From a Facebook exchange regarding Paul’s podcast of a conversation with Rob Berger of Doughroller.net: “Am I the only one who listened to the Paul Merriman episode with Rob and thought, ‘This is my favorite bromance ever. I'm looking forward to hearing many more conversations between these two amazing educators.’” – Gabe S.
“You are not the only one! I enjoyed every minute and will listen to it again to catch anything I may have missed!” – Lisa P.
This past week has been remarkable. I finally met with John “Jack” Bogle, founder of Vanguard, saw the Liberty Bell at the last minute, and began a video project for students at Western Washington State, as well as our own readers and listeners.
Meeting Vanguard Founder, Mr. John C. Bogle
The tireless 88-year-old “Jack,” as he is called, scheduled 60 minutes with me but graciously let our meeting run 90 minutes. Among the many topics covered, he shared the history of the early days of Vanguard, much of which I was unaware. Founding his then-groundbreaking investment firm was not easy, nor an overnight success. Quite the contrary, as is often the experience of pioneers — in Jack’s case, advocating for the superiority of index funds over traditional actively-managed mutual funds.
To launch his idea of creating the world’s first index mutual fund available to the public, Dean Witter agreed to underwrite the initial offering. It was 1976 and the goal was to raise $150 million, but only $11 million was raised in the initial offering. Over the next five years, only another $17 million was raised. His efforts were referred to as “Bogle’s Folly” at the time. But time has proven that for long-term investors, diversification via index funds is the surest, least risky way to build wealth. By 1999, most of the investment community knew it was one of best place to invest for the long term.
He’s proud of what he’s done and lives his philosophy that his work is not about him but the company he has built and all the “members of the Vanguard family.” For example, his assistant Emily has been with him for 27 years. He smiles broadly when he mentions joining the employees in the cafeteria for lunch.
Jack says that academic research was important in establishing his Vanguard 500 Index Fund and was particularly influenced by economist Paul Samuelson, the first American to win the Nobel Prize in economic sciences.
I have often said, “I don’t make people money, the market that makes people money.” And Jack and I agreed that although indexing and lower fees – in which Vanguard forced others to follow suit – are essential, there is also the luck of timing. And no one has a crystal ball on that. I will discuss Jack’s amazing timing luck in an upcoming podcast.
For an “average investor’s” portfolio, Jack has often advocated a formula for the proportion of stocks and bonds – which is to deduct your age from 100. This means he, at 88, should be 12% stocks and 88% bonds. However, he and I both hold 50/50 stocks and bonds. When you have “enough money,” such advice need not apply. And no investment strategy is one size fits all. For Jack, who left Vanguard in 1999 and continues to lead the Bogle Financial Markets Research Center, being frugal is matter of pride… he even admitted he still flies coach.
I am among the many of us who owe a debt of gratitude to this brilliant man whose dedication to “common sense” investing and empowering individual investors has made a real difference in the lives of millions. He’s updating his classic, The Little Book of Common Sense Investing, which will be released soon.
The Liberty Bell I almost didn’t see
I’ve been wanting to see the Liberty Bell since I was a kid, and here I was on the Vanguard campus in Malvern, Pennsylvania about 30 miles from Philadelphia and my best chance to fulfill this wish. After leaving Jack’s office, I headed to Liberty Bell Center. Traffic was heavy and slow. I parked and walked quickly to the front door to find it just closed.
I went around back, hoping for a chance to duck in as people were filing out. The security guard said No. I explained my situation and he said, “Sorry, but we’re closed now.” I thanked him and walked away. I hadn’t gone 10 steps when the guard called after me and said he’d make an exception. I hurried in, saw the iconic bell famously inscribed, “Proclaim Liberty Throughout All the Land Unto All the Inhabitants thereof," asked someone to snap a photo on my phone, thanked the guard and left satisfied.
I reflected on how, sometimes, remaining respectful to authority can get us what we want, and also about the meaning of the bell and its call to liberty. Although liberty can mean a number of things, financial freedom is certainly one of them, and I hope our work helps you and your loved ones to enjoy such liberty with less risk, less stress, and more peace of mind.
Update Notice: 401(k) Plans
We’re beginning our overdue update on America’s Top 100 largest corporate employers and the U.S. government TSP … and will need your help.
We’re delighted that Tom Cock, friend and managing director of Vestory Investment Advisory, is working with us to update our 401(k) plans.
We’ll focus first on the 100 plans on our site and then add additional 401(k) plans. Please listen to this week’s podcast for more about 401(k)’s. I cover how to get the most out of your 401(k), how to self-direct with Schwab or Fidelity programs, and what to do when your plan doesn’t have good choices.
How to help us: Is your company on our list of 100? If so, send me an email with the name of your 401(k) plan in the subject line. Include a link or an attachment or scanned image of your investment choices.
Questions & Answers
Below please find five new Q&A’s. Check out the archive on our website for general questions or go to the Motif pages for FAQs pertaining to Motif Investing.
