June 11, 2015


Dear Friends,

There have always been shysters, hucksters, scam artists – people adept at making outrageous promises or inducements – playing on our fears or hopes to manipulate a sale. But what’s most disconcerting in our time is the institutionalization of unscrupulous methods and misinformation that affects our lives in significant, negative ways – far beyond buying a bottle of snake oil.

I just completed one of the most satisfying projects of my career. A friend was improperly sold a financial product that would have cost him over $1,000,000 in future returns to his family. I don’t know anyone in the industry who agrees the product was appropriate for the investor, but all agree that the salesperson was royally rewarded; so at least someone made money on the deal – almost.  Most unsettling is that the salesperson is one of the “top 10 agents” for one of the biggest insurance companies in the country.

I will tell you the rest of the story in the coming months and meanwhile I’ll give you the punchline: I think he got all his money back. But as he had to sign a non-disclosure agreement, he can’t talk about the resolution or warn others. In my report, I will tell you how the sales pitch worked, how the salesperson got the client to give up his rights (almost), and what I suggested he do to get his money back.

I found this video segment by satirist John Oliver an insightful – and disturbing – look at the pharmaceutical industry, which like the financial industry is in a position to motivate the uninitiated to use products that may not be in their best interest. You can watch it below.

To learn how to select the best and get the most from your financial advisor, I suggest you read my book GET SMART or GET SCREWED, available as a free download or for sale at my website. 

Below are 10 Q &A’s I hope you find useful.

To your success,


Q: What are your thoughts on Vanguard Personal Advisor Services at a cost of .3%? The minimum investment amount is now $50,000 and I need advice on my investing goals.

A: I am so glad you asked. We are taught ‘you get what we pay for’. If that is true the higher costs of actively managed funds should lead to higher returns. Of course we know better now, but that wasn’t always the case. You can be a big help to your fellow readers and me. I would like to see a copy of the information you provide them so I can get an idea of what they find out about you. I would also like to know whether they give you advice on the rest of your portfolio. I want to be sure the recommendation they give you for the money they will manage fits with the rest of your portfolio.

Do they also consider the investments your wife may be making? I assume the recommended portfolio is all in index funds. If not, why not? I can’t wait to see the amount of exposure to value, small cap, international, REITs, etc.  I am sure many of your fellow readers will be appreciative of your taking the role of “mystery shopper.” If you will do this for me and our readers, I will tell you what I would recommend if I were your advisor.  (To our readers:  Please understand this is not a service I provide to others.)

As I think you know, I am no longer a registered investment advisor so my advice will come with lots of disclaimers. Who wouldn’t like to believe they will get the best advice for such a low fee? Let’s find out if you are getting your moneys worth! I will probably share your story with our readers but there will be no way anyone will know it is you. I hope we will all learn something from your experience.

Q: To take your annual distribution, how do you decide which assets in your portfolio to liquidate and in what amounts?

I see that you and your wife fund your coming year’s expenditures and needs by withdrawing 5% from your portfolio at the beginning of the year and putting it in a short-term bond fund. Assuming you have multiple asset classes, as recommended in your advice, how do you decide which assets in your portfolio to liquidate and in what amounts to get your annual distribution?

A: I am a little embarrassed to admit that I don’t make those decisions but here’s what my advisor does. He uses any year-end distributions to fund a portion of the distribution. The balance is normally funded from the proceeds of rebalancing the portfolio. He also considers taxes and the minimal costs of rebalancing.

Q: What are your ETF suggestions to line up with the 4-fund combo? The DFA funds seem to be limited to institutional accounts.

A: It is not necessary to be an institution to access DFA funds.  They are available through individual advisors that are approved by DFA. Visit DFAUS.com  to ask for names of DFA advisors who manage the amount you have to invest. You can also request the names of advisors in your area.  Most DFA advisors service investors in the majority of states.  When I was an advisor about half of our clients were located outside Washington State.

The 4-fund combo can be created at Vanguard (VOO, VONV, VIOO, VTWV), Fidelity (IVV, IVE, IJR, IJS) and Schwab ( SCHX, SCHV, SCHA, SLYV). All three of these companies offer these ETFs on a commission-free basis.

Q:  When should we start adding bonds to our portfolio? I am 37.  My wife and I are saving $40,000 a year and our portfolio is worth about $900,000.  We hope to retire at 50 with $3,000,000. Should we start adding bond funds to our portfolio now or wait until we reach our goal?

A: Assuming you keep up the saving rate, you only need to earn about 7% a year to reach $3,000,000 by age 50.  You should be able to get that return with 30 to 40 percent of your money in short to intermediate-term bond funds. I would be comfortable staying 100% in equities for a few more years, but after that I would start adding bond funds. The last chapter In my free e-book, “101 investment decisions guaranteed to change your financial future” discusses 10 approaches to adding bonds to your portfolio. If you do decide to stay 100 in equities you may reach $3,000,000 before 50 or it’s also possible you will have to work beyond 50.

Q: Should I still have bonds in my portfolio when their outlook is so bad?  I’m 43 and invest with Vanguard. If so what do you recommend? Total bond market funds?

A: I don’t blame anyone for not wanting to be in bonds or stocks. Both the stock and bond markets have higher than normal risk, but investors have to decide how they want to invest for the long term. As I have mentioned many times, I have half of my own portfolio managed with timing and the other half withbuy-and-hold.  Regardless what’s going on in the economy or market, I don’t override either investment discipline.

