“Thanks again for being “The Great Navigator” for the rest of us!” – G.W.
More than four years ago when I retired and created The Merriman Financial Education Foundation, my team and I started with presenting free podcasts, eBooks and articles to guide investors toward a successful retirement. We then focused on funding the development of an accredited course in “Personal Finance for non-business majors” at Western Washington University. Now, I am excited to welcome our first guest blogger, Joline Godfrey, an expert in educating children and their families for a lifetime of sound investing, and with a passion for women’s financial literacy. Please start reading her article below which links to the full article on my website.
If Only…. The Economic Regrets, Dreams and Possibilities of Women
If only… my parents had put $500 away when I was born (a lot of money back then) and then added $500 a year until I was 18 years old. And then, IF ONLY I’d left it there, today I’d have about a half million dollars* in what we quaintly refer to as a ‘nest egg’ or the start of a retirement fund.
Many women (and let’s be clear—men too, though that’s not my focus here) have a long list of ‘If Only’ regrets:
- If only I’d put $500 away every year instead of buying all those shoes…
- If only I’d started an investment account before getting a credit card in college…
- If only I’d left the money my dad gave me in the account instead of taking it out…
Lingering on our ‘if onlys
’ is worthwhile if it’s motivational, but not so useful if it’s simply an act of self-flagellation that paralyzes new behavior. I began to think about those ‘if only’ actions in our lives in June when, as a speaker at the San Francisco Area Women’s Summit, I had a chance to ask a roomful of women: … READ MORE
The Bainbridge Community Foundation
I’m enjoying my involvement with our local Community Foundation. Last week I addressed employees of local non-profit organizations on “How to retire on a non-profit salary.” Mark your calendar: If you are in the Puget Sound area, I invite you to join me Nov. 3rd, 6:30-8:30 p.m. at the Bainbridge Island Museum of Art where I’ll be presenting, “Investing For Retirement: the Good, the Bad and the Ugly.” Here is the registration link for those who wish to join me.
Click here to read an interesting discussion about what can be done to make the Social Security system whole. Mary Beth Franklin is considered one of the most knowledgeable experts on Social Security payments.
Master Limited Partnerships
I get a lot of questions about master limited partnerships. They seem to offer the best of all worlds, tax-free distributions (kind of) and possible appreciation. Anyone considering these securities should be aware of the tax implications of MLPs. This article, written for investment advisors, makes the topic easy to understand and properly highlights tax risks that aren’t made so obvious by people selling the partnerships.
The impact of half a percent and Stan The Annuity Man
In a recent podcast, I spoke with Stan The Annuity Man, a.k.a. Stan Haithcock, about the impact of an extra 1/2 percent and other topics important for both first-time investors to those getting ready for retirement. Stan is a nationally recognized expert on annuities. For those interested in immediate life annuities and other specialized annuities, Stan has some of the best literature on annuities in the industry. You can find a variety of free eBooks and many other resources at his website.
The following is an exchange on my Facebook page regarding Stan:
Roger F: You commented about Stan The Annuity Man and I looked up his web site and ordered the free books he offered. They arrived quickly. There were no sales pitches. I’m not interested in annuities but I like to learn new things. Thanks!
Paul: Stan goes above and beyond anything I’ve seen in educating investors about annuities. Plus, when you call his organization to get personal help, you get to talk directly with Stan. All the conversations I have had with Stan indicate a commitment to dong the right thing. He even suggests that investors contact Vanguard and USAA to compare the payouts of similar products. By the way, I assume Stan makes a good living acting in the best interest of his clients. I wish that was more common.
To your success,
Questions & Answers
Below are a few Q&As addressed in my “Ask Me Anything” live chat session for September 21. To read them all, click here. The next session takes place Wed. Oct. 26 at 1 p.m. EST. We will include the link in the next newsletter.
Q: When it comes to market timing, which is challenging for many, are there systems that you would recommend and what caveats should one watch for in choosing a service?