To your success,
Q: How often are the portfolios re-balanced?
Your recent AAII article, “Power your portfolio with value,” was very interesting. I see that you have factored in 1% management fees. Is management necessary?
A: For purposes of tracking the worst rolling periods (12, 36 and 60 months) the portfolio is rebalanced monthly. I don’t recommend rebalancing any more often than once a year. If the portfolio had been rebalanced annually the return would have been higher.
There are several reasons I have added the 1% management fee. The database that has been used to create the returns is based on the research of Dimensional Fund Advisors (DFA). Their returns are based on small cap and value companies that are specific to the DFA method of identifying those important asset classes. While small cap and value asset classes are well defined, they are not the same as those Vanguard uses to build their index funds. Since DFA funds are only available through DFA approved advisors, I think some management fee has to be applied. While some charge less than 1%, many charge more. I think most charge 1%, depending on the account size.
Also, I have found most investors simply don’t want to do the work to maintain the strategy I recommend, so adding the 1% fee created a more realistic outcome for those who don’t want to manage the process.
Finally, I think the reduction in returns, from imposing the 1% fee, makes the outcome more realistic. When I was an advisor I used a similar table and suggested building a plan based on applying the 1% management fee less another 2%. It was my way of trying to get investors to prepare for the worst while hoping for the best.
Q: Do you have an updated recommendation for an emergency fund?
In your book, “101 Investment Decisions”, the recommendation for emergency funds – that I plan to never touch – is Vanguard's Wellesley Income fund. Since the book is from 2012, do you have an updated recommendation? I'm saving for a home down payment and estimate it will take at least 2 years until I have enough.
A: When you know you will need the money within 2 years, I don’t think you should take any more risk than a short-term investment grade bond fund. Updating books and popular articles is a big project. If I had thought ahead, we would have suggested readers check the recommendations pages on our website for updates. The “recommendations” tab will lead to my latest recommendations for Vanguard, Fidelity, Schwab, T Rowe Price and TD Ameritrade mutual funds and ETF portfolios. They are usually updated the first quarter of each year. Some of our portfolios have not been updated since early 2016. We hope to have them all updated to 2017 very soon.
Q: Why did you write that an S&P 500 fund is a poor long-term investment?
In your MarketWatch article, (Jan. 14, 2015) you also mentioned Vanguard Index Funds as a group of asset classes that you recommend. Is it still possible to get this information?
A: Check out my Vanguard Index recommendations. This page includes taxable, tax-deferred, emergency and monthly income portfolios.
Q: Do you think that value stocks are worth all the work I’d have to go through, in Australia, to gain exposure to value stocks, including US and international large and small cap value indices?
Given our stock market is quite small, there are no current offerings of ETFs or index funds for large and small value stocks for global or US stocks here, we're planning to buy these ETFs on the New York stock exchange instead. We already have an international brokerage account set up to do this, and have considered the tax implications.
A: Of all the asset classes, value has produced the best premium. The small cap premium is also meaningful but the addition of value to small cap has had the biggest additional return. As you may have noticed we now offer all-value portfolio ETF recommendations.
Q: Do you set the amount to be distributed based on the balance at the beginning of each year?
I enjoyed your video and plan to implement the flexible distribution plan you outlined, as I am in the distribution phase of my life. I am also curious: do you break it down into smaller chunks so that if the market turns south, you adjust your budget quicker (e.g. 1% of your balance each quarter instead of 4% of the yearly beginning balance)?
A: First of all, my wife and I take our distributions the first of the year to eliminate watching the market during the year. We would likely make more taking the money monthly or quarterly as it allows additional money to compound before it’s distributed. In fact, if you can delay the first year’s distribution, and take the money at the end of the year, it adds a lot more to what your heirs will have. Check out tables 47 and 54. Notice the 50% stocks/50% bonds portfolio in each table. In table 47 the distribution was taken at the first of the year. In Table 54 the distribution was taken at the end of the year. The difference is more than $2,000,000 by waiting until the end of the year based on an initial $40,000 distribution.
Q: For a do-it-yourselfer like me who has enough money and can’t get into DFA funds, are the Admiral Shares the next best thing?
In your recent podcast with Rob Berger, as you were discussing Motif Investing, you said, “…you should be at Vanguard because there are a lot of advantages once you have a certain amount of money to be in their Admiral Shares.” All of my money is at TD Ameritrade, but your statement concerning the Admiral shares is so strong that I’m thinking about putting all of money there.
A: I prefer Admiral shares over ETFs, when they are both available in the same asset class. Mutual funds are easier to trade and can be bought and sold without commissions and spreads. ETFs shares all have a bid-ask spread when traded and in some cases there are commissions. The Admiral Shares at Vanguard have very low expenses, but there are some great asset classes not represented by the Admiral Shares. I think most of the DFA equity funds, for those who qualify, are going to produce better returns than similar Admiral Shares. There is no secret to the DFA advantage – smaller companies and more deeply discounted value.