April 30, 2015


Dear Friends,

Last week I received a disconcerting response to my article, Best Target-Date Funds? Fidelity vs. Vanguard. While I suspect the writer works for Fidelity, his criticisms give me a chance to make the case that investing is about more than numbers.

Because of the length of this response, which I hope you’ll enjoy reading, I am including only one Q&A at the end of this newsletter; more next time. In the meantime, you can find an archive of all Q&As, thePerformance Series articles and podcasts and much more at my website. You can also share this newsletter directly or link to the newsletter archive.

Here’s another reminder of upcoming live events where we’d have the opportunity to meet face-to-face:
May 5, I’ll be addressing the Bellevue, WA Rotary.

May 7, those of you in the Santa Barbara/Ventura area are invited to attend my 3-hour presentation at the AAII Chapter. Pre-registration is required. Pleaseclick here for more information.

May 16, I’ll make a similar presentation to the Portland, OR chapter of AAII, also open to the public. For more information, click here.

Following is the reader’s comment in red italicsand my responses in black:

I used to pay more mind to Paul’s articles and his site until I figured out that he is a salesman of his own agenda.

I guess I have been found out. Yes, I am working (selling?) fulltime to help investors do the best they can with their retirement investments.

Articles like this have convinced me more than ever to stop taking what he has to say seriously.  He has been nothing but a Vanguard salesman in his articles and on his podcasts.

This article was focused on the decision between using Fidelity or Vanguard as the better choice for investing in a target date fund. I chose those two companies, as they are the two giants in the target date fund market and 2 of the largest fund families.

As previously mentioned, anyone should be suspicious of someone who writes a comparison of two different types of offerings and then calls one better than the other.

Selecting one over the other was the whole purpose of the article. That’s the purpose of almost every article I write. Large vs. small, growth vs. value, active vs. passive, etc.

So lets do a realistic comparison.

I’m happy the writer has decided to do something as suspicious as I have.

Actually the Fidelity Freedom Index fund has had lower expenses longer than Vanguard’s target date funds.

It is true that the Fidelity 2050 Freedom Index target date fund has a lower expense ratio (.16% vs. .18%) than the Vanguard 2050 fund but that is not the only variable I consider.  According to Morningstar the turnover rate at Fidelity is more than 3 times higher than Vanguard (could that be some market timing within the fund?) and Fidelity’s 5 year return is 9.5% vs, Vanguard’s 10.9%.

Now for a portfolio comparison. Yes, Fidelity has about 1% or so of a commodities fund that Vanguard does not. Interestingly, Fidelity, for the 2050 fund has more emerging markets equity than the Vanguard fund. We know that for the past five years, emerging markets haven’t performed very well. Ironically, in his various materials and podcasts, Mr. Merriman has widely emphasized having emerging markets in his recommendations. The Vanguard 2050 fund has a larger percentage in international USD currency hedged bonds than the Fidelity Freedom Index funds have in commodities. Mr. Merriman has spoken out against including any international bonds in his recommendations “due to their volatility.” The statement that the funds are comparable is a lie from the start as the Fidelity Freedom non-index fund has substantially larger companies (2.5% of entire portfolio more) vs. the Vanguard fund, more in domestic equity, and substantially less in bonds. Mr. Merriman likes to always emphasize the importance of selecting the right asset classes. The differences should have been apparent to him, especially since his own recommendations emphasize the importance of value tilting your portfolio.

Let me make this very clear: I do not like either the Vanguard or Fidelity target date fund asset class selection or asset allocation. I think the existence of any bonds in a 2050 fund is an outrage. What I trust about Vanguard is they are likely (no guarantees) to stick to their asset allocation, whereas I believe Fidelity will continue to tweak their portfolios. They are the third largest fund family in America because of active management. Vanguard is the largest fund family in America because of its passive funds. If Fidelity believes passive will provide better long-term returns than active, why does its active Freedom Funds have about 10 times more money under management than their index offerings? Fidelity has three groups of target date funds. I suspect that is done to maximize their profitability. Vanguard has one group of target date funds. I suspect that is done to maximize the profitability of the investors.