If you are going to follow my bond advice, please take a look at my Vanguard portfolio bond recommendations. You will find I lean to short-to-intermediate government bond funds in tax-deferred accounts and mostly tax exempt for taxable accounts.

Q: Where can I find your distribution recommendations?

I am retired from Boeing, 70+ and have been following your advise on asset allocation for many years with the Boeing 401k and Vanguard. I recall you did an article on the distribution phase, Do you still have that article? It was a comparison of distribution methods, and one stuck in my mind, a variable % withdrawal, based on performance (4% if under 8%, 6% if over 8%).

A: When I retired from the advisory business I was able to take many past articles with me. Sadly, that was not one of them. I have added the topic to my list of future articles. Thank you for asking. For more information on retirement distributions, please visit this portion of my website.

Q: Are your 2014 recommendations for Fidelity still valid?

I just rolled my 401k into Fidelity in early February, did OK for a while but broke even on the drop in biotech. I see your selections for stocks and allocations for 2014. Would these recommendations still be prudent investments now?

A: Yes, I think my recommendations would be a better long-term approach than trying to time the market or sectors.  But remember my buy-and-hold portfolio recommendations have nothing to do with what the market is likely to do in the next year. I strongly suggest you read all of the articles under thePerformance Series link, to get a better idea of the long term return possibilities.

Q: What do you think of GNMA funds (specifically Vanguard and Fidelity)?

I have seen GNMA funds (specifically Vanguard and Fidelity) recommended for tax-deferred accounts. The reasons are: higher yield than a Treasury, less risk of losing value when interest rates rise, and same full faith and credit of Uncle Sam. Your thoughts?

A: I like the Vanguard GNMA fund as part of a diversified bond portfolio. My Vanguard Monthly Income Portfolio includes equal parts Short-Term Investment Grade (VFSTX), Intermediate-Term Investment-Grade (VFICX), GNMA (VFIIX) and High-Yield Corporate (VWEHX) bond funds. The Hulbert Financial Digest reports my Vanguard Monthly Income Portfolio has compounded at 5.7% over the 15 years ending December 31, 2014. The current S.E.C. 30-Day Yield for the combination is 2.7%. The present yield for their GNMA fund is 2%. The Vanguard GNMA fund has a much lower expense ratio than the comparable Fidelity fund.

Q: What do you think about using The Mutual Fund Store?

A: I spoke with Adam Bold in the early days of starting his business. He never had a lack of energy and always spoke optimistically about the future results of his recommendations. Regardless how much energy or optimism one has, what you must determine is the advisor’s core investment beliefs. What does Adam Bold believe about investing? Active vs. passive (indexing) management?  Low costs vs. higher?  High tax-efficiency vs. low?  You can buy based on recent performance vs. you can’t predict what will work best in the next cycle?  If his view of successful investing doesn’t agree with what you believe, that should be an important consideration. I find his beliefs don’t agree with mine. That doesn’t make him wrong, but I wouldn’t use his strategies in my portfolio.

When Adam opened MFS there were not many sources of advice for smaller investors. Today there are lots of advisors and robo advisors for small investors, and I think most of them will likely outperform Adam’s approach by at least 1% a year. Of course I am referring to advisors who recommend an index approach to building a portfolio.

One last consideration. When I know nothing about an organization I start with a quick internet search.  I usually search “name of organization complaints” or “name of organization fraud.” Try it with several large brokerage firms, as well as The Mutual Fund Store. I tried it with one of the largest brokerage firms in the country and got 10 million results. Just read the first 3 pages and you will probably think twice before trusting their advice. Also try it with Garrett Planning Network. For an investor with a small portfolio, I think you might find the feedback regarding Garrett more appealing.

Q: Can you recommend a book on Modern Portfolio Theory for do-it-yourselfers?

I was just introduced to your Sound Investing podcast and love it. Thank you. As you had mentioned on it, you enjoy your audience to ask questions.  Just to give a little background, I have researched Modern Portfolio theory and know you are a fan based on your DFA and Vanguard preferences. To educate myself more than a decade ago, I read and enjoyed Dr. William Bernstein’s book, which he wrote around 2000, called “The Intelligent Asset Allocator.”  It has helped me immensely and guided me in the ways of Modern Portfolio Theory.  In my opinion, it was the last financial investing book I would ever need to read. His principles are historically-based since 1928 and are completely sound today, yet the book is now 15 years old.

Here is my question: I would like to choose a book to “give” to friends to help them in the same manner as Dr. Bernstein’s book taught me. Do you have any other recommended books that would teach MPT and also be a good gift for do-it-yourselfers?

A: I too am a fan of Dr. Bernstein’s writings. When I started to write for the internet, my goal was to bring investors the best of what the academic community had to help make better investment decisions.  While I think my two books, Financial Fitness Forever andLive It Up Without Outliving Your Money are helpful, I suspect my recent series on Performance is the most up to date work I’ve done.


The series is not finished, but should be complete within 2 months. I think what sets me apart from many of the folks who address the same topics is myrecommended mutual fund portfolios and ETF portfolios at paulmerriman.com.  I am also a big fan of Larry Swedroe‘s work. If your friends are just getting started they will benefit from my 3 free e-books, also available for purchase at Amazon.

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