May 14, 2015


Dear Friends,

I was delighted that my presentation to the American Association of Individual Investors (AAII) Chapter in Ventura California on May 7 was to a full house. Most of the questions included here came from attendees and, as ever, I hope you find them useful. An archive of all Q&A’s is available at my website.

The next presentation I’ll be giving is to AAII in Portland, OR on Saturday May 16. It’s open to the public and there’s still time to register. This talk will be videotaped and available for sale. Stay tuned for more on this in our next newsletter.

In answer to many questions I’ve receive about updates, we will be updating the Ultimate Buy-and-Hold Strategy,

Fine-Tuning Your Asset Allocations, and the Retirement Distribution tables in the next few weeks as part of thePerformance Series.

My Vanguard, Fidelity  T Rowe Price mutual fund and ETF portfolio recommendations, including Schwab  will be updated early next year. You should not expect there to be major changes in buy-and-hold strategies in coming months.

Now, for some Q&A’s.

To your success,

How can I get back in the market?


Q: I always seem to get in and out of the market at the worst time. The last time I got in was early 2009 and right back out a couple of months later.  I panicked and sold as it looked like the market was going down a lot more than it did. I have been sitting in cash since and now I’m sure if I get in, it will immediately go down, leaving me in the same position as 2009. I’m 67 and can’t afford any more big mistakes.


A:  This is the most common question I get, and the higher the market goes the more I get it. There is no easy answer. The industry commonly says to invest everything at one time, regardless of how high the market is. That advice ignores the human nature that leads to disastrous results for investors who overestimate their risk tolerance.


It may be the only way low-risk investors will survive the natural cycles of the stock market will be by applying two defensive strategies. The first defensive strategy is to limit the exposure to equities, no matter how high or low the market might be. It may be that a 30 to 40 percent equity position is the maximum equity exposure for these investors.


The second defensive step is to dollar cost average into the equity portion over several years. If it takes 2 or 3 years to get properly positioned in the right asset allocation, it’s better than finding yourself having guessed wrong again, often leading to giving up forever. The key is to find a mechanical strategy to deal with a very emotional process.


Should a retiree invest in small cap and emerging markets?


Q: As a retiree I am uncomfortable with funds that invest in small companies, as well as emerging markets. Should a retiree be taking that kind of risk?


A: I think the first step is to determine how much of a portfolio should be in any kind of equity asset class. It turns out the intermediate-term risk of a portfolio comprised of large, small, value, growth, U.S. and international asset classes has about the same downside risk as the higher quality S&P 500.  So, if you have the risk tolerance of 50% equities, the downside risk of the portfolio is about the same with or without the inclusion of small cap and emerging market funds. Yes, there will be slightly larger short-term losses with the addition of the more risky asset classes, but these asset classes also rebound much faster when the market turns around.


The important consideration is that by adding the more profitable asset classes, the returns are likely to be substantially higher. That allows an investor to have more fixed income in the portfolio to meet their goals, thereby reducing their overall risk. Over the last 45 years a 70% worldwide equity/30% fixed income portfolio has about the same return as a 100% S&P 500 or total market index, at one-third less risk.



Should I add additional sectors to my portfolio?


Q: I use the 10 asset classes you recommend in the ultimate buy and hold portfolio. What are your thoughts on including additional sectors such as consumer staples, consumer discretionary, financials, energy, IT, utilities and health care?


A   I think there are lots of steps we can take that might have a small impact on our long-term returns, but most of them make the process more complicated and require more attention. All of the sectors you mentioned are part of the 10 asset classes in my portfolio. If I decided to add money to a sector or asset class, in the hope of getting a better return, I would simply add more money to the small cap value asset class. I could do that by adding a little to my U.S., international and emerging market small cap value positions.


I think the key is to make it as simple as possible and eliminate the necessity to stay on top of any particular sector. For many investors evaluating sectors are part of the fun of investing. I’m not looking for any fun from my portfolio.



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


A: The only reason the buy-and-hold portfolio goes to cash is to take money out of the portfolio to live on or put aside for an upcoming financial need. The first day of each year, my wife and I take out 5% of our portfolio and put it in a short-term bond fund. We then use the proceeds to cover our costs for that year.


I think the question could be restated as, “Why wouldn’t you sell equities if it’s obvious the market is over valued and likely to decline?” The whole idea of buy-and-hold is to build a portfolio of equity and fixed income securities with the intent to hold them in all markets. There are always reasons the market is expected to go up (list A the good news) or go down (list B the bad news). Attempts to time the market have ended badly for most investors, so experts believe it’s best to find investments expected to do well for the long term and ignore the noise in the short term.  My 50 years around the investing process makes me believe those experts are right.