A: I have written many articles on the challenges of market timing. Most of the articles are focused on the emotional challenges of timing. Buy-and-hold is challenging as well, but once an investor is firmly committed to staying the course in all markets, there are not many forces to take them off the rails. In the case of market timing there may be a similar long-term view but there are a lot of short-term events that can make an investor question whether the timing discipline is working. When a timing system has a series of losing trades it is easy to question whether there isn’t some other timing system that would have been better. Of course, there is always another system that performed better during those losing trades but that doesn’t mean that other system will be better in the future. No one knows!
I only recommend totally mechanical systems. I only recommend portfolios of many funds and ETFs so the outcome isn’t dependent on any one asset class. My own portfolio holds large, small, value, growth, REITs, U.S., international, and emerging markets funds and ETFs, as well as many types of bond funds.
When I was younger my timing portfolio was all equities, but now at almost 73, my timing portfolio is 70% equities and 30% bonds. That combination with timing has almost the same risk and return characteristics as a 50/50 buy-and-hold portfolio.
Be careful in your selection of professional timers. Many timers promote systems that have only been proven in hypothetical testing. Computers have no problem identifying what trend following system has been best in the past. Of course, there is no risk in the past. We always know what would have been best.
I have almost no confidence in the reported results of timing newsletters, as they are not regulated in what they can claim about their performance. They can literally lie about the past. I used to use Mark Hulbert’s newsletter tracking service to keep the newsletters honest, but sadly his service is no longer available.
If you are hiring someone to manage your investments, be sure the past results provided include management and brokerage fees. Whether you do the timing yourself or hire someone to do it, I hope you will build a realistic set of expectations. Expect many losing trades in a row periodically. Expect to get back into the market at a higher price than you last got out sometimes. Expect to do worse than buy-and-hold in bull markets. Don’t expect to make money in bear markets but expect to do better than buy-and-hold.
Q: How does the performance of market timing over the years compare to buy-and-hold? You say that half of your portfolio is invested in a mechanical market timing system. While you’ve provided copious charts about how various buy-and-hold portfolios have done historically, I’ve never seen data about the results of the market-timing portfolio.
A: It is very difficult to compare the results of market timing systems, as every one can be very different. Timing results can be impacted by how often the system trades, how much in stocks and bonds, whether the portfolio can use leverage and whether it goes short instead of to cash on sell signals.
Here are some numbers you may find of interest. The following results are for a timed all-equity portfolio strategy that is a combination of traditional trend following systems (80%) and an asset class rotation system (20% of portfolio). For the 10 years ending 6/30/2016 the return was 5.7%. For the same period the MSCI ACWI (A market capitalization weighted index designed to provide a broad measure of equity-market performance throughout the world including 22 developed markets as well as 23 emerging markets) compounded at 4.5%. The MSCI ACWI results do not include any management expenses or costs of timing. The timing results are all net of all management fees and trading costs.
As expected timing produced better returns in the worst years for buy-and-hold and timing underperformed buy-and-hold in their most profitable years. For example, in 2009 the MSCI ACWI index was up 36.4% vs. 32.1% with timing. In 2008 the MSCI ACWI index lost 42.3% vs. a loss of 18.3% with timing.
Another important consideration is the timing was about one-third less volatile when measured by standard deviation (15.6% vs. 10.6%).
Q: What’s your view on adding international bonds? Vanguard is now recommending that there is a diversification benefit from including some a dollar-hedged international bond fund as part of one’s bond allotment. I think I read Fama or French saying the same thing.
A: I do not recommend international bonds. The goal of the fixed income portion of my recommended portfolio is to reduce the volatility of the more risky equity holdings. If you hold international bond funds without hedging the currency rate you will increase the volatility. If you hedge the currency risk you will produce about the same return as U.S. bonds. If the international bonds do better than U.S. bonds it is likely the international bonds are more risky.