September 17, 2015


Dear Friends,
One of the biggest projects, since I started my financial education foundation, was the analysis and recommendations for the best 401(k) plans for the top 100 U.S. companies and the U.S. government TSP. Periodically these companies make changes in their plans, so I have to review my recommendations. We’ve recently made some changes to the 401(k) plans at Chevron.
While Chevron itself won’t apply to most of you, I want to make some universal points about 401(k) plans that do apply to many of you. While many large plans are moving more offerings to index funds, as well as offering more asset classes, there is much the trustees of these plans can do to maximize the likely returns for the participants.
I would have enjoyed being in the room with the Chevron 401(k) trustees to understand why they added the Vanguard Small Cap Fund, but didn’t add the Vanguard Small Cap Value Fund. Here is what I would have shared with the trustees: For the last 87 years (1928-2014) the small-cap-blend asset class compounded at 12.2% vs. 13.6% for the small-cap-value asset class. This is based on academic studies done by the Drs. Fama and French. Of course, most of the results were hypothetical. The real-time results of similar asset classes, as represented by Vanguard index funds, compounded at 9.8% (SCV) and 8.3% (SCB) for the 15 years ending August 14, 2015, according to Morningstar.
There are a lot of ways to compare the results, but two simple variables are the average company size and standard deviation – about $3 billion (average size company) and almost exactly the same standard deviation) over 15 years – making them virtually the same. I hope one of our readers who work for Chevron will encourage the Chevron 401(k) trustees to do their homework. As is usually the case, those who do their homework come out ahead of those who do not.
What is also interesting is the trustees have used both U.S. large cap blend and U.S. large cap value funds but have overlooked the same advantage with small cap.  By the way, over the last 15 years the large cap value fund added 2.6% a year, over the large cap blend fund (S&P 500).
I don’t want to sound like a broken record (do young people even know what that means?) but they have also left out international large-cap value from the portfolio. This will not likely come as a shock to find out the Vanguard international large cap blend fund made about 1.5% less than the Vanguard international large cap value fund over the last 15 years. Those value advantages are meaningful differences. If the trustees won’t listen to me maybe they will listen to Warren Buffet.
While I do not plan to add any new 401(k) plans, I would greatly appreciate if you keep me apprised of changes in plans already listed, as I’d like to keep them up-to-date. You can write me at with subject line: “401(k) Changes”.
Below are more Q&As. You’ll find hundreds of them at my website.
To your success,
How can you know the percentages of value and growth in an ETF?
Q: I am wondering how I can find how much of an ETF is in growth and how much in Value? For example, I have seen you state that Vanguard Total Stock Index has only 36% in Value. Do you know how I can find this out for other ETFs?
A: Great question. You have motivated me to do a series of podcasts, later this year, on how to access the statistics you need from the free site. In the meantime, to find the percentage of “value” in a fund or ETF, you need to access the Portfolio page on This page also offers information on how much in stocks, bonds and cash, the average size company, the price-to-book ratio and percentages in U.S. and international stocks.

1. Put your fund/ETF ticker symbol in the top “quote” box on the homepage of The Vanguard Total Stock Market ETF ticker is VTI.
2. Click on “Portfolio” on the main navigation bar.
3. On the P page, scroll down to “Holdings Style” or what is commonly called the style box.
4. The numbers in the 3 boxes on the left represent the percentage holdings of value in large, mid and small cap companies.

What to do with a $5000 gift to a young child?

Q: I have a male co-worker with a 2-year-old daughter. His mom just gave $5,000 as a gift for the daughter. He wants her to have this money when she is 18. I tried to convince him to make it a retirement fund, but he wants her to have it when she is younger to help pay for whatever she chooses to pursue, whether that is college or something else. My best idea for him was an aggressive, diversified brokerage account, but I want to know if you have some other ideas.

A: You’ve got a serious problem. It’s the same problem I have every day. People ask for advice and I never have enough information to give the advice a real advisor would give. That means we have to guess at a lot of things. What might be right for the 2-year-old may be uncomfortable for your co-worker. We also don’t know how many more gifts there will be. My intuition (remember I am not the advisor) is a Vanguard Target Retirement 2030 fund as it will automatically become more conservative over time. Hopefully, by the time the child is 14, the parents will know more about the child’s financial needs. I’m assuming your friend is asking for help because he doesn’t know what to do on his own. In fact, it may be his wife has a very different idea and risk tolerance. Whatever the solution, it better be something simple and professionally managed for the time period the money will be invested, as your friend is not likely to do the necessary maintenance of ratcheting down the risk over the next 16 years. Let me know what you decide to recommend and what he actually does.

