Paul Merriman
Sound Investing For Every Stage of Life 

Paul answers questions from our Readers
and listeners

As a dedicated financial educator and retired investment advisor, Paul Merriman welcomes questions from his readers and listeners. Please email your questions (stated as succinctly as possible) to info@paulmerriman.com. Title the subject line: ASK PAUL. Be sure to include your name and phone number so Paul can reach you if further discussion is required. While time does not permit Paul to answer every question personally, or even specifically, we do our best to address common questions. We may post your question and Paul‘s answer here on this site. We will not post your name or personal information. Thank you!

These many Q&As form an extensive knowledge base, adding to the resources, recommendations, podcasts, videos, articles and books also found on this website. You can use the search box at the top of the page to enter a search phrase (such as “mutual funds” or “asset allocation”) and receive information on this site related to that topic.

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Q:  Why are you recommending Motif – which seems like a little new company, and I’m worried about moving my investments there – wouldn’t I be safer using a larger more established brokerage?.

A:  While many investors are managing accounts through Motif, we have made it possible for investors to replicate the portfolio through firms like Schwab, TD Ameritrade and Fidelity.  Notably, when Schwab was first offered to the public, competitors made them out to be questionable and unsafe. There’s always a risk with new firms, but there’s some comfort in knowing that investments at Motif are insured up to $500k by SIPC, and the equities are held by Pershing LLC.

Q:  Should we limit the amount we invest at Motif to less than $500,000?
On Motif’s website, they say they because they are insured as members of the Securities Investor Protection Corporation (SIPC), funds are available to meet customer claims up to $500,000, including a maximum of $250,000 for cash claims.

A:  You could, but the Motif website goes on to say “Pershing LLC provides coverage in excess of SIPC limits from certain underwriters in Lloyd’s insurance market.”  As pointed out on this Wealthfront blog post, “Simply put there are exceptionally few cases where investors have lost money due to a brokerage firm going out of business.”

Q:  If I used a particular motif of yours, will I get notified when an adjustment occurs (perhaps an email from Motif) so that I can choose whether or not I want to go in and rebalance according to the adjusted composition (or maybe next time I contribute funds)?

A:  The answer is yes, you will get a notification email when we rebalance a Motif back to the desired allocations IF you have a Motif Investing account AND have invested in the Motif.  Our current plan is to rebalance approximately quarterly or more frequently if needed.

Q:  Why are the specific mutual funds for Motif’s TDF’s unreadable in the portfolio descriptions?

A:  Unfortunately, Motif Investing chooses to blur some of the asset allocations for people visiting their website without an account.  The good news is that accounts can be created for free, and most of the allocations are also available on www.paulmerriman.com.  The TDF allocations in particular are available in a Google Sheet that you can copy and customize as well.

Q:  Are annual asset class returns available that include 2017? 
I have BlackRock’s’ copy from last year and a couple others without web addresses on them. Some of the ones I have found have a limited number of actual asset classes.

A:  In building our long-term return tables, we use the data from Dimensional Funds. The good news is they provide long-term history on all of the asset classes we suggest investors hold in their portfolio.  Some of the information goes back to 1926, while other data only goes back 20 to 30 years.  The problem is we are not allowed to distribute the separate asset class returns.   The best public source has been “Stocks, Bonds, Bills and inflation Yearbook” by Roger Ibbotson and Roger M. Grabowski. The information goes back to 1926, including both large and small cap stocks.  The book normally comes out in April.  The 2017 publication (through 2016) costs $127.  When it was my prime source of information, I used to go to the library to get what I needed.

Q:  What is the self-guided online course by Lew Mandell you mentioned in a podcast?

A:  The following information on the course is from the Moneyskill.org. MoneySKILL® educates students on the basic understanding of money-management fundamentals. The free course includes the content areas of income, expenses, saving and investing, credit, and insurance. The high school and college course is designed to be used as all or part of a course in economics, business, math, social studies or wherever personal finances are taught. Students can access the modules in the classroom, home, or wherever an Internet connection is available. Built-in quizzes test students' grasp of each concept. Two versions are available: High School/College (adaptable for use by homeschoolers and/or employers) and Middle School level. Both the curriculum and its underlying technology infrastructure are updated each year. Take a moment to review AFSAEF's new MoneySKILL® handout which highlights the program.

Parents can sign in as a teacher and oversee the process with your children.  If you take the course yourself or have a child or grandchild take it, please let me how you like it and how much it improved your or your children’s or grandchildren’s financial knowledge.  There is a pre and post course test I hope you will take.  Your feedback is very important to me.

Q:  With the market hitting new highs almost daily, is it time to get out or at least short the market to protect our gains?

A:  I’m assuming your investments are taxable since you are concerned about protecting gains.  In the tax-deferred portion of a portfolio the cheapest thing to do is simply sell and go to cash with a portion of your portfolio.  Going short may seem like a reasonable step to take, but I heard from a lot of investors who wanted to short the market when Trump was elected.  For those who don’t understand the impact of taking a short position, here is an explanation from a Kiplinger article, along with a fund to use.

“ProShares’ SH is an easy way for individual investors to hedge against a bear market. The fund provides the inverse daily return of the S&P 500, which in short means that if the S&P 500 declines by 1%, the SH should gain 1%. Should you find yourself in a down market but have many long-term holdings with low cost basiss, ample yields and the ability to keep producing returns once the market recovers, the SH allows you to essentially recover some of the losses in your long portfolio.”

It seems so simple.  In fact, you can even double up and go short with leverage at ProShares.

I’m not a fan of the short side as a market timing strategy, since most professionals who try it end up losing money.  On the other hand, if the reason to go short is to lock-in your present gains, that’s not a terrible idea.  Of course that makes you a market timer and most experts advise against market timing or going short.

Q:  What do you think about doing backdoor Roth conversions and the Mega Backdoor Roth?  

A:  I am not a tax advisor but here are a few links to articles that may be helpful.  One is from Kiplinger (an online publication that I find very helpful), Leverage a Backdoor Roth IRA. The other two are from Geoff Curran an investment advisor from my old investment advisory firm, Mega Backdoor Roth IRA Explained and http://www.merriman.com/wealth-enhancement/mega-backdoor-roth-ira-explained/ and for How to Report a Backdoor Roth Conversion.

Q:  Why do you not recommend Total Bond Market Index such as VBTLX or BND or Schawb's SCHZ instead of Short-Term Government, Intermediate Term Gov. and Inflation protection?

I understand the VBTLX fund will has a small portion in Corporate bonds but the fund is fully diversified with high quality Government and Security agency bonds.

A:  It’s okay to use the Total Bond Market Index.  The idea of my recommendation is to be entirely in governments as they usually do the best in a catastrophic equities market.  As you may know, VBTLX was up 5.2% in 2008, compared to our threesome of TIPS, short-term and intermediate bonds being up over 7%. The maturity of my portfolio is shorter, so there is less interest rate risk than you will be exposed to in a total market bond fund.

Q:  With the reduction in income taxes, has that changed your advice on Roth vs. regular IRAs and 401k’s?

A:  If you qualify, I am a believer in using Roths over regular IRAs.  As for taxes, how can we guess where taxes will be when an investor retirees?  When I began in the investment industry, marginal tax rates were 70%, where they may be again at some time in the future.  When you use an IRA you are forcing yourself to save more money, as you will not get a refund.  In most accounts my guess is the refund is spent on something fun.  Use the Roth and all of your money goes to work.  Also, with the Roth one is not forced to take minimum required distributions so that can be a bonanza to heirs.  In other words, the Roth allows more flexibility in estate planning.


Q:  Do you have Hulbert performance numbers for the long-term return of your 60/40 moderate risk Vanguard portfolio?

A:  According to Mark Hulbert, for the 15 years ending July 31, 2017, my 60% equity/40% fixed income Vanguard portfolio compounded at 8.0 percent and the Vanguard 100% equity portfolio compounded at 9.6%. During the same period the S&P 500 compounded at 9%. Of course my Vanguard portfolio spread the investments across many major equity asset classes. Almost all of the equity asset classes in that portfolio have outperformed the S&P 500 over the long term. Of course past performance is not a guarantee of future performance.

Q:  With a big bear market likely on the horizon, does it make sense to put part of the portfolio in a fund that makes money as the market goes down?  How about the Grizzly Short Fund (GRZZX)?

A:  You would have been very happy having some money in GRZZX in 2008, up 73.7%. I’m sure there are lots of investors who have recently guessed wrong on the belief the market had to go down after such a long run. In fact, over the last 15 years, through August 31, 2017, GRZZX has lost 13.2% a year.  Over the same period the loss was even worse for most GRZZX investors as the average investors return, according to Morningstar, has been an annualized loss of 15.4% for the fifteen years.  The reason investors have larger losses than the fund is the tendency for investors to make bad timing decisions.

My approach is to hold enough fixed income to limit the losses during severe bear markets. My belief is the stock market is always at risk of a 50% loss.  Since my loss limit is 25%, I have 50% of my money in U.S. Government bonds.  Over the last 15 years the S&P compounded at 9% and intermediate Government bonds compounded at 4.1%. During the same time GRZZX lost a lot of money. If my timing was off, I could have gone from a decent return to a loss.

When The Hulbert Financial Digest was in business, I tracked all of the newsletters that took the short side. I could not find one newsletter that was able to add any significant extra return by adding the short component.

Q:  I followed your recommendation to invest my IRA into a small cap value fund and it has been a big disappointment so far this year… could this be a longer term problem?

A:  For investors who hold small cap value funds, get ready for returns that are substantially different than other asset classes. In fact, even expect substantially different returns than other small cap value funds. When compared to the S&P 500, the average difference in return is about 17% a year over the last 50 years. Plus, while U.S. small cap value has broken even to small losses this year, international small cap value and emerging markets value funds have had returns of 19% to 26%.

Q:  Why don’t you offer recommendations for DFA funds like you do for Vanguard and others?

A:  Several reasons. To begin with, anyone using DFA funds is working with an investment advisor who constructs a client’s portfolio based on the specifics of an investors need for return, risk tolerance, size of account and tax situation. Without getting too far into the weeds, an advisor has many ways to access small cap and value asset classes through DFA funds. For example, if an advisor wants to position a client in emerging markets asset classes, they can buy individual emerging market asset classes (large, small or value) through an individual fund that includes all three asset classes, or buy emerging market funds that represent any one of the three classes. Investors are paying a management fee to sort through all these choices. I do not have the time or legal ability (no longer a registered investment advisor) to give advice to individuals. Also, any recommendation will have to be matched to the other holdings that are not held in DFA funds. When I was an advisor is was common to manage a taxable account with DFA funds, while the client held non-DFA funds in their 401k.

Q:  How can I find a DFA advisor who will help me manage my portfolio?

A:  If you want to find a DFA advisor, you can start by going to dfaus.com, click on “Find an advisor.” They will likely give you ten advisors in your area.

I suggest you take the time to review at least of them. This is a huge decision, as an advisor is hopefully a lifetime appointment. I know, from personal experience, there is a great deal of comfort in finding an advisor who understands all of your financial facts, as well as your hopes and fears. And if you find the right advisor, and firm, you will have someone to take care of them, if you die first.

I have decided to do an extended podcast on DFA in the coming months. I will include a segment on selecting an advisor. That selection should be driven by your needs and the advisors expertise, as well as the firm’s capabilities. This is one of the most important financial decisions most of us will ever make.  Let’s make sure we don’t make a mistake.


Q:  Regarding Emerging Markets Small-Cap "Value", mentioned in your videos/podcasts, do you have a mutual fund or ETF recommendation for this asset class?

A:  The small cap emerging markets ETF I recommend is SPDR S&P Emerging Markets Small Cap (EWX), a deeply-discounted small cap emerging markets fund. For more ETF recommendations check out my best-of-class recommended portfolios, and for commission-free ETFs, see my recommendations for Vanguard, Fidelity and Schwab.

Q:  Could I use the Vanguard Monthly Income Portfolio for an Emergency Fund? 
Currently I'm getting 1% on a CD and looking for a higher return. Am I missing anything on that portfolio? My time horizon is longer than a couple years.

A:  The Vanguard Monthly Income Portfolio can be used for an emergency portfolio, but it will have a lot more risk than a short-term bond fund. The combination of U.S. corporate and government short, intermediate, high-grade and high-yield funds have an approximately 2.6% current yield. The question is, should you take the risk of losing 5% of the value of your account to earn the extra yield?  As you know, for those willing to take additional risk, I have advocated the use of balance funds in an emergency fund. A portfolio of 50% Vanguard Wellesley and 50% Vanguard Short-Term Federal Fund (VSGX) has compounded at over 4% with a loss of less than 2% in 2008.

Q:  As a first time investor, with all of my investments with Schwab, how do their target-date funds compare to Vanguard’s offerings?
I like the idea of adding a small-cap value fund to beef up the small and value asset classes. Which Schwab small-cap value mutual fund or ETFs do you recommend?

A:  I assume you would like me to compare the Vanguard and Schwab 2060 target-date funds, as they are the longest retirement date fund they each offer.  To begin, it’s important to note that my comments about the Schwab offerings will focus on their index based TDFs. The Schwab index target-date funds are a relatively new offering and there are some very important long-term considerations. The Schwab TDFs charge a .08% operational expense vs. Vanguard at .16%. Advantage Schwab. The Schwab 2060 TDF has 5% in bonds vs. Vanguard at 10%. That difference should represent a .25% annual advantage to Schwab. The Schwab portfolio has almost 5% more  in REITs than Vanguard. That could generate an additional .10%. If we add up the possible Schwab advantages, they could add an additional .5% a year.

Schwab offers a commission-free low cost small-cap value ETF. Schwab offers the SPDR S&P 600 Small-Cap Value (SLYV) ETF. SLYV has an expense ratio of .15%, which is .05% cheaper than Vanguard Small Cap 600 Value ETF (VIOV).  As of 9/22/17 the three year annualized return of SLYV was 10.87% compared to 10.73 with VIOV.

Bottom line:  While asset allocations can change over time, as well as the battle for lowest fees, at this time Schwab should serve you well with the combination of a long-term target-date fund and an additional commitment to small-cap value. Check out this article to find out more about how much you should put in the TDF and how much in small cap value.

Q:  You mention small cap value in your articles, what about mid-cap value, like VOE from Vanguard? 
It seems to have done well and at times, out-performing small-cap value.

A:  Over the last 15 years, as of 9/22/17, the large-cap, mid-cap and small-cap blend funds at Vanguard compounded at 9.6%, 11.5% and 11.8% respectively. We should also understand that there will be very long periods of time when large will do better than small. For example, for the 20 years ending 1999, large-cap blend out-performed small cap blend by less than .5% a year. Following that long period of under-performance, many investors gave up on small cap, only to have it be the far better asset class for the following 17 years.

Q:  In your Vanguard taxable portfolio page, you leave out domestic and international real estate…for someone who wants to invest in a taxable account, wouldn't the high dividends and the traditionally strong performance of this asset class outweigh their less favorable tax conditions? 

A:  Most REIT distributions are considered non-qualified dividends, which means that they do not qualify for the capital gains tax rate. In most cases, an individual will have a 15% capital gains rate on qualified dividends and will be charged their regular income tax rate for non-qualified dividends. It seems that a conversation with your tax expert will help determine what makes sense in your tax situation.

​Q:  I have 30k in a Money Market. I pull out $1k every 2 weeks and invest it in your Vanguard Mutual Fund portfolio recommendation. Is there a better place I should put the $30k while I dollar cost average into the various funds?

