Bogel, Doughroller and Fund Updates

From: "Sound Investing" <info@PROTECTED>
Subject: Bogel, Doughroller and Fund Updates
Date: May 11th 2017
May 11, 2017

“Paul, you came to Western Washington University 2 years ago and I was president of the financial management association. You held a conversation hour for the students and handed out packets with historical data. You were one of the most influential speakers our club ever had, and what you had to say stuck with me. I still use the handout and I follow up on your website, podcasts and Facebook page. They're great resources! Thank you!” – Alex S.

Dear Friends,

At the end of the day, what investors want is performance. In this video, John Bogle, the founder of Vanguard, discusses his view of returns for stocks over the next decade. As one of my personal heroes and among the best educators in the mutual fund industry, his comments are worth considering.

I am excited that next month, while on the east coast, I will be meeting with John (“Jack”) Bogle at his office in Malvern PA. I have a list of questions and topics I think are important.  One topic is target date funds. Vanguard is the biggest provider of target date funds (and probably the best) and I am anxious to get his views on the future of this very efficient way for most investors to invest in their 401k and IRA.

Over the years, I’ve had the pleasure and honor of being interviewed on national TV by some great names in the financial news world, such as Louis Rukeyser on Wall Street Week and Paul Kangas on Nightly Business Report (PBS). These were life changing in that they exposed my work to hundreds of thousands of investors and had a huge impact on our business. I believe this meeting with John will be just as impactful as I believe his comments will help me determine the next steps we need to take to help more investors improve their financial future.
I hope you’ll enjoy my recent conversation/podcast with Rob Berger about the Ultimate Buy-and-Hold strategy and more. Rob founded the Dough Roller in 2007 to help people make sense out of the ever-more complicated world of personal finance, investing, and money management. Starting as a simple blog about money, Doughroller has turned into a website enjoyed by nearly 2 million visitors a year. Rob’s articles on personal finance have been syndicated to Forbes, MSN Money, U.S. News & World Report, and Yahoo! Finance.

Updates to Vanguard Mutual Fund Recommendations
I am in the process of updating the portfolio recommendations for the mutual funds and ETFs, starting with Vanguard funds and ETF recommendations.

In 2016 I changed many of my Vanguard recommendations from “Investor Shares” to "Admiral Shares.”  The minimum for most Admiral Shares is $10,000, while the minimum for Investor Shares is normally $3,000. Vanguard also has very low cost ETFs that have fees lower than the Investor Shares.

Of course, ETFs have other challenges that make it easier to buy Investor Share. If you have questions about which are best for you, speak to a Vanguard advisor.  If your account at Vanguard is worth over $50,000 you should qualify for a free consultation.

If you’re not sure whether ETFs or no-load mutual funds are best for you, I suggest you read what Vanguard has to say. They also have their own recommended ETF portfolios. If you compare their recommendations to mine and don’t understand the difference, please read the Ultimate Buy and Hold update article and/or listen to the podcast.

I also have made changes to the Vanguard Emergency Fund Portfolio and Monthly Income Portfolio. (See here). There were no changes to Vanguard ETF portfolios. I will have more changes for Fidelity, T Rowe Price, and the ETF groups next time.

AAII Puget Sound Presentation with Special Session on Robo Investing
Join me and the American Association of Individual Investors, Puget Sound Chapter on May 20, 9 a.m.-Noon for Beyond Buffett: Value Investing, Asset Allocation and Fund Selection

Mercer Island Community & Event Center, 8236 SE 24th Street, Mercer Island, WA. To reserve your space, you should register via Eventbrite. There is no fixed fee but a donation of any amount will be accepted. You should preregister at least 48 hours prior to the event. Assuming there is room, you can also register on the day of the presentation and make your donation at the door.

Doors open at 9 a.m. My presentation is from 9:45 a.m. to 12:30 p.m. with a break. I will cover our latest work on asset allocation, equity selection and distributions, as well as the All-Value portfolio and a real breakthrough in target date funds.

In a special second presentation – 12:45 to 2:00 p.m. – I will address Motif Investing and other robo advisors. There will be room for 220 for the first presentation but only 70 for the second. There is no cost for my second presentation but it is first-come, first-served. 

Questions and Answers: Read below and find many more available on my website. FAQs specific to Motif Investing can be found here.

To your success,

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 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.

The Ultimate By and Hold Strategy

“Ultimate” isn’t a term to toss around lightly. But in this case it fits. ‚Äčmore

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