What are the best 401(k) investments for a 21-year-old?

Q: My son just started his first job out of college (21 years old). His employer has a 401(k) and he’s asked me to help him choose his investments. Would you mind taking a look at it, and tell me what you think? I think they are pretty good investments and I try to follow your allocation and asset classes for young investors like him.
A: I rarely review a list of 401(k) choices due to my other responsibilities, but I was a sucker when I found out it was for your 21-year-old son. Of course I am doing this in the hope it will be helpful to others in a similar situation.
Your son’s options are basically a group of Fidelity target date funds and a bunch of actively-managed funds. My hope is an investor has access to all the asset classes I recommend. Those asset classes are discussed in articles and podcasts, along with an important Buy-and-Hold table. Your son’s 401(k) is missing several important asset classes and many of the funds have high expenses and high turnover. Sometimes the high expenses of actively managed funds eat up their asset class advantage.

My conclusion is your son will likely do well with a combination of the Fidelity Index 2060 Fund along with 25% to 40% in a small cap fund. While it isn’t ideal, the one that is available in his plan is Glenmede Small Cap (GTCSX). To understand that suggestion, please read this article.  Congratulations to you and your son. This may be one of the most important financial decisions he will ever make.

How should I allocate my investment funds?

Q:  My employer offers a Simple IRA with American Funds. I know the American family of funds isn’t ideal, but it’s what I’m stuck with. Do you have a recommended American Funds portfolio? I’m already maxing out my Schwab Roth IRA, so I will probably only contribute up to matching, at least initially. After two years in a Simple IRA you can transfer any funds over to any traditional IRA at any time, so hopefully I won’t be in American Funds for long!

A: The American Funds are not an easy family to use for traditional asset class investing. Many of their funds are a mixture of U.S. and international securities. Plus they tend to lean to growth rather than value. I am not going to give you the names of the funds I suggest, as I think it will be helpful for you to do a little research on your own. Here are my hints to help you find the funds. Since the holding period is only a couple of years I suggest a combination of one of two large cap blend funds (mostly U.S.), one global small cap fund (half U.S. and half international}, one large cap value fund (mostly U.S. with 20% in bonds), one large cap international fund and a value oriented emerging markets funds. I suggest 40% in the small cap fund and equal parts of the remaining funds. I hope that helps and you learn something in the process.

How do I broach the subject with my mother that her long-time advisor might not be the best?

Q: My mother recently inherited money and chose to leave the money with the advisor who managed my grandmother’s affairs. When I asked my mother what she was invested in, what the fees were for the funds and the advisor’s fees, she did not know. She said she feels comfortable with it and doesn’t want to change because grandma used the advisor and my uncles have money with him, so he must be good. “It’s just easier.” She and my father are nearing retirement (within the next 10 maybe 15 years) and I want to help them get all this under control so they can save as much as possible. She is getting me a statement of the account and the advisor agreement to review. What’s the best way to show her that this adviser may not be the best choice (assuming the fees are high and the funds are actively managed)?
A: Trying to help an investor understand the impact of high fees and active management is not easy when the reasons for the client/advisor are purely emotionally based. The fact that the present advisor has worked successfully for many of the family members, both living and dead, makes it a tough challenge.
It’s important for your mother and father to understand this has nothing to do with personalities or friendships. It only has to do with doing the best for the family members who were meant to use the proceeds. If there are prudent things that will increase the returns for the family (both living and heirs yet to be born) without taking more risk, it seems only fair to give the ideas a hearing.
We know that lower expenses lead to higher rates of return. Virtually every academic (including Nobel Prize winners) believe that to be the case. I suggest you have your mom and dad read John Bogle’s, “The Little Book of Common Sense Investing.” Bogle is considered  the Father of Index Funds and founder of the Vanguard family of funds. The fund family is the largest in the world now managing almost $3 trillion.  In fact, it’s where Warren Buffet’s estate will be invested when he dies.
If you want to get involved, why don’t you do some homework for your parents? Make a list of the current holdings. Check the asset classes, operating expenses and returns. If you can make the case for adding .5%, by simply reducing the fees, that should be a no brainer. It would be a no brainer except the present manager is going to pull out all stops to keep the account. You may have to work into this slowly. When I was an advisor I often suggested taking a part of the portfolio to create a track record so the investor could easily compare the two strategies. Many advisors will run the present portfolio though a program so your parents can easily see how they would have done with another group of lower cost funds.  If the difference is simply about lower fees that should be a powerful reason to change.

