher returns.

• There are lots of small additional steps but just this handful of suggested steps can lead to having twice as much to spend in retirement, as well as leaving many times more to your heirs or favorite causes.

• Loss and risk are normal, but don’t accept the loss unless it is accompanied by greater returns. Keep in mind that losses are guaranteed, but greater returns can never be guaranteed.

Q:  Why are you adding emerging markets funds when their long-term return diminishes portfolio value and adds to volatility?

A: The emerging markets asset class can run either red hot or ice cold. It makes a good candidate for rebalancing. For the 15 years ending 5/5/17 the S&P 500 compounded at 7.7%, while the DFA Emerging Markets Fund compounded at 10.1%. The more risky DFA Emerging Markets Small Cap Fund and DFA Emerging Markets Value Fund compounded at 12.9% and 11.8% respectfully. The Vanguard Emerging Markets Fund is invested similar to the DFA Emerging Markets Fund (large cap) but under-performed slightly with a 9.1% return including dividends and capital gains.

Q: Why don’t you add the QQQ to your portfolio? Don’t these mostly technology companies have a higher expected growth rate than the S&P 500?

A: The NASDAQ (QQQ) has had a terrific return over the past years, but for the 17 years ending 2016, the compound rate of return (without dividends) was only 2.4%. The S&P 500 compounded at 5% including the reinvestment of dividends. What makes QQQ a doubtful buy-and-hold candidate is its very large downside risk. During the 2000-2002 bear market, it was down over 80 at one point.

Q:  The Ultimate Buy and Hold chart shows that the S&P 500 has higher risk and lower historic returns than US LCV, so why hold any S&P 500 at all?

I am helping my children and grandchildren make their first investments.

A:  For young investors I believe an All-Value portfolio makes sense, but the S&P 500 is likely to hold up better in a catastrophic situation so it’s appropriate for those close to or in retirement. I suggest you compare the Fine-Tuning Tables for the S&P and All-Value portfolios. You can find them here.  

For young investors my best work is yet to come. In the coming months we will introduce a group of Target Date Funds that are almost all All-value until age 40.  

Q:  I happened upon your 1985 book “Market Timing with No-Load Mutual Funds” and wonder, how do you feel about market timing since you occasionally mentioned that you have a portion of your investments in market timing?

I enjoyed the book and wish it could have been updated to cover ETFs and a more up-to-date strategy. I use a somewhat similar strategy that includes a 200-week exponential moving average and the percentage of stocks above their 40-day moving average with some success in a small portion of my retirement account.

A:  I am a big fan of market timing but rarely recommend it to do-it-yourself investors, as it is unlikely that they will maintain the timing systems. I only trust trend-following systems.

Since 1995 my best return (including all buy-and-hold and timing portfolios) has come from a hedge fund that combines mutual funds and ETFs with leverage and market timing. The annual return of the hedge fund has been about 2.3 times greater than the S&P 500, with the same downside standard deviation. 

The majority of my timing is more conservative, including all the important U.S. and international equity asset classes plus high grade and high yield bond funds. This strategy has worked well, under performing in the best of times and out performing in the worst of times.

I don’t expect writing another book on timing but Les Masonson, author of All About Market Timing, does a good job of showing investors how to use trend-following systems with ETFs.

Q:  Could you share your thoughts on rebalancing the portfolio and the frequency of rebalancing? 

I really liked your approach to investing and am interested in knowing more about investing for taxable accounts. 

A:  Here is a link to an article that may help: “6 Things You Should Know About Rebalancing.” If you want to get more complex, check out Larry Swedroe’s “5/25 Rebalancing Strategy.”

Q:  When are you going to update your mutual fund recommendations?

A:  I’m working on them right now. Some will be out in the next week. 

Q:  You often mention that one could use a flexible distribution strategy with an ample retirement savings, but how to determine ample?

Is  33.3 x annual expenses ample? 1.5X that? 2X that? It’s probably highly subjective based on risk tolerance but I am curious to know how you think about that question.

A:  I love the question. I will be recording a podcast on distributions in the coming month. I will likely do one on fixed distributions and second on variable distributions. I will address your question on the variable podcast. In the meantime you already know most of the answer: “It depends.” 

From my viewpoint, your suggestion of 33 times your “need for money” is close.  I would probably use 40 times. So let’s assume a minimum cost of living, that needs to be taken out of your investments, is $40,000. Let’s also assume you would like to take out a lot more but you don’t need to. Let’s also assume you are concerned (even if it’s a completely emotional feeling) about running out of money before running out of life.

If you waited to retire until you accumulated $1,600,000 it suggests you could easily take out 5% ($80,000) with little risk of using all your savings. And if the market went down for an extended period you could certainly cut back to the $40,000 distribution. I waited until I had at least twice what I needed before I chose to spend the rest of my career working without pay. I think you will enjoy my new distribution tables.

FAQ’s for Motif Investing

Q:  How do I find your Motif portfolios?

I tried looking for it under Paul Merriman and could not find it.

I discovered Motif about 2 years ago. I love Motif because it has so much potential for the little guy.  I’m so happy you are using it to help us with the best of the best and guiding us along the way. Looking forward to buying it and belonging to your Motif community.

A:  If you search for “Merriman diversified” under Community Motifs you should see the list of 70 portfolios. Here is a direct link as of today

Q:  I am thinking of converting an IRA to a Roth and then transferring the Roth to Motif. Which of your portfolios should I use?  Do you think this is a good idea? What should I be aware of?

