Many of the questions I receive could, and should, be answered by your trusted financial advisor as they require knowledge of your personal situation. I can’t get involved in that part as I am no longer a licensed investment advisor. I hope I’ve made clear the importance of having someone who is competent and ethical (and works for a competent and ethical company) to call upon, especially if you’re a do-it-yourselfer and only consult on a periodic hourly-fee basis.
There is plenty of information available about how to be a successful investor. As simple as investing can be, it is not easy for the majority of investors. The greatest challenge most investor face is his or her own emotions. This is the most important reason why most people need an advisor.
Many of you have asked about my personal advisor. He is Tyler Bartlett with Merriman Wealth Management, the firm I started in 1983, but no longer have an ownership. Nor do I receive any compensation. While there are thousands of great advisors, I can’t know them all. I can say without reservation that Tyler is a good match for me. He believes what I believe about investing my money and I have complete confidence that he will be there to take care of my wife, should I predecease her. He will also be there to take care of both of us when we no longer have the mental capacity to deal with the many estate, tax, family and financial questions in our life.
I explain this because I want to share with you this 5-minute video
in which he explains the process by which he and his colleagues at Merriman select and work with clients. I hope it serves as a model for you in your choice of an advisor. I don’t care if you select Merriman as a firm to manage your money, but I do care that you find an advisory firm that covers all the topics that a great advisor can and should oversee.
And too, I would like you to read, and share with family and friends, my easy-to-read book, available as a free eBook, Get Smart or Get Screwed: How To Select The Best and Get The Most From Your Financial Advisor . It
gives you insights into the variety of financial brokers and advisors, and the services they can – and should – offer, and includes extensive lists of questions you should ask and services you should receive from an advisor. As this is one of the most important investment decisions you can make, I encourage you to not put off educating yourself (and loved ones) about choosing the best advisor for you.
This last recording, Chapter 7, speaks to what I’ve written above: “How Will You Protect Yourself From Yourself?
” Everyone in the financial community knows that emotion-based decisions almost always hurt investors in the long run. This chapter discusses 5 ways an investor can eliminate most of the dangerous outcomes of emotional decisions. It is read by Rich Buck, co-author of Financial Fitness Forever
and Live it Up Without Outliving Your Money!
Rich and I have worked together on books and articles for over 20 years. He was a Seattle Times
business reporter for 20 years, capping a 30-year journalism career that included eight years as a writer and editor for the Associated Press. He began working with me as senior editor of Merriman Inc. in 1993 and retired in the fall of 2011. He has kindly continued to donate his time and expertise to The Merriman Financial Education Foundation and as co-author our three “How To Invest
” series books (available as free eBooks at paulmerriman.com
) andweekly MarketWatch articles
In Chapter 6, “How Will You Diversify Your Investments?
“, I address the long-term impact of diversifying beyond large cap companies to include both U.S. and International small cap and value asset classes, as well as REITs and emerging markets. I hope you have enjoyed these audio chapters and I welcome your feedback
April 20 at 1 p.m. – next “Ask Me Anything” chat session at Scutify.com.
You can go to this link
anytime before the next session and type in your question or tune in and participate live. Here are the links to the Q&As at Scutify: January
Below are a few Q&A’s for this newsletter. While I have been working on a 3-part video for CPAs and the public, I have not been able to respond to many questions. In the coming weeks I will be answering many of your questions in the newsletter and podcasts. All Q&A’s can be found here
To your success,
Q: When are you going to give us an article on a diversified fixed-income portfolio?
A: I suspect it will be several months before I tackle the topic. I have addressed many of the aspects of fixed-income in Q&As and podcasts in the past. I have a Vanguard monthly income portfolio that I have recommended for more than 15 years. Check it out along with the other Vanguard portfolios I recommend.http://paulmerriman.com/vanguard/
. For the 15 years ending 12/31/15, this portfolio compounded at 5.5%. For the first quarter of 2016 the four-fund portfolio is up 2.4%. That’s good start to a year that was promising lower bond returns due to expected increased interest rates and lower bond returns.
Q: Diversification or Specialization: which is it?
