January 7, 2016


Dear Friends,
Thank you to those who joined me yesterday for a Live “Ask Me Anything” Chat online at Scutify.com. All the Q&A’s will be archived on Scutify’s site but I will share some of my favorite Q&As in the next newsletter.
Retiremeet Conference In Bellevue
Tickets are almost sold out for this one-day investor conference/workshop on Feb. 27, 8:30 a.m. – 4:00 p.m. at the Meydenbauer Center in Bellevue, WA. Early bird tickets are $15 single and $25 per couple, including lunch. Click here to register.

My keynote speech addressing habits, attitudes and beliefs of successful investors, will be videotaped and available on our website in March or April. I will also conduct a breakout session covering asset class selection, asset allocation and distributions in retirement. Hopefully that session will be videotaped as well.Other presenters include Consumerman Herb Weisbaum, who will teach you how to protect your identity before and during retirement. Dimensional Funds Vice-President, Apollo Lupescu, Ph.D, will share “A Different Way to Invest” based on Nobel Prize-winning research. Rick Gregorek will cover estate planning, special needs trusts, long-term care options, Medicaid planning and more. And Tom Cock and Don McDonald, two of the smartest and nicest guys in the industry, from Talking Real Money, will be on hand to entertain and enlighten. I hope to see you there.

2016 looks to be a busy year for this retired financial educator.  In the next letter I will announce the dates of an upcoming 2 part, 4 hour course at Edmonds Community College’s Creative Retirement program.  Meanwhile, I trust you’ll continue to help others by sharing the work of my team. Here’s a new article on our website “The Truth About Financial Newsletters ” also available on LinkedIn.
Below are this edition’s Q&A’s, all of which arearchived at my website.
To your success,
Questions and Answers
Q: Do you offer an investment newsletter for income-oriented investors who are in or near retirement?
A: I don’t offer a traditional investment newsletter that focuses on investing for income. Instead, Rich Buck and I write articles that focus on asset class selection, asset allocation, fund selection, and taking distributions in retirement. Along with those articles, plus podcasts, I recommend the funds an investor can use to build a portfolio during the accumulation period as well as distribution period. The combination of articles, podcasts and portfolio recommendations is my way of giving the general investment advice investment newsletters normally offer.
Q: Any thoughts on the newsletter, Retirement Watch, from Bob Carlson? Or can you recommend one that is good for retirees?
A. I suggest subscribing to The Hulbert Financial Digest for one year. Hulbert is the only source of newsletter performance I trust. I have subscribed for over 20 years and find his work worth every penny. According to Hulbert’s results, Carlson’s newsletter has two portfolios with at least 15 years of performance.  His Sector Portfolio has a 2.8% compound rate of return and his Balanced Portfolio has a 3.5% compound rate of return, through June 30, 2015. It’s easy to find other newsletters that have performed better. Sound Mind Investing has a 5.6% return for a similar low-risk portfolio (60% equities/40% bonds). My Vanguard Moderate Portfolio, (also 60/40) compounded at 6.5% a year for the same 15-year period, during which my Vanguard Monthly Income Portfolio (all bonds) compounded at 5.6%. The key for most investors is to find a strategy that requires very little maintenance and makes the necessary return.
For more on this subject, you may want to read “The Truth About Financial Newsletters.
Q: Can you recommend a single fund that is low risky but still might make 12%?
I like the idea of making a $3,000 investment for my future grandchild that may turn into a significant legacy, but I’m not very comfortable putting it all in small cap value. Can you recommend a single fund that is less risky but still might make 12%?
A:  That’s a tall order. If I had to choose one asset class that might make a 12% return, but be less risky, I would choose large cap value. If I could twist your arm a little, I would recommend half each in small and large cap value.  Please take a look at the tablehttp://paulmerriman.com/legacy-new-born-child-pdf-1/ that shows the lifetime results of 4 to 12 percent returns. At 11% (likely large cap value return) the distributions and life ending values would be $22,000,000 and at 10% (all S&P) about $10,000,000.
Q: Should we factor Social Security in our long-term planning?