A:  Before I answer your questions it’s important to understand my limitations.  I want to do all I can to help you make good investment decisions but I am not able to give personal advice.  My hope is, with the help of the Fine-Tuning tables you can identify the right combination of asset classes to meet your need for return within your risk tolerance.  Of course the conversion of a traditional IRA to a Roth IRA is a combination of tax and estate planning decisions. Again I am limited in giving personal tax advice.  When I was an advisor I often encouraged investors to convert their IRAs to Roths as it was the equivalent of saving more money. Plus who knows what tax and estate laws will be in the future?

I know our present lineup of portfolios at Motif is overwhelming to many investors. My hope is our soon-to-be offered target date portfolios will make the decision easier.

Q:  Regarding Motif commissions: since I usually like to save a certain amount per paycheck and invest it into an account, wouldn’t it be wasteful to be investing that amount and incurring a commission every paycheck from making a trade?

My name is Ryan and I am a 23-year-old who has been in the work force for 9 months. I’m a big fan of your work and have been listening to your podcasts and reading your material for a little over a year.

A:  No, it doesn’t make any sense to spend $9.95 a month to dollar cost average into a small account. I am trying to figure out the steps you should take, as I’m sure there are a lot of people in your position.

Here are a couple of ideas. You can set up an account with a firm that doesn’t charge anything to make small contributions. One possibility is to work with Schwab. At your age an all-value portfolio is a reasonable strategy. Then once you get to $2,000 you can transfer $1,500 to Motif and continue to invest the monthly amounts at Schwab.

Another approach is to borrow your intended annual contributions from your parents and let them be the recipient of your monthly contribution. What I like about this approach is it means you invest earlier in the year and that should produce a lot more income when you retire. I will be doing more on this in the future.

My goal for you is to find the best place to meet your personal needs and Motif is not going to be the answer for many investors.

Q:  Can I use the names of the funds in your ETF portfolio and try to find similar mutual funds on Schwab’s OneSource list where I have my 401k?

A:  There must be a lot of people who would like that help at Schwab, and Fidelity. I have added them both to my “to do” list. In the meantime I suggest the following: I know you will be able to find funds that represent the asset classes I hope you will have in your portfolio. They include all the equity asset classes found in by Ultimate Buy and Hold Portfolio. Some are available in very low cost Schwab index funds.  Watch for my Schwab and Fidelity self directed recommendation in the last quarter of the year.

Q:  I am moving roughly $10,000 from an American Fund Roth to Vanguard; with that small amount, should I break it down as it was – into 4 different types of mutual funds to diversify – or stay put with one until it grows more?

I am new to the podcast and new to Vanguard… after my financial advisor announced he is going to 1.6% management fee.

A: Glad you have found our information helpful. In the beginning you might want to use our ETF recommendations, as they have no minimum. Later you can move to mutual funds. The ETFs allow you to use asset classes AND their expense rations are lower than the Vanguard Investor Shares class mutual funds.

Q: Are willing to share the structure of you all value portfolio you use for DFA funds?

A: I don’t normally get into how my advisor approaches the application of DFA funds, but in this case there’s not many ways to change it. Here are the ticker symbols: DEMSX. DFEVX, DISVX, DFIVX, DFSVX. This is a small part of my portfolio. Most of my Buy and Hold portfolio is 50/50 equity and fixed income funds at DFA and Vanguard.

Q: Have you moved – or plan to move – your portfolio over to Motif

If not, I was wondering why not? I would also ask the same set of questions to Chris Pederson. Any insight would be appreciated as I am currently pondering this move with my retirement investments.

A: PAUL: I am opening a $50,000 account using our All Value Motif. It will mirror a portfolio I hold in a Roth IRA using DFA funds.  Other than that I will be keeping the rest of my buy and hold portfolio with my DFA advisor.  It is my belief that DFA still holds an advantage over ETFs in most of the equity asset classes my wife and I own. Plus, I am not a do-it-yourself investor and depend on my advisor to take care of all the investment details. I believe one should never take a risk (or pay an expense) for which there is not an expected premium.  I know having someone take care of my investments will work better than doing it myself.  

A: CHRIS: I’m not moving mine because I just spent a lot of time getting my assets aggregated at Schwab, and I prefer control over convenience while I’m evolving my portfolio allocations from discrete stocks to ETFs and mutual funds to align with your recommendations. Basically, I have too many moving parts.

Q:  A major cost of investing in stocks or ETFs is not the commission but rather the spread.  Does Motif provide executions that are as favorable as other brokerage platforms?

A: CHRIS: According to the Securities Exchange Commission, “brokers are legally required to seek the best execution reasonably available for their customers’ orders,” and there are audit and reporting steps to make sure this happens. In my experience trading Paul’s Motifs, the bid-ask spread has been VERY NARROW Spreads are supposed to be largest at the beginning and end of the trading day, so it may help to avoid those times, especially when investing larger sums.

Q: Why did you become an affiliate with Motif? That seems counter to all the free information you’ve given in the past.

A: The affiliate relationship provides a one-time compensation to our Foundation when someone becomes a Motif client by joining Motif via our website or link. We will also receive $1 for some Motif trades. This is similar to the small commission we receive from sales of our books. Both provide some minimal incremental funding to the foundation. Neither is large enough to motivate me to recommend anything but the best for you. For those who are interested, the by-laws of The Merriman Financial Education Foundation prohibit any officer or director from receiving any compensation.

We like that Motif provides a high level of convenience at low cost – especially good for young investors. But it is only one option and not best for everyone. For large accounts, especially taxable accounts, moving to Motif may be very costly as the sale of the holdings might create taxable gains.

Q: Why do you recommend using Motif instead of Vanguard, Fidelity, Schwab, T. Rowe Price, etc.?

