March 5, 2015


Dear Friends,

In our last newsletter (Feb. 19), we posted 10 Q&As and asked you to tell us if you liked the format and wanted more. The response was an overwhelming “Yes!” Hundreds of you took the time to write things like:

“I think reading 10 Q&A from Paul, someone we respect and value his advice, is a great use of my time. My opinion is, “the more the Merrimaner.” Jon W.

“Ten an issue would be great. I download the pod casts and listen to them while exercising and look forward to reading each newsletter.” John B.

“I like the idea of Paul answering at least 10 questions per newsletter! His answers are always well and carefully written and are of great value to me in managing my portfolio. Also, by including headings above each Q&A, I can scroll through the questions I am less interested in. Thanks for all you do – it must be a very contented feeling to realize how many people you have helped over the years, including me!” Bill C.

Thank you for your readership, and your kind and enthusiastic responses. As Bill C. notes, it is gratifying to know that my commitment, in retirement, to providing free financial education is having an increasingly positive impact. Your help in sharing my free books, articles and podcasts is greatly appreciated. Together, helping others to be less stressed and have more peace of mind, we are making the world a better place.

So, this week, here’s another 10 questions and answers for you. All Q&A’s are archived at and topics are searchable via the “Search” box on the right side of the page.

To your success,


Hiring an advisor to manage DFA funds


Q:  Do you really believe it makes sense to pay an advisor to manage a portfolio using DFA funds compared to doing it yourself at Vanguard?


A: When I compare how DFA and Vanguard build their equity portfolios, I absolutely believe DFA has an advantage that is greater than the advisor’s fee. Some funds, like the S&P 500 and REITs, have little return advantage at DFA, while others have huge advantages – and not due to luck. For example, for the 15 years ending February 6, 2015, the DFA large cap value fund compounded at 9%, while the Vanguard Value Index compounded at 5.8. In my podcasts and articles about performance I address why those differences happened and why they are likely to continue in the long run.

I have met thousands of investors over the years who do not care if DFA will produce a better return than Vanguard; they refuse to pay a fee to have something done they can do on their own. Plus, the do-it-yourself investor could be right when they say it’s possible that DFA won’t beat Vanguard in the future. By the way, there are a lot of sane investors who think people who take the risk of owning stocks individually or through mutual funds are making a big mistake. They have all their investments in bonds or real estate. And they could be right. The one thing we know for sure is that nobody knows the future.


Sources of advice for Social Security questions

Q:  There seems to be a lot of contradictory information on Social Security. What is the best source of advice on Social Security questions?


A: Please don’t ask me for advice on Social Security. There are over 2800 SS regulations and I am not an expert on the subject. There are two experts/authors whose work I respect. I think you can trust their articles and books on the subject. The Social Security guru to the investment advisory community is Mary Beth Franklin. Search her name and you will find a long list of interesting articles. The other is Andy Landis, author of Social Security:  The Inside Story.  Be sure to get the 2014 edition. Of course, if you are making a big decision regarding Social Security, it is always smart to check with your advisor. Unfortunately, many advisors are not experts on the subject. I suggest you do the best you can reading Beth and Andy’s work and confirm what you find out with your advisor.

Investment versus mortgage payoff


Q:  We have extra money that we can invest or use to prepay our mortgages. Which is the smarter place to put our money for the next 15 years?


A:  When I was an advisor this was my position: I believed an investor should max out their retirement accounts (IRA and 401k), including a non-working spouse’s IRA, before paying extra on a mortgage. With additional taxable money I tried to make the judgment whether the investor would likely panic during majormarket declines. If I thought they would sell during a market decline, I suggested they pay down the mortgage rather than lose the money. After making all the retirement plan investments, I, personally, would pay down a mortgage, even though I thought I could do better with the money in the market. Paying down the mortgage is guaranteed, while the market going up is not.

Alternative investments


Q: After listening to a podcast about the ProShares Morningstar Alternatives Solution ETF recently, I am wondering whether I should start to look into alternative investments as a means of reducing risks during a bear market. What is your opinion of Long/Short, Merger, Managed Futures, Hedge Replication alternative funds? Are they suitable for use in a buy-and-hold strategy?