A:  Consider the Vanguard Ultra Short-Term Bond Fund (VUBFX). There is very little risk and it currently pays more than 1% interest.

Q:  I understand ETFs can be more tax efficient than mutual funds, but if I want to become a mechanical investor, wouldn't my best choice really only be mutual funds, since only mutual funds allow automatic investments?

A: Most brokerage firms don’t allow partial share purchases of ETFs so automatic investing doesn’t work with that limitation. Motifinvesting.com allows partial share purchases of ETFs but at a cost of $4.95 per transaction.

Q:  Could you point me to an academic source showing that investing in diversified asset class index funds is more profitable than picking winning stocks -- as you discuss in Financial Fitness Forever?  

A:  Check out this article by Larry Swedroe, one of the most trustworthy people I know in the industry: http://mutualfunds.com/expert-analysis/speculating-versus-investing-buying-individual-stocks/

Q:  In First Time Investor you cite model portfolios for Vanguard, Fidelity, etc. Do you have one for TIAA-CREF as well?  I could adapt one of your other model portfolios to TIAA-CREF, but if you've already done the research and recommendations that would be great.

A: I have put together TIAA-CREF portfolios of funds in the past but have not updated them for many years. I think you will find it relatively easy to figure out what my recommendations would be by looking at my other portfolios. Be sure and compare the expenses and returns of similar actively and passively managed funds at TIAA-CREF, as they offer both.

Q; I follow your recommended Vanguard portfolios and wonder what you think about the recent addition of two International Bond funds – the Vanguard Total International Bond Index Fund and the Emerging Markets Government Index Fund?

A: I do not recommend international bond funds for the Vanguard portfolios. The purpose of the bond funds is to reduce the volatility of a portfolio. Bonds for stability and stocks for growth. Due to the currency differences, the international bonds will increase the volatility of the bond portion of the portfolio. Of course, as you know, half of the equity portion of the portfolios is in international stocks, and that is enough currency diversification. In fact, adding international equities reduces the equity volatility, while adding international bonds increases volatility.

Q: How can you write, “don't pay a commission for a fund blah blah blah”? Why don’t you just write, “Please get a wrap account with my firm so I can get paid to do nothing by swiping a cool 1% of your assets each year”? Oh, I guess you forgot that little rule, lol. You are just like the rest of them. Yeah, I am the only poor advisor because I’m not able to just tell little lies. I don’t expect a reply, you guys never do.

A: I enjoyed your email. I am completely retired and have spent my retirement trying to help investors take better care of their investments, which includes underwriting a university course helping college students do the right thing as they make their first investments. I have been helping do-it-yourself investors use the best asset allocation I know, with the Vanguard funds, for over 15 years. What do I get out of this? A sense of helping others improve their financial future.

For every email like yours, I get hundreds thanking me for my effort and I appreciate every one. I cannot accomplish what I want if my readers conclude I’m getting something out of this. Go to my website – no advertisements. Go to my website – free books for simply signing up for my bi-weekly newsletter that you can unsubscribe from anytime. My suspicion is you have not looked at any of my free books. Please take a look and let me know if you still think I’m a fake. I could use your closing sentence, “I don’t expect a reply, you guys never do,” but I think this might be the exception. I look forward to hearing from you.

Q: Wow, you are extrapolating the past into the future there. Very creative analysis! Or wait… wait a second! Wasn’t all this extrapolating the past into future one of the behaviors that led to massive losses during the financial crisis?

A: I can guarantee the future will not look like the past. Not the next week, month, year or decade. If I could guarantee the future would look like the past, I would recommend investors put all their money in small cap value. Better yet, let’s go back to 1986 and put all of our money in Microsoft. There is no risk in the past. We all know exactly what we should have done.

I know what small cap value has done in the past. I know if from all of the tedious work done by the academic community. I don’t trust Wall Street, I don’t trust Main Street (friends and family) but I do accept the hard work done by the academic community (I call University Street), which gives us the best sense of relative returns. The academics are very clear about the expected returns of small cap value.

They believe small cap value is very likely to make more than small cap growth (over 4% more per year since 1927) but they refuse to say what the return will be. They also believe small cap value will make more than large cap value (over 2% per year since 1927) but they refuse to predict what the future return will be. Their belief is that investors should get a premium for stocks over bonds, small stocks over large, and value over growth. They make no attempt to tell you what future returns will be, but are willing to report on what they have been.

Most people think that recent returns (one, five, 10, maybe even 20 years) are meaningful. I like 50 to 80 years. In fact, if investors had used 50 to 80 years they would not have been surprised by the losses in the bear markets of 1973-1974, 2000-2002 or 2007-2009. They all looked very much like the past.

The purpose of my article was simply to suggest that small cap value should be one of many asset classes in a properly diversified portfolio. Yes, I like having the past on my side, but my own portfolio is a combination of over 12,000 stocks (through index funds) – approximately half in stocks, half in bonds, half in growth, half in value, half in large, half in small, half in international, half in U.S. half in buy and hold and half in market timing. Your comment is exactly the thinking that led me to this massively diversified portfolio. I don’t trust the future to look like the past.

Q: I’m assisting my parents with their retirement. They have Traditional IRA’s and Roth IRA’s. They both also have pensions and will collect Social Security in two years and receive a monthly royalty from an inherited oil partnership. Their pensions and the royalty cover their living expenses, my father’s pension decreases by 10% when he starts collecting social security. My question is, what’s the most tax efficient strategy to withdrawal from their IRA and ROTH?

A: I do not give tax advice, so I hesitate to answer your question. Here’s what I suggest you and your parents do to consider the best tax approach: consult an online search for “tax efficient withdrawals from regular and Roth IRAs.” Here are a couple of the articles that seem worth reading, and If you don’t find what you need in these articles please let me know.

Q: What would happen if I did the exact opposite of what you recommend?

A: You would invest in loaded funds, with high expenses, high turnover and little diversification. Better yet, you would put all of your money in one company that has a great future because diversification is for dummies. And you wouldn’t want to start investing early because it’s better to have fun when you’re young and leave the investing until later. And since you will do the opposite of what I suggest, you will work with a great stockbroker who will let in on some of his firms most exciting investment opportunities. And here is the best part: you will encourage your children to follow in your footsteps. I have one change to recommend.

You do what you think is right and encourage your children to get a free copy of “First Time Investor: Grow and Protect Your Money". They can get their free copy at paulmerriman.com. While they are there they can also download, “Get Smart or Get Screwed" and “101 Investment Decisions Guaranteed to Change Your Financial Future." By the way, in “101″ you will have the chance to see the impact of doing the exact opposite of what I recommend. Good Luck!

Q: Your recommended bond funds include Tips and Treasuries. What do you think about allocation to foreign bonds, such as Australia or Brazil? Some even recommend bank loans, e.g., BKLN. Or am I just reaching for yield?

A: The reason I recommend the Tips and Treasuries is to minimize (or reduce) volatility in the portfolio – bonds for stability and equities for growth. If you add foreign bonds, it will add to volatility and I would then reduce the exposure to equities.

Once adjustments are made to reach for yield, we get into a market timing decision as to when to get out of those instruments and into something with less risk and greater fixed-income return. Half of my own retirement investments are in buy and hold (50% equities and 50% low risk bonds). The other half is managed with timing (70% equities and 30% fixed income). In this part of my portfolio I use more risky fixed-income securities, as there is a defensive strategy to address the higher volatility of the high-yield and other more risky bond funds.

Q: Should my retirement funds should be in my taxable or 401(k) accounts?

A: Mutual funds that pay out interest, dividends and capital gains are considered less tax efficient. In theory, you should have your tax-efficient funds in your taxable account and the tax-inefficient funds in your 401(k) or IRA, if you have one. If you are following my recommendations your portfolio is made up of index funds that have very little turnover, so most of the stock funds are relatively tax efficient. Taxable bond funds, Treasury inflation-protected securities, real estate investment trusts (REITs), small cap and value funds will tend to pay out more tax-triggering events than large cap U.S. and international stock funds. Some fund families (e.g., Vanguard and Dimensional) offer tax-managed funds to minimize the taxable events in typically less tax-efficient asset classes.

Q: Did they pay this guy, Paul Merriman, for this MarketWatch article on asset allocation? It’s NOT a new idea.

A: First of all, I am a retired investment advisor and when I retired I promised my wife I will never work for money again. So everything I do at MarketWatch.com is 100% for the reader, I am not paid me a cent. You are correct, there is nothing new about asset allocation, but I find that most investors do not do a very good job of diversifying their portfolios. My intention with this article was to present such overwhelming evidence that it would be difficult to ignore the asset classes I recommend. If readers want more evidence, I hope they will read my book “101 Investment Decisions Guaranteed to Change Your Financial Future.” It is available free at paulmerriman.com. One more thing, I didn’t just recommend these asset classes. I recommended them over 10 years ago and the Vanguard all equity portfolio has compounded (according to The Hulbertt Financial Digest) at 10.3% a year for the 10 years ending Dec. 31, 2012.

Q: Is it possible to put money into our IRA account after retirement?

A: Anyone can contribute to an IRA but you have to have earned taxable income and be under age 70-1/2. Social Security, dividends, interest and capital gains do not qualify as earned income.

Q: Now that Apple is down to $450, is it time to purchase again?

A: What I am about to tell you is the truth, the whole truth and nothing but the truth. I know exactly what to buy, when to buy it, and when to sell it. My problem is I don’t know what will happen after I tell you what to buy or sell. My other challenge is that I only feel confident in recommending broadly diversified asset class index funds. While I find it very comfortable to recommend asset classes (particularly low-cost index funds), I am totally out of my comfort level suggesting a good time to buy or sell individual securities. That is an exercise for speculators and traders, neither of which I could ever do with other peoples’ money.

Q If everyone believes that small-cap index funds will outperform and have better results, won’t everyone invest in them until they become overvalued and not such an amazing deal anymore?

A: There are times when that happens to all asset classes. In the 1995 through 1999 period, the S&P; 500 became way over priced. That period was followed by a 10-year period of under performance. This is where rebalancing goes to work.

As the S&P; was compounding at 28.5% a year (1995-99), our firm was rebalancing the excess returns to small cap, value, and international asset classes. This is a strategy that guarantees you sell asset classes while they are high (part of them) and buy asset classes that are not as popular. Our clients were frustrated we only had 10% of our equities in the S&P; 500 during the 1995-1999 period… but very happy we only had 10% of our portfolio in the same asset class during the 10 years of under performance.

Once an investor gets past trying to guess what is going to be the better performer, and builds their portfolio with asset classes that are likely to be great performers over the long term, managing a portfolio becomes very easy. I suggest that you take a look at my recommended asset allocation and recommended funds, at paulmerriman.com.

Q: Do you have an opinion on the Vanguard Managed Payout Funds as a way to tap portfolio income in retirement, as opposed to the usual 4% of assets at retirement date, and adjusted for inflation every year after that? I’m a regular listener to your podcasts and enjoy all the advice you’ve provided over the years.

A: I am retired and living off my investments, using the 4% variable distribution strategy. (If you don’t know what I mean by variable distribution I suggest you read Appendix H of “Financial Fitness Forever, Withdrawing Money When You’re Retired. I would not use the Vanguard Managed Payout fund (VPGDX) as it isn’t close to what I want for my asset allocation. It is overweighted to U.S. equities, overweighted to large cap growth, underweighted to bonds (I have 50% of my portfolio in bonds), and holds asset classes I don’t think help – and may even hurt – your returns. I’m not a fan of commodities or long short hedge funds. Their market neutral fund lost 1.4% last year and compounded at 1% a year for the 10 years ending Dec. 31, 2012.

Q: I read “Live It Up Without Outliving Your Money" in 2008. You were very high on DFA. Are you still as high as you were when you wrote the book?

A: I am even higher today than I was when I wrote “Live It Up". For Do-It-Yourself investors I am a Vanguard fan, but for those using an advisor, Dimensional Fund Advisors has distinct advantages over Vanguard. DFA funds are constructed to use less turnover than Vanguard, give access to more deeply discounted value than Vanguard, offers asset classes that are not available at Vanguard, and offer higher tax efficiency than using Vanguard funds. I have my own buy-and-hold investments almost entirely invested with DFA funds. DFA no load funds are only available through advisors, and each advisor will have a custom asset allocation. So, the long term success of DFA funds is a combination of the DFA funds with a savvy advisor. If you want to make sure you get a great advisor I suggest you read, “Get Smart or Get Screwed: How to Select the Best and Get the Most from Your Financial Advisor.


Q: Is there a reason to wait until after year end distributions are paid at Vanguard before I re-balance my funds?

A: As there are no tax consequences, it doesn’t matter whether you do it before or after the first of the year. I do think once a year is enough.

Q: I have Vanguard funds and was analyzing the Short-Term and Intermediate-Term Treasury Bond Funds that you recommend (VFISX) and (VFITX). Both bond funds have high turnover rates (273% and 302%). I currently have the Vanguard Total Bond Index Fund (VBMFX) and it only has a turnover rate of 73%. I don’t think turnover rates mean as much for bonds as equities, but should I even be looking at turnover rates of bonds?

A: The management of a bond fund may lead to high turnover as the manager is able to find very small advantages in moving within the market. Vanguard knows the return of these government guaranteed securities you mention, and if they can trade for very small additional profits (after trading costs), they will. On the other hand, notice the turnover of the Vanguard High Yield Bond Fund is only 26%. The cost of buying and selling in that asset class is much higher and the outcome is less guaranteed, so keeping the turnover low is important. I think the Total Bond Index is fine. I sometimes worry that the desire to squeeze every last ounce of profit causes investors too much work.

Q: You recommend people hire an advisor who uses Dimensional funds. Are there advisors who offer Dimensional funds in Canada? And are they no-load?

A: The best way to find an advisor who uses Dimensional Funds in Canada is to visit http://www.dfaca.com/ and follow the link to “individual investor and a second link to “find an advisor. They will normally give you three names. I hope you take the time to meet with all three. In my new book, “Get Smart or Get Screwed" I include a long list of questions you might ask, as well as a list of services you should expect from a professional advisor. I also offer a very long list of reasons you should not work with a commission based advisor.

Q: I am meeting with a new investment advisor next week. What should I ask them about their track record?

A: This can be a difficult question to get answered. Most brokers will not tell you how their client’s accounts have performed. They take the position that every client is a custom account and not representative of your situation. Also, most brokers have accounts that are made up a combination of holdings they recommended and holding the client asked the broker to buy. So, in reality the results are relatively meaningless. It is possible the stocks or funds the broker recommended did poorly and the ones selected by the client performed well. It’s also possible the account contained holdings that the client had when they opened the account with the broker. But how can you judge their expertise (or luck) without a genuine track record?

On the other hand, most registered investment advisors have returns of their strategies so it should be possible to get actual returns that can be used to see how you would have done, based on the risk you were willing to take. For example, my own portfolio is 50% in equity funds and 50% in bond funds. My advisor and his firm can produce returns for the average of all 50/50 accounts for the last 10 years. They also have returns for more aggressive as well as more conservative strategies. The key is for you to compare the returns of strategies that have a similar risk as yours.

But, as every investor knows, any strategy has a risk of loss that goes hand in hand with the expected gains. It is imperative you know the expected loss as well as the expected gain. The last 10 years will certainly give you several examples of what a strategy could look like in the worst of times. One of the reasons I am only willing to hold 50% in equities is that combination produced losses that represent the worst I’m willing to accept and not panic. I believe if every investment recommendation came with an expected long term gain and expected short-term loss, most of the terrible losses of the past would not have been experienced by investors. If I told you a diversified all equity portfolio is expected to lose 50 to 60 of it’s value from time to time, can you imagine making that decision?

