“Where have you been all my life? Although my husband and I have done well with our small business and real estate investments, we did not have the confidence to invest in the market. Your information and resources have empowered us to get on the road to more diversification and an even brighter future. Thank you and keep up the good work!” – Suzanne K.
Last weekend my wife and I attended “The Art and Science of Love” workshop at the Gottman Institute in Seattle. I learned many ways we can improve communication, manage conflict and better support each other’s hopes for the future. Drs. John and Julie Gottman base their work with couples on four decades of research with thousands of couples. and I recommend it.
Because of their extensive research, the Gottmans’ work is both credible and effective. For example, in employing science and technology to monitor heartbeats, brainwaves, changes in blood pressure, etc., they were able to track and measure physical reactions to thoughts and actions that induce different levels of stress. It is generally recognized that stress is at the center of all challenges – emotional, physical, relational and, I’ll add, financial.
When we “get stressed,” our capacity for ration decision making – acting in our best interest – goes out the window and we are prone to say and do things we later regret. We also have a tendency to make assumptions that are not true.
Dr. John shared that in over 60% of his research, the things he thought would discover turned out to be wrong. That’s not so dissimilar to those who “sense” or “have a gut feeling” about what the market will do. They are likely wrong.
The good news is: we have a choice. We can make decisions based on what we know… or on what we guess. Gottman’s goal is to help couples make decisions on what we know, based on what has been well tested, tried and true.
This is similar to my goal of helping investors make sound decisions based on what we know about the past. Although no one can predict the future, the work of academics - like economists Kenneth French and Eugene Fama – can at least provide reason for investments based on what we know, as opposed to what we guess.
Tune In this Saturday!
I will be speaking with Tom Cock of Vestory on his radio show, “Talking Real Money,” on Saturday, July 22 from Noon to 2pm PDT. If you’re in the Seattle area, you can tune in to KOMO AM 1000 or listen online at http://komonews.com/live/komo-4-newsradio. You can also go online to tunein.com and type in “KOMO”.
San Miguel de Allende and Retirement Dreams
As many of you know, San Miguel de Allende – in the state of Guanajuato, in the geographic heart of Mexico – has been a second home for my wife and me since 2006. While it has received much good press over the years, it was just named “The World’s Best City” by the Travel & Leisure readers’ poll.
In 2013, I wrote an extensive article about it and recorded a podcast, including resources – most of which are still valid. We have found in San Miguel de Allende much of what we wanted to experience in our retirement, such as participating in a creative community, spending time in another culture, and enjoying sunny, warm winters.
With fame, comes changes, and some predict the increase in tourism, traffic and development may portend the end of the charm that distinguished this community. That may be and, if so, we are fortunate to be in a position to choose somewhere else.
You don’t need to be “fabulously wealthy” to be able to live comfortably in your post-working years. You can make decisions to live less expensively in other places in the U.S. or the world. But the key to having choices is to start saving – and investing for the future – as early as you can. The extent to which you are willing to save during your working years will largely dictate the quality of the life you will be able to choose and enjoy in retirement.
This kind of choice is what I hope to help you – my readers and listeners –accomplish through your long-term investments.
Questions and Answers
Last week I recorded a podcast answering 14 questions and hope that those of you who do not typically tune in to my podcasts will at least take a look at the topics and see if there aren’t some answers to your questions there. You’ll find hundreds of others in our archives. Below, are more.
To your success,
Q: What do you think of the disappointing returns of the small cap value ETFs I recently purchased?
It’s particularly frustrating as I have a history of getting in too late and it has evidently happened again.
A: I think what has been difficult about the recent performance of small cap value is that its performance is lagging the S&P 500 by so much this year. As of July 17 the S&P is up 11.1% while the average small cap value fund is up 1.6%. I am working on an article about what we should expect from the small and large value asset classes. It may be the most important piece of information, after the long-term returns of these asset classes, is how different the returns of small cap value have been from the S&P 500. If you intend to use the S&P 500 as the benchmark for small cap value finds or ETFs, you may be surprised at how different their one year returns have been. Over the last 50 years ending 2016, small cap value’s return has produced an average difference of 17%. Plus, in 6 of those years the S&P 500 made money while small cap value lost money.
My hope is you have made this investment for the long term. If you judge it over a short period of time you will probably move on to another investment that is more like the S&P. In fact, if your benchmark is the S&P 500, I suggest that’s where you put your long-term investments. I hope to release the special value report in the next month.
Q: What is the definition of "All Value" vs. "Worldwide" in your fixed distribution schedule tables?
A: The All-Value portfolio is a combination of 25% U.S. Large Cap Value, 25% U.S. Small Cap Value, 20% International Large Cap Value, 20% International Small Cap Value and 10% Emerging Markets Value. There is no way to invest in 100% of any of the asset classes, as the funds that give us access to those asset classes almost always have a small percentage of either mid-cap and/or growth in the portfolio.
Q: How do you recommend I use your 5 Fund All-Value portfolio for the equity portion of my portfolio?
I currently have funds held at Fidelity but am willing to use other companies’ ETFs or mutual funds, or move our funds to Vanguard if this would be beneficial.
A: You can construct the portfolio using Fidelity or Vanguard commission-free ETFs but you will have to pick up a couple of funds outside the commission-free group to get access to all the asset classes in the All-Value portfolio. Check out these recommendations in the All-Value Best in Class group.
Q: Do you know how bad the service is at Motif Investing?
I very much appreciate all that you do for your readers, including the Buy-and-Hold portfolio at Motif. However, you can't control their bad customer service, or lack of it! I have attempted three times to get assistance to no avail. I will be transferring my funds somewhere else. Hopefully I'm an anomaly since you attached your name to this company. Again thanks for all you do!
A: I think it’s important that our readers who are considering using Motif see your comment. I too have had periods of slow responses. I find if I send them an email they respond within 24 hours. As I mentioned in a recent podcast, Chris Pedersen and I will be doing a special report on Motif. I think there are very specific investors who will get the best out of Motif. Without getting into details, I think the best fit is with IRAs. Let me know if they respond to an email. More later.
Q: Could you confirm that you recommend a tax-managed fund in a tax-deferred portfolio?
It has been a while since I have rebalanced my Vanguard Tax-Deferred portfolio (my bad). You now recommend Vanguard Tax-Managed Small-Cap Admiral Shares instead of Vanguard Small-Cap Index Fund Admiral Shares. When I attempted to create the Vanguard Tax-Managed Small-Cap Admiral Shares account I received a warning from Vanguard that these funds are usually not part of a retirement account.
I could not find anything on your website that explains why it is okay to have a tax-management fund in a tax-deferred portfolio. I was not confortable moving forward on my rebalancing without confirmation from you that you do, in fact, recommend a tax-managed fund in a tax-deferred portfolio.
A: I think it’s great they are doing their best to make sure you are doing what’s in your best interest. My focus is the size of the companies and the relationship of price-to-book. In both cases the tax-managed fund is better. Plus the operating expenses in the tax-managed fund are only .09%. The 15-year performance of the tax-managed fund is about .5% a year better than the traditional small-cap fund.