October 29, 2015


Dear Friends,
I’ve got some very good news. More investors have a written plan. More importantly, more non-retired U.S. investors have a written financial plan. A 2015 Gallup survey of over 1000 households, with more than $10,000 in investable assets, finds that more retirees have financial plans than non-retirees.
But the percentage of non-retirees with plans has had more growth since the last survey in 2011, up over 39% from 2011 to 2015. While 70% of all surveyed claim to have a plan, only about 50% have a written plan. A written plan is likely more important than most people think. The Gallup survey finds those who do have a written plan are very likely to follow it, with 92% saying that once it is written, they follow it “very” or “somewhat” closely, and 88% indicating that they track it and review it at least once per year.
It doesn’t come as a surprise that those with a financial plan developed it with the aid of a professional advisor. 80% of those with more than $100,000 are working with the help of a professional advisor. One important outcome of having a written plan is having the confidence that an investor is doing the right thing. The Gallop survey finds that of those with a written plan 42% are highly confident of being on track, with another 48% somewhat confident.
According to Gallop, the implications of the survey are, “Although most U.S. investors say they have a financial plan, fewer than four in 10 have gone the extra step to develop a written financial plan. However, that percentage has been growing in recent years. A written plan is a key tool to help investors define their goals and spell out specific steps needed to achieve those goals.
The act of developing a clearly defined written plan likely keeps investors more on track for their goals than if they did not have such a plan. Those who have a written plan appear to be more committed to achieving their goals than those who do not have such a plan.
From all of my experience, the development of a financial plan, along with the help of someone recommending the best way to implement that plan, can easily lead to an earlier retirement, more money in retirement and more left for family and important causes at our passing. Of course the key is to find someone who is competent and ethical, working for a firm that is competent and ethical, recommending investments that are ethical and competent. For help on how to find such a person, I recommend you readGet Smart or Get Screwed: How To Select The Best and Get The Most From Your Financial Advisor. You can get a free download at the homepage of my website.
Please find more Q&As below and all of them archived at my website.
To your success,
Won’t I make more investing in individual stocks?
Q: I get it that mutual funds are a good way to invest but it seems like I could make a lot more investing in individual stocks. Is there a trustworthy newsletter service that is known for helping people find highly profitable individual stocks?
A: There is no question that you could double or triple the returns of mutual funds by simply investing in the “best” companies. It looks so easy to find a company that’s been doing well and just ride it for a while. Warren Buffet has a great track record. You could just get a hold of list of the companies he owns and buy a few of them. There are lots of articles that highlight “How to invest like Warren Buffet.” Try that search and you will find lots of hot ideas. Of course the companies that have done the best will likely be most attractive. But watch out, last year’s winner can be this year’s dog. According to BTN, The # 1 S&P 500 stock for calendar year 2014 gained +124.6% last. That same stock lost 21.8% in the first half of 2015.
If I wanted to take more risk and likely make a higher return, I would invest in a small cap value ETF, like SPDR S&P 600 Small Cap Value (SLYV). It is available as a commission-free ETF through Charles Schwab.  If you want to understand why I recommend that kind of fund please read this article.
Should I move my IRA from Putnam to Vanguard?
Q: I have a Roth IRA with Putnam that I started 12 years ago through an employer program. All my investments are Y shares and I am not able to contribute any longer because my income exceeds the limits. Should I/can I transfer my Putnam funds balance to a Vanguard Roth to cut down the expenses? My balance is about $30k in this Putnam account and it seems that all of the funds have expenses of 1% or more.

A: According to Morningstar, the average Putnam U.S. equity fund expense ratio is 1.33%, international equity fund 1.51%, and the muni and corporate bond funds about 1%. That compares to Vanguard averages of .19% for U.S. equity, .23% for international equity and about .15% for the bond funds. That is a huge difference that should translate into higher returns of at least the difference in expenses. The other advantage of the Vanguard index funds will be the lower turnover that could easily add .5% a year. I would certainly make the move. Ask Vanguard to help you with the transfer. That’s their job.

How do your recommended portfolios protect investors?