I can accept hypothetical returns as long as the period of time includes a long enough period to expose likely losses you are likely to experience during the worst of times. When I was an advisor, I thought it was necessary to review the returns, and losses necessary to get the long term return, going back to 1970. It was not unusual for advisors to start their hypothetical performance starting in 1975, which eliminated the horrible losses of 1973 and 1974.

Here’s what I won’t accept. If someone tries to sell you the performance of a handful of actively managed funds that have out performed the market, you should start by asking if these were the funds they were recommending 10 years ago. If they say yes, ask them to put that in writing. Anyone can tell you which funds had the best performance over a period of time. Unfortunately there is very low correlation with that past performance and the future. But it’s a great sales pitch because everyone would like to invest in yesteryears best performers, if they would reproduce the past.

Never forget, there is no risk in the past. Everyone in the industry knows what he/she should have done. And if you ignored your spouse’s suggestion to buy Microsoft in 1986, it’s possible he/she is still reminding you how your life would be different if you had just listeneda to them.

Also, I suggest you ask them about their commitment to low expenses, low turnover and high tax efficiency. All of those forces that will have an impact on your future results.

Q: I have followed your investment recommendations for years and I’ve fared better than most during the 2009 downturn. However, I’ve noticed that my recent investment performance has been significantly lower than the recent performance of the S&P; 500. Does it still make sense to stick with your recommended Vanguard Index Funds vs. the simple Vanguard S&P; 500 Index?

A: Your question is a great one. How important is short term performance? How do we know when historical trends have changed? Should the recent out-performance of the S&P; 500 be enough evidence to put all of your money in this fund? I will do a podcast on the topic, but the bottom line isabsolutely not.

What is happening is normal based on the past. For the 42 years ending 2011, the S&P; 500 out-produced my suggested group of asset classes in 17 years, or about 40% of the years. The difference in return was 2.2 percent a year. In other words, a $10,000 investment in the S&P; 500 turned into $507,339 (9.8%) vs. $1.167.231 (12%) for the diversified portfolio. Stay tuned for my podcast!

Q: Why no bucket of commodities in your portfolio recommendations?

A: On a long-term basis, commodity returns are about the same as long-term bonds… with a lot more risk. If you take money out of the asset classes I have recommended in The Ultimate Buy and Hold article and podcast, and put the proceeds in commodities, you should expect lower long-term returns. Of course people who sell commodities would disagree loudly

Q: Would you recommend anything different for our 60% in Vanguard? Seems lots of advice, including from Pimco, to get out of bonds. I’ve been following your diversified Vanguard portfolio at 60/40 for some years. Do you see the coming downturn as any more significant? Would you recommend anything different for our 60%?


A: I always assume the market is going to do something horrible. That is the nature of the market. Every 5 years, on average, the S&P; 500 falls about 30%. My own portfolio is built to lose less than that because I am 50% in bond funds. Yours will lose more than mine because you are 60% in equities. But yours will probably make more than mine over time. You can either listen to others, and use that information to become a market timer or be a buy and holder, ready, at all times for a major market decline. Of course when people fear the market is about to tank, and they should get out and don’t, they vow not to let that happen again. It’s a trap! Maybe you should have more fixed income in your portfolio, not just for the present, but for the long term.

Q: I have a Vanguard account and have been following your recommendations with the nine different asset classes that you recommend in Financial Fitness Forever. This year I noticed the Emerging Markets Fund VEIEX has not done very well but every other fund has had a good return. I’m just wondering, do you still recommend VEIEX as part of your Vanguard recommendations? I am a long time listener of your podcasts and reader of your books. Thanks for giving me the knowledge and confidence to take on my own investments!


A: The best approach to diversification is to build a portfolio of asset classes that have a long history of good returns (none of them are without long periods of under performance) but don’t go up and down together.

In 2003 the Vanguard Emerging Market Fund was up 57.7% and up 13.3 % for the last 12 months. During 2003 the Vanguard S&P; 500 was up 28.5% and it was up 24.4% for the last 12 months. We should not expect these great asset classes to move up and down together or at the same rates. I still think emerging markets will have a good long term record but I don’t expect them to go up and down at the same time as the other asset classes in your portfolio. If we sell out once an asset class when it doesn’t do what we expect, we will eventually end up with a portfolio of money market funds, as all asset classes have periods of disappointing returns.

Q: Don’t you think you suggest too many funds? I think all the portfolio needs is emerging markets, International markets and US REITs.These 3 essential troika asset classes will do well.


A: I’m not trying to get you to do unnecessary work, but I think you should break down the asset classes a bit more. In the international markets, the large cap index has way under-performed the international value and small cap asset classes. In the U.S., the small cap and value asset classes have made more than the REITs. I don’t recommend any of the asset classes without either adding return or reducing risk. On the other hand, I know what I suggest is a lot more work than your three fund portfolio. I am fighting for another 1% and I want you to fight for it too. By the way, we never KNOW what asset classes will do well, but we do know which ones did well in the past. There is no risk in the past. More diversification protects you from your threesome under performing the rest of the major asset classes. Of course, your three could be the cream of the crop. We never know!

Q: Good article. I like the small value stock analysis and comparison to other ways of investing in stock. What is the best strategy to avoid market loss and invest defensively?


A: Thanks! For most, the only defensive strategy to protect against loss is the addition of fixed income securities. For a very small fraction of investors market timing can work. I have half my own portfolio defended with fixed income and the other half using trend-following market timing strategies. I will write more about the timing in future articles and podcasts.

Q: What is the differences between Index Funds and ETFs? The strengths and weaknesses of each? And in particular, how should people go about choosing one over the other?

A: I suggest you visit the websites of the three ETF groups I recommend. They each have a slightly different way of discussing the topic. Here are links to the Vanguard, Fidelity and Schwab ETF pages: This is a very good comparison of mutual funds and ETFs from Vanguard. https://investor.vanguard.com/what-we-offer/etfs/compare-etfs-and-index-funds Here is a good article by Fidelity on why most ETFs are more tax efficient than most mutual funds. https://www.fidelity.com/learning-center/etf/etfs-tax-efficiency All three companies have commission-free ETFs. Here is the information on the Schwab commission free offerings. http://www.schwab.com/public/schwab/investing/accounts_products/investment/etfs/schwab_etf_onesource

If you want more details on the pricing differences between mutual funds and ETFs, I suggest you read the following 10 page white paper entitled, “ETFs: are they the right choice?�? http://www.greycourt.com/wp-content/uploads/2012/01/White_Paper001-Exh-TradedFunds-CRP.pdf

I use both ETFs and no load mutual funds in my accounts.

Q: I have reached the point now where I can invest more heavily into mutual funds and plan to follow your asset mix. I am reluctant to do so now as the market is so high. Should I wait or dollar-cost-average and move forward? There are so many different opinions as to whether the bull market will continue it gets confusing.

A: This is probably the most common question I get. It’s interesting to note that there is a similar feeling after the market has gone down 20 to 30 percent. Investors don’t like to invest when the market is in decline as they sense it will probably keep going down. In other words, there may not be a time it is easy for most investors to invest. I suspect that for many investors dollar cost averaging is the only way they can comfortably put their money to work.

Let me suggest a couple of ways to use dollar cost averaging. As I know nothing about your personal situation, these ideas may not be appropriate for you. One approach is to put half your money to work immediately and spread the balance over an extended period of time. Twelve months is not uncommon, but I’ve seen people spread it over 36 months. Another approach is to dollar cost average over 12 to 36 months or until the market is down a specific percentage – like 20 or 30 percent. Or you could use a combination of the two strategies.

You might put 25 percent in immediately and spread the balance over 24 months or until the market is down 25 percent. There are dozens of possible combinations, but the fact is you might invest dutifully for whatever period you choose and have everything go just fine. And then when all the money is invested, the market takes a nosedive. So, one of the most important decisions you will make is how much in fixed income to cushion the downside risk when things go wrong?… and they will go wrong. I guarantee it!

Q: Thank you so much for your MarketWatch article about “The Ultimate Buy & Hold Strategy“. I was wondering: Should I wait for a pull-back in the market before switching our retirement funds to your strategy?

A: This is a question that needs a lot more information before being answered. If the investments are already in the market and you simply intend to sell your present holdings and reinvest, I would see no reason not to move from one set of equities to what I hope will be better returns and less risk. If you are moving from cash into the new portfolio, I am concerned that you could be taking more risk than you expect. “The Ultimate Buy & Hold Strategy” article should not be the only basis of your move. The buy and hold article uses a 60% equity and 40% fixed income asset allocation. That may be too risky. I strongly recommend that you review the podcast, article and table that compare many different balances of equity and fixed income. Here are three links so you can use all three presentations.

Article: http://paulmerriman.com/fine-tuning-retirement-portfolio-allocations/

Table: http://paulmerriman.com/fine-tuning-asset-allocations/

Podcast: http://paulmerriman.com/2013/08/21/fine-tuning-your-asset-allocations-qas/

After you are sure you have the right balance of equity and fixed income funds or ETFs, you have to figure out how to get invested. My experience is that conservative investors rarely feel comfortable investing all at one time. If you are in cash, I suggest you spread the investment out over a period of months. For very large amounts of money it might be over 24 months. The dollar cost averaging approach does not protect you from getting burned after all the money is committed but it does keep you from putting it all in at the top of the market. This may be a case to hire professional guidance to help you get the money invested, and then you can take over from there. Before you hire a professional, I suggest you read “Get Smart or Get Screwed: How To Select The Best and Get The Most From Your Financial Advisor“.

Q: My question regards REIT funds. I’d like to diversify my portfolio to include some real estate. You recommend in your books to open this asset class as an IRA (traditional or Roth). However, for my case this may not work. I am a US citizen living and working overseas. My income falls below the Foreign Earned Income Exclusion amount, and so I am unable to open/contribute to an IRA in the US. So, if I diversify into an REIT fund, I will have to accept the higher tax burden that comes with these accounts. My question is: do you think that it is worth it, in the long run? (I plan on working overseas for the next 4-5 years at least) Or should I skip on diversifying into real estate until I am able to do so in an IRA? Would an REIT ETF fund be a better move over an REIT mutual fund?

A: The long term return and risk of REITs are very similar to the returns and risk of value stocks. My suggestion is you put the REIT money into a split of small cap and large cap U.S. value funds. When you are back in the U.S. you can start making IRA investments in REITs. Thanks for your kind comments about my books. I hope you will encourage others to read them. I would also be grateful if you would review them at Amazon.

Q: How can a beginning investor get started with little to invest?

I’m a college freshman and ever since I heard your podcasts in my senior year of high school, I’ve wanted to start investing my money for retirement. Now that I’m 18, I’m able to open a retirement account, but I currently only have around $250 to invest because I come from a low-income family. I remember, from one of your podcasts, that you recommend ETFs for college students because they have no minimum. I tried to open an account with Vanguard, but it said that I need a minimum of $3,000 to put in the prime money market to open an account before I can begin to buy ETFs. I’d really like to invest in Vanguard because of your recommendation. How might I buy a Vanguard ETF without having $3,000?

Q: There has been a change at Vanguard that changes our status on the Developed Markets Fund. The question I have been getting is: What do you recommend now that the Vanguard Developed Markets Fund is closed?

A: In April it is expected that the Developed Markets Fund and Tax Managed International Fund will merge. When the merger was announced Vanguard stopped offering new shareholders the Developed Markets Fund but still offered the Tax Managed International Fund. That’s the good news! The bad news? The minimum investment was $10,000. As of today Vanguard has established an Investor Share class of the tax managed fund so it has a minimum of $3,000, the same as the Developed Markets Fund. Investors who own the Developed Markets Funds should stay put as the fund is supposed to be open again in April. We shall see.

Q: Why do you always allocate to large and small cap stocks but never mention the mid-cap tier? What is your reasoning for the omission of this capitalizationsize tier from your recommendations?

A: The process of rebalancing is more impactful if you invest on the large and small extremes. If you would like to see the differences between the small, mid and large cap returns, get a copy of Live It Up Without Outliving Your Money from your local library or Amazon. Chapter 7 has some great graphs that show the impact of returns of small to large cap asset classes.

Q: You mentioned in your newsletter that DFA Funds are significantly better performers then Vanguard Funds. So why you recommend in your column only Vanguard funds and ETFs without a word of better DFA funds?

A: Great question. It is relatively easy for me to make recommendations at Vanguard, Fidelity, Schwab and T. Rowe Price, but DFA funds are much more complex. They have several ways (and different funds) to manage value, small cap, international, global diversification, REITs and emerging markets. To recommend the best combination of DFA funds requires all lot of information about a client.

If I were your DFA advisor, I would want you to own approximately half of your equities in U.S and international, half of each the U.S. and international in large and small, and more than half in value with the balance in growth in the U.S. and international portions. That’s my DFA recommendation.

If a DFA advisor agrees with that portfolio, it would be up to him to decide which DFA funds should be used to accomplish that asset allocation. What I suspect you will find is the advisor won’t agree with my basic recommendation, as every DFA advisor is free to use the DFA funds the way they want. DFA educates advisors how to use their funds, but they do not dictate a particular asset allocation or particular DFA funds. In fact, some DFA advisors use only one DFA fund, which I think robs investors of the return they could have achieved with a larger group of funds. As an advisor, if I only use one fund, it makes my work very easy but it isn’t in the interest of most clients.

Q: I just finished reading First-Time Investor and am planning to set up a retirement portfolio in my Vanaguard account. I am 66 years old, retired and financially in great shape, with a defined pension plan and no debt. I am wondering if the portfolio for a retired person should be similar to the one you suggested in this book, or if you have advice about another book to read for retirement portfolios.

A: First Time Investor was written with the beginning investor in mind. Financial Fitness Foreverincludes a lot more on retirement decisions. If you want a free source of info check out my articles onMarketWatch.com. Here is an article that links you to a group that will be of help. http://www.marketwatch.com/story/my-10-best-retirement-advice-articles-2013-11-06.

Q: How much further can this bull market go?

A: Many – if not most – investors don’t trust it can go much further. As of April 21, 2014, it was up 206% (total return) since the bottom of the bear market on March 9 2009. I don’t know how much further it will go up, nor how far down the next bear market will take us. I do know that five of the last 10 bull markets lasted more than five years. I also trust that my portfolio is built to limit my losses in the next bear market.

Q: I really enjoy reading you articles on MarketWatch, your website and watching your videos. I am in the process of implementing your Buy and Hold Strategy in my 403(b) and Roth IRA accounts, which both happen to be at Vanguard. I am a 41 year old employed in the health care sector. I am currently maxing out both of these tax-advantage saving plans plus adding a few hundred dollars a month in a taxable account. Although I am doing a decent job of saving, I am still playing catch up.

Right now I have only approximately $150K total in these accounts. I currently set up my funds as you prescribed, with the exception of the International Small Cap Value fund. As you know Vanguard does not offer this yet. Hopefully it is in development.

My question is about the 60/40 allocation. Based on my age, should my equity exposure be higher than 60%? I was considering trying 70/30 or 75/25 until I reach about 50. Then I would start gravitating towards the 60/40 allocation. I have a pretty good amount of risk tolerance, Any thoughts on that plan?

Q: I just finished reading First-Time Investor and am planning to set up a retirement portfolio in my Vanaguard account. I am 66 years old, retired and financially in great shape, with a defined pension plan and no debt. I am wondering if the portfolio for a retired person should be similar to the one you suggested in this book, or if you have advice about another book to read for retirement portfolios.

