How to stay the course despite the news

November 10, 2016

Dear Friends,

One of the toughest aspects of successful investing is dealing with the news. Not only do we struggle with the fear of loss when something bad happens, the problem is almost always blown out of proportion by those who make a living scaring people so they can attract new readers or clients. As I write this, the U.S. body politic has been in a contentious state, awaiting the outcome of the presidential election. While I may have something to say about that in the next newsletter, I thought that since Brexit is so fresh in our minds, this article, below, by Bryan Rogowski is a good reminder of the struggle investors go through to stay the course.

I’ve recently had the pleasure of addressing various groups of investors and appreciate receiving feedback. Here’s one from a couple who attended my Nov. 3rd presentation co-sponsored by the Bainbridge Community Foundation:

“Thank you for kick-starting the process we need to go through to rid ourselves of a team of investors at RBC who honestly see greater returns through their fees and commissions than my wife and I do. You made very clear that the advisors will always tout their expertise and imply that without them we would be lost at sea.

We know we can do this, and the most refreshing thing I heard last evening was we can take the Ron Popiel approach “set it and forget it”.  Well not exactly, some annual reallocations may be necessary, but we’ve been doing that with our 401K’s currently. Again, thank you for your current endeavors during your ‘retirement.’ Your advice and life lessons touched this couple last evening and gave us the confidence to research and grab hold of our financial destiny.”

The Free “Financial Fitness Forever 2016” Video

Thanks to all of you who responded to my “birthday wish” that you share the video with family and friends. We’ve had over 3,000 “opens” and received wonderful comments. Here are a couple of them. Please keep sharing! And if you watch this on YouTube, your “like” and a comment would be appreciated.

I have watched the video and love the fact that you are sharing this critical information with people who need it most! I’ve been following your work for a while and you are one of my favorites for investment talk. You break things down and make them understandable and, even better, actionable. You have a lot of material I can refer people to and this video can be something we watch, but it already assumes some understanding that is beyond what my students have. Your book on basic investments fills in the gap nicely.  – Alan S.

My daughter and son-in-law with twins have never invested a dime. You have made it possible for me to provide your information to them to study and follow through. You are making a difference! – Dennis B.

You truly have a gift for making the complex understandable. Thank you so much for sharing your gift with all of us. – Pam W.

History on the Run by Bryan Rogowski

Bryan is a former retirement policy expert at the U.S. Government Accountability Office (GAO) and made numerous recommendations to Congress on how to improve government for the people. In one report Bryan wrote to Congress, he met with the top retirement experts in the country to discover how best Americans should manage their savings to ensure a prosperous retirement. Bryan is a very bright caring DFA advisor who lives on Bainbridge Island.  For those looking for a DFA advisor who doesn’t require a big minimum, I can whole heartily recommend Bryan.

(August, 2016) When news breaks and markets move, content-starved media often invite talking heads to muse on the repercussions. Knowing the difference between this speculative opinion and actual facts can help investors stay disciplined during purported “crises”.

At the end of June this year, UK citizens voted in a referendum for the nation to withdraw from the European Union. The result, which defied the expectations of many, led to market volatility as participants weighed possible consequences.

Journalists responded by using the results to craft dramatic headlines and stories. The Washington Post said the vote had “escalated the risk of global recession, plunged financial markets into free fall, and tested the strength of safeguards since the last downturn seven years ago.”

The Financial Times said “Brexit” had the makings of a global crisis. “[This] represents a wider threat to the global economy and the broader international political system,” the paper said. “The consequences will be felt across the world.”

It is true there have been political repercussions from the Brexit vote. Theresa May replaced David Cameron as Britain’s prime minister and overhauled the cabinet. There are debates in Europe about how the withdrawal will be managed and the possible consequences for other EU members.

But within a few weeks of the UK vote, Britain’s top share index, the FTSE 100, hit 11-month highs. By mid-July, the US S&P 500 and Dow Jones Industrial Average had risen to record highs. Shares in Europe and Asia also strengthened after dipping initially following the vote.  Read More…

Questions & Answers

The nextAsk Me Anything” Live Chat – about investing, funds, retirement, saving for a child’s education and more #AMA – takes place Nov. 23 at 1:00 EST. Go to this link now and leave your questions, or check in at the scheduled time. The follow Q&A’s are a sampling from the September session, all of which can be accessed here.

To your success,

Q: Why shouldn’t I be able to manage my own money?  

A: I think you can if you are willing to keep control of the emotions that often get in the way of people doing it “by the rules.” And then there are people like me who simply want someone else to do it. If you read “Your Money and Your Brain” or “How To Think About Money,” I think both do a good job of explaining the many emotional challenges investors face. It should be easy. I have recommended putting 75% of a portfolio in a good target date fund and another 25% to 40% in a small-cap value index. I think that combination will put investors in the top 10% of similar aged people. Of course the investments would be made on a dollar-cost-averaging basis.

Q: Why don’t you mention DFA recommendations in your video?

On the strength of your recommendations, I invested $350,000 solely in dimensional funds thru an authorized DFA advisor.