Finally, he really likes to sell Vanguard’s structure as a benefit. What a farce. “Fidelity must make profits for corporate shareholders. Vanguard, on the other hand, is owned by the shareholders in its funds. Operating profits go right back to those shareholders.” Congratulations. Every corporation will return profits to shareholders through dividend distributions… that is, after their expenses for whatever they want to compensate their employees, add new buildings, etc. Last time anyone checked Fidelity and Vanguard were and still remain private for profit corporations. Don’t let the advertising fool you!

This was the point where I was convinced the writer works for Fidelity. Please read this article about Vanguard ownership and let me know if you think Vanguard is misleading their shareholders.

The rest is a lot of hearsay and statements of personal feelings.

Yes, I write often about trust, an important and totally personal feeling, like in this article about who investors trust. In fact, trusting the wrong source of advice is one of the biggest mistakes investors make.

It’s too bad, since I have read and listened to most of Paul’s material only to realize that he tries to steer people rather than make up their own minds.

I am guilty of trying of trying to steer investors to the best research I can find. That’s why I have focused on the academic research, rather than the latest Wall Street offering.

A typical example is the performance series of articles in which he does a numeric comparison of only the asset classes he wants to talk about. Not a single asset class outside of that.

Actually, before the series on Performance is over, I will focus on the asset classes I don’t think investors should use. I’m saving that for last.

It almost makes me suspect he is hiding something.

Okay, I am hiding something. I’m 71 and have so much to accomplish in the next few years that I feel a sense of panic. What can I say to make people believe how important these decisions are to their financial future? How can I help college students understand the importance of saving from the first day they qualify for a 401k? The odds are good, if I can convince them to use the Vanguard target date funds, they will end up with twice as much money in retirement.

Unfortunately Paul has lost my respect.

I am sorry to lose anybody’s respect because people who don’t trust my work won’t recommend it to others. To those who still think my information can help others, I hope you will help me reach new readers and investors.

To your success,


Do you always advise against owning individual stocks?

Q: In a MarketWatch article, you wrote, “I don’t recommend owning individual stocks,” but didn’t give any reasons. I’d like to know if your advice is 100% ironclad to all persons or if, for example, you had multi-millionaire clients for whom you recommended individual stocks…or did you turn away that business?

A: When I was an advisor I never recommended individual stocks, regardless how large the account. I have a fairly large account myself and, with the exception of some ETFs, I don’t own any individual stocks. In previous articles I’ve often noted that my beliefs about the best steps to successful investingcome from what I have learned from the academic community. Having been around the investment community for over 50 years, I know that almost every investor thinks their individual stock picks are better than the market. I have absolutely no way of knowing if that will be true or not.

The academics teach us that the expected rate of return of any individual large-cap growth stock is the average of all large-cap growth stocks. Of course some will do better and some worse, but the expected rate of return for all shareholders must be the average. That doesn’t change the fact that if investors own a stock, they see it worth more than investors who don’t own that stock. In fact, according to studies, it goes beyond what you like. It seems it also depends on your nationality. In surveys, Germans think they make 2% more a year than U.S. investors. Not surprisingly, U.S. investors who took the same survey believed they make 2% better returns than German investors. For a great book on how investors think, please read Your Money and Your Brain by Jason Zweig. It’s one of four books I try to get all investors to read.

So, if the expected rate of return for one stock is the same as 1000, the smart thing would be to own all 1000, as the risk of owning just one is huge. The challenge is to access the best asset classes, and access them as efficiently as possible. I think the more mechanical we are in our investment decisions, the better we are likely to do. Automatically dollar-cost-averaging from your paycheck: mechanical. Using index funds: mechanical. Rebalancing is also likely best done mechanically. Taking money out of investments in retirement can be done mechanically.

Owning an individual stock becomes a very emotional experience for most investors.  I think eliminating any emotional attachments improves your probability for success.

Own the ‘best’ companies in the world
Many U.S. investors are understandably reluctant to invest in international companies. But I think they are missing an important opportunity.More 
Six reasons you should invest internationally
Most investors can probably achieve their goals without venturing beyond U.S. stocks. Yet in my recommendations I call for having half your equity investments in international funds. More



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