Q: How does your recommended portfolio address all the serious risks investors are taking today? Rising interest rates, inflation, market declines around the world, higher volatility, and the craziness that is coming out of the Presidential Primaries.
A: While my portfolios are built for bear markets as well as bull, there is no way the portfolios are likely to make money in a broad market decline. In the 2000-2002 bear market, my portfolios did okay because the small cap, value and international markets performed well. So sometimes my equity portfolios will do okay in a narrowly focused bear market. The broad asset class diversification in my portfolios didn’t help reduce the losses of the 2007-2009 bear market. But in both those bear markets the bond portion of the portfolio sheltered investors from a lot of the losses. In fact, in 2008, while the broad market was down 40%, the bond portion of our portfolios rose about 7%.
Rising interest rates will be painful for all bond portfolios, but short-to-intermediate maturities protect against the worst losses of longer-term bonds. Also, historically, inflation is offset with gains in a diversified portfolio of equities. For example, from 1965 through 1981 inflation took back all of the returns of the S&P 500. In fact, the index lost .3% a year after inflation. But a diversified portfolio of big, small, growth, value, U.S. and international had about a 6%, after-inflation return
The obvious assumption is the market will come back after either equity or bond bear markets. Without making any promises what the future will bring, we know that there has never been a permanent bear market. Proper diversification is the key. The good news is, with all the defensive aspects of my portfolios, the expected return is considerably higher than the broad market indexes.
I have no words of wisdom regarding what is happening with the Presidential election process, except to say when the left and right find a candidate, they tend to move back to the center to attract the independents. Of course it might be different this time.
You might be interested in this Forbes article that gives lots of historical data on returns under both Republicans and Democrats.
What is the best source of mutual fund recommendations?
Q: What is the best source of mutual fund recommendations? I am particularly interested in the Vanguard family.
A: I will be writing an article and recording a podcast on the topic before the end of the year. The Hulbert Financial Digest will be my source of information for results. Hulbert has been tracking financial newsletters since 1980.
There are three newsletters with long-term results that have focused on Vanguard funds. The best known is Dan Wiener’s, The Independent Advisor for Vanguard Investors. The cost is about $100 a year, when a discount is offered. The second is Moneyletter, a newsletter that covers both Vanguard and Fidelity. They sell for about $130 but are likely available for less when they offer discounts. The third is my newsletter/advice, you know as paulmerriman.com, but previously under the name Fundadvice.com. When I sold my firm they were kind enough to let me take the newsletter with me. Of course it didn’t cost them anything because all the services were, and are, offered at no cost. The returns for similar portfolios have been almost identical. The Vanguard Moderate Portfolio at Moneyletter compounded at 5.6% for the 15 years ending June 30, 2015. For the same period, Wiener’s newsletter compounded at 6.5%. My Vanguard Moderate Portfolio also compounded at 6.5%. What is interesting is that my portfolio was about 20% less volatile. By the way, Moneyletter had some other moderate portfolios that made about 7%.
What risks exist in mutual funds?
Q: Those of us who have owned mutual funds over the last 15-20 years understand how volatile and risky they can be. What I want to understand is the other less-exciting risks we might be taking. For example, what risk do we take having all our money in one fund family?
A: There are many risks that most investors overlook. I consider anything that takes your money without a return a risk. For example, a 5% load is a guaranteed loss, and therefore a risk. The internal costs of buying and selling stocks are an expense you don’t have to pay in passively managed funds. Administration expenses are costs that translate to a reduction in return. It seems strange that some fund families pay more in administration than others for the same services. Some actively managed funds are sitting on very large unrealized capital gains that will eventually be paid, even though the new investor wasn’t there when they were made. And of course high turnover can lead to additional taxes.
I recently wrote an article that mentioned Artisan Small Cap Value Fund, once one of the top performing funds in its category. During the last 10 years Vanguard Small Cap Value (also mentioned in the article) made 7.64% but after taxes 7.11%. This after tax return assumes taking losses at the highest tax rate. That’s a 6.9% reduction due to taxes. Artisan Small Cap Value made 4.93%, before taxes, and 3.07, after taxes. This is a reduction of 37.7%. I don’t think many investors consider the potential loss to taxes a risk. I do!
You asked about all you money in one mutual fund family as a risk. There have been rare circumstances where investors discovered there were bad things happening inside their family of mutual funds. I do not consider it a risk to have all your money at Vanguard as the investments in fact belong to the shareholders. Vanguard has no claim to ownership of your portfolio, other than the operating expenses that are accrued daily. I would not have the same level of confidence in a small mutual fund family.
How often should I review my account with my financial advisor?
A: You should review your accounts once a year, unless something major changes in your life. Any reason you sense a change in your risk tolerance is also a good reason to talk to your advisor. When I was an advisor, it was not unusual to meet quarterly for the first year. The idea is to make sure an investor becomes comfortable with the process. In a year, most investors learn what to expect. One question for your advisor is how fast they will respond to an email question? If the question is asked and answered ‘within a couple of hours,’ it can relieve a lot of potential anxiety.
Can I pay an advisor based on profitability?
Q: I don’t like the idea of paying an advisor when I lose money. I would even pay more in the good times if I didn’t have to pay anything in the bad times. Is it possible to pay based on profitability?
A: Yes, but not for all investors. The advisors in the hedge fund in which I participate get 20% of the profits, plus about 1.5% in accounting and administration fees. They get the 1.5% during the year but they don’t get their 20% until after the end of the year. If they lose money during a year they do not get any of the 20% money. Plus, they don’t get any of the profits until they make up the percentage they lost.
There are other ways to set up incentive payments, but the advisor has to assume a better return for working without compensation for a year or more.

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