Superb podcast, Mr. Merriman. One of your best! All the lessons you so eloquently teach are wrapped up in this one podcast. Essential listening especially for those starting out. – Harry C.
(referring to “12 lessons we must teach first-time investors”)
I hope you will read last week’s Marketwatch article. In it, I have compared the investment advice of Warren Buffet with my own. While Mr. Buffet and I manage money in very different ways, we both are doing our best to help investors grow the long-term value of their investments.
There are three important ways we agree. We agree that we don’t know what the market is going to do in the future, we agree that value stocks will probably out-perform growth, and we agree that most investors should put their long term money into index funds. Where we disagree is in how to build a value portfolio. His value portfolio is built on the careful selection of companies Buffet likes for the long term. He has famously said, “My favorite holding period is forever.” My recommended value portfolio is based on basically owning all small-to-large value companies, both here in the U.S. and internationally. By the way, with the exception of periodic rebalancing and adding more fixed income as we get closer to retirement, I too believe the best holding period is forever.
I recently received an email from a reader in Hungary. He is one of many regular readers who are part of my unpaid research team. I always appreciate hearing from our readers and listeners about what you’re doing that is working for you. While I do my best to stay appraised of financial news and new ideas, it’s impossible, so I count on you to make me aware of what you find useful (and not). Here are his comments:
“As we know, Buffet likes value and quality so I have compared Berkshire vs. MSCI USA Prime Value Index (low valuations and high quality). I made a calculation. If you invested $100 in Berkshire Hathaway Dec 31, 2001, you had $261 at the end of 2015. But if you invested the same $100 in MSCI USA Prime Value Index, the final value was $284! From 2000-2015 the simple MSCI USA Prime Value Index has outperformed the Berkshire Hathaway. What’s more, the pure value MSCI USA Enhanced Value Index outperformed both!”
And while we’re talking about value stocks, I’d like to refer you to a recent podcast in which I explain the importance of adding value to your portfolio… for many it may be the key to ensure you don’t outlive your money.
Questions & Answers
Below please find five Q&A’s from the July “Ask Me Anything” that I do monthly at Scutify.com. Click here to read all the Q&As from the July session. The next Q&A session will be Aug. 20 at 1 p.m. EST. You can leave your questions anytime, or tune-in for the Live Chat by clicking here.
To your success,
Q: Should I use your recommendations for ETFs or Mutual Funds to fund a Roth IRA with Fidelity mutual funds or ETFs?
A: The minimums on each Fidelity mutual fund is $2,500, whereas you can put together an entire portfolio of asset classes using the ETFs at Fidelity with $1,000.
Q: I’m surprised you recommend a timing service here… Doesn’t that go against everything you promote, such as buy-and-hold index ETFs?
A: Both market timing and buy-and-hold are legitimate investment strategies but very few investors will follow the difficult disciplines of timing. Buy-and-hold is a very simple strategy. First, you identify the asset classes you should hold. Second, you fund those asset classes with no-load low-cost index funds or ETFs. Third, you rebalance once every year or two. That’s it!
Market timing means you have to watch the market on a regular basis. The only timing I trust uses purely mechanical trend-following systems. The problem is the systems results are very different from most investors’ expectations. I expect half of the trades to end in a loss (hopefully a small one). Drat! I will spend a lot of time sitting in a money market fund while the market is rising. Drat! I will often buy back into the market at a price higher than I last got out. Ouch! Timing should produce smaller loses in major market declines and underperform buy-and-hold in rising markets. I could go on and on with the challenges of timing, but I trust you can see how frustrating timing can be. Plus, market timing is less tax efficient in taxable accounts.
Q: Should I start putting money into the Roth 401(k) at Boeing or keep it all pretax contributions? Or some split of the two?
Boeing’s VIP 401(k) now offers a Roth contribution option. I’m 36 years old and maxing out my pre-tax contributions up to the IRS limits ($18,000 for 2016), then putting aside more cash in a Roth IRA at vanguard (up to that limit of $5,500 for 2016).
A: I favor the Roth. A deductible IRA or 401(k) offers a deduction against income taxes and therefore leads to a tax refund. Some choose to invest the refund while others decide to spend it. When we use a Roth IRA or 401(K), we do not get a deduction. Instead we get to have the money compound tax-free until we take it out at which point it is distributed tax-free. The end result of a Roth IRA or 401(k) is one is likely investing the amount that would have otherwise been a tax refund.
I vote for doing as much in a Roth as you can, as it means you have put more aside and the tax-free distributions could be a very big deal 30 years from now.
Q: I noticed that your Schwab ETF recommendations have not been updated since Feb 2014… are those recommendations still current?
A: Thanks for the heads-up on our oversight. We review and update all of the mutual fund and ETF portfolios in January of each year. We should be sure and note the review date even when we don’t make a change. You shouldn’t make too many changes, as we are not making changes due to economic or market reasons. The only reasons to change are to add a fund or ETF for a previously missing asset class, or when a family has a better fund or ETF to represent the asset class.
Q: What stocks do you recommend to fulfill the international portion of your “Ultimate Buy-and-Hold portfolio”?
A: The international holdings are very similar to the U.S. asset classes: large and small blend and value, real estate, plus a slice of emerging markets. I have done my best to match those asset classes through no-load mutual funds and commission-free ETFs at Vanguard, Fidelity, T Rowe Price, Schwab and TD Ameritrade. Some portfolios do include all the asset classes due to the fund family not having a fund to fill the spot. All the portfolios are under “recommendations” at paulmerriman.com