Your mother is continuing a tradition that may have made the family a lot less money than they could have made, without taking anymore risk. I think it may be time to create a new family tradition. I would like to see a tradition of commitment to low fees, more diversification and less risk. That is not difficult to do but it means dealing with some emotional challenges. Vanguard is such a large established organization that maybe your mother would consider a conversation with their advisors. The key is to get her to trust someone we know who has her best interest at heart.

Why would an advisor recommend this portfolio?

Q: I asked a new, young investment advisor for his portfolio recommendations for me. He was aware of my recommendations and belief that DFA (Dimensional Funds) is the best source of asset class (index) funds. What surprised me was that his recommended portfolio did not include any specific value funds in either the U.S. or international markets. Also the portfolio is less than 25% small cap. And finally there was no position in REITs. What do you think?
A: There are easily 10,000 ways you can put together a portfolio. And in any period any one of them might produce the highest return. I think the responsibility of an advisor is to put together a portfolio that is going to produce the best unit of return per unit of risk over the long term. An advisor can overweight the portfolio to one or two assets in the hopes of being in the right place at the right time. Being in the “hot” asset classes with a major part of a portfolio can help an advisor raise lots of money as the public will rarely understand the result was more a matter of luck than skill.
An advisor will always have a common sense reason to justify whatever they recommend. In the case of this new advisor, his recommendations are based on the belief that small cap and value have been through a period of out-performance and are likely to under-perform in the next cycle. He believes his new clients won’t have the patience to see a broader diversification do its long-term work. My experience is that investors who demand superior short-term performance will not be successful long-term investors.
This advisor also makes the point that his portfolio has lower fees and is therefore better for investors. I have talked to a lot of investors who stay away from small cap and value because of slightly higher fees. I think that is being penny wise and pound foolish as small and value have both added premiums of more than 1% over large and growth asset classes.
Should an advisor get paid on assets they’re not directly responsible to manage?
Q: I so appreciate your piece on annuities. As an independent broker I dropped my insurance license back in 2001 when I left a major insurance company that happened to have a brokerage arm. During my time there I never pursued any annuity business, but did assist a few inherited clients with 1035 exchanges and was shocked at the fees and commissions. I decided then I wanted no part of this kind of fleecing. I often thought then, and now, that had Elliot Spitzer not gotten into trouble for his personal failings, he would have gone after insurance companies the same way he went after the B share structure of mutual funds. I continue to pound on my desk that annuities are just plain bad investment vehicles.
However, I have one disagreement with you regarding commissions vs. fees – in my business I take the approach that if a person is inactive – such as the 83-year-old retired exec from a large company who wishes to hold only his company stock and collect the dividend off it – it is far less expensive for him to pay the occasional transaction charge over a fee on assets. Do you think an advisor should get paid on assets that they’re not directly responsible to manage?
A: I agree with most of what you said about annuities. They are grossly oversold, but there are situations where they fit. For example, the older person who doesn’t have much in savings will likely never get as much as they can from using an immediate life annuity. The key is to buy them right. I just had a wonderful dinner with Stan the Annuity Man regarding how to shop for annuities. I was shocked at some of the terrible tricks of the trade. Maybe every industry has its scoundrels but I want to do all I can to help people protect themselves from the liars and con artists.
I agree with your comment about management fees on unsupervised assets. My firm (I should say “my old firm” as I am now retired) never charged a fee on unsupervised assets. That included positions in investments that we didn’t directly manage such as long-term positions in individual stocks, as well as 401k holdings. I know that many investment managers apply a fee to all investments, as they take responsibility for all the buy, hold or sell decisions. If that is the case, I suspect the percentage should be much lower.
Chevron could learn a lot from Warren Buffett
“There’s an old saying: Don’t throw out the baby with the bath water. Trustees of Chevron’s 401(k) retirement plan should have remembered that bit of folk wisdom before they tinkered with the plan’s investment options. More



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