We don’t. We recommend Motif Investing for investors looking for a simpler, more convenient way to invest in a broadly diversified portfolio. Many investors will still do better investing with an advisor who provides an even higher level of convenience. Some will prefer to work with Vanguard directly for the lowest costs. Others may have a preference for Schwab. All the providers offering mutual fund and ETF portfolios we recommend are good. What we care about most is that you invest using the service that assures you will maintain the Buy-and-Hold strategy in all market environments.

Q: Who is behind Motif?

Motif Investing is an online brokerage company founded in 2010 with over $120M venture capital investments from J.P. Morgan, Goldman Sachs and others.  Investments made at Motif are held by Pershing, which was founded in 1939 and holds over $1.5 trillion in assets and serves more than 1,400 business clients worldwide.

Q: What do I gain by changing brokerages?

Changing brokerage firms may or may not make sense based on your needs and values. Every situation is different. The primary advantages of Motif are one-click and one-fee purchasing and re-balancing of our recommended portfolios. The Motif portfolios we have put together allow us to build portfolios based on “Best-In-Class,” as opposed to being relegated to one ETF group. Motif does not offer the broad range of services like Vanguard, Fidelity or Schwab. 

Q: If it costs just $9.95 a transaction, to purchase a whole “basket” of up to 30 ETFs, what is the $9.95 a month offer they present at Motif?

Motif has a number of services that can be purchased for $9.95. As you noted an investor can select up to 30 stocks (including ETFs). Investors can build their own portfolio of securities, including what percentage of each to put in the portfolio, and buy the whole portfolio automatically with the push of a button. The total cost of the trade is only $9.95. The purchase even buys partial shares so all of the money goes to work. That’s unusual with ETFS. 

If you don’t want to build the portfolio yourself, you can select from a long list of portfolios designed by others. We have 70 of our portfolios for investors, built with our unique approach to asset allocation. Many investors are familiar with our work as they have followed our recommendations at Vanguard, Fidelity and others for many years.

We like Motif because we can build a portfolio of Best-in-Class ETFs and rebalancing is always just a button-push away. (We hope you will only push the rebalance button once a year). There are other advantages but those are the two most important.  Next week I expect to do a podcast about the challenges of working with Motif.

Motif offers a robo advising service called Motif Impact Portfolios for $9.95 a month. It is a robo advisory service that is built to compete with other the major robo advisors. They also have a $9.95 monthly fee for investors who want to auto invest and auto rebalance on a monthly basis.  That service has nothing to do with our portfolio.

The Merriman Motifs are designed for investors who are not looking for a robo advisor and are willing to take care of the basic steps to manage the account.  Using the portfolios we’ve designed requires you to take the step to periodically (annually is often enough) of pushing the rebalance button. I estimate most accounts can be managed for less than $25 account.

Q: I am not willing to pay $9.95 to make monthly payments through the Blue Plan offered by Motif. Do you have a recommendation on how to make regular payments without paying so much?

A: The $9.95 automatic investment and automatic rebalancing service has advantages but may lead to lower returns. In one study we found that monthly rebalancing lowered the annualized rate of return by .5% a year, compared to annual rebalancing. 

If you invest on a quarterly basis, by selecting a single ETF to put your investment in rather than rebalancing the whole portfolio, you will pay $4.95. If you make the investment and rebalance at the same time, the cost would have been $9.95. If you do that quarterly, in the 4th quarter you deposit the cash in the account and rebalance at the same time, the total commission cost for the entire year will be approximately $25. If you are able to make the entire year’s investment during the first month of the year, you can make the deposit and rebalance all at one time for a total annual cost of $9.95.

Q: Do you updated the website yearly or do the funds and percentages generally not change from year to year?

I’m newly retired and followed your recommendations for portfolio allocation in preparation for my retirement last year. I’m now looking at doing my first yearly rebalancing. Looking at your website, the allocations for Vanguard Mutual Funds was last updated February 29, 2016.

A: I hope you are enjoying retirement. I should have any changes made by the end of April. With all the work of introducing the new Motif portfolios, I have gotten behind. My sincere apologies.

Q: You’ve always recommended avoiding individual stocks before. Why have you changed with Motif? Why not recommend only ETFs, which would be consistent with your previous recommendations?

A: Even though Motif is set up to use individual stocks to build portfolios, all of our recommendations are based on ETFs. In each asset class we have tried to identify the best ETF based on what we believe produces the best returns.  Plus, we will continue to look for better solutions in the future.

Q: Do you plan to set up Motifs for each of the seven Ultimate Buy and Hold asset classes you’ve talked about in the past on your podcasts and web site?

A: Almost every one of our new Motif portfolios are built on those Ultimate Buy and Hold asset classes. What we have been able to do is offer many more combinations. Previously, we had conservative (40% equity/60% fixed-income), moderate (60% equity/40% fixed-income) and aggressive (100% equities) portfolios. Now we offer 7 different combinations of equities and fixed-income, as well as All-Value portfolios. The good news is investors can look at what we have done at Motif and do it on their own with another broker.

Q: Have you moved – or plan to move – your portfolio over to Motif? 

Your last podcast unveiling opportunities with Motif was very intriguing and seems to solve a number of problems with managing a portfolio. 

A: I have money being moved to Motif but the bulk of my portfolio will stay in DFA funds. I am putting the Motif investment in our All-Value Portfolio. I want to compare it to my All-Value portfolio at DFA. I think the bulk of investors at Motif are going to be real Do-It-Yourself investors.

There are three major camps of DIYers. One group does it because they love the process of selecting and managing their own investments. Another group does it themselves to eliminate as many expenses as they can. The third group is made up of millions of investors who don’t have enough money to find a good advisor to work with them. I think Motif will appeal to people from all three groups.

The group I would especially like to help is the young people who don’t have enough money to get the best advice from other sources. My hope is they will take the time to understand how we have constructed the portfolios and conclude we are the experts they can count on.