My wife and I are doing some long-term planning for the first time. We have a difference of opinion about the viability of Social Security. What do you suggest? Count it in or out?
A: I’m not surprised at your difference of opinion. In April 2015, Gallop surveyed 1,015 people about their expectations regarding the receipt of Social Security when they get to retirement. One out of seven (14%) do not believe they will receive a penny of Social Security. The Social Security shortfall can be easily fixed. It will simply be painful for the taxpayers who will make Social Security viable. I believe Social Security will be means tested, more heavily taxed and require a higher deposit rate. I do believe it should be part of the long-term plan.
Q: In addition to U.S. small cap value, what other asset classes could make 12% long term?
A: The list is fairly long.  Some asset classes have made 12% or more since the 1920s, while others only have historical returns since the 1980s. The asset classes that have over 80 years of history are U.S. small cap value, U.S. large cap value, and U.S. small cap blend (combination of growth and value). The asset classes that have produced more than 12% over the last 25 years are international large cap value, international small cap blend, international small cap value, emerging markets large cap value, and emerging markets small cap.
Q: Do you think its worth a 1% annual charge to have access to the DFA funds?
I know you are a big fan of Dimensional Funds. I’ve located a DFA in my area. I’m going to invest $100,000 in a taxable account. I don’t need the money for at least 20 plus years. Is the 1% charge the industry standard?
A: Making DFA funds available is only a small part of what a good advisor should do for you. I suggest you read my book, “Get Smart or Get Screwed:  How to Select The Best and Get The Most From Your Financial Advisor” It is available as a free download. I believe the DFA equity funds will make at least 1% more than the similar Vanguard equity funds. The additional return is due to  smaller average size companies and more deeply discounted value companies.  The 1% fee is normal, although I know many firms that charge more and less.
Q: Why should I pay someone a 1% fee when I can simply put 10% in each of the nine no-load Vanguard funds you recommend?
A:  If the advisor uses DFA funds you will have access to funds that are designed to make more than similar Vanguard funds. As I mentioned in the last question, the large and small cap funds at DFA are smaller on average than similar Vanguard funds, as well as being more deeply discounted. Plus, if you hire a knowledgeable advisor you will get advice on the rest of the portfolio that can’t be put into DFA funds.
Q: What are your thoughts about investing in theTennessee 529 plan offering a DFA Small Cap fund (DFSTX) for a 2-year-old’s 529 investment? 

There’s about 15 year’s time before the money is needed, although granted we’d probably want to get more conservative before it’s needed to pay tuition and other expenses.
A: I’m not opposed to including DFSTX in the portfolio but I wouldn’t put all the money in one fund. The good news is your plan has a number of the equity asset classes I recommend. If you are going to change the equity/bond mix as your child gets closer to college, I think you should take a look at the glide paths of 529s that are run by Vanguard. While I wouldn’t recommend their equity portfolio, I do think their balance of equity and fixed income is worth following.
By the way, DFSTX is a small cap blend, not small cap value, fund. DFSVX is the DFA small cap value fund. What’s the difference?  DFSTX has a price to book ratio of 1.87 vs. 1.16 for DFSVX. According to MorningstarDFSVX holds 28% in small cap value, 35% in small cap blend and 30% in small cap growth. DFSVX is 50% small cap value, 32% small cap blend and 9% small cap growth. So what?  The academics find that more deeply discounted value (lower price to book ratio) produces higher returns over the long term. For the 15 years ending Dec. 31, 2015, DFSTX compounded at 9% and DFSVX compounded at 10.4%. What is interesting is the 15-year standard deviation (volatility measurement) for the two funds was virtually the same.
Q: How I can find a DFA advisor who will open an account for my son?
I’m planning to sell some individual stocks and use the money to open an account for my son. I intend to invest the money in the DFA small cap value fund. I need to find a DFA advisor who will open the account.
A:  I don’t think any DFA advisor is going to open an account unless you personally have an account with the advisor. If I am correct in my assumption that means you have to find a DFA advisor that fits your personal needs. Some DFA advisors have minimums as low as $50,000, while others require $500,000.  If I were in your position I would start by going to DFAUS.com to find an advisor that would take the amount of money you have to invest for your own needs.  Once you meet with the advisor (depending on your needs, DFA normally gives the names of 3 firms in your area) and find there is a fit, then you can ask if they will accommodate the separate investment for your child. It may take a little time to find an advisor to help but it’s worth the effort. If I were still an advisor I would provide the service for your child, if you were an account.
Q: I read your article about adding small cap value funds to the portfolio. If I had added a small cap value fund to my Vanguard 2060 Target Date Fund (401k), what impact would that have had on my return?
A: The 2060 target date fund didn’t start until January 2012, so there’s not much history to compare. During 2015 the target date fund was down 1.7% but for the 3 years ended Dec. 31, 2015 it gained 9.4% a year. During 2015 the small cap value fund was down 4.8% but compounded at 12.8% over the 3 years.  The increase in return was lower than expected historically as it only added .8 percent a year with a 25% position in small cap value. The study in “How to double your target date fund’s return in a single move” projected a 1.5% advantage by adding a 25% small cap value position.
Is it realistic to expect a 12% long-term return?
In 1999 and early 2000, when the stock market was going gangbusters under the leadership of technology stocks, many investors believed double-digit returns were a given.  More



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