Prepared for the Catastrophic?

December 7, 2016

“After I stumbled upon your podcasts, I fell in love. I have looked at all the recommendations on your website and am ready to put your advice in action. I am SO thankful for you, Paul, and have shared your information with countless friends to help guide them toward financial freedom.” – Lauren B

Dear Friends,

I recently had a big scare. I was moving chairs from our Thanksgiving celebration down and around to the storage area in the basement of our house. I had made one trip down with a chair and walked back empty handed.  Then I made another trip down with a second chair and as I turned to head back up to the back porch a giant evergreen tree smashed to the ground right where I had just walked three times in the previous five minutes.

The tree must have been between 40 and 50 years old and were concerned it was leaning in the direction of our house. We even discussed “doing something” about it after the holidays. There had been so much rain lately the tree finally just gave up and fell with a deafening noise and an earthquaking crash. It landed right at the corner of our house, with little damage. The big cost will be getting rid of the huge tree.

This kind of “near miss” caused me to think of the randomness of life. We can have all the plans in the world but we never know when something enormous, life changing, and possibly catastrophic might occur. When I think in terms of your portfolio I want you to do all you can to minimize the impact of a catastrophic event.  This is why I encourage you to take care of all that you know you can control – like maximizing diversification, minimizing expenses and controlling the impact of catastrophic bear markets with an appropriate amount of fixed income so you don’t get “killed” in a huge crash.

James Lange is back with another free book for our readers

James Lange has three decades of estate and planning experience as both CPA and an estate attorney. He is offering our listeners and readers a free copy of his e-book, The Ultimate Retirement and Estate Plan for Your Million-Dollar IRA, which you can download here.

In response to a Senate Finance Committee vote in favor of what Jim calls, “The Death of the Stretch IRA law” – referring to the new $450,000 per IRA owner exclusion – he wrote an addendum to the book. In the Addendum he offers practical strategies to accommodate the new $450,000 exclusion. That addendum can be downloaded for free by going to

Click here to read Jim’s article on “Committee Votes to Kill the Stretch IRA. What Should You Do Now?”

A series of podcasts

In 2011, I was featured in a 60-minute show entitled “Financial Fitness After 50” for PBS stations to use for their annual fundraising drive. Supporters who donated $150 or more received a package of educational presentations from PBS – 6 videos, 6 CDs and a copy of Financial Fitness Forever.  Recently, I was given permission by the producers of the PBS series to share the DVDs and CDs with you. I will do so over the coming months. I had not heard the CDs or watched the DVDs since 2011. I was surprised to discover, in Lessons from the World’s Most Famous Investors, I had used a quote from Donald Trump. You may find some of the numbers out of date but the basics are as meaningful today as they were 5 years ago.

Questions and Answers

Wednesday, Dec 21 – Join me for a Scutify live chat session starting at 1:00 pm ET. Ask me anything about investing, funds, retirement, saving for a child’s education and more.  You may  go to this link anytime and leave your questions, to be answered on December 21.  Following are some Q&As from November’s session.

To your success,
Q:  Is there really any evidence that there are great fund managers who can easily beat the market when they have a relatively small amount of money to invest?
There is an argument that great active fund managers cannot beat the market when their fund gets really big, because there are less opportunities to invest large sums of money. However, the argument goes, when the fund is small it is easy for these great active managers to beat the market because they can invest in almost anything.
 A:  I am going to recommend a couple of articles that will be of interest, but let me make a few comments before leading you to more meaningful research. If I give 50 people to throw 20 darts at a page of the names of  500 small cap value companies, a few of them will pick mostly dogs, a few mostly huge winners and most will pick companies that produce more nomal results. If the period they compete is a period of superior performance for small cap over large cap, those holding the smallest companies in the group will likely be the best performers. If it is a period of poor performance for small cap, and relatively good performance for large cap, I expect the  small cap portfolios holding bigger small cap companies will have better returns than the smaller small cap companies.

Now your homework: Please read several articles by Larry Swedroe.  Simply do a search for “Larry Swedroe: do actively managed small cap funds add value?”  That will take you to two articles, one on U.S. and one on international small cap funds.

Q:  What is your take on Emerging markets ETFs, small cap EM and frontier markets?
I’m about to implement the Ultimate Buy & Hold portfolio, 100% stock with value ETFs only.