I don’t fit into any of those groups. Money is a very emotional topic for me.  I don’t want anything to do with managing my own money, so I have an advisor.  Plus, I am 73-years-old and have health issues that suggest I should make sure my wife and family have someone they can trust. I know it’s a luxury to have a financial advisor, but it comes with a great deal of peace of mind.

Q: I have 30k in a Money Market. I pull out $1k every 2 weeks and invest it in your Vanguard Mutual Fund portfolio recommendation. Is there a better place I should put the $30k while I dollar cost average into the various funds?

Consider the Vanguard Ultra Short-Term Bond Fund (VUBFX). There is very little risk and it currently pays more than 1% interest.

 

Q: I have 30k in a Money Market. I pull out $1k every 2 weeks and invest it in your Vanguard Mutual Fund portfolio recommendation. Is there a better place I should put the $30k while I dollar cost average into the various funds?

Consider the Vanguard Ultra Short-Term Bond Fund (VUBFX). There is very little risk and it currently pays more than 1% interest.

 

Q: I have 30k in a Money Market. I pull out $1k every 2 weeks and invest it in your Vanguard Mutual Fund portfolio recommendation. Is there a better place I should put the $30k while I dollar cost average into the various funds?

Consider the Vanguard Ultra Short-Term Bond Fund (VUBFX). There is very little risk and it currently pays more than 1% interest.

 

Q: I have 30k in a Money Market. I pull out $1k every 2 weeks and invest it in your Vanguard Mutual Fund portfolio recommendation. Is there a better place I should put the $30k while I dollar cost average into the various funds?

Consider the Vanguard Ultra Short-Term Bond Fund (VUBFX). There is very little risk and it currently pays more than 1% interest.

 

Q: I have 30k in a Money Market. I pull out $1k every 2 weeks and invest it in your Vanguard Mutual Fund portfolio recommendation. Is there a better place I should put the $30k while I dollar cost average into the various funds?

Consider the Vanguard Ultra Short-Term Bond Fund (VUBFX). There is very little risk and it currently pays more than 1% interest.

 

Q: I have 30k in a Money Market. I pull out $1k every 2 weeks and invest it in your Vanguard Mutual Fund portfolio recommendation. Is there a better place I should put the $30k while I dollar cost average into the various funds?

Consider the Vanguard Ultra Short-Term Bond Fund (VUBFX). There is very little risk and it currently pays more than 1% interest.

 

Q: I have 30k in a Money Market. I pull out $1k every 2 weeks and invest it in your Vanguard Mutual Fund portfolio recommendation. Is there a better place I should put the $30k while I dollar cost average into the various funds?

Consider the Vanguard Ultra Short-Term Bond Fund (VUBFX). There is very little risk and it currently pays more than 1% interest.

 

Q: I understand ETFs can be more tax efficient than mutual funds, but if I want to become a mechanical investor, wouldn't my best choice really only be mutual funds, since only mutual funds allow automatic investments?

Most brokerage firms don’t allow partial share purchases of ETFs so automatic investing doesn’t work with that limitation. Motifinvesting.com allows partial share purchases of ETFs but at a cost of $4.95 per transaction. 

Q: Could you point me to an academic source showing that investing in diversified asset class index funds is more profitable than picking winning stocks -- as you discuss in Financial Fitness Forever?

A:  Check out this article by Larry Swedroe, one of the most trustworthy people I know in the industry: http://mutualfunds.com/expert-analysis/speculating-versus-investing-buying-individual-stocks/

Q: In First Time Investor you cite model portfolios for Vanguard, Fidelity, etc. Do you have one for TIAA-CREF as well? I could adapt one of your other model portfolios to TIAA-CREF, but if you've already done the research and recommendations that would be great.

A: I have put together TIAA-CREF portfolios of funds in the past but have not updated them for many years. I think you will find it relatively easy to figure out what my recommendations would be by looking at my other portfolios. Be sure and compare the expenses and returns of similar actively and passively managed funds at TIAA-CREF, as they offer both.

Q: Why did you become an affiliate with Motif? That seems counter to all the free information you’ve given in the past.

A: The affiliate relationship provides a one-time compensation to our Foundation when someone becomes a Motif client by joining Motif via our website or link. We will also receive $1 for some Motif trades. This is similar to the small commission we receive from sales of our books. Both provide some minimal incremental funding to the foundation. Neither is large enough to motivate me to recommend anything but the best for you. For those who are interested, the by-laws of The Merriman Financial Education Foundation prohibit any officer or director from receiving any compensation.

We like that Motif provides a high level of convenience at low cost – especially good for young investors. But it is only one option and not best for everyone. For large accounts, especially taxable accounts, moving to Motif may be very costly as the sale of the holdings might create taxable gains.

Q: Why do you recommend using Motif instead of Vanguard, Fidelity, Schwab, T. Rowe Price, etc.?

A: We don’t. We recommend Motif Investing for investors looking for a simpler, more convenient way to invest in a broadly diversified portfolio. Many investors will still do better investing with an advisor who provides an even higher level of convenience. Some will prefer to work with Vanguard directly for the lowest costs. Others may have a preference for Schwab. All the providers offering mutual fund and ETF portfolios we recommend are good. What we care about most is that you invest using the service that assures you will maintain the Buy-and-Hold strategy in all market environments.

Q: Who is behind Motif?

Motif Investing is an online brokerage company founded in 2010 with over $120M venture capital investments from J.P. Morgan, Goldman Sachs and others.  Investments made at Motif are held by Pershing, which was founded in 1939 and holds over $1.5 trillion in assets and serves more than 1,400 business clients worldwide.

Q: What do I gain by changing brokerages?