A: Absolutely not. The only way to use these products is as a market timer and that’s very difficult to do. All of the evidence is that even professionals fail at market timing with securities that are built to go up when the market goes down. It’s a great sales pitch but there is no evidence it works. If you reviewed all the newsletters that apply these kinds of methods, you’d discover they virtually all underperform a traditional buy-and-hold strategy with an appropriate amount of fixed income. The Hulbert Financial Digest tracks most of the major investment newsletters and the long-short newsletters have terrible results.

Percentages in REITs


Q:  In your recent article about REITs you mention recommending a 10% position in REITs, although some of your portfolios recommend less than 10%.  Which is it?


A: In some mutual fund families I recommend a 10% position in U.S.REITs and in other portfolios I recommend as little as 5%. It depends on whether the family has an international real estate fund. For example, in the Vanguard all-equity portfolio, I recommend 5% in U.S. REITs and 5% in an international real estate fund. So, the 10%real estate commitment is spread between 2 funds.

New Fidelity REIT fund


Q: Fidelity has recently opened a new U.S. REIT fund (FREL) that has a much lower expense ratio than the commission-free REIT ETF from Ishares (IRY). Do you intend to replace the present ishares fund?


A:  Yes, I expect to make a change but the Fidelity REIT ETF is a very small fund and I think it is prudent to wait until it grows to at least a couple hundred million dollars under management.  Right now the Fidelity REIT only has $19 million under management compared to 6 billion dollars in the Ishares REIT fund.

Invest now or wait?


Q: I have $25,000 to invest, should I wait until stocks drop in price to invest?


A: I have answered this question 1000 times and I’m still frustrated that I can’t give an answer that will help investors make an obvious decision. My gut says wait, but how good is my gut? I have absolutely no evidence that my gut is better than a dollar cost averaging approach. Many professional advisors say, “If you have money to invest, do it now!” The key is to find a strategy that works now and for the future. If you find yourself guessing every move, you don’t have a mechanical approach and your future will be based on how you, or someone else feels.


Robo advisors


Q: I was wondering what you think of the automated investment companies such as Betterment, Personal Capital and Wealthfront?


A: I will be writing an article on the robo advisors you listed at the end of the performance series that will likely finish in April/May. I will list the pros and cons as well as the implications of long term performance using their respective approaches to asset allocation and fund/ETF selection.

Finding a good DFA advisor


Q: How can I find a good DFA advisor?


A: The easy answer is to go to and follow the links to “find an advisor.”  If you are Canadian, go to  They will ask you a number of questions that will lead them to making three recommendations in your area. But you must understand there is a world of difference between DFA advisors. Some have research departments, but most don’t. Some have advisors who work as teams, but most don’t. Some will recommend all DFA funds, while some will go wherever they find the best answer. Some will use alternative investments, but most don’t. Some have advisors who have relatively little experience, while others hire only experienced advisors. Some have a limit to how many clients an advisor can help, while others take all they can get.
Keep in mind we are looking for an advisor who is competent and ethical, working for a firm that is competent and ethical, recommending securities that are competent and ethical. My wife and have found all that. I hope you do too. For much more on how to hire an advisor, read my book, “GET SMART or GET SCREWED: How To Select The Best and Get The Most From Your Financial Advisor,” available for sale or as a free download.



Q: Is silver a good store of wealth?


A: Not in my book or any academic research I have read. The only people I know who push silver as a store of value are those who make a living pushing it. In the last approximately 40 years the price of silver has gone from $5 an ounce to about $50, back to the high 40s and then back to about $15. During that same time, $5 in the S&P 500 rose to about $403. During the same period $5 in a long-term U.S. 30-year Treasury Bond grew to $155. Maybe a good store of long-term value would be in a balance of U.S. Govt. Bonds and the S&P 500.

Understanding performance: The S&P 500 Index
Preparing to become a successful investor may be a bit like preparing to become a successful spouse. More

Looking for action? Try large-cap value stocks
Investors looking for a bit more “action” than they’ll find in the Standard & Poor’s 500 Index and other large-cap-blend funds don’t have to look very far. More



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