A: First Time Investor was written with the beginning investor in mind. Financial Fitness Foreverincludes a lot more on retirement decisions. If you want a free source of info check out my articles on MarketWatch.com. Here is an article that links you to a group that will be of help. http://www.marketwatch.com/story/my-10-best-retirement-advice-articles-2013-11-06.

Q: Years ago I heard you when you came to Southern California to give a seminar on investing, and was impressed. Now that I am retired and you are not actively working at Merriman, are your principles better realized by an investor by themselves? Or are your ways of diversifying best handled at the company that bears your name? I bring this question to you because I see some of the recommendations on this site as it was years ago. These recommendations are absent on the Merriman.com site.

A: The company is doing everything they were doing for clients when you saw me speak, and a whole lot more. In fact, I have all of my own money managed by the company that still bears by name. I loved giving workshops and I felt a drive to do all I could to help everyone who might listen—even if they only had $1000 to invest. I believe I was born to teach. I just ended up teaching people about investing, instead of teaching high school kids about history or math.

When the company knew I was going to retire, they realized they had to build a different business model as they didn’t have anybody to travel all over the country giving free workshops. Their focus changed from trying to served everyone to serving their clients, an approach I heartily endorse. Truthfully, as much as I want to educate as many investors as possible, I want my advisor at the office taking care of me and the rest of his or her clients. I don’t want them spending all their time writing articles, doing workshops, interviews with financial publications, going on TV, etc. In that transition the company smartly made the decision to let me take care of all the education (without a penny of compensation) for do-it-yourself investors, and let them concentrate on what they do so well.

So, if you are a do-it-yourself investor, I am still here to help. I am not an advisor anymore, but I am a very dedicated educator. If you want professional help there are many firms that do a good job with buy and hold. What I built at my old firm is an approach for investors who may be best suited for only buy and hold, as well as for those who might be better suited for market timing. And, for those like me, the firm manages accounts that are a combination of buy and hold as well as market timing. I honestly don’t know another firm in the industry that offers all of these services.

When I am in conversations with people I will often refer to the company in terms of “our firm” or what “we” do at the firm. When my wife is within hearing distance she is quick to remind me that it is no longer “our firm” or what “we” do because I have no ownership or involvement in the firm. But it is my baby, and anyone who has started and built a successful firm probably feels as I do. I also know that when people sell their firm and the new owners make terrible decisions, it can be a very frustrating feeling and it is easy to lose the feeling of pride.

I can say, without reservation, that my old company has only gotten better over time. If I didn’t like what was going on I would move my investments somewhere else. In fact, I have a list of old clients that I have promised to tell if I make the change. If you liked my recommendation many years ago, you can still access them through paulmerriman.com. Plus, I have set up a financial education foundation that is presently supporting personal investing classes at Western Washington University as well as the costs of my website. At my death the foundation gets even more money to continue the work I have been doing for the last 30 years.

Q: You mentioned in your newsletter that DFA Funds are significantly better performers then Vanguard Funds. So why you recommend in your column only Vanguard funds and ETFs without a word of better DFA funds?

A: Great question. It is relatively easy for me to make recommendations at Vanguard, Fidelity, Schwab and T. Rowe Price, but DFA funds are much more complex. They have several ways (and different funds) to manage value, small cap, international, global diversification, REITs and emerging markets. To recommend the best combination of DFA funds requires all lot of information about a client.

If I were your DFA advisor, I would want you to own approximately half of your equities in U.S and international, half of each the U.S. and international in large and small, and more than half in value with the balance in growth in the U.S. and international portions. That’s my DFA recommendation.

If a DFA advisor agrees with that portfolio, it would be up to him to decide which DFA funds should be used to accomplish that asset allocation. What I suspect you will find is the advisor won’t agree with my basic recommendation, as every DFA advisor is free to use the DFA funds the way they want. DFA educates advisors how to use their funds, but they do not dictate a particular asset allocation or particular DFA funds. In fact, some DFA advisors use only one DFA fund, which I think robs investors of the return they could have achieved with a larger group of funds. As an advisor, if I only use one fund, it makes my work very easy but it isn’t in the interest of most clients.


Q: Why do you always allocate to large and small cap stocks but never mention the mid-cap tier? What is your reasoning for the omission of this capitalizationsize tier from your recommendations?

A: The process of rebalancing is more impactful if you invest on the large and small extremes. If you would like to see the differences between the small, mid and large cap returns, get a copy of Live It Up Without Outliving Your Money from your local library or Amazon. Chapter 7 has some great graphs that show the impact of returns of small to large cap asset classes.

Q: There has been a change at Vanguard that changes our status on the Developed Markets Fund. The question I have been getting is: What do you recommend now that the Vanguard Developed Markets Fund is closed?

A: In April it is expected that the Developed Markets Fund and Tax Managed International Fund will merge. When the merger was announced Vanguard stopped offering new shareholders the Developed Markets Fund but still offered the Tax Managed International Fund. That’s the good news! The bad news? The minimum investment was $10,000. As of today Vanguard has established an Investor Share class of the tax managed fund so it has a minimum of $3,000, the same as the Developed Markets Fund. Investors who own the Developed Markets Funds should stay put as the fund is supposed to be open again in April. We shall see.

Q: i recently read some of your articles and noted the Fidelity buy and hold ETF portfolios. How often do you update those portfolios?

A: When I owned an investment advisory firm I had access to some of the brightest minds in the business. I also had access to their time. Now that I am retired I am on my own, so my efforts are compromised by my old mind and body. I expect to update my Fidelity portfolio once a year. I don’t believe you will see many changes because my asset allocation is based on 80 years of market returns, not the last few years as many other advisors use. I hope my advice is helpful. Let me know if you have questions.

Q: How can a beginning investor get started with little to invest?

I’m a college freshman and ever since I heard your podcasts in my senior year of high school, I’ve wanted to start investing my money for retirement. Now that I’m 18, I’m able to open a retirement account, but I currently only have around $250 to invest because I come from a low-income family. I remember, from one of your podcasts, that you recommend ETFs for college students because they have no minimum. I tried to open an account with Vanguard, but it said that I need a minimum of $3,000 to put in the prime money market to open an account before I can begin to buy ETFs. I’d really like to invest in Vanguard because of your recommendation. How might I buy a Vanguard ETF without having $3,000?

A: Wow! How did you know about my podcasts at such a young age? I’m happy to learn you are ready to start investing at age 18. There is a way to start with as little as you wish. You can open an account with any amount at share builder.com.They are owned by Capital One. There is a $6.95 charge per trade. I suggest you put the first $250 in a small cap value ETF and add another asset class as you make your new contributions. At some point you will be able to meet the higher minimums of other providers.

For example, a Schwab account that allows you to invest in their commission-free ETFs requires $1,000. If you plan to make the move as soon as possible, you may want to put the first $1,000 in one ETF, so the commissions to liquidate is only $6.95. From what little I know about you, I believe you will be there in a couple of years. It gives me a great deal of pleasure to know that I had a part in helping you get started. I suspect your parents are very proud of the step you are taking. I have a hunch you will be helping others do the same before your investing career is over.

Q: My question regards REIT funds. I’d like to diversify my portfolio to include some real estate. You recommend in your books to open this asset class as an IRA (traditional or Roth). However, for my case this may not work. I am a US citizen living and working overseas. My income falls below the Foreign Earned Income Exclusion amount, and so I am unable to open/contribute to an IRA in the US. So, if I diversify into an REIT fund, I will have to accept the higher tax burden that comes with these accounts. My question is: do you think that it is worth it, in the long run? (I plan on working overseas for the next 4-5 years at least) Or should I skip on diversifying into real estate until I am able to do so in an IRA? Would an REIT ETF fund be a better move over an REIT mutual fund?

A: The long term return and risk of REITs are very similar to the returns and risk of value stocks. My suggestion is you put the REIT money into a split of small cap and large cap U.S. value funds. When you are back in the U.S. you can start making IRA investments in REITs. Thanks for your kind comments about my books. I hope you will encourage others to read them. I would also be grateful if you would review them at Amazon.

Q: Thank you so much for your MarketWatch article about “The Ultimate Buy & Hold Strategy“. I was wondering: Should I wait for a pull-back in the market before switching our retirement funds to your strategy?

A: This is a question that needs a lot more information before being answered. If the investments are already in the market and you simply intend to sell your present holdings and reinvest, I would see no reason not to move from one set of equities to what I hope will be better returns and less risk. If you are moving from cash into the new portfolio, I am concerned that you could be taking more risk than you expect. “The Ultimate Buy & Hold Strategy” article should not be the only basis of your move. The buy and hold article uses a 60% equity and 40% fixed income asset allocation. That may be too risky. I strongly recommend that you review the podcast, article and table that compare many different balances of equity and fixed income. Here are three links so you can use all three presentations.

Article: http://paulmerriman.com/fine-tuning-retirement-portfolio-allocations/

Table: http://paulmerriman.com/fine-tuning-asset-allocations/

Podcast: http://paulmerriman.com/2013/08/21/fine-tuning-your-asset-allocations-qas/

After you are sure you have the right balance of equity and fixed income funds or ETFs, you have to figure out how to get invested. My experience is that conservative investors rarely feel comfortable investing all at one time. If you are in cash, I suggest you spread the investment out over a period of months. For very large amounts of money it might be over 24 months. The dollar cost averaging approach does not protect you from getting burned after all the money is committed but it does keep you from putting it all in at the top of the market. This may be a case to hire professional guidance to help you get the money invested, and then you can take over from there. Before you hire a professional, I suggest you read “Get Smart or Get Screwed: How To Select The Best and Get The Most From Your Financial Advisor“.

Investing is quite simple. It’s just not easy!

Q: I have reached the point now where I can invest more heavily into mutual funds and plan to follow your asset mix. I am reluctant to do so now as the market is so high. Should I wait or dollar-cost-average and move forward? There are so many different opinions as to whether the bull market will continue it gets confusing.

A: This is probably the most common question I get. It’s interesting to note that there is a similar feeling after the market has gone down 20 to 30 percent. Investors don’t like to invest when the market is in decline as they sense it will probably keep going down. In other words, there may not be a time it is easy for most investors to invest. I suspect that for many investors dollar cost averaging is the only way they can comfortably put their money to work.

Let me suggest a couple of ways to use dollar cost averaging. As I know nothing about your personal situation, these ideas may not be appropriate for you. One approach is to put half your money to work immediately and spread the balance over an extended period of time. Twelve months is not uncommon, but I’ve seen people spread it over 36 months. Another approach is to dollar cost average over 12 to 36 months or until the market is down a specific percentage – like 20 or 30 percent. Or you could use a combination of the two strategies.

You might put 25 percent in immediately and spread the balance over 24 months or until the market is down 25 percent. There are dozens of possible combinations, but the fact is you might invest dutifully for whatever period you choose and have everything go just fine. And then when all the money is invested, the market takes a nosedive. So, one of the most important decisions you will make is how much in fixed income to cushion the downside risk when things go wrong?… and they will go wrong. I guarantee it!

Q: What is the differences between Index Funds and ETFs? The strengths and weaknesses of each? And in particular, how should people go about choosing one over the other?
A: 
I suggest you visit the websites of the three ETF groups I recommend. They each have a slightly different way of discussing the topic. Here are links to the Vanguard, Fidelity and Schwab ETF pages: This is a very good comparison of mutual funds and ETFs from Vanguard. https://investor.vanguard.com/what-we-offer/etfs/compare-etfs-and-index-funds Here is a good article by Fidelity on why most ETFs are more tax efficient than most mutual funds. https://www.fidelity.com/learning-center/etf/etfs-tax-efficiency All three companies have commission-free ETFs. Here is the information on the Schwab commission free offerings. http://www.schwab.com/public/schwab/investing/accounts_products/investment/etfs/schwab_etf_onesource

If you want more details on the pricing differences between mutual funds and ETFs, I suggest you read the following 10 page white paper entitled, “ETFs: are they the right choice?” http://www.greycourt.com/wp-content/uploads/2012/01/White_Paper001-Exh-TradedFunds-CRP.pdf

I use both ETFs and no load mutual funds in my accounts.

Q: Good article. I like the small value stock analysis and comparison to other ways of investing in stock. What is the best strategy to avoid market loss and invest defensively?
A: Thanks! For most, the only defensive strategy to protect against loss is the addition of fixed income securities. For a very small fraction of investors market timing can work. I have half my own portfolio defended with fixed income and the other half using trend-following market timing strategies. I will write more about the timing in future articles and podcasts.

Q: Don’t you think you are suggest too many funds? I think all the portfolio needs is emerging markets, International markets and US REITs.These 3 essential troika asset classes will do well.
A: I’m not trying to get you to do unnecessary work, but I think you should break down the asset classes a bit more. In the international markets, the large cap index has way under-performed the international value and small cap asset classes. In the U.S., the small cap and value asset classes have made more than the REITs. I don’t recommend any of the asset classes without either adding return or reducing risk. On the other hand, I know what I suggest is a lot more work than your three fund portfolio. I am fighting for another 1% and I want you to fight for it too. By the way, we never KNOW what asset classes will do well, but we do know which ones did well in the past. There is no risk in the past. More diversification protects you from your threesome under performing the rest of the major asset classes. Of course, your three could be the cream of the crop. We never know!

Q: I have a Vanguard account and have been following your recommendations with the nine different asset classes that you recommend in Financial Fitness Forever. This year I noticed the Emerging Markets Fund VEIEX has not done very well but every other fund has had a good return. I’m just wondering, do you still recommend VEIEX as part of your Vanguard recommendations? I am a long time listener of your podcasts and reader of your books. Thanks for giving me the knowledge and confidence to take on my own investments!
A: The best approach to diversification is to build a portfolio of asset classes that have a long history of good returns (none of them are without long periods of under performance) but don’t go up and down together.

In 2003 the Vanguard Emerging Market Fund was up 57.7% and up 13.3 % for the last 12 months. During 2003 the Vanguard S&P 500 was up 28.5% and it was up 24.4% for the last 12 months. We should not expect these great asset classes to move up and down together or at the same rates. I still think emerging markets will have a good long term record but I don’t expect them to go up and down at the same time as the other asset classes in your portfolio. If we sell out once an asset class when it doesn’t do what we expect, we will eventually end up with a portfolio of money market funds, as all asset classes have periods of disappointing returns.

Q: Would you recommend anything different for our 60% in Vanguard? Seems lots of advice, including from Pimco, to get out of bonds. I’ve been following your diversified Vanguard portfolio at 60/40 for some years. Do you see the coming downturn as any more significant? Would you recommend anything different for our 60%?


A: I always assume the market is going to do something horrible. That is the nature of the market. Every 5 years, on average, the S&P 500 falls about 30%. My own portfolio is built to lose less than that because I am 50% in bond funds. Yours will lose more than mine because you are 60% in equities. But yours will probably make more than mine over time. You can either listen to others, and use that information to become a market timer or be a buy and holder, ready, at all times for a major market decline. Of course when people fear the market is about to tank, and they should get out and don’t, they vow not to let that happen again. It’s a trap! Maybe you should have more fixed income in your portfolio, not just for the present, but for the long term.


Q: Why no bucket of commodities in your portfolio recommendations?
A: On a long-term basis, commodity returns are about the same as long-term bonds… with a lot more risk. If you take money out of the asset classes I have recommended in The Ultimate Buy and Hold article and podcast, and put the proceeds in commodities, you should expect lower long-term returns. Of course people who sell commodities would disagree loudly.