Changing brokerage firms may or may not make sense based on your needs and values. Every situation is different. The primary advantages of Motif are one-click and one-fee purchasing and re-balancing of our recommended portfolios. The Motif portfolios we have put together allow us to build portfolios based on “Best-In-Class,” as opposed to being relegated to one ETF group. Motif does not offer the broad range of services like Vanguard, Fidelity or Schwab. 

Q: If it costs just $9.95 a transaction, to purchase a whole “basket” of up to 30 ETFs, what is the $9.95 a month offer they present at Motif?

Motif has a number of services that can be purchased for $9.95. As you noted an investor can select up to 30 stocks (including ETFs). Investors can build their own portfolio of securities, including what percentage of each to put in the portfolio, and buy the whole portfolio automatically with the push of a button. The total cost of the trade is only $9.95. The purchase even buys partial shares so all of the money goes to work. That’s unusual with ETFS. 

If you don’t want to build the portfolio yourself, you can select from a long list of portfolios designed by others. We have 70 of our portfolios for investors, built with our unique approach to asset allocation. Many investors are familiar with our work as they have followed our recommendations at Vanguard, Fidelity and others for many years.

 

We like Motif because we can build a portfolio of Best-in-Class ETFs and rebalancing is always just a button-push away. (We hope you will only push the rebalance button once a year). There are other advantages but those are the two most important.  Next week I expect to do a podcast about the challenges of working with Motif.

 

Motif offers a robo advising service called Motif Impact Portfolios for $9.95 a month. It is a robo advisory service that is built to compete with other the major robo advisors. They also have a $9.95 monthly fee for investors who want to auto invest and auto rebalance on a monthly basis.  That service has nothing to do with our portfolio.

 

The Merriman Motifs are designed for investors who are not looking for a robo advisor and are willing to take care of the basic steps to manage the account.  Using the portfolios we’ve designed requires you to take the step to periodically (annually is often enough) of pushing the rebalance button. I estimate most accounts can be managed for less than $25 account.

Q: I am not willing to pay $9.95 to make monthly payments through the Blue Plan offered by Motif. Do you have a recommendation on how to make regular payments without paying so much?

A: The $9.95 automatic investment and automatic rebalancing service has advantages but may lead to lower returns. In one study we found that monthly rebalancing lowered the annualized rate of return by .5% a year, compared to annual rebalancing. 

If you invest on a quarterly basis, by selecting a single ETF to put your investment in rather than rebalancing the whole portfolio, you will pay $4.95. If you make the investment and rebalance at the same time, the cost would have been $9.95. If you do that quarterly, in the 4th quarter you deposit the cash in the account and rebalance at the same time, the total commission cost for the entire year will be approximately $25. If you are able to make the entire year’s investment during the first month of the year, you can make the deposit and rebalance all at one time for a total annual cost of $9.95.

Q: Do you updated the website yearly or do the funds and percentages generally not change from year to year?

A: I hope you are enjoying retirement. I should have any changes made by the end of April. With all the work of introducing the new Motif portfolios, I have gotten behind. My sincere apologies.

Q: You've always recommended avoiding individual stocks before. Why have you changed with Motif? Why not recommend only ETFs, which would be consistent with your previous recommendations?

A: Even though Motif is set up to use individual stocks to build portfolios, all of our recommendations are based on ETFs. In each asset class we have tried to identify the best ETF based on what we believe produces the best returns.  Plus, we will continue to look for better solutions in the future.

Q: Have you moved – or plan to move – your portfolio over to Motif? Your last podcast unveiling opportunities with Motif was very intriguing and seems to solve a number of problems with managing a portfolio.

A: I have money being moved to Motif but the bulk of my portfolio will stay in DFA funds. I am putting the Motif investment in our All-Value Portfolio. I want to compare it to my All-Value portfolio at DFA. I think the bulk of investors at Motif are going to be real Do-It-Yourself investors.

There are three major camps of DIYers. One group does it because they love the process of selecting and managing their own investments. Another group does it themselves to eliminate as many expenses as they can. The third group is made up of millions of investors who don’t have enough money to find a good advisor to work with them. I think Motif will appeal to people from all three groups.

The group I would especially like to help is the young people who don’t have enough money to get the best advice from other sources. My hope is they will take the time to understand how we have constructed the portfolios and conclude we are the experts they can count on.

I don’t fit into any of those groups. Money is a very emotional topic for me.  I don’t want anything to do with managing my own money, so I have an advisor.  Plus, I am 73-years-old and have health issues that suggest I should make sure my wife and family have someone they can trust. I know it’s a luxury to have a financial advisor, but it comes with a great deal of peace of mind.

Q: Do you plan to set up Motifs for each of the seven Ultimate Buy and Hold asset classes you've talked about in the past on your podcasts and web site?

A: Almost every one of our new Motif portfolios are built on those Ultimate Buy and Hold asset classes. What we have been able to do is offer many more combinations. Previously, we had conservative (40% equity/60% fixed-income), moderate (60% equity/40% fixed-income) and aggressive (100% equities) portfolios. Now we offer 7 different combinations of equities and fixed-income, as well as All-Value portfolios. The good news is investors can look at what we have done at Motif and do it on their own with another broker. 

Q: I am moving roughly $10,000 from an American Fund Roth to Vanguard; with that small amount, should I break it down as it was – into 4 different types of mutual funds to diversify – or stay put with one until it grows more? I am new to the podcast and new to Vanguard… after my financial advisor announced he is going to 1.6% management fee.

A: Glad you have found our information helpful. In the beginning you might want to use our ETF recommendations, as they have no minimum. Later you can move to mutual funds. The ETFs allow you to use asset classes AND their expense rations are lower than the Vanguard Investor Shares class mutual funds.

