Even the very rich and powerful can get bad advice

August 30, 2016

Dear Friends,

The goal of my foundation is to help educate the full range of investors – from first-time investors to those already in retirement. When it comes to first-time investors, there are reliable sources of information which are doing a terrific job of helping those getting started. I have recommended “Mutual Funds for Dummies” for many years, and my own “First-Time Investor: Grow and Protect Your Money,” (free download at my website). But there are lots of first-time investors who favor short online videos as an effective way to learn the basics. In my opinion, the best of breed for educational videos is Kahn Academy.

Bank of America’s Better Money Habits®, a free service, has partnered with Khan Academy to present a new way to help people learn about money. Their aim is to simplify the facts, cover topics people want to learn about, use easy-to-understand terms and examples, and connect information to people’s goals and situations. To learn more about this, click here.

“When “When I started Khan Academy, my goal was to teach them math the way I wish it had been taught to me… If we can teach somebody the underlying principles, we can put them in a position to ask the right questions when it comes to other situations. And that applies to their finances as well.” 

– Sal Khan, Khan Academy

The Better Money Habits videos aren’t just for first-time investors, as they cover a huge range of topics. I’m sure you will find plenty more of these great learning tools to give you the basics that prepare you for the next level of education and the extensive investor resources you’ll find atmy website. Here are a few that represent wide range of money topics they address :

Money Management for Couples
How to Establish Money Rules for Your Child
Comparing the Costs of New and Used Cars
Steps to Better Money Management

Q & A’s: Below you’ll find some edited responses to Q&A’s from the Aug. 17 “Ask Me Anything” session on Scutify.com. I often find reasons to expand on my answers to be sure they are complete. To read all the questions posed and answered from that session, click here. At this point I have not received the list of all the questions and answers in an organized fashion.  I will email Craig Tolliver and ask him to send the link.  If we don’t hear back from him please delete the previous sentence and link. The next session isWednesday, Sept. 21 at 1:00 p.m. EST. You can go to this link anytime and leave your question, or participate in the live chat on Sept. 21.

To your success,



Q: Should I be considering “generating additional income” as I move into retirement? Besides maintaining a diversified portfolio of the asset classes you suggest, is there something additional I should be doing, like adding or migrating to certain types of bond funds and/or adding or mixing in a dividend producing stock fund to the equity side? Many advisers/authors suggest or imply that the portfolio should shift to focus on generating an income stream when entering into the distribution phase. Is this simply suggesting a more conservative stock/bond ratio?

If I follow your lead in moving a year’s worth of needed income into a short-term bond fund in the beginning of the year (and rebalance portfolio), do you suggest moving this into an after-tax account short-term bond fund or leave it in an IRA and take monthly distributions?

A: Great questions!  Let me take the last one first. In my own case all the money we use for our cost of living comes from taxable investments. The RMD on my IRAs are used for charitable contributions.

Without knowing all I would need to know about your personal situation, if you’re not sure you will need all the money, and not required to take it out of the IRA, it makes sense to leave the money in the IRA until needed. Maybe you will discover your cash need is less than anticipated. That will allow you to distribute less than planned, thereby reducing the tax impact for taking distributions. (There are some tax situations where it makes sense to take money out of a IRA before MRD).

The idea of moving to more conservative equity funds in retirement is not unusual but my position is to maintain the more diversified equity portfolio (large, small, value, growth, REITs U.S. & international asset classes). If you go the route of using funds that produce more income, from either dividends or interest, don’t forget that most value funds distribute dividends. You might also consider a portion of your bonds in high yield bond funds.

Also, keep in mind that the defensive dividend-based funds can fall as much as 50% in a big bear market so they should not be considered low risk.

Q:  Do you have any concern about the Schiller Ratio being so high and the market in general being so overpriced? It is at a PE ratio just around the level it was pre-2008 crash. Should I be investing more in bonds and wait for the crash or just continue buying stocks in our desired allocation even though the market is so overvalued? Why or why not?