Q; I follow your recommended Vanguard portfolios and wonder what you think about the recent addition of two International Bond funds – the Vanguard Total International Bond Index Fund and the Emerging Markets Government Index Fund?

A: I do not recommend international bond funds for the Vanguard portfolios. The purpose of the bond funds is to reduce the volatility of a portfolio. Bonds for stability and stocks for growth. Due to the currency differences, the international bonds will increase the volatility of the bond portion of the portfolio. Of course, as you know, half of the equity portion of the portfolios is in international stocks, and that is enough currency diversification. In fact, adding international equities reduces the equity volatility, while adding international bonds increases volatility.

Q: How can you write, “dont pay a commission for a fund blah blah blah”? Why don’t you just write, “Please get a wrap account with my firm so I can get paid to do nothing by swiping a cool 1% of your assets each year”? Oh, I guess you forgot that little rule, lol. You are just like the rest of them. Yeah, I am the only poor advisor because I’m not able to just tell little lies. I don’t expect a reply, you guys never do.

A: I enjoyed your email. I am completely retired and have spent my retirement trying to help investors take better care of their investments, which includes underwriting a university course helping college students do the right thing as they make their first investments. I have been helping do-it-yourself investors use the best asset allocation I know, with the Vanguard funds, for over 15 years. What do I get out of this? A sense of helping others improve their financial future.

For every email like yours, I get hundreds thanking me for my effort and I appreciate every one. I cannot accomplish what I want if my readers conclude I’m getting something out of this. Go to my website – no advertisements. Go to my website – free books for simply signing up for my bi-weekly newsletter that you can unsubscribe from anytime. My suspicion is you have not looked at any of my free books. Please take a look and let me know if you still think I’m a fake. I could use your closing sentence, “I don’t expect a reply, you guys never do,” but I think this might be the exception. I look forward to hearing from you.

Q: Wow, you are extrapolating the past into the future there. Very creative analysis! Or wait… wait a second! Wasn’t all this extrapolating the past into future one of the behaviors that led to massive losses during the financial crisis?

A: I can guarantee the future will not look like the past. Not the next week, month, year or decade. If I could guarantee the future would look like the past, I would recommend investors put all their money in small cap value. Better yet, let’s go back to 1986 and put all of our money in Microsoft. There is no risk in the past. We all know exactly what we should have done.

I know what small cap value has done in the past. I know if from all of the tedious work done by the academic community. I don’t trust Wall Street, I don’t trust Main Street (friends and family) but I do accept the hard work done by the academic community (I call University Street), which gives us the best sense of relative returns. The academics are very clear about the expected returns of small cap value.

They believe small cap value is very likely to make more than small cap growth (over 4% more per year since 1927) but they refuse to say what the return will be. They also believe small cap value will make more than large cap value (over 2% per year since 1927) but they refuse to predict what the future return will be. Their belief is that investors should get a premium for stocks over bonds, small stocks over large, and value over growth. They make no attempt to tell you what future returns will be, but are willing to report on what they have been.

Most people think that recent returns (one, five, 10, maybe even 20 years) are meaningful. I like 50 to 80 years. In fact, if investors had used 50 to 80 years they would not have been surprised by the losses in the bear markets of 1973-1974, 2000-2002 or 2007-2009. They all looked very much like the past.

The purpose of my article was simply to suggest that small cap value should be one of many asset classes in a properly diversified portfolio. Yes, I like having the past on my side, but my own portfolio is a combination of over 12,000 stocks (through index funds) – approximately half in stocks, half in bonds, half in growth, half in value, half in large, half in small, half in international, half in U.S. half in buy and hold and half in market timing. Your comment is exactly the thinking that led me to this massively diversified portfolio. I don’t trust the future to look like the past.

Q: I’m assisting my parents with their retirement. They have Traditional IRA’s and Roth IRA’s. They both also have pensions and will collect Social Security in two years and receive a monthly royalty from an inherited oil partnership. Their pensions and the royalty cover their living expenses, my father’s pension decreases by 10% when he starts collecting social security. My question is, what’s the most tax efficient strategy to withdrawal from their IRA and ROTH?

A: I do not give tax advice, so I hesitate to answer your question. Here’s what I suggest you and your parents do to consider the best tax approach: consult an online search for “tax efficient withdrawals from regular and Roth IRAs.” Here are a couple of the articles that seem worth reading, and If you don’t find what you need in these articles please let me know.

Q: What would happen if I did the exact opposite of what you recommend?

A: You would invest in loaded funds, with high expenses, high turnover and little diversification. Better yet, you would put all of your money in one company that has a great future because diversification is for dummies. And you wouldn’t want to start investing early because it’s better to have fun when you’re young and leave the investing until later. And since you will do the opposite of what I suggest, you will work with a great stockbroker who will let in on some of his firms most exciting investment opportunities. And here is the best part: you will encourage your children to follow in your footsteps. I have one change to recommend.

You do what you think is right and encourage your children to get a free copy of “First Time Investor: Grow and Protect Your Money.” They can get their free copy at paulmerriman.com. While they are there they can also download, “Get Smart or Get Screwed” and “101 Investment Decisions Guaranteed to Change Your Financial Future.” By the way, in “101” you will have the chance to see the impact of doing the exact opposite of what I recommend. Good Luck!

Q: Your recommended bond funds include Tips and Treasuries. What do you think about allocation to foreign bonds, such as Australia or Brazil? Some even recommend bank loans, e.g., BKLN. Or am I just reaching for yield?

A: The reason I recommend the Tips and Treasuries is to minimize (or reduce) volatility in the portfolio – bonds for stability and equities for growth. If you add foreign bonds, it will add to volatility and I would then reduce the exposure to equities.

Once adjustments are made to reach for yield, we get into a market timing decision as to when to get out of those instruments and into something with less risk and greater fixed-income return. Half of my own retirement investments are in buy and hold (50% equities and 50% low risk bonds). The other half is managed with timing (70% equities and 30% fixed income). In this part of my portfolio I use more risky fixed-income securities, as there is a defensive strategy to address the higher volatility of the high-yield and other more risky bond funds.

Q: Should my retirement funds should be in my taxable or 401(k) accounts?

A: Mutual funds that pay out interest, dividends and capital gains are considered less tax efficient. In theory, you should have your tax-efficient funds in your taxable account and the tax-inefficient funds in your 401(k) or IRA, if you have one. If you are following my recommendations your portfolio is made up of index funds that have very little turnover, so most of the stock funds are relatively tax efficient. Taxable bond funds, Treasury inflation-protected securities, real estate investment trusts (REITs), small cap and value funds will tend to pay out more tax-triggering events than large cap U.S. and international stock funds. Some fund families (e.g., Vanguard and Dimensional) offer tax-managed funds to minimize the taxable events in typically less tax-efficient asset classes.

Q: Did they pay this guy, Paul Merriman, for this MarketWatch article on asset allocation? It’s NOT a new idea.

A: First of all, I am a retired investment advisor and when I retired I promised my wife I will never work for money again. So everything I do at MarketWatch.com is 100% for the reader, I am not paid me a cent. You are correct, there is nothing new about asset allocation, but I find that most investors do not do a very good job of diversifying their portfolios. My intention with this article was to present such overwhelming evidence that it would be difficult to ignore the asset classes I recommend. If readers want more evidence, I hope they will read my book “101 Investment Decisions Guaranteed to Change Your Financial Future.” It is available free at paulmerriman.com. One more thing, I didn’t just recommend these asset classes. I recommended them over 10 years ago and the Vanguard all equity portfolio has compounded (according to The Hulbertt Financial Digest) at 10.3% a year for the 10 years ending Dec. 31, 2012.

Q: Is it possible to put money into our IRA account after retirement?

A: Anyone can contribute to an IRA but you have to have earned taxable income and be under age 70-1/2. Social Security, dividends, interest and capital gains do not qualify as earned income.

Q: Now that Apple is down to $450, is it time to purchase again?

A: What I am about to tell you is the truth, the whole truth and nothing but the truth. I know exactly what to buy, when to buy it, and when to sell it. My problem is I don’t know what will happen after I tell you what to buy or sell. My other challenge is that I only feel confident in recommending broadly diversified asset class index funds. While I find it very comfortable to recommend asset classes (particularly low-cost index funds), I am totally out of my comfort level suggesting a good time to buy or sell individual securities. That is an exercise for speculators and traders, neither of which I could ever do with other peoples’ money.

Q: If you were leery about investing in foreign markets, like I am, what one fund would you suggest?

A: If you are nervous about international asset classes, I assume you will be interested in the fund with the least risk, and therefore lowest expected return. The Vanguard Developed Markets Index is the international equivalent to the S&P 500 domestically. The portfolio is comprised of large, mostly growth companies. I hope you will become comfortable adding the small cap, value and emerging markets components. Remember, over the last 40-plus years, the portfolio I recommend would have added over 2% a year compared to the S&P 500, at virtually the same risk. Most of the extra return came from the small cap and value components.

Q: If everyone believes that small-cap index funds will outperform and have better results, won’t everyone invest in them until they become overvalued and not such an amazing deal anymore?

A: There are times when that happens to all asset classes. In the 1995 through 1999 period, the S&P 500 became way over priced. That period was followed by a 10-year period of under performance. This is where rebalancing goes to work.

As the S&P was compounding at 28.5% a year (1995-99), our firm was rebalancing the excess returns to small cap, value, and international asset classes. This is a strategy that guarantees you sell asset classes while they are high (part of them) and buy asset classes that are not as popular. Our clients were frustrated we only had 10% of our equities in the S&P 500 during the 1995-1999 period… but very happy we only had 10% of our portfolio in the same asset class during the 10 years of under performance.

Once an investor gets past trying to guess what is going to be the better performer, and builds their portfolio with asset classes that are likely to be great performers over the long term, managing a portfolio becomes very easy. I suggest that you take a look at my recommended asset allocation and recommended funds, at paulmerriman.com.

Q: Do you have an opinion on the Vanguard Managed Payout Funds as a way to tap portfolio income in retirement, as opposed to the usual 4% of assets at retirement date, and adjusted for inflation every year after that? I’m a regular listener to your podcasts and enjoy all the advice you’ve provided over the years.

A: I am retired and living off my investments, using the 4% variable distribution strategy. (If you don’t know what I mean by variable distribution I suggest you read Appendix H of “Financial Fitness Forever,” “Withdrawing Money When You’re Retired”). I would not use the Vanguard Managed Payout fund (VPGDX) as it isn’t close to what I want for my asset allocation. It is overweighted to U.S. equities, overweighted to large cap growth, underweighted to bonds (I have 50% of my portfolio in bonds), and holds asset classes I don’t think help – and may even hurt – your returns. I’m not a fan of commodities or long short hedge funds. Their market neutral fund lost 1.4% last year and compounded at 1% a year for the 10 years ending Dec. 31, 2012.

Q: I read “Live It Up Without Outliving Your Money” in 2008. You were very high on DFA. Are you still as high as you were when you wrote the book?

A: I am even higher today than I was when I wrote “Live It Up”. For Do-It-Yourself investors I am a Vanguard fan, but for those using an advisor, Dimensional Fund Advisors has distinct advantages over Vanguard. DFA funds are constructed to use less turnover than Vanguard, give access to more deeply discounted value than Vanguard, offers asset classes that are not available at Vanguard, and offer higher tax efficiency than using Vanguard funds. I have my own buy-and-hold investments almost entirely invested with DFA funds. DFA no load funds are only available through advisors, and each advisor will have a custom asset allocation. So, the long term success of DFA funds is a combination of the DFA funds with a savvy advisor. If you want to make sure you get a great advisor I suggest you read, “Get Smart or Get Screwed: How to Select the Best and Get the Most from Your Financial Advisor.”

Q: Is there a reason to wait until after year end distributions are paid at Vanguard before I re-balancy my funds?
A: As there are no tax consequences, it doesn’t matter whether you do it before or after the first of the year. I do think once a year is enough.

Q: I have Vanguard funds and was analyzing the Short-Term and Intermediate-Term Treasury Bond Funds that you recommend (VFISX) and (VFITX). Both bond funds have high turnover rates (273% and 302%). I currently have the Vanguard Total Bond Index Fund (VBMFX) and it only has a turnover rate of 73%. I don’t think turnover rates mean as much for bonds as equities, but should I even be looking at turnover rates of bonds?

A: The management of a bond fund may lead to high turnover as the manager is able to find very small advantages in moving within the market. Vanguard knows the return of these government guaranteed securities you mention, and if they can trade for very small additional profits (after trading costs), they will. On the other hand, notice the turnover of the Vanguard High Yield Bond Fund is only 26%. The cost of buying and selling in that asset class is much higher and the outcome is less guaranteed, so keeping the turnover low is important. I think the Total Bond Index is fine. I sometimes worry that the desire to squeeze every last ounce of profit causes investors too much work.

Q: You recommend people hire an advisor who uses Dimensional funds. Are there advisors who offer Dimensional funds in Canada? And are they no-load? 
A: The best way to find an advisor who uses Dimensional Funds in Canada is to visit http://www.dfaca.com/ and follow the link to “individual investor,” and a second link to “find an advisor.” They will normally give you three names. I hope you take the time to meet with all three. In my new book, “Get Smart or Get Screwed” I include a long list of questions you might ask, as well as a list of services you should expect from a professional advisor. I also offer a very long list of reasons you should not work with a commission based advisor.

Q: I have followed your investment recommendations for years and I’ve fared better than most during the 2009 downturn. However, I’ve noticed that my recent investment performance has been significantly lower than the recent performance of the S&P 500. Does it still make sense to stick with your recommended Vanguard Index Funds vs. the simple Vanguard S&P 500 Index?

A: Your question is a great one. How important is short term performance? How do we know when historical trends have changed? Should the recent out-performance of the S&P 500 be enough evidence to put all of your money in this fund? I will do a podcast on the topic, but the bottom line is absolutely not.

What is happening is normal based on the past. For the 42 years ending 2011, the S&P 500 out-produced my suggested group of asset classes in 17 years, or about 40% of the years. The difference in return was 2.2 percent a year. In other words, a $10,000 investment in the S&P 500 turned into $507,339 (9.8%) vs. $1.167.231 (12%) for the diversified portfolio. Stay tuned for my podcast!

Q: I am meeting with a new investment advisor next week. What should I ask them about their track record?
A: This can be a difficult question to get answered. Most brokers will not tell you how their client’s accounts have performed. They take the position that every client is a custom account and not representative of your situation. Also, most brokers have accounts that are made up a combination of holdings they recommended and holding the client asked the broker to buy. So, in reality the results are relatively meaningless. It is possible the stocks or funds the broker recommended did poorly and the ones selected by the client performed well. It’s also possible the account contained holdings that the client had when they opened the account with the broker. But how can you judge their expertise (or luck) without a genuine track record?

On the other hand, most registered investment advisors have returns of their strategies so it should be possible to get actual returns that can be used to see how you would have done, based on the risk you were willing to take. For example, my own portfolio is 50% in equity funds and 50% in bond funds. My advisor and his firm can produce returns for the average of all 50/50 accounts for the last 10 years. They also have returns for more aggressive as well as more conservative strategies. The key is for you to compare the returns of strategies that have a similar risk as yours.

But, as every investor knows, any strategy has a risk of loss that goes hand in hand with the expected gains. It is imperative you know the expected loss as well as the expected gain. The last 10 years will certainly give you several examples of what a strategy could look like in the worst of times. One of the reasons I am only willing to hold 50% in equities is that combination produced losses that represent the worst I’m willing to accept and not panic. I believe if every investment recommendation came with an expected long term gain and expected short-term loss, most of the terrible losses of the past would not have been experienced by investors. If I told you a diversified all equity portfolio is expected to lose 50 to 60 of it’s value from time to time, can you imagine making that decision?

