And now for some Q&As below.
Will you be speaking near my hometown?
Q: I’m 65 years old, planning to continue working until at least 68-70 to allow my 401(k) balance to grow. I would never miss reading any of your articles, especially those on Marketwatch
. I respect you and your advice so much, I keep a copy of your “The Ultimate Buy and Hold Strategy
” on my desk for reference. My portfolio has all of the asset classes you recommend, and I’m very comfortable with it moving forward. I would very much like to attend one of your presentations in person. I live in a suburb of Washington, DC. Will you be in this area any time soon?
A: Thanks for your kind comments. I would like to speak to the Washington D.C. AAII Chapter in the next year but not sure we can find a time that works. I hope you noted the opportunity to watch my 3-hour video that was taped in Portland at an AAII workshop. It is presently available for $20 from the Portland Chapter of the AAII. You can buy a copy of the DVD, along with a 22-page outline, by sending a $20 check to: AAII PORTLAND Chapter, PO Box 66034, Vancouver, WA 98666. Be sure to add a note that it is for the Paul Merriman presentation.
I have been talking with the Portland Chapter of AAII in the hopes of being able to offer the video free on the internet. One way or another I hope I can provide the workshop in the privacy of your own home.
How do I get my dad to consider a new advisor?
Q: My dad, near 60, has a broker/advisor with Wells Fargo and worked with her for many years. After reading all of your information, I’ve had a discussion with him and explained why I think he could do better for an advisor. He has been with her a long time so he’s pretty bought into her business pitch and I’m struggling to get traction. I’m afraid she makes commission on selling him “polished turds” and she has convinced him several times it makes sense for her to recommend individual stocks of different companies. I’ve been sending him your articles and he likes your content. Any advice on trying to change his mind on his advisor?
What is the simplest investment solution?
Q: Your podcasts are great. I’ve listened to all of them. I think this question will be fun for you: In John Bogle’s “Little Book of Common Sense Investing,” he briefly mentions “Okham’s Razor.” This basically states that “If there are multiple rational solutions to a problem, pick the simplest one” and you’ll be right 90% of the time. If you were going to build a reasonable portfolio according to William of Okham’s theory, what would it look like?
A: I must admit this is going to be fun. I have two answers worth consideration. My first would be predicated on knowing the individual investor and how they might handle their investments. Let’s use me as an example. My personal investments are about as complex as any mutual fund investor I know. My wife and I have a portion in buy and hold using 12 different asset classes, a second portion in a broadly diversified (as many as 36 funds) portfolio plus market timing, and a portion combining up to 100 funds and ETFs, plus market timing and leverage. Sound complicated? Not at all. It’s dirt simple. I understand how each part works but I don’t have to do any of it. An investment management firm does it all. My only job is to call and ask for money when I need it.
What I do is not so different from what target date fund investors do. I let someone else make all the decisions. That’s as simple as it gets.
But most people who are following my work are trying to do the heavy lifting themselves. My job is to make it as simple as possible and still give the Do-It-Yourself investor a premium return. Putting all one’s money in a total market index is simple, but it is far from giving investors the best unit of return per unit of risk. So, for those willing to put some time into the process, I have tried to give guidance that will lead to much higher returns.
I am in favor of keeping things simple. I wish there was one fund that represented all the asset classes I would like investors to own. That would be simple. But for those willing to spend a small amount of time to build a better portfolio, I think the rewards can be life changing. I believe it’s possible to add at least an extra percent to the compound rate of return. That can easily add a million or two to a young couple’s retirement portfolio.
I believe there will be a very simple solution to accessing a strategy much like what I recommend in the coming years. That will likely come in the form of a robo advisor. Stay tuned!
How likely is a 70% drop in the Dow Jones Index?
Q: I am a loyal Marketwatch
reader and appreciate your articles. Another MW columnist recently wrote an article about the possibility of the Dow Jones Index going down to 5,000 from 15,450 today, a loss of almost 70%. That will put a big hole in my retirement plans. I am planning on retiring in 2 years but a 70% loss would mean retiring later. How likely is a loss of 70%?
A: Anything is possible but a 70% loss is very improbable. Lots of people are critical any time I use historical returns to answer questions about the future. The problem is I have nothing else to go by. Yes, a 70% loss is possible but not probable. Please take a look at my article about bear markets
. Note that the average loss is 35%, not counting the reinvestment of dividends. The worst loss was a drop of 62% from November 1931 to June 1932. A loss of 70% would suggest a catastrophic collapse of our economy, which is always a possibility.
