Who are the smartest people in the room?

July 21, 2016

“You’re a rock star, Paul, keep it up! Don’t ever retire from your unpaid gig!” – Alan H.

Dear Friends,

Because where, how and in whom you place your trust can make all the difference in your retirement, I want to share with you one of my favorite articles, Who should retirement investors trust?, that Rich Buck and I wrote a couple of years ago for MarketWatch. It addresses the ideas and sources I trust most in the investing process. As many of you know, there are three primary places from which investors can glean information: Main Street, Wall Street and University Street; and I trust the latter.

In addition to the following trust points I believe, I will introduce you to two of the people on University Street that I most trust. My intention, as always, is to take what is otherwise complex or slow reading and simplify it for investors to most easily understand.

  • I trust that academic research is the best guide to making the best decisions. I trust this much more than my own emotions. Though I wish it were otherwise, how I feel and what I want makes absolutely no difference to the market.
  • I trust that my results will be better if I carefully make a long-term plan and then stick to it until my circumstances change. I trust that this will serve me better than if I try to follow investment fads;
  • I trust that my results will be better if I’m dedicated to minimizing my expenses, both of the one-time variety (such as sales commissions) and of the ongoing variety (such as annual expense ratios;
  • I trust that I will end up with more usable money in my lifetime with tax-deferred (or tax-free) investments than with taxable ones;
  • I trust that in the long run, stocks will make me more money than bonds, even though my portfolio contains some bonds to reduce volatility;
  • I trust that professional salesmen, such as stockbrokers, aren’t likely to place my interests above theirs, and that I will be better off to avoid such advisers, no matter how much I may like them personally;
  • I trust that well-chosen no-load mutual funds will do better in the long run than equally well-chosen load funds. I trust this even knowing that there are some very good load funds;
  • I trust diversification over concentration. No matter how good I may be at picking an asset class or a no-load mutual fund, I believe my results will be better if I diversify;
  • I trust I will experience less risk if I own international stocks as well as U.S. stocks, small-cap stocks as well as large-cap stocks, value stocks as well as growth stocks;
  • I trust I will have less anxiety — and take less risk — if I include a hefty proportion of bond funds in my portfolio;
  • I trust that academic research is the best guide to making the best decisions. I trust this much more than my own emotions. Though I wish it were otherwise, how I feel and what I want makes absolutely no difference to the market;
  • I trust that my investment results will be better, my anxiety and my tax bills will be lower and my time will be freer if I use the services of an adviser who understands my needs and trusts the same things I do.

Here are two academics that have had the largest impact on my views on successful investing, as well as impacting my portfolio recommendations: Eugene Fama and Kenneth French. I also trust dfaus.com for information on the family of funds that have put the Fama-French research to work. My goal is to make the work of these experts accessible to investors and, although many investors will not have access to DFA funds, to come as close as you can – via my recommendations – with funds and ETFs at Vanguard, Fidelity, Schwab, TD Ameritrade and T Rowe Price.

Feedback from the recent video

Financial Fitness Forever: Five Steps to More Money, Less Risk and More Peace of Mind, a 2.5 hour video, was produced by the Washington Society of Certified Public Accountants for CPAs nationwide, and is available by special arrangement to our readers and listeners. You can see the trailer on my home page, learn more here, or jump right to the purchase page and get access that can be shared and never expires. Here are a few comments from CPAs who’ve watched it:

Loved it! Great course. Very useful information!

Very timely, as I have many clients that are investing in managed accounts that do not understand what is going on. It is great information.

A good pep talk about the benefits of saving and sticking to your overall long-term investment goals. Will recommend to my client’s for sure.

This was a very valuable course.

And a comment from one of our viewers:

Hi Paul, just finished your video and I tried to find something that I thought needed improving. Honestly, I cannot find anything to nit-pick… nothing. Outstanding job. You are doing important work and I just wish the people who would benefit most were interested in saving and investing. I look forward to your podcasts. Stay healthy… we really need people with the knowledge and desire to share their knowledge.”– Don G.

Have you seen it? I’d love your feedback. Have you gotten others to watch it (kids, grandkids, friends)? If so, how did you motivate them to watch… what did you say or do? Email me and let me know!

Q & A’s

Read my most-recent Q&As from the “Ask Me Anything” Live Chat on July 20. Once a month, Scutify.com creates a page where you can leave a question for me in advance, or join in at the specified time. The next Live Chat will be Aug. 17 at 1:00 p.m. EST and you can go to this link now to pose your question to be answered next month. It’s an excellent way to have me answer your question, as regrettably we cannot get to all the emails we receive.

Below please find more Q&As. Thank you for your interest and sharing my work to help others become better investors so more people can enjoy “More Money, Less Risk and More Peace of Mind.”