A:  My own Worldwide All Value Portfolio is built using all DFA funds. Before the end of the year I will recommend the ETFs for the do-it-yourself all-value portfolio. I don’t want to make those recommendations until I have presented more about the risk of the portfolio. I hope you have signed up for my free newsletter, as I will let you know when the articles come out as well as new podcasts on the subject.

Q:  Why is there no small-cap value fund in the Vanguard mutual fund recommendation? What mutual fund would be good to invest in for international small-cap value?

I’m a bit confused about your 10% recommendation for international small-cap value in your “Ultimate Buy and Hold Strategy 2016” webpage vs. the fund recommendations given on the page “Paul’s Mutual Fund Recommendations for Vanguard“. In particular, I don’t see an international small-cap value fund.

A:  You have noted one of the challenges of trying to match the desired asset classes to specific mutual funds or ETFs providers have to offer. Vanguard does not offer an international small cap value fund or ETF. I have recommended DLS as it gives investors reasonable access to the missing asset class. It may cost you a small commission to add it but I think it will be worth it in the long run. If you want to minimize commissions you may choose to hold DLS without rebalancing.

Q: How can anyone put money into stocks at these high prices?

I know I need some stocks in my portfolio for growth, but the three times I invested in stocks all I did is lose money. I know you have answered this question several times but I still struggle with getting into a market at a market high again. Like a lot of investors, I sold my all my stocks in early 2009 and now not sure what to do.

A:  There is hope.  Millions of investors have been adding money without questioning whether the market is under or over priced. Most of these investors are regularly putting money into their 401k or IRA portfolios. They are doing what most advisors suggest, dollar cost averaging regardless what the market is doing or might do. I agree with your concern. As I write this the S&P 500 is up almost 300% since the bottom in March 2009. By the way, this is the total return, including dividends.

Dollar cost averaging is probably for you. Depending on the amount of money and your age, you should DCA over a period of 12 to 36 months. You should also be prudent about how much of your portfolio is in equities and how much in fixed income. Please take a look at my Fine Tuning Table for the expected worst losses for many combinations of stocks and bonds. This link includes an article, podcast and the table to be sure you understand how to use it. In the coming weeks there will be another Fine Tuning Table based on an all-value equity portfolio.

Q:  What kind of returns do you think we can expect in the future and how I should plan in a market that seems to unpredictable?
I don’t have much confidence in the predictions of all you so-called experts. I’ve been investing in the stock market for almost 20 years and I think I could have made more in CDs.  What do you think about residential real estate returns?  I had expected the value of my house to be an important part of my early retirement but so far it hasn’t been any better than stocks.

A: I love your question as it is what most of us would like to know. Of course the answer is no one knows. I know it was easy to predict a rosy future in 1999, after the S&P 500 had compounded at over 17% for 25 years. As we now know, the rosy predictions totally missed their mark as the major market index has only made about 5% a year since 1999. Of course there are other equity asset classes that made much higher returns during the same period. For example, the Vanguard Small Cap Value Fund compounded at about 10% since 1999.

While I can’t know what the market will do in the next 10 or 20 years, I know the S&P has a very long track record of making 10%, large cap value 11%. small cap blend 12% and small cap value over 13%.  I also know a combination of all 4 made almost 2% more than the S&P 500, with similar losses during significant bear markets.

The best defense against not knowing what will happen is to save more than you want, plan on working longer than you would like and learn how to enjoy living on less. Lots of investors who realize they are way behind where they think they should be are taking more risk to catch up. I think you are better served focused on accessing the right balance of equity asset classes, keep your expenses low and stick with index funds that are likely to at least match market returns. With actively managed funds you are likely to pay higher expenses and run the risk of making less than the market. Yes, about 10 to 20 percent of actively managed funds will do better than index funds over 10 years but the odds are you will own those that trail the index funds.

About real estate:  I have never known how to judge the return on real estate as the returns rarely include all of the costs of ownership – taxes, repairs, remodels, etc.  I do know that an index of REITs (real estate investment trusts) has compounded at 12.5% from 1978 through 2015. Of course REITs are a portfolio of commercial real estate, not the residential real estate that most individuals hope will be an important part of their retirement assets.


Investors should be wary of these 5 bits of Wall Street ‘advice’

Ernest Hemingway once said: “The best way to find out if you can trust somebody is to trust them.”






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