There is some conflict between the two messages of your recent podcast on diversification: (1) diversify by holding many different sorts of investments, (2) specialize by tilting toward small cap value stocks, because these offer the best returns. So, which is it – diversify or specialize?
A: Your question is an especially important one for investors trying to figure out the best way to approach the diversification within the equity part of their portfolio. There are many investors who believe in using the S&P as the base of their equity portfolio. Many of those investors choose a traditional S&P 500 fund or ETF that holds cap-weighted positions in the companies within the index. In other words, the portfolio returns are going to be mostly driven by the larger companies in the index. Other S&P 500 investors believe in owning all of the same S&P companies but equally weighting the individual issues, so they end up with the same number of holdings but in different percentages. Both are legitimate ways to own the S&P 500. Both are considered diversifying rather than specializing.
I recommend the same approach to building a portfolio but I do it with asset classes rather than individual companies. The S&P 500 is considered a large cap blend index. Part of the S&P is identified as growth and the balance as value. But in all cases the companies are considered large.
Most academics studying asset allocation have highlighted the long-term importance of owning more value and small cap than would be represented in a cap-weighted portfolio. In a total market index, investors will get a small amount of small cap growth and small cap value but the exposure is so small it has little impact on long-term performance. If you want to compare the long-term returns of equally balancing four main U.S. equity asset classes, I hope you will take a look at this article
The article compares large cap blend, large cap value, small cap blend and small cap value asset class returns over one, 15 and 49 year periods. The table also shows the impact of balancing a portfolio across all 4 asset classes. Over the entire period of the study, the 4 fund portfolio produced about 6 times more return with almost exactly the same average losing year. The additional return for the 4 asset class strategy was about 2% a year.
You ask which is it – diversify or specialize? I consider my approach a chance to expand your diversification, not reduce it, and raise your return with approximately the same long-term risk.
Q: Why are you still recommending funds with negative returns?
Looking at most of the returns of the funds you recommend, they seem to be returning negative results in the recent past (1-3 years). Why are you still recommending them? What is your thought behind these funds?
A: This is one of the most important questions I get… and I get it often. My portfolio is constructed using asset classes that have very long histories of success. There are periods in which they all fail to live up to their past. For example, from 1975 to 1999 the S&P 500 compounded at 17.2% and the biggest calendar loss was 13.1%. Plus, there were only 5 losing years, averaging 7.6%.
After that run of returns, at a risk level that most would say is acceptable, investors were expecting something similar or, if not similar, something reasonable. What they got was a kick in the financial teeth. From 2000 to 2009 the index had 4 losing years, averaging 20%, with 2008 losing 37%. For the entire 10-year period, the S&P 500 lost .9% a year, including the reinvestment of dividends. What most people don’t know (including most experts) is the 2000-2009, inflation adjusted return is lower than that of the 1929-1938 period (-3.4 for 2000-2009 vs. a gain of 1.1% for 1929-1938).
So, what did I do with the short-term loss? Yes, 10 years is a short period of time to judge any return. What I know is the 1928-2009 return of the S&P 500 was 9.8% and long periods of underperformance are normal. My decision was to stay the course and continued to include the S&P 500.
Yes, many of the asset classes I recommend have experienced lower than desired returns over the last few years, but they have not been lower than expected returns. So I have kept all of those asset classes in the portfolio.
We know that losing money, or underperforming expectations, are difficult emotions for people to manage. My hope is that with very broad diversification of historically successful asset classes, more investors will be able to stay the course long term. I know it will not be the answer for a lot of investors.
For some investors the solution may be an all-U.S. portfolio and for others a single balanced fund that doesn’t make it so easy to notice the underperformers. Another approach that seems to work for many, at lower expected rates of return, is a portfolio of very large U.S. companies that pay dividends. Even if the expected returns are lower, it may be a way for some to continue holding during painful periods.
I only wish for you to find the strategy that will help keep you in the process. Some investors find a combination of my Vanguard Monthly Income Portfolio, my Vanguard Moderate Portfolio and an ETF like Vanguard Mega Cap Vale (MGV) will keep them on course. Good luck!