As close as you are to retirement, I assume you have a major percentage of your portfolio in bond funds, so you are certainly not expected to lose most of the value of the bonds. In fact, in catastrophic markets there is normally a rush to government bonds. Your concern is something that is always a possibility, but it always seems more likely after a week of very serious declines.
Should I convert my tax-deferred accounts to index funds?
Q: I have held a portfolio of actively managed funds for almost 20 years. Many of them were purchased in the excitement of the technology boom of the late 1990s. Most, but not all, are sitting in tax-deferred accounts. Needless to say I haven’t made much money. I have hesitated to sell believing the minute I sell them they will skyrocket. What kind of strategy would you suggest to transition from the actively managed funds to index funds? To make things more complicated. the investments are spread around 3 different fund families.
A: When investments are held in tax-deferred accounts I always suggest selling the holdings immediately and moving the money to the index funds. In some cases the custodian is slow in moving the proceeds so you may want to transfer the funds and have them sold and reinvested within the new custodial account. It is possible you could sell at the old custodian and sit in cash while the market is making a strong upward move. That’s very frustrating. Of course it is also possible the funds will go down in value so you wouldn’t mind sitting in cash during the decline. Of course we have no idea what the market will do in the short run. But we do know that the market goes up about 2/3s of the time so you are likely better staying invested until you can immediately reinvest. The portion that is in taxable accounts may require some tax planning, particularly if you have big capital gains. I find many investors don’t have as much in capital gains as they expect since a lot of those gains have been paid out in capital gains distributions and reinvested at higher prices.
Is you data accurate for my long-term planning?
Q: I find your Fine Tuning
and Distribution Tables
very useful and would like to use them for long-term planning purposes. Are there any reasons these tables don’t represent the likely outcome in the future?
A: That is a very important question. Here are some of the reasons the future is guaranteed to be different from the past:
1. Most investors don’t have access to funds that represent funds the way Dimensional Funds (the folks who supply the data base) builds them. For example, Vanguard equity portfolios will likely underperform these results by more than one percent a year.
2. Many of the equity asset classes were not available for the entire 45 years. If they had been available the entire period, the returns would have been higher.
3. The market will go up and down at very different rates, so we know the future won’t be like the past.
4. For reasons of tracking 12-month losses, the portfolios in the Fine Tuning Table
are rebalanced on a monthly basis. If the portfolio had been rebalanced annually the compounded returns would have been about .5% higher.
5. Not only will the returns be different but the timing of purchases and distributions will be different. For example, in the distribution tables it is assumed the money will be taken the first day of the year rather than monthly. That makes a significant difference. Check out this article “How $40K Can Add $1 Million to Retirement.” For planning purposes I would plan on the basis of 2% lower returns than listed on the Fine Tuning Table.
How do I get started investing, and when?
Q: I know I should get started making my investments but I just can’t pull the trigger when it seems so obvious that the market is headed for a big decline. What advice do you give to those of us who are just getting started?
A: First, it’s important for you to understand that you have a lot of company. As of the first of the year, the AAII Sentiment Survey showed that 52% of investors were bullish. As of August 2015 only about 25% are bullish. Of course it’s not unusual for the crowd to be wrong.
Successful investing is mostly about developing good habits. In my article, “5 Habits of the Very Best Investors
” I note the following about habit #3: Save regularly.
Successful investors save regularly and routinely. In my roundtable discussions among advisers, this was the very first trait that emerged. Every adviser I talked to agreed that this is an absolutely essential ingredient for successful investing. After all, you can’t invest money unless you have it; and unless you save it, you probably won’t have it.
The best investors find ways to add to their savings automatically. These days, that is pretty easy through payroll deductions and regularly scheduled online transfers. If you want to be among the best, set this habit on automatic.
You may want to consider SPDR S&P 600 Small Cap Value (SLYV), which is available as a commission free ETF through Charles Schwab. If you want to understand why I recommend that kind of fund please read “The One Asset Class Every Investor Needs
I think you are letting your emotions take over the decision making process. Those who let their emotions dictate their timing will likely make much less than those who put it on automatic. For young investors that normally means dollar-cost averaging. I have yet to find any evidence that investors do better if they second guess when to invest. This may sound strange but my hope is the market goes down a lot the first year you start investing. I want you to have the chance to buy a bunch of shares when the market is down. The reward is almost guaranteed to come later. Buying low is so much better than buying high. It just doesn’t feel better.