A: There are 4 reasons I don’t make DFA recommendations: 1. The DFA funds are not available to the public so they are not for do-it-yourself investors. 2. The DFA family of funds offers so many different configurations of their funds, it is impossible to give a “one size fits all” recommendation.  3. A good DFA advisor will build a portfolio that, along with the other funds you own, may require a DFA portfolio that is totally unique to your situation. 4. Most DFA advisors will suggest a different balance of asset classes than what I use in my own DFA portfolio. I suspect I own more international, small cap blend, and small cap value asset classes than most advisors recommend.

Q: Should I use the advice you give for my IRA and non-IRA alike? Or should I treat them differently?

I am retired 75-year-old and have my IRA with Fidelity. Even though I’m able to live on my Social Security and retirement pension, I must take my MRD from my IRA each year due to my age. I have been moving it over into a non-IRA account at Fidelity.

A: I think it depends on the purpose of the investment. If the proceeds are eventually going to be given to your children upon your death, you might take a bit more risk. In fact, you may want to invest with their risk tolerance in mind, instead of your own. Another consideration is to rebuild your total portfolio so you end up with the same balance of fixed income and equity asset classes. The different could be where you own the stocks and bonds. You might put all the fixed income inside the tax-deferred account and the taxable portion could be in equities.

Q: If I wanted to go fully into index funds from half in actively-managed mutual funds, would you recommend doing it all at one time, over time, or another strategy?

I am fully retired and have all of my retirement monies in a roll over IRA, half each in index funds and actively managed mutual funds.

A: I see nothing wrong in moving directly from the actively managed funds into the index funds. If you thought the actively managed funds might do something to protect you against a future bear market, maybe you should reconsider the risk exposure you have in your portfolio. I have always found my Fine Tuning Table and article helpful in figuring out the right balance of equities and fixed income.

Q:  What should I do with an inactive account?

I have an account to which I do not contribute anymore and I cannot move the money from it. I do not plan to touch the money in the account and I have 20 years until retirement. Should I take the same amount of risk as I do with my active accounts where I contribute regularly and then go gradually into more fixed income when approaching retirement? Or is it safer to use a more conservative allocation now and not change it in the future? I am not sure if an account can recover itself without any contributions to it in case of bear market.

A: If I were your advisor I would have you consider the inactive account as a part of your total portfolio. Let’s assume that investment has several good asset classes available in low-cost index funds. In that case you could use that part of the portfolio to access those asset classes. It takes a little work to see the entire portfolio as one, but once you find that comfortable you will probably have a portfolio constructed for the best long-term results. Plus, if you are married and your spouse is contributing to an IRA and 401k or 403b, you should use his/her choices of asset classes and funds to be part of the master portfolio.

Q: Until what age would you like to see your average young investor, who has a long-term horizon and high-risk tolerance, in a 100% equity portfolio?

Assuming this person has the emotional discipline to stay the course during long stretches of a declining stock market, at what age would you recommend introducing bonds into the portfolio? And from that point on, what would be your preferred glide path as the investor ages toward retirement (say at age 65)? I’ve read your “Fine Tuning” article and I want to be as aggressive as possible to maximize return over the next 30 years of my working life. But I don’t want to be excessively reckless either.

A: Great question and one that can’t be answered properly without a long conversation that I no longer do as an investment advisor. At the end of my free e-book, “101 investment decisions guaranteed to change your financial future,” I have a list of 10 different strategies to move from all equities to a balance of stocks and bonds. I think it’s possible to remain all equities for the first 20 to 30 years. I will use your question for a podcast soon.

The other major question is how aggressive to be with the equity portion of your portfolio?  I have recently written two articles on the implications of an all-equity portfolio comprised of both large and small value asset classes.  I suggest you read both of them.
How a simple two-fund portfolio can boost your retirement returns

If you’re under 35 this is the ultimate all-value equity portfolio

All this information leads to another question: how aggressive should a young investor be in the equity portion of their portfolio?

Q: When selecting among different mutual funds/ETFs which fall into the same asset class, assuming that costs are very close, what is the best way to determine which fund is preferable?

I assume we want to choose the fund that best represents the asset class. For example, the small-cap value fund with smaller average capitalization and more strongly weighted towards value. Are the holdings-style diagrams used by a good way of comparing funds in terms of growth vs. value or is there a better method?

On a related note, what are your thoughts on periodically re-evaluating funds in a portfolio and moving to different funds which represent the same asset classes? If the investor makes these decisions based on the fundamentals of the funds (i.e. the funds’ various costs and their effectiveness at representing their asset classes), rather than on short-term performance, is this a good idea every few years?

A: Your assumptions about evaluating funds and ETFs are correct. You are looking for smaller average size companies in each asset class. That would include smaller large as well as smaller small. The Morningstar style box is helpful as a quick overview of size and value orientation.  On the “portfolio” page of each fund or ETF you can see the numbers behind the style box. There are numbers for average size company, price-to-book ratio, price-to-earnings, dividend yield and more.  Other factors are turnover, after-tax results and holdings, including number of companies in the portfolio.

Short-term performance is meaningless, but I am always on the lookout for more efficient access to the asset classes I would like investors to own.


If you’re under 35, this is the ultimate all-value equity portfolio

Most savvy investors (and certainly Warren Buffet) are well acquainted with the attractions of value stocks and value funds. More






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