I can accept hypothetical returns as long as the period of time includes a long enough period to expose likely losses you are likely to experience during the worst of times. When I was an advisor, I thought it was necessary to review the returns, and losses necessary to get the long term return, going back to 1970. It was not unusual for advisors to start their hypothetical performance starting in 1975, which eliminated the horrible losses of 1973 and 1974.

Here’s what I won’t accept. If someone tries to sell you the performance of a handful of actively managed funds that have out performed the market, you should start by asking if these were the funds they were recommending 10 years ago. If they say yes, ask them to put that in writing. Anyone can tell you which funds had the best performance over a period of time. Unfortunately there is very low correlation with that past performance and the future. But it’s a great sales pitch because everyone would like to invest in yesteryears best performers, if they would reproduce the past.

Never forget, there is no risk in the past. Everyone in the industry knows what he/she should have done. And if you ignored your spouse’s suggestion to buy Microsoft in 1986, it’s possible he/she is still reminding you how your life would be different if you had just listeneda to them.

Also, I suggest you ask them about their commitment to low expenses, low turnover and high tax efficiency. All of those forces that will have an impact on your future results.


A: I’m glad my work has been helpful. Without asking lots of questions, let me assume you earn a 7% return and save $20,000 a year. With that combination you will get to about $2 million by the time you are 65. I think you should do better than 7% with 60/40.

If you have the risk tolerance for 70/30, I don’t see any problem with using that for the next 9 years. Another approach would be to use 60/40 with the present $150,000 and all equity with new investments during the next 5 years. That serves to protect the present saving a little more than 70/30 but lets you take the higher risk with the part you are saving on a dollar cost average basis.

Q: I am 57 years old and have $200k in money market fund (457b plan). I will retire next year with $10k/month pension, and receive my deferred retirement option plan (DROP) money, $650k.

I have read your books, web sites, recommended authors, and learned about risk management, diversification, portfolio management, re-balancing, buy and hold strategy and variable draw down.

I’m afraid to move into equities when the market is at an all time high. When do I know it’s the right time to enter the market? I understand that we need to have a long-term perspective (35 yrs.) and there will be ups and downs. But, if I enter right before a down, my wife will never trust me with our nest egg again. What do you suggest?

A: You have a couple of approaches. One is to dollar cost average in over 12 to 24 months. If during that time the market goes down 30%, go ahead and invest the balance. You can also wait until the market is down 20% to 30% to make the commitment. I am assuming you will meet your cost of living with the $10,000 a month. If that’s so, there is no reason to make the investment in a hurry.

Q: I have read many things written by you, as well as follow you on YouTube. Your teachings have revealed a lot to me. I am 55 years old and want to start investing. I have a sum of $2,500 to begin with and have an Roth account with Fidelity. Should I start with FUSEX? I could get in with $2,500 minimum. Is that my best thing to do?

A: I’m glad my work has helped you get ready to invest. I suggest you use the Fidelity, Vanguard, or Schwab ETFs so you will be able to buy all of the asset classes. While Fidelity is fine, the expenses at Vanguard and Schwab are lower. In fact, Schwab has the lowest expenses and the lowest minimum. I hope you will listen to my podcast on using the commission free ETFs at these three companies.

Q: I am trying to find a Vanguard Index Fund or ETF for your international small value category. What would you suggest?

A: I hope Vanguard, Fidelity or Schwab will add an international small cap value ETF to their commission free lineup. In the meantime, investors should use WisdomTree International SmallCap Div (DLS).

Q: I am a long time reader/listener. My mother has approximately $700K invested with Edward Jones. The investments are terrible and I estimate she’s lost $500K over the past 17 years, relative to where she’d be following your advice. I’d like to get her in contact with a financial advisor to go through all of her funds and recommend a strategy (trusts, etc). Any suggestions? I’m located in Portland OR.

A: I suggest you help your mother visithttp://www.dfaus.com/find_advisor/ and request the names of local DFA advisors. She will likely be given the names of 3 local advisors. With the amount she has to invest, she should not pay anymore than 1% in fees. I am glad you have found my work helpful. I hope you will point your children my way when the time is right. Let me know if she does not find a good advisor.

Q: There are many low-cost ETFs with good performance, like those issued by ishares and spdrs. Why don’t you include them in your portfolios?

A: My focus is on commission-free ETFs at Vanguard, Fidelity and Schwab. There are lots of other great ETFs. In many cases the size of the investments are very small, so the commission-free ETFs work well. My main goal is to expose investors to the best asset classes with low cost.

Q: As a retired person with a moderate risk profile, can I use the Vanguard portfolio and what percentage?

A: This question is a good example of people seeking personal advice, which I do not give. My A: You need someone who knows more about your personal situation. I suggest you meet with an hourly advisor from Garrett Planning Network. They use Vanguard and you can share my recommendations to see if they agree. It may take a couple hours of work, but likely well worth the price. I am no longer an advisor but I hope my information will be helpful in working with an advisor.

Q: I have followed your ultimate buy-and-hold portfolio for a long time – thank you! My wife and I have been fortunate in our lives, and we will be able to leave a nice amount to a foundation or donor-advised-fund (“DAF”), to fund charities with annual donations in perpetuity. I want to give the trust company or DAF the instruction to hold the ultimate buy-and-hold portfolio.

The mandate will be: withdraw 5% of the corpus each year to make contributions (no inflation adjustment). Since we are dealing with funding charities, as opposed to funding our own living expenses, it seems that the portfolio can tolerate an occasional large drawdown. It also seems that our best bet for growing the corpus into “perpetuity” is to use the 100% equity mix, recognizing that there will be the occasional bear market year when the charities will get a smaller donation than in the prior year. Could you comment on this?

Q: I enjoyed your podcast talk on Ken Roberts’ Bulls and Bears Report.In it you mentioned how you take your yearly distribution in early January and park your money in a short-term bond fund and pickup 1-2% over the long term. I do the same in regards to taking my yearly distribution in early January, but I park the money in a high-interest savings account (.5%) and draw the money down as I need it. Can you explain how that is different from putting the money in a short-term bond fund? As you say, “Always look for ways to tweak.” I couldn’t find anything about this on your website and I also looked in your free ebook, 101 Investment Decisions.

A: I use the Vanguard Short Term Investment Grade Bond Fund. It is presently paying 1.6% based on the standard 30-day S.E.C. yield. But it’s not without a small amount of risk. Its 15-year return has been 4.3% and the last year 1.8%. The worst and best calendar returns in the last 10 years were a loss of 4.7% in 2008 and a gain of 14% in 2009.

Q: The portion of small cap exposure in the recommended Schwab ETF allocation seems to be significantly higher than the small cap allocation in Vanguard or Fidelity ETF’s, or in your mutual fund recommended allocation. What am I missing?

A: The range of small cap is from 38% to 45% in the 3 portfolios. The differences happen due to the different asset class each firm offers. My own DFA portfolio has 45% in small cap U.S. and international funds.

Q: My retirement plan at work is a 403(b) through Met Life. They offer us four index funds (S&P; 500, S&P; 400, S&P; 600 and Total Bond Index), and other active management funds that have rather poor long-term records; with the exception of the American EuroPacific fund. I have been using the following approach: 24% S&P; 500, 12% S&P; 400, 12% S&P; 600, 12% American EuroPacific, and 40% Total Bond Index. I would like to incorporate your approach, but the value choices in my plan are terrible. Any suggestions?

A: Unless your plan allows self direction, the only thing I know to do is add investments through yours and your wife’s IRAs. That decision will be driven by your saving limits, marginal tax rate and age.

Q: I like your Vanguard ETF commission-free portfolio, but I would like to include two other funds. Since Vanguard doesn’t have ETFs for international large cap value or international small cap value, what ETFs would you recommend and what would the cost of trading be?

A: First let’s talk about the cost of trading ETFs and stocks that don’t qualify for their commission-free ETF service. The cost is dependent on the size of account and frequency of trading. For many accounts, a certain number of trades are free and additional trades can cost from $2 to $25 each. Here is the link to the table of commissions for different size accounts. https://personal.vanguard.com/us/whatweoffer/stocksbondscds/feescommissions

For investors who wish to add the additional ETFs, I recommend WisdomTree International SmallCap Dividend Fund (DLS) for small cap international value and SPDR S&P; International Dividend ETF(DWX) for large cap international value.

Q: I’ve been speculating in commodities and futures for 10 years. While my track record is terrible (one profitable year out of 10), it has been great fun. Why shouldn’t an investor experience the thrill of a possible home run?

A: They should, if they can afford it, but I must admit I choose not to do it knowing the odds are stacked against me. As a wise man once told me, “Don’t play in a game you don’t have an advantage.” I think it comes down to how much you can afford to lose permanently. It’s one thing to lose half of your money on the S&P; 500, but it’s entirely different when you lose half of your money in a strategy that is very unlikely to work over the long run. Of course speculators often think they are going to get it back on the next opportunity.

Q: I have a different approach to investing. I value each company and invest only in those trading way below their intrinsic value and have certain characteristics, such as low debt, predictability, constant or growing margins, etc. What’s your view on having a concentrated portfolio of value companies you’ve analyzed and selected as likely to have better than average returns over a value index fund?

A: All the evidence I know suggests that the small cap value index is built for the best long-term returns. Your approach suggests that selecting the best value companies will turn in the best returns. The academics have not been able to find any approach to preselect the value stocks that will outperform other value stocks. Their answer is to own them all. The premium for taking that broadly diversified approach is huge, so why try to pick the best and fail, which you are likely to do?

Q: Should I directly follow one of your model portfolios? Or do you have a personalized suggestion for me different from your model portfolios? (This question came with a list of Vanguard funds that were either not on my recommended list or with different percentages than I recommend.)

A: When I was an investment advisor, I was able to give personal advice based on an investors need for return, risk tolerance and other variables, including their investment biases. I even gave free advice on the portion our firm didn’tmanaged. Also, I gave advice to the children of my clients on what to do with their 401k(s), without compensation. Since I am no longer a licensed investment advisor I cannot give personal investment advice to anyone but my closest friends. However, I can give general recommendations that are made without the personal information necessary to do the work of an investment advisor.

I find most investors get their investment ideas from dozens of sources and then construct a portfolio based on the best they have learned from all the sources. In essence these investors end up with a portfolio that none of the sources would agree is the best they know. My portfolios are the best I know given that the investor understands the likely risk and return of each combination of asset classes, and I work hard to make the risk and return very clear. In other words, I have given you the best I know without taking the responsibility of being your personal investment advisor.

Q: As a tax-minded Belgian, I need to invest in European ETF’s or funds. There are many funds available in different currencies but would it really matter as I am a young investor and expect never-ending currency wars between central banks?

A: Your suggestion to sticking with one currency is okay. I would not be adverse to young investors in the U.S. building a portfolio with U.S. asset classes only. There will be times that the diversification of currencies will offer some profitable rebalancing opportunities, but the additional returns will probably not change your lifestyle. Having said that, I use a balance of U.S. and international asset classes because it protects against the catastrophic impact of U.S. politicians doing something really harmful to our dollar. Of course many Americans probably believe that many countries in Europe are doing something really harmful to their economies and don’t want any of their money in those markets.

Q: As more and more investors know the small cap value premium, do you think they will evaporate in the future?

A: In the coming weeks I will share the history of small cap value returns over many different market cycles. Over the last 87 years, small cap value had long periods of great success, often followed by relatively long periods of under performance. To some extent it will be luck which period we personally experience.

15 years ago all professional investors, most academics and lots of amateur investors were well aware of the small cap value premium. For the 50 years through 1995, the small cap value asset class (as defined by the academics who support DFA Funds) compounded at 15.8%, compared to 11.9% for the S&P; 500. During the amazing 1995-1999 S&P; 500 run, the performance of small cap value under-performed the S&P; 500 by almost 10% a year. Many saw that as the beginning of the end of the small cap value premium. Of course, during the following 15 years the small cap value DFA fund compounded at 11.6% (with management fees)vs. 4.2% for the S&P; 500 (without fees).

While I think the small cap value asset class will produce a premium, I am less sure how much that premium will be. It could be less than in the past. Stay tuned for my series of articles and podcasts on performance, and I will share the beliefs (absolutely no guarantees suggested) of the smartest academics I know.

Q: As more and more investors know the small cap value premium, do you think they will evaporate in the future?

A: In the coming weeks I will share the history of small cap value returns over many different market cycles. Over the last 87 years, small cap value had long periods of great success, often followed by relatively long periods of under performance. To some extent it will be luck which period we personally experience.

15 years ago all professional investors, most academics and lots of amateur investors were well aware of the small cap value premium. For the 50 years through 1995, the small cap value asset class (as defined by the academics who support DFA Funds) compounded at 15.8%, compared to 11.9% for the S&P; 500. During the amazing 1995-1999 S&P; 500 run, the performance of small cap value under-performed the S&P; 500 by almost 10% a year. Many saw that as the beginning of the end of the small cap value premium. Of course, during the following 15 years the small cap value DFA fund compounded at 11.6% (with management fees)vs. 4.2% for the S&P; 500 (without fees).

While I think the small cap value asset class will produce a premium, I am less sure how much that premium will be. It could be less than in the past. Stay tuned for my series of articles and podcasts on performance, and I will share the beliefs (absolutely no guarantees suggested) of the smartest academics I know.

Q: Thank you for your article on the Ultimate Buy and Hold Strategy. I am in my 20’s and trying to develop a solid retirement portfolio. Your thoughts in this article make a lot of sense to me. I am considering investing in the recommended Vanguard ETFs using your “aggressive” approach but am wondering if this portfolio covers energy and commodity sectors. What are your thoughts on adding an energy ETF such as XLE, and possibly a gold ETF such as GTU to the portfolio?

A: My recommended portfolio has lots of energy companies in both the U.S. and international asset classes. The ownership of energy companies is one of the reasons for the profitable long-term return. Gold, on the other hand, has not had a good long-term return. If we take money out of other very productive asset classes to put into gold, the portfolio return would likely decline. If you want to add more of something that is likely to add to long term returns, I suggest adding more small cap value.

Q: What do you think of Tony Robbins new “Money Master The Game” book? I was a little surprised his recommendations included gold and commodities.

A: As with most investment books there is a lot to recommend and a lot that will likely get investors in trouble. Without creating long lists of both, I will simply say his motivational info is good but a lot of his investment recommendations are inappropriate. The back testing of his recommended portfolio is a great example of data mining, of which his recommendations of gold and commodities are great examples.

As I have said in recent articles and podcasts, “It’s all about performance.” Of course it’s also “all about risk.” I don’t think the risk-adjusted return of his recommended portfolio will be as productive in the futureas many other well tested portfolios.

Q: I am looking at investing in Vanguard Admiral funds for their low expenses. I only have around $25,000 in investments, and the minimum for these funds is $10,000. Would it be better to invest in 2 asset classes of the Admiral funds (to keep expenses down), or invest in the 9 asset class funds that you recommend with a $3,000 minimum (in order to be more diversified)?

A: There are two possible solutions. One is to purchase the investor shares with the $3000 minimum purchase. That means you will be paying about .1% more in expenses but pick up asset classes that should more than make up for the difference in return. The second is to use the commission-free ETFs where the expenses are similar to the Admiral shares. You will pay a slight premium to access the ETFs but that should be easily made up by the lower fees. When you have enough in the ETFs to reach the Admiral shares, Vanguard allows a cost-free exchange to the Admiral shares.