Q: Are willing to share the structure of you all value portfolio you use for DFA funds?

A: I don’t normally get into how my advisor approaches the application of DFA funds, but in this case there’s not many ways to change it. Here are the ticker symbols: DEMSX. DFEVX, DISVX, DFIVX, DFSVX. This is a small part of my portfolio. Most of my Buy and Hold portfolio is 50/50 equity and fixed income funds at DFA and Vanguard.

Q: Have you moved – or plan to move – your portfolio over to Motif? If not, I was wondering why not? I would also ask the same set of questions to Chris Pederson. Any insight would be appreciated as I am currently pondering this move with my retirement investments.

A: PAUL: I am opening a $50,000 account using our All Value Motif. It will mirror a portfolio I hold in a Roth IRA using DFA funds.  Other than that I will be keeping the rest of my buy and hold portfolio with my DFA advisor.  It is my belief that DFA still holds an advantage over ETFs in most of the equity asset classes my wife and I own. Plus, I am not a do-it-yourself investor and depend on my advisor to take care of all the investment details. I believe one should never take a risk (or pay an expense) for which there is not an expected premium.  I know having someone take care of my investments will work better than doing it myself.  

A: CHRIS: I’m not moving mine because I just spent a lot of time getting my assets aggregated at Schwab, and I prefer control over convenience while I’m evolving my portfolio allocations from discrete stocks to ETFs and mutual funds to align with your recommendations. Basically, I have too many moving parts.

 

Q: A major cost of investing in stocks or ETFs is not the commission but rather the spread. Does Motif provide executions that are as favorable as other brokerage platforms?

A: CHRIS: According to the Securities Exchange Commission, “brokers are legally required to seek the best execution reasonably available for their customers’ orders,” and there are audit and reporting steps to make sure this happens. In my experience trading Paul’s Motifs, the bid-ask spread has been VERY NARROW Spreads are supposed to be largest at the beginning and end of the trading day, so it may help to avoid those times, especially when investing larger sums.

Q: The Ultimate Buy and Hold chart shows that the S&P 500 has higher risk and lower historic returns than US LCV, so why hold any S&P 500 at all? I am helping my children and grandchildren make their first investments.

A:  For young investors I believe an All-Value portfolio makes sense, but the S&P 500 is likely to hold up better in a catastrophic situation so it’s appropriate for those close to or in retirement. I suggest you compare the Fine-Tuning Tables for the S&P and All-Value portfolios. You can find them here.  

For young investors my best work is yet to come. In the coming months we will introduce a group of Target Date Funds that are almost all All-value until age 40.  

Q: I happened upon your 1985 book "Market Timing with No-Load Mutual Funds" and wonder, how do you feel about market timing since you occasionally mentioned that you have a portion of your investments in market timing?

I enjoyed the book and wish it could have been updated to cover ETFs and a more up-to-date strategy. I use a somewhat similar strategy that includes a 200-week exponential moving average and the percentage of stocks above their 40-day moving average with some success in a small portion of my retirement account.

 

A:  I am a big fan of market timing but rarely recommend it to do-it-yourself investors, as it is unlikely that they will maintain the timing systems. I only trust trend-following systems.

Since 1995 my best return (including all buy-and-hold and timing portfolios) has come from a hedge fund that combines mutual funds and ETFs with leverage and market timing. The annual return of the hedge fund has been about 2.3 times greater than the S&P 500, with the same downside standard deviation. 

The majority of my timing is more conservative, including all the important U.S. and international equity asset classes plus high grade and high yield bond funds. This strategy has worked well, under performing in the best of times and out performing in the worst of times.

I don’t expect writing another book on timing but Les Masonson, author of All About Market Timing, does a good job of showing investors how to use trend-following systems with ETFs.

Q: Could you share your thoughts on rebalancing the portfolio and the frequency of rebalancing?

A:  Here is a link to an article that may help: “6 Things You Should Know About Rebalancing.” If you want to get more complex, check out Larry Swedroe’s “5/25 Rebalancing Strategy.”  

Q: When are you going to update your mutual fund recommendations?

A:  I’m working on them right now. Some will be out in the next week. 

Q: You often mention that one could use a flexible distribution strategy with an ample retirement savings, but how to determine ample? Is 33.3 x annual expenses ample? 1.5X that? 2X that? It's probably highly subjective based on risk tolerance but I am curious to know how you think about that question.

A:  I love the question. I will be recording a podcast on distributions in the coming month. I will likely do one on fixed distributions and second on variable distributions. I will address your question on the variable podcast. In the meantime you already know most of the answer: “It depends.” 

From my viewpoint, your suggestion of 33 times your “need for money” is close.  I would probably use 40 times. So let’s assume a minimum cost of living, that needs to be taken out of your investments, is $40,000. Let’s also assume you would like to take out a lot more but you don’t need to. Let’s also assume you are concerned (even if it’s a completely emotional feeling) about running out of money before running out of life.

If you waited to retire until you accumulated $1,600,000 it suggests you could easily take out 5% ($80,000) with little risk of using all your savings. And if the market went down for an extended period you could certainly cut back to the $40,000 distribution. I waited until I had at least twice what I needed before I chose to spend the rest of my career working without pay. I think you will enjoy my new distribution tables.

Q: How do I find your Motif portfolios? I tried looking for it under Paul Merriman and could not find it. I discovered Motif about 2 years ago. I love Motif because it has so much potential for the little guy. I'm so happy you are using it to help us with the best of the best and guiding us along the way. Looking forward to buying it and belonging to your Motif community.