A: I always have a list of good news (list A) and bad news (list B) when thinking about my own investments. Presently the lofty Schiller Ratio is on the B list. In the buy and hold portion of my portfolio (half each in equities and fixed income) I totally ignore all the bad news as it would create anxiety to be sitting on a bunch of stocks when the evidence indicates there is a greater risk of loss than gain. On the other hand, in the half of my portfolio that is committed to market timing, (70% in equities and 30% in fixed income) the 15 to 100 different mutual fund or ETF investments I might own are all being tracked daily for the change in trend that indicates the fund should be sold and moved to money market funds. Again, I ignore the 200 plus reasons the market is moving up or down and simply go with the trend, in the trend following portion of my timing account, and move from asset class to asset class in the asset class rotation portion of my timing account.

Bottom line is in both the buy and hold and timing portions of my portfolio, I ignore all the predictive noise and either stay the course or go strictly with the trends or relative strength of the asset classes.

With all of these strategies in place I simply stay the course in all markets.  Both bonds and timing gave me a lot of defense in 2008 but bonds and timing will keep me from capturing the big returns of an extended bull market in stocks.

The one thing I know about my approach is I have no reason to second guess the strategies. If I start mistrusting my strategies it’s probably time to move to an all-bond portfolio.

Q: What are your thoughts and estimates of an ROI(return on investment) that I would receive from never rebalancing vs. annually re-balancing?

You have provided information in various podcasts, especially when speaking about your tables, that if a young investor NEVER had RE-BALANCED their portfolio, they would have been better off than re-balancing every year. As a young investor, instead of re-balancing annually, especially since I’m not risk adverse, does this make sense?

A: I hope to release a study on an all value, all-equity portfolio in the coming months. I’m not sure it will address your rebalancing question but it will appeal to those who have higher risk tolerance.

If we look only at the equity portion of a portfolio, rebalancing is going to lead to a lower long-term return, but the lower return will come from taking less risk. Since you are a young investor I assume you are still making regular contributions to your account. If you continue to add money in equal percentages, you should make more without rebalancing. Please review my 4 fund solution table for more evidence.  http://paulmerriman.com/wp-content/uploads/2015/03/Large-Table-Layout-2-page.pdf

One simple computation reflects the impact of the average 40 year return for the 4 asset classes individually, as well as rebalancing. Based on the average 40-year return of each asset class, there is a 15% higher return without rebalancing. Of course when you are making monthly contributions to these asset classes the difference will be magnified by buying more shares of small cap value during the worst of times.

Q: Why do you have no Precious Metals and/or Commodities in your Portfolios? We are new to your Newsletter and apologize in advance if you answered the question in the past!

A: I have addressed this topic before but I think it’s worth repeating my findings. All of the asset classes I recommend have a long history of earning a high unit of return per unit of risk. Neither precious metals nor commodities have a record of earning high rates of returns for the high unit of risk compared to those asset classes I recommend. I have written many articles and recorded many podcasts focused on performance.  Here is the link:http://paulmerriman.com/performance/

If an investor is looking to precious metals and commodities as a non-correlated asset class, U.S. Government Bonds have a much better track record with much less risk than precious metals and commodities.

Q: What do you think AMD?

A: I think it will double in the next year or fall by 50%. Just kidding! I have no idea what the stock will do for the next week or 10 years. Over the last 10 years it has declined at 11.3% a year (compounded rate of return) while the S&P 500 has grown at 7.6% a year. Probably a better comparison would be the average semiconductor stock at 9.7%.  Of course, if you know how to time your holdings in AMD you could easily make 25% a year. I wish I knew how to do that.  Maybe one of our readers will see how the stock would have done using a 150 day moving average timing system. I suspect it would do better than losing more than 11% a year!


Six lessons for a beginning investor

While relaxing with my college-age daughter, Lexi, at Cannon Beach over a recent weekend, we got to talking about how people her age can become successful investors. 






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Paul Merriman |  info@PROTECTED | http://www.paulmerriman.com