Q: Do you really believe it makes sense to pay an advisor to manage a portfolio using DFA funds compared to doing it yourself at Vanguard?

A: When I compare how DFA and Vanguard build their equity portfolios, I absolutely believe DFA has an advantage that is greater than the advisor’s fee. Some funds, like the S&P; 500 and REITs, have little return advantage at DFA, while others have huge advantages – and not due to luck. For example, for the 15 years ending February 6, 2015, the DFA large cap value fund compounded at 9%, while the Vanguard Value Index compounded at 5.8. In my podcasts and articles about performance I address why those differences happened and why they are likely to continue in the long run.

I have met thousands of investors over the years who do not care if DFA will produce a better return than Vanguard; they refuse to pay a fee to have something done they can do on their own. Plus, the do-it-yourself investor could be right when they say it’s possible that DFA won’t beat Vanguard in the future. By the way, there are a lot of sane investors who think people who take the risk of owning stocks individually or through mutual funds are making a big mistake. They have all their investments in bonds or real estate. And they could be right. The one thing we know for sure is that nobody knows the future.

Q: There seems to be a lot of contradictory information on Social Security. What is the best source of advice on Social Security questions?

A: Please don’t ask me for advice on Social Security. There are over 2800 SS regulations and I am not an expert on the subject. There are two experts/authors whose work I respect. I think you can trust their articles and books on the subject. The Social Security guru to the investment advisory community is Mary Beth Franklin. Search her name and you will find a long list of interesting articles. The other is Andy Landis, author of Social Security: The Inside Story. Be sure to get the 2014 edition. Of course, if you are making a big decision regarding Social Security, it is always smart to check with your advisor. Unfortunately, many advisors are not experts on the subject. I suggest you do the best you can reading Beth and Andy’s work and confirm what you find out with your advisor.

 

Q: We have extra money that we can invest or use to prepay our mortgages. Which is the smarter place to put our money for the next 15 years?

A: When I was an advisor this was my position: I believed an investor should max out their retirement accounts (IRA and 401k), including a non-working spouse’s IRA, before paying extra on a mortgage. With additional taxable money I tried to make the judgment whether the investor would likely panic during majormarket declines. If I thought they would sell during a market decline, I suggested they pay down the mortgage rather than lose the money. After making all the retirement plan investments, I, personally, would pay down a mortgage, even though I thought I could do better with the money in the market. Paying down the mortgage is guaranteed, while the market going up is not.

Q: After listening to a podcast about the ProShares Morningstar Alternatives Solution ETF recently, I am wondering whether I should start to look into alternative investments as a means of reducing risks during a bear market. What is your opinion of Long/Short, Merger, Managed Futures, Hedge Replication alternative funds? Are they suitable for use in a buy-and-hold strategy?

A: Absolutely not. The only way to use these products is as a market timer and that’s very difficult to do. All of the evidence is that even professionals fail at market timing with securities that are built to go up when the market goes down. It’s a great sales pitch but there is no evidence it works. If you reviewed all the newsletters that apply these kinds of methods, you’d discover they virtually all underperform a traditional buy-and-hold strategy with an appropriate amount of fixed income. The Hulbert Financial Digesttracks most of the major investment newsletters and the long-short newsletters have terrible results.

Q: In your recent article about REITs you mention recommending a 10% position in REITs, although some of your portfolios recommend less than 10%. Which is it?

A: In some mutual fund families I recommend a 10% position in U.S.REITs and in other portfolios I recommend as little as 5%. It depends on whether the family has an international real estate fund. For example, in the Vanguard all-equity portfolio, I recommend 5% in U.S. REITs and 5% in an international real estate fund. So, the 10%real estate commitment is spread between 2 funds.

Q: Fidelity has recently opened a new U.S. REIT fund (FREL) that has a much lower expense ratio than the commission-free REIT ETF from Ishares (IRY). Do you intend to replace the present ishares fund?

A: Yes, I expect to make a change but the Fidelity REIT ETF is a very small fund and I think it is prudent to wait until it grows to at least a couple hundred million dollars under management. Right now the Fidelity REIT only has $19 million under management compared to 6 billion dollars in the Ishares REIT fund.

Q: I have $25,000 to invest, should I wait until stocks drop in price to invest?

A: I have answered this question 1000 times and I’m still frustrated that I can’t give an answer that will help investors make an obvious decision. My gut says wait, but how good is my gut? I have absolutely no evidence that my gut is better than a dollar cost averaging approach. Many professional advisors say, “If you have money to invest, do it now!” The key is to find a strategy that works now and for the future. If you find yourself guessing every move, you don’t have a mechanical approach and your future will be based on how you, or someone else feels.

Q: I was wondering what you think of the automated investment companies such as Betterment, Personal Capital and Wealthfront?

A: I will be writing an article on the robo advisors you listed at the end of the performance series that will likely finish in April/May. I will list the pros and cons as well as the implications of long term performance using their respective approaches to asset allocation and fund/ETF selection.

Q: How can I find a good DFA advisor?

A: The easy answer is to go to dfaus.com and follow the links to “find an advisor.” http://us.dimensional.com/services/individuals.aspx If you are Canadian, go to http://ca.dimensional.com/en/service/individuals/find-an-advisor.aspx They will ask you a number of questions that will lead them to making three recommendations in your area. But you must understand there is a world of difference between DFA advisors. Some have research departments, but most don’t. Some have advisors who work as teams, but most don’t. Some will recommend all DFA funds, while some will go wherever they find the best answer. Some will use alternative investments, but most don’t. Some have advisors who have relatively little experience, while others hire only experienced advisors. Some have a limit to how many clients an advisor can help, while others take all they can get.

Keep in mind we are looking for an advisor who is competent and ethical, working for a firm that is competent and ethical, recommending securities that are competent and ethical. My wife and have found all that. I hope you do too. For much more on how to hire an advisor, read my book, “GET SMART or GET SCREWED: How To Select The Best and Get The Most From Your Financial Advisor,” available for sale or as a free download.

Q: Is silver a good store of wealth?

A: Not in my book or any academic research I have read. The only people I know who push silver as a store of value are those who make a living pushing it. In the last approximately 40 years the price of silver has gone from $5 an ounce to about $50, back to the high 40s and then back to about $15. During that same time, $5 in the S&P; 500 rose to about $403. During the same period $5 in a long-term U.S. 30-year Treasury Bond grew to $155. Maybe a good store of long-term value would be in a balance of U.S. Govt. Bonds and the S&P; 500.

Q: If one is invested 100% into global equities, what would you consider as a realistic worst-case one-year return? I’m leaning towards a loss of up to 70% but not sure what history would show.

A: I think your 70% number is probably realistic. As you will see in this table, the worst calendar year (1931) for U.S. large cap value was a loss of 62%. I’m sure there are 12-month periods that were worse. Of course, when we are living off our money in retirement, we should also be concerned about multiple year losses. For example, the S&P; 500 had a 22.7% compounded annualized loss from 1929-1932. At that rate of loss, $100,000 would be worth $35,704 at the end of 4 years. For the same period the small cap value asset class had a 37.7% compounded annualized loss with a final value of $15,064 for the initial $100,000 value. I think most people believe we now have tools to protect against the devastating impact of a great depression, but we do have proof it can happen. In some bear markets a broadly diversified, globally diversified portfolio protects investors against huge losses, like 2000-2002, but most big bear markets are more like 2007-2009 when almost all equity asset classes fell.

Q: In your recent MarketWatch article you implied that if you are offered two investments, one with a 10% average annual return and one with a 10% compound annual growth rate, that you would likely be better off choosing the latter? Why is that the case?

A: Compound is the only return that matters for the long term. The average rate of return, with a volatile security, will overstate the expected rate of return. In an upcoming article onMarketwatchabout combining 4 major asset classes, I include a table that lists the average and compound rate of return for each of the four asset classes. The difference is as much as 4% a year. The compound return represents the real return you would get but the average return understates the impact of the years the investment lost money. The compound rate of return for small cap value is 13.6% compared to an average return of 18.2%. At a 13.6% growth rate you double your money every 5.3 years. At 18.2% the money doubles every 4 years. Anyone who uses the average return is either purposely misleading investors or ignorant of how compounding works.

Q: How do you suggest rebalancing in a TAXABLE account? I have always automatically reinvested my dividends and capital gains, but then my allocation balances get off and I would have to sell funds, incurring extra income taxes, to rebalance. What about NOT automatically reinvesting and then periodically (once a quarter?) reinvesting to keep my asset allocation balanced? Or do you have a better method?

A: Rebalancing is one of the most difficult challenges for investors. For people who have both taxable and tax deferred investments, it is often possible to do some of the rebalancing within the tax-deferred part of the portfolio. It is not required that a certain asset allocation be achieved within each account. Assuming similar amounts in taxable and tax deferred accounts, you could end up 60/40 in one account and 40/60 in the other to for an overall 50/50 balance. I like the idea of accumulating the dividends and capital gains to give you more money to invest so you can minimize taxes and other costs. Of course the most efficient way to rebalance is with new money. For most people rebalancing every 1 to 2 years is often enough. The longer you wait to rebalance the more money you are likely to make. Rebalancing is another topic I will address in my performance series of articles.

Q: I have seen a fair amount of press on so called Robo Investing firms such as Wealthfront, Betterment and others. From what I can tell these firms follow a good deal of the best advice out there. They use ETF’s and low fee index funds in diversified portfolios to manage your investment. Are these Robo Adviser firms a good investment strategy? Are they a better value than using traditional advisors such as Edward Jones or Ameriprise?

A: I intend to do an article for MarketWatch regarding Robo Investing firms in the coming months. They are generally doing a good job of asset allocation and fund/ETF selection. The one process they do, that is difficult for a lot of investors is rebalancing the portfolio. Are they a better value than using commission-based advisors? Yes, if the investor can make sure they understand their own return needs and risk tolerance. A lot of investors panic during major market losses. I suspect the robo advisor will not be effective in helping those people stay the course. But, if you combine the robo advisor with an outside hourly advisor, that might help during times of great stress.

Q: Do you know of any good international SCV ETFs? The only one I can find is DLS but it has an expense ratio of 0.58%.

A: DLS has good track record thus far. For the last 5 years It has compounded at 8.6% vs. 7.2% for the average ETF in its asset class. It is not uncommon to find that less liquid asset classes, like international small cap value, small cap emerging markets and micro cap have higher average expense ratios.

Q: I have read a lot of articles about the pros and cons of TIPS. You recommend the Vanguard intermediate-term TIPS. It seems a lot more volatile than the short term TIPS. Is the expected return worth the extra risk?

A: I have spoken with a number of experts about short-term vs. intermediate-term TIPS. The expectation is that the difference in return between short and intermediate TIPS will be similar to the difference between short and intermediate term bonds. Over the last 15 years, the Vanguard Short-Term Treasury Fund compounded at 3.7% vs. the Vanguard Intermediate Term Treasury at 5.8%. Of course both the intermediate Treasuries and intermediate TIPS are more volatile than short-term treasuries and short-term TIPS. If investors are uncomfortable with the additional volatility of the intermediate-term TIPS, it is okay to move to the less risky short-term TIPS, but expect a lower long term return.

Q: Last year I moved my balance to Vanguard funds to mimic your long-term asset allocation strategy. I just noticed that Vanguard Developed Markets (VTMGX) and Vanguard FTSE International Small Cap (VFSVX) lost value over the last year. I think your long-term strategy based on analyzing past decades of data is sound, but I am wondering if you think the poor international performance is just a blip in the long-term strategy or has something fundamentally changed with those funds?

A: One year has little to do with the long-term return of an asset class. In my “Understanding Performance” series on MarketWatch, I discuss the best of times and the worst of times for all of the major asset classes. The last 15-year period was one of the worst for U.S. large cap blend (S&P; 500) and international large cap blend. Both produced less than 5% compound rates of return. Does that mean it’s time to get rid of these two previously productive equity asset classes? Both of these asset classes also struggled for the 15 years ending 1974, with almost the same returns as the last 15 years. For the 15 years following 1974 the S&P; 500 compounded at 16.6% and the international large cap blend at 20.6%. For the U.S. and international small cap indexes, 1975 through 1989 returns were 23.1% and 31.5% respectively.

One of the biggest challenges for investors is trusting their investments after a period of poor performance. I have done all I can to protect you against long-term underperformance by recommending massive diversification across many highly profitable asset classes. As I’m sure you are aware, other U.S. and international equity asset classes made 50 to 100 percent more than large cap blend over the last 15 years.

Q: Compared with the S&Ps500;, how do large-cap value stocks perform in times of rising interest rates?

A: During the period from 1973 through 1981, inflation was 9.2%. During the same period the S&P; 500 compounded at 5.2% and the large cap value 12.8%. So, for that period the S&P; 500 lost money, after inflation, and the large cap value made money. My favorite asset class – small cap value – compounded at 17.4% before inflation.

Q: I have enjoyed your series on the performance of the asset classes and funds you recommend. What do you think of adding leverage to these asset classes through the leveraged mutual funds or ETFs?

A: I am not a fan of buy and hold investors or market timers using leveraged funds. Investors should be very careful using leveraged funds or ETFs to access the asset classes I am discussing in my Performance series. Rydex and ProFunds have offered souped-up funds for many years. For the 10 years ending 1/31/14, the Rydex 2X S&P; 500 Fund (RYTNX), using 100% leverage, made less than the index (7.7% vs. 8.1%), without leverage, but at twice the risk. I know market timers think they can harness the risk and make better returns but the evidence isn’t very strong. According to Morningstar the average “investor” return with the leveraged fund is about 2.5% a year less than the fund. Bottom line: The average investor in RYTNX made almost 3% a year less than the S&P; 500 for 10 years, at twice the risk. If you are interested in why the leveraged funds perform so poorly read this article.

Q: Jim Collins, at jlcollinsnh.com always promotes Vanguard Total Stock Market Index (VTSAX) as the exclusive stock fund for index investors. Please shed light on the superiority of your diverse recommendations vs. VTSAX.

A: Check out the 4 Fund Solution Table in my series on the performance of many major asset classes. The S&P; 500 (virtually the same long-term track record as VTSAX) has an 87-year track record of producing a 9.8% compound rate of return (CRR), including dividends. The total market index produced a 9.9% CRR over the same period of time. The balance of 4 asset classes (large cap blend, large cap value, small cap blend and small cap value) compounded at 11.9% for the same period. The table also compares the returns of 15 and 40-year periods.

When you review the Performance articles, I know you will understand why I take a very different approach than Jim. I visited Jim’s site and I think he is working hard to give readers a wide range of prudent financial advice. I suspect he is trying to make investing very simple for investors but, like so much of life, with a little extra work and time, much higher returns are highly probable. I think picking the stocks that will be successful in the future is very difficult. I suspect there is a lot of luck in the outcome. On the other hand, picking successful asset classes is very easy. The academics have already done all the research. Once you figure out the best asset classes your job is to select the best mutual funds to represent those asset classes. I find junior high school kids can understand this information, so I’m not concerned about adults understanding it. The hurdle is usually the belief, “Investing is just too complicated for me to understand.” Besides reading the Performance articles, I suggest you read, “Why Vanguard Total Stock Market isn’t the best ship in the fleet.”

Q: I have been gifted a largish sum of money and I am trying to determine whether to put it all in the market per my target asset allocation or spread it out by investing over 6-12 months. Your thoughts?