A:  If you search for “Merriman diversified” under Community Motifs you should see the list of 70 portfolios.  Here is a direct link as of today

Q: I am thinking of converting an IRA to a Roth and then transferring the Roth to Motif. Which of your portfolios should I use? Do you think this is a good idea? What should I be aware of?

A:  Before I answer your questions it’s important to understand my limitations.  I want to do all I can to help you make good investment decisions but I am not able to give personal advice.  My hope is, with the help of the Fine-Tuning tables you can identify the right combination of asset classes to meet your need for return within your risk tolerance.  Of course the conversion of a traditional IRA to a Roth IRA is a combination of tax and estate planning decisions. Again I am limited in giving personal tax advice.  When I was an advisor I often encouraged investors to convert their IRAs to Roths as it was the equivalent of saving more money. Plus who knows what tax and estate laws will be in the future?

I know our present lineup of portfolios at Motif is overwhelming to many investors. My hope is our soon-to-be offered target date portfolios will make the decision easier.

Q: Regarding Motif commissions: since I usually like to save a certain amount per paycheck and invest it into an account, wouldn't it be wasteful to be investing that amount and incurring a commission every paycheck from making a trade? My name is Ryan and I am a 23-year-old who has been in the work force for 9 months. I'm a big fan of your work and have been listening to your podcasts and reading your material for a little over a year.

A:  No, it doesn’t make any sense to spend $9.95 a month to dollar cost average into a small account. I am trying to figure out the steps you should take, as I’m sure there are a lot of people in your position.

Here are a couple of ideas. You can set up an account with a firm that doesn’t charge anything to make small contributions. One possibility is to work with Schwab. At your age an all-value portfolio is a reasonable strategy. Then once you get to $2,000 you can transfer $1,500 to Motif and continue to invest the monthly amounts at Schwab.

Another approach is to borrow your intended annual contributions from your parents and let them be the recipient of your monthly contribution. What I like about this approach is it means you invest earlier in the year and that should produce a lot more income when you retire. I will be doing more on this in the future.

My goal for you is to find the best place to meet your personal needs and Motif is not going to be the answer for many investors.

Q: Can I use the names of the funds in your ETF portfolio and try to find similar mutual funds on Schwab’s OneSource list where I have my 401k?

A:  There must be a lot of people who would like that help at Schwab, and Fidelity. I have added them both to my “to do” list. In the meantime I suggest the following: I know you will be able to find funds that represent the asset classes I hope you will have in your portfolio. They include all the equity asset classes found in by Ultimate Buy and Hold Portfolio. Some are available in very low cost Schwab index funds.  Watch for my Schwab and Fidelity self directed recommendation in the last quarter of the year.

Q: What is your definition of risk? You, like others, talk a lot about risk but few rarely seem to define it in the same way. It doesn’t make sense to eliminate all risk but do you have a simple list of steps to take to keep the risks of investing to a minimum?

A: I love the question as it can open a discussion that could go on for hours. Of course you probably don’t want my answer to go on for hours, so here is as short as I can make it. First the definition from Merriam-Webster: Risk is the possibility of loss or injury. Here is the BusinessDictionary.com definition of risk: A probability or threat of damage, injury, liability, loss, or any other negative occurrence that is caused by external or internal vulnerabilities, and that may be avoided through preemptive action. 

The risks I want to address are the risks we take in the process of investing.  While risk can be the loss from not doing something (sin of omission), most of us experience risk when we lose money (sin of commission).  So my definition of risk is anything that leads to a loss during the steps taken to manage ones investments. 

In my article, “The best investment advice ever!” I conclude the best advice I know is, “Never take an investment risk that doesn’t pay a premium for taking that risk over the long term.” 

In other words, if you know you are exposing yourself to a loss of money, make sure you can expect an additional return (no guarantees of course) for having taken the risk.  y the way, the list of ways to lose money is long. The good news is there is a way to manage almost every one of those losses. Here is a short list of ways guaranteed to cost you money and what you can do about it:

  • Paying a commission to buy a mutual fund: Buy a no-load fund where the investor doesn’t pay a commission.
  • Paying high expenses to manage a mutual fund: Buy a fund with low operating expenses.
  • Putting all your money in one company that can go down or even out of business: Buy a portfolio of many companies. This is also called diversification.
  • Putting all your money in one asset class: NASDAQ lost 73% from 2000 to 2002. Buy many different asset classes.
  • Paying more in taxes than necessary: Use tax-deferred or tax-free investment vehicles like Roth IRAs and Roth 401ks.
  • Putting your money into Ponzi or other fraudulent schemes: Restrict your investments to heavily regulated investments like mutual funds or ETFs.
  • Paying the additional expenses of actively managed mutual funds: Restrict your investments to inexpensive index funds.
  • Paying for an investment advisor to take care of your investments: Some investors enjoy the process of managing their own money… others don’t. For those who don’t want to take care of the investment details, having someone else do it likely leads to higher returns.
  • There are lots of small additional steps but just this handful of suggested steps can lead to having twice as much to spend in retirement, as well as leaving many times more to your heirs or favorite causes.
  • Loss and risk are normal, but don’t accept the loss unless it is accompanied by greater returns. Keep in mind that losses are guaranteed, but greater returns can never be guaranteed.

Q: Why are you adding emerging markets funds when their long-term return diminishes portfolio value and adds to volatility?

A: The emerging markets asset class can run either red hot or ice cold. It makes a good candidate for rebalancing. For the 15 years ending 5/5/17 the S&P 500 compounded at 7.7%, while the DFA Emerging Markets Fund compounded at 10.1%. The more risky DFA Emerging Markets Small Cap Fund and DFA Emerging Markets Value Fund compounded at 12.9% and 11.8% respectfully. The Vanguard Emerging Markets Fund is invested similar to the DFA Emerging Markets Fund (large cap) but under-performed slightly with a 9.1% return including dividends and capital gains.