To your success,

Q: What are your thoughts on advice from Dan Weiner, the Vanguard newsletter guy?  I’m not subscribed to it, but I’m wondering about Vanguard mutual funds and building an awesome portfolio is my passion.

A: Dan provides a ton of information on Vanguard funds, but at the end of the day it’s what you do with it. His track record is very similar to ours. For the 15 years ending Dec. 31, 2015, his Conservative Growth Portfolio compounded at 6.6% compared to my Vanguard Moderate Portfolio compounding at 6.3%. His two Growth Portfolios (one an index portfolio) compounded at 6.9% vs. our Aggressive Portfolio at 6.4%. The difference comes from the fact that his portfolios have less international holdings. Will his portfolios do better in the future? That will depends how small, value and international asset classes do as our portfolios have more of all three.  Both Dan’s and our portfolios are destined to produce middle of the road returns. For higher returns stay tuned for new portfolios that I’ll release in the next 2 months. Keep in mind that Dan’s recommendations cost $100 to $150 a year and mine are available at no cost.

Q: Is there anything wrong with reducing my exposure to international markets? I am not a market timer but I am coming to the conclusion that there is too much risk in the international markets. I think Brexit was the breaking point. I’m particularly worried about emerging markets, both in terms of the economics as well as the potential political unrest.

A: I don’t have a problem with you reducing your exposure to international markets, but I do have a problem with your reason. I know lots of good advisors who recommend less exposure to internationals, but not because of Brexit.  And they certainly would not be worried about the recent challenges in emerging markets. I have talked to a lot of investors who are staying away from emerging markets until things settle down. I just looked to see how my emerging markets fund has done this year. It’s up 14%. And yes, I admit I didn’t expect it! I don’t want investors to use market-timing moves to respond to the news or recent returns. For most investors, that is counterproductive.

Here is a great article by my friend George Sisti. He recommends a 30% position in international asset classes. His newsletter is always worth reading.

Q: How can I tell if what my advisor has done was in my best interest? I have worked with the same advisor for more than 20 years. I have no idea how much he has made for me. You talk a lot about doing what’s in my best interest. How do I know?

A: Let’s start with one important concept – your advisor didn’t make you anything, but hopefully he invested your money in asset classes that did well and protected you from the things that steal your hard earned money. The market makes investors money. I can’t make the market go up and down, and neither can your advisor. The control he has is to make sure you are in low-cost index funds, funds with high tax efficiency, funds with massive diversification, and the right amount of fixed income to address your risk tolerance.

If you find this analysis difficult, ask another advisor if they can help.  In some cases advisors will work for an hour or two to analyze your holdings. Almost any legitimate advisor can figure out the answer in about 10 minutes. If your advisor has been selling you products with high expenses and commissions, he/she is not working in your best interest or is incompetent. I hope you find out your advisor has only acted in your best interest. If you want to hire someone to take a quick look, you can check with a Garrett Planning Network advisor. If you ask, they will work on an hourly basis.

Q: Would your Financial Fitness Forever video be something I could/should share with my advisory subscription clients, or is it mainly for CPAs? BTW, I love the John Oliver video! Classic.. even as someone in the industry.

A: I think the FFF video is valuable to all investors who are beyond the first-time investor level; someone who doesn’t understand how mutual funds work will find it a challenge. Those who want to understand asset class selection, asset allocation, indexing, fund selection, and how to take distributions in retirement, should find the video helpful. And I’d appreciate if you’d share it with your clients and let me know what feedback your receive.

Q: Why do many recommended portfolios seem to call for an overlap between related funds? It seems this greatly diminishes diversification. Examples would be calling for Vanguard 500 Index Admiral Shares plus Vanguard Value Index Admiral Shares or Vanguard S&P Small–Cap 600 Index plus Vanguard S&P Small-Cap 600 Value. I’m sure that there must be a reason why this is not counter-productive to the goal of diversification, but I can’t understand what that reason could be.

A: I think I can explain the reason by walking through one set of decisions: How much should an investor hold in U.S. large cap blend and U.S. large cap value? My goal is to build the portfolio with a combination of growth and value, even though the long-term return of value is higher than growth. The S&P 500 is mostly growth, but has a large percentage in value stocks as well. The Vanguard U.S. large cap value fund is heavily weighted to value, so the combination of the S&P 500 and a large cap value fund will create a balance of about 75% in value and 25% in growth. If I wanted a 50/50 split of growth and value, I would simply hold the S&P 500. A similar outcome results from the combination of small cap blend and small cap value. More value than growth.


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Paul Merriman |  http://www.paulmerriman.com

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