How should we handle planned withdrawals?


Q: Would you recommend holding cash in an amount equal to 1, 2, or 3 years of planned withdrawals, or do you recommend we just convert the amount planned for the immediate year?


A: When I was an advisor I had lots of clients who were comfortable holding 1 or 2 years of cash to meet their near-term cash flow needs. In many cases the cash pool was separate from their long-term asset allocation. I like taking the cash annually instead of monthly. When I take it monthly I seem to be a little more focused on what the market is doing month to month. Of course sitting with money in cash or short-term bonds is going to reduce the return a bit. I think my conservative approach of taking the annual needs the first day of the year costs us about .10% a year in return, an amount I’m willing to exchange for greater peace of mind. I do keep the annual “cash” account in a short-term bond fund and move money to cash on a monthly basis.



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


A:  This is a question I get almost every year that my recommended portfolio underperforms the S&P 500, the benchmark in the mind of most investors. My portfolio is almost always going to be different than the S&P 500 as it is made up of asset classes that are built to be different than the benchmark. For the period 1970-2014 the average difference between the S&P 500 and my worldwide equity strategy was about 10% a year. The biggest difference was 1977 when the S&P lost 7.2% and my recommended equity combination made 26.8%.  Over the entire 45 years the S&P compounded at 10.5% and the worldwide portfolio compounded at 11.8%. Their standard deviations were virtually the same, as well as the worst period losses. What was very different was the difference in annual returns. Expect it!



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


Q: What is your opinion on this?  “Investing: Time for a no-bond portfolio?” here is link


A: Great article, but not helpful to me. In the buy-and hold portion of my portfolio I’m in bonds because they are an easy way to limit losses in declining stock markets. In the timing portion of my portfolio (30% of it in bond funds) I am in bond funds when they are in an uptrendand out when they are in a down trend. The only thing that will make me change is a change in trend, not an article that makes common sense. It may sound strange, but I have done all I can to keep “common sense” out of my decision making process.



Can you analyze my 401(k) plan?


Q: A friend of mine says you analyze 401k plans. The following is a list of my 401ks holdings. I would like to be aggressive. What do you recommend?


A: I wish I had time to analyze 401k plans but my plate is full and overflowing.  Here is what I recommend that might help. Take a look at the asset classes I recommend in The Ultimate Buy and Hold Strategy. Try your best to match up your 401k offerings with those asset classes. The problem is what to do when the plan is missing one or more asset classes. One solution is to pick up the unavailable asset classes in your IRA or your spouse’s 401k or IRA. I will do a podcast on the subject in the coming months.


My other limitation is I am not an investment advisor, so whatever I recommend may not be appropriate even if I knew all your personal financial information. That leads to another solution. Let’s say you want to be all equities but you’re not sure how to match my recommendations with your investment options. I suggest you contact a Garrett Planning Network advisor and buy an hour of their time having them help you put your 401k portfolio together. I will contact Cheryl Garrett and see if she can identify one of her advisors who could be of help for this kind of request. Finally, check out my 401(k) recommendations at my website for the top 100 US companies and US Government TSP.


Should I reduce my stock exposure?


Q: I am retired and holding 40% of my portfolio in stock funds and feeling like I should probably reduce my stock exposure to 30%. What do you think?


A: If you move from 40% to 30% equity position you will reduce your worst-case losses of the last 45 years by about 1/3. If your goal is to reach your needed return with the lowest possible risk, the question is: will 30% in equities get you there? If it will, I would move to the lower equity position. If you are considering the move to reduce your equity exposure because you think the market is going down, that’s a market-timing decision and my buy-and-hold recommendations are totally unrelated to what a timer should do.


I have a new Fine Tuning Table that will be released in an upcoming article. I hope it will help in your decision making process as it will compare the worst 3, 6, 12, 36 and 60-month periods for 11 levels of risk, plus the same results for the S&P 500. The 45-year period covered in the study does not necessarily represent the future, but the period did include 3 of the worst bear markets of the last 100 years.

How international small-caps spice up a retirement portfolio
Savvy investors have known for many years that small-cap stocks provide a good vehicle for boosting long-term performance. More
Foreign big-cap value stocks outshine U.S. counterparts
Just as large-cap value stocks add significant value to U.S. stock investing, value stocks are also worthwhile internationally.More



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