Q: Why don’t you add the QQQ to your portfolio? Don’t these mostly technology companies have a higher expected growth rate than the S&P 500?

A: The NASDAQ (QQQ) has had a terrific return over the past years, but for the 17 years ending 2016, the compound rate of return (without dividends) was only 2.4%. The S&P 500 compounded at 5% including the reinvestment of dividends. What makes QQQ a doubtful buy-and-hold candidate is its very large downside risk. During the 2000-2002 bear market, it was down over 80 at one point.

 

Q: Should I reduce my stock exposure?

Q: Can you analyze my 401(k) plan?

Q:Is it time to get rid of bonds in my portfolio?

Q: Why did your all equity portfolio do so poorly last year?

Q: How should we handle planned withdrawals?

Q: Do you ever recommend the buy-and-hold portfolio go to cash?

Q: Do you always advise against owning individual stocks?

Q: Should a retiree invest in small cap and emerging markets?

Q: How can I get back in the market?

Q: Do you always advise against owning individual stocks?

Q: Is it better to invest a lump sum at once or spread it out over time?

Q: What can I learn from asset class performance history?

Q: What’s the matter with leveraged funds?

Q: How do large cap funds perform in times of rising interest rates?.

Q: Are you concerned about the poor performance of international funds?

Q: Short-term vs. intermediate-term TIPS?

Q: What international small cap value ETF do you recommend?

Q: I have seen a fair amount of press on so called Robo Investing firms such as Wealthfront, Betterment and others.

Q: How should I rebalance a taxable account?

Q:Why is compound growth more important than average growth?

Q: What’s the worst-case scenario for 100% global equity portfolio?

Q: Is silver a good store of wealth?

Q: How can I find a good DFA advisor?

Q: I was wondering what you think of the automated investment companies such as Betterment, Personal Capital and Wealthfront?

Q : I have $25,000 to invest, should I wait until stocks drop in price to invest?

Q: Fidelity has recently opened a new U.S. REIT fund (FREL) that has a much lower expense ratio than the commission-free REIT ETF from Ishares (IRY).

Q: In your recent article about REITs you mention recommending a 10% position in REITs, although some of your portfolios recommend less than 10%. Which is it?

Q: What is your opinion of Long/Short, Merger, Managed Futures, Hedge Replication alternative funds?

Q: We have extra money that we can invest or use to prepay our mortgages. Which is the smarter place to put our money for the next 15 years?

Q: There seems to be a lot of contradictory information on Social Security. What is the best source of advice on Social Security questions?

Q: Do you really believe it makes sense to pay an advisor to manage a portfolio using DFA funds compared to doing it yourself at Vanguard?

Q: How Should I Invest in Vanguard Admiral Funds?

Q: What’s Your Opinion of Tony Robbins’ new “Money” book

Q: Should I Add Energy and Commodity Sectors?

Q: What Is The Future of Small Cap Value Premiums?

Q: What Are Your Thoughts on Momentum Investing?

Q:  Should I Diversify Across Many Currencies?  

Q: Should I Follow Your Model Portfolios?

Q: Can I Beat A Value Index Fund?

Q: Speculation – Is It A Thrill Worth Risking?

Q: What ETFs would you recommend for international large and small cap, and what would the cost of trading be?

Q: How do I incorporate your approach into my company’s retirement plans when the value choices are terrible?

Q: Why is there a discrepancy in small cap allocations between Schwab, Vanguard and Fidelity ETF’s?

Q:  What’s the difference between putting the money in a high-interest savings account or a short-term bond fund?

Q: As a retired person with a moderate risk profile, can I use the Vanguard portfolio and what percentage?

Q: What do you think of an all-equity portfolio for funding a charitable trust?

Q: Why don’t you include low-cost ETFs in your recommendations?

Q: How can I help my mother find a financial advisor who will serve her well?

Q: I am trying to find a Vanguard Index Fund or ETF for your international small value category. What would you suggest?  

Q:  I am 55 years old and want to start investing, should I?

Q:  When do I know it’s the right time to enter the market?

Q:  I am in the process of implementing your Buy and Hold Strategy… Based on my age, should my equity exposure be higher than 60%?

Q: How much further can this bull market go? 

Q: Is your portfolio advice in First-Time Investor applicable for retired persons?

Q: Are your principles better realized by an do-it-yourself investor, or are your ways of diversifying best handled at the company that bears your name?

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?

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?

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?

Q: How often do you update those portfolios?

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

Q: 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?

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?

Q: What should I do now with the market being so high?

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?

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?

Q: Don’t you think you 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. 

Q: The Emerging Markets Fund VEIEX has not done very well. Do you still recommend VEIEX as part of your Vanguard recommendations?  

Q: Would your recommend anything different for our 60% in Vanguard?

Q: Why no bucket of commodities in your portfolio recommendations?

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?

Q: How can you write, “don’t pay a commission for a fund blah blah blah”?

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?

Q: What’s the most tax efficient strategy to withdrawal from their IRA and ROTH?

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

Q:  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?

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

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

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

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

Q: 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 and amazing deal anymore?

Q: Do you have an opinion on the Vanguard Managed Payout Funds as a way to tap portfolio income in retirement?

Q: 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?

Q:  Is there a reason to wait until after year end distributions are paid at Vanguard before I re-balance my funds?

Q:   I don’t think turnover rates mean as much for bonds as equities, but should I even be looking at turnover rates of bonds?

Q:  You recommend people hire an advisor who uses Dimensional funds. Are there advisors who offer Dimensional funds in Canada? And are they no load?

Q:  I am meeting with a new investment advisor next week.  What should I ask them about their track record?

Q:  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?