A: The industry has always taken the position that money should be invested ASAP. A must-read study from Vanguard may help you make your decision. In fact, I suggest you read it before you read my thoughts.

The Vanguard study supports the case for immediate investment. When I was an advisor, I often counseled people in your position and found they were more comfortable making lump sum investments when markets were rising and reticent to commit 100% when markets were in decline. Of course the amount of money they had to invest, in relationship to what they already had invested, was an important consideration. Also, money that had been gifted from a loved one was often treated more conservatively than money that came from a bonus or some other less-emotional source.

You may decide to use the 12-month DCA and at the end of the 12 months the market collapses. You may decide to put it all in now, as the Vanguard study supports, and immediately lose 30% of your money. (Of course you would have lost part of that even if you used the 12-month DCA.) I can’t give specific advice, as I am no longer an advisor, but a compromise may be to put half in now and DCA the balance over 12 to 24 months. If, during the 12 to 24 months the market goes down 20% or 30%, go ahead and invest the rest.

I am always looking for mechanical answers to overcome the emotional challenges of investing. I should have invested much more aggressively over my life. I would have much more today if I hadn’t invested so aggressively in my 20s and so conservatively for the last 40. But after the early lessons from being too aggressive, I was more comfortable taking a more conservative approach. Your previous experience will probably dictate the answer to your present question. Your answer will not be perfect regardless what you do. I promise there will be something you could have done better. We always know what we should have done to do better. My goal for investors is to find comfortable, trustworthy ways to meet their long term goals. Let’s say you use the 12 month DCA and you discover you would have better off using lump sum, are you still likely to reach your financial goals?

Q: In a MarketWatch article, you wrote, “I don’t recommend owning individual stocks,” but didn’t give any reasons. I’d like to know if your advice is 100% ironclad to all persons or if, for example, you had multi-millionaire clients for whom yourecommended individual stocks…or did you turn away that business?

A: When I was an advisor I never recommendedindividual stocks, regardless how large the account. I have a fairly large account myself and, with the exception of some ETFs, I don’t own any individualstocks. In previous articles I’ve often noted that my beliefs about the best steps to successful investingcome from what I have learned from the academic community. Having been around the investment community for over 50 years, I know that almost every investor thinks their individual stock picks are better than the market. I have absolutely no way of knowing if that will be true or not.

The academics teach us that the expected rate of return of any individual large-cap growth stock is the average of all large-cap growth stocks. Of course some will do better and some worse, but the expected rate of return for all shareholders must be the average. That doesn’t change the fact that if investors own a stock, they see it worth more than investors who don’t own that stock. In fact, according to studies, it goes beyond what you like. It seems it also depends on your nationality. In surveys, Germans think they make 2% more a year than U.S. investors. Not surprisingly, U.S. investors who took the same survey believed they make 2% better returns than German investors. For a great book on how investors think, please read Your Money and Your Brain by Jason Zweig. It’s one of four books I try to get all investors to read.

So, if the expected rate of return for one stock is the same as 1000, the smart thing would be to own all 1000, as the risk of owning just one is huge. The challenge is to access the best asset classes, and access them as efficiently as possible. I think the more mechanical we are in our investment decisions, the better we are likely to do. Automatically dollar-cost-averaging from your paycheck: mechanical. Using index funds: mechanical. Rebalancing is also likely best done mechanically. Taking money out of investments in retirement can be done mechanically.

Owning an individual stock becomes a very emotional experience for most investors. I think eliminating any emotional attachments improves your probability for success.

Q: I always seem to get in and out of the market at the worst time. The last time I got in was early 2009 and right back out a couple of months later. I panicked and sold as it looked like the market was going down a lot more than it did. I have been sitting in cash since and now I’m sure if I get in, it will immediately go down, leaving me in the same position as 2009. I’m 67 and can’t afford any more big mistakes.

A: This is the most common question I get, and the higher the market goes the more I get it. There is no easy answer. The industry commonly says to invest everything at one time, regardless of how high the market is. That advice ignores the human nature that leads to disastrous results for investors who overestimate their risk tolerance.

It may be the only way low-risk investors will survive the natural cycles of the stock market will be by applying two defensive strategies. The first defensive strategy is to limit the exposure to equities, no matter how high or low the market might be. It may be that a 30 to 40 percent equity position is the maximum equity exposure for these investors.

The second defensive step is to dollar cost average into the equity portion over several years. If it takes 2 or 3 years to get properly positioned in the right asset allocation, it’s better than finding yourself having guessed wrong again, often leading to giving up forever. The key is to find a mechani

Q: As a retiree I am uncomfortable with funds that invest in small companies, as well as emerging markets. Should a retiree be taking that kind of risk?

A: I think the first step is to determine how much of a portfolio should be in any kind of equity asset class. It turns out the intermediate-term risk of a portfolio comprised of large, small, value, growth, U.S. and international asset classes has about the same downside risk as the higher quality S&P; 500. So, if you have the risk tolerance of 50% equities, the downside risk of the portfolio is about the same with or without the inclusion of small cap and emerging market funds. Yes, there will be slightly larger short-term losses with the addition of the more risky asset classes, but these asset classes also rebound much faster when the market turns around.

The important consideration is that by adding the more profitable asset classes, the returns are likely to be substantially higher. That allows an investor to have more fixed income in the portfolio to meet their goals, thereby reducing their overall risk. Over the last 45 years a 70% worldwide equity/30% fixed income portfolio has about the same return as a 100% S&P; 500 or total market index, at one-third less risk.

Q: I use the 10 asset classes you recommend in the ultimate buy and hold portfolio. What are your thoughts on including additional sectors such as consumer staples, consumer discretionary, financials, energy, IT, utilities and health care?

A I think there are lots of steps we can take that might have a small impact on our long-term returns, but most of them make the process more complicated and require more attention. All of the sectors you mentioned are part of the 10 asset classes in my portfolio. If I decided to add money to a sector or asset class, in the hope of getting a better return, I would simply add more money to the small cap value asset class. I could do that by adding a little to my U.S., international and emerging market small cap value positions.

I think the key is to make it as simple as possible and eliminate the necessity to stay on top of any particular sector. For many investors evaluating sectors are part of the fun of investing. I’m not looking for any fun from my portfolio.

Q: Do you ever recommend the buy-and-hold portfolio go to cash?

A: The only reason the buy-and-hold portfolio goes to cash is to take money out of the portfolio to live on or put aside for an upcoming financial need. The first day of each year, my wife and I take out 5% of our portfolio and put it in a short-term bond fund. We then use the proceeds to cover our costs for that year.

I think the question could be restated as, “Why wouldn’t you sell equities if it’s obvious the market is over valued and likely to decline?” The whole idea of buy-and-hold is to build a portfolio of equity and fixed income securities with the intent to hold them in all markets. There are always reasons the market is expected to go up (list A the good news) or go down (list B the bad news). Attempts to time the market have ended badly for most investors, so experts believe it’s best to find investments expected to do well for the long term and ignore the noise in the short term. My 50 years around the investing process makes me believe those experts are right.

Q: Would you recommend holding cash in an amount equal to 1, 2, or 3 years of planned withdrawals, or do you recommend we just convert the amount planned for the immediate year?

A: When I was an advisor I had lots of clients who were comfortable holding 1 or 2 years of cash to meet their near-term cash flow needs. In many cases the cash pool was separate from their long-term asset allocation. I like taking the cash annually instead of monthly. When I take it monthly I seem to be a little more focused on what the market is doing month to month. Of course sitting with money in cash or short-term bonds is going to reduce the return a bit. I think my conservative approach of taking the annual needs the first day of the year costs us about .10% a year in return, an amount I’m willing to exchange for greater peace of mind. I do keep the annual “cash” account in a short-term bond fund and move money to cash on a monthly basis.

Q: Why did your all equity portfolio do so poorly last year?

A: This is a question I get almost every year that my recommended portfolio underperforms the S&P; 500, the benchmark in the mind of most investors. My portfolio is almost always going to be different than the S&P; 500 as it is made up of asset classes that are built to be different than the benchmark. For the period 1970-2014 the average difference between the S&P; 500 and my worldwide equity strategy was about 10% a year. The biggest difference was 1977 when the S&P; lost 7.2% and my recommended equity combination made 26.8%. Over the entire 45 years the S&P; compounded at 10.5% and the worldwide portfolio compounded at 11.8%. Their standard deviations were virtually the same, as well as the worst period losses. What was very different was the difference in annual returns. Expect it!

Q: What is your opinion on this? “Investing: Time for a no-bond portfolio?

A: Great article, but not helpful to me. In the buy-and hold portion of my portfolio I’m in bonds because they are an easy way to limit losses in declining stock markets. In the timing portion of my portfolio (30% of it in bond funds) I am in bond funds when they are in an uptrendand out when they are in a down trend. The only thing that will make me change is a change in trend, not an article that makes common sense. It may sound strange, but I have done all I can to keep “common sense” out of my decision making process.

Q: A friend of mine says you analyze 401k plans. The following is a list of my 401ks holdings. I would like to be aggressive. What do you recommend?

A: I wish I had time to analyze 401k plans but my plate is full and overflowing. Here is what I recommend that might help. Take a look at the asset classes I recommend in The Ultimate Buy and HoldStrategy. Try your best to match up your 401k offerings with those asset classes. The problem is what to do when the plan is missing one or more asset classes. One solution is to pick up the unavailable asset classes in your IRA or your spouse’s 401k or IRA. I will do a podcast on the subject in the coming months.

My other limitation is I am not an investment advisor, so whatever I recommend may not be appropriate even if I knew all your personal financial information. That leads to another solution. Let’s say you want to be all equities but you’re not sure how to match my recommendations with your investment options. I suggest you contact a Garrett Planning Network advisor

http://garrettplanningnetwork.com and buy an hour of their time having them help you put your 401k portfolio together. I will contact Cheryl Garrett and see if she can identify one of her advisors who could be of help for this kind of request. Finally, check out my 401(k) recommendations at my website for the top 100 US companies and US Government TSP

Q: I am retired and holding 40% of my portfolio in stock funds and feeling like I should probably reduce my stock exposure to 30%. What do you think?

A: If you move from 40% to 30% equity position you will reduce your worst-case losses of the last 45 years by about 1/3. If your goal is to reach your needed return with the lowest possible risk, the question is: will 30% in equities get you there? If it will, I would move to the lower equity position. If you are considering the move to reduce your equity exposure because you think the market is going down, that’s a market-timing decision and my buy-and-hold recommendations are totally unrelated to what a timer should do.

I have a new Fine Tuning Table that will be released in an upcoming article. I hope it will help in your decision making process as it will compare the worst 3, 6, 12, 36 and 60-month periods for 11 levels of risk, plus the same results for the S&P; 500. The 45-year period covered in the study does not necessarily represent the future, but the period did include 3 of the worst bear markets of the last 100 years.

Q: What is your view regarding equal-weighted ETFs?

A: I think equal-weighted ETFs are a legitimate way to build a portfolio. We have tried to replicate the concept of equal weighting by recommending a balance of large, small, value, growth, U.S., international and emerging markets asset classes. If you created the same group of asset classes but used equal-weighted ETFs, the average size company will be smaller, there will be more value and the expenses will probably be higher. When large and growth are doing better than small and value, you should expect lower rates of return. There will be many periods you will underperform, but your long-term returns should be at least slightly higher over the long term.

Q: Should I be following your Ultimate Buy and Hold Portfolio or Fine Tuning Tables?
I have been following you for several years and have modeled both my IRA and brokerage accounts on your Ultimate Buy and Hold Strategy. In your original Ultimate buy and hold Strategy you used 60% stocks and 40% bonds, which is to say that 60% of the portfolio in equity would be the ultimate buy-and-hold portfolio. Now your Ultimate Buy and Hold Strategy is 100% in equities. I’d appreciate it if you could help clear this up for me.

A: For many years I updated a portfolio we called the Ultimate Buy and Hold Strategy or Portfolio. I suspect that is the original article you read. The problem with that title was it suggested the ultimate asset allocation was 60% equity and 40% fixed income. If a reader also read “Fine Tuning Your Asset Allocation they found that the best ultimate combination should be based on your need for return, and willingness to accept an expected level of risk.

My reason for converting to an all-equity portfolio was the hope that our readers would understand that we were not recommending an all-equity portfolio as the ultimate personal asset allocation for all investors. The key is to determine the right balance of equity and fixed income bases on need for return and risk tolerance. I think hope our readers understand the importance of combining the two articles in the process of determining the right balance of equity and fixed income asset classes.

Q: Which Fidelity ETFs do you recommend for emergency funds?
In a recent podcast you suggested 50% Vanguard Wellesley and 50% in an investment-grade bond fund at Vanguard.

A: It’s important to note that the Wellesley and investment-grade bond fund were recommended for investors who want to take more risk than an almost guaranteed short-term bond fund. The Wellesley Fund is 40% equity and 60% fixed income. In order to build a portfolio at Fidelity, you would use a combination of equity and bond ETFs. For the equity portion you could use a dividend-based ETF for 20% and a short-to-intermediate term corporate bond fund for the bond portion. I think it will be a good exercise for you sort through their offerings. It should be obvious. Let me know if you are not able to figure it out.

Q: Would you allow us to publish your videos on our website?

A: Thanks for asking, Bob. My hope is everyone will find a way to take advantage of the videos, which are available on my YouTube channel

For individuals, I am hoping the videos will be shared with family and friends. For people in the industry, especially those like Advisor Perspectives that reach others in the industry, I am thrilled to have you include them on your site. And finally, I hope we can figure out a way to get the videos used in financial literacy classes in high schools and institutions of higher education.

Q: What do you think of the disappointing returns of the small cap value ETFs I recently purchased?

It’s particularly frustrating as I have a history of getting in too late and it has evidently happened again.

A: I think what has been difficult about the recent performance of small cap value is that its performance is lagging the S&P 500 by so much this year. As of July 17 the S&P is up 11.1% while the average small cap value fund is up 1.6%. I am working on an article about what we should expect from the small and large value asset classes. It may be the most important piece of information, after the long-term returns of these asset classes, is how different the returns of small cap value have been from the S&P 500. If you intend to use the S&P 500 as the benchmark for small cap value finds or ETFs, you may be surprised at how different their one year returns have been. Over the last 50 years ending 2016, small cap value’s return has produced an average difference of 17%. Plus, in 6 of those years the S&P 500 made money while small cap value lost money.

My hope is you have made this investment for the long term. If you judge it over a short period of time you will probably move on to another investment that is more like the S&P. In fact, if your benchmark is the S&P 500, I suggest that’s where you put your long-term investments. I hope to release the special value report in the next month.

Q: What is the definition of “All Value” vs. “Worldwide” in your fixed distribution schedule tables?

A: The All-Value portfolio is a combination of 25% U.S. Large Cap Value, 25% U.S. Small Cap Value, 20% International Large Cap Value, 20% International Small Cap Value and 10% Emerging Markets Value. There is no way to invest in 100% of any of the asset classes, as the funds that give us access to those asset classes almost always have a small percentage of either mid-cap and/or growth in the portfolio.

Q: How do you recommend I use your 5 Fund All-Value portfolio for the equity portion of my portfolio?

I currently have funds held at Fidelity but am willing to use other companies’ ETFs or mutual funds, or move our funds to Vanguard if this would be beneficial.

A: You can construct the portfolio using Fidelity or Vanguard commission-free ETFs but you will have to pick up a couple of funds outside the commission-free group to get access to all the asset classes in the All-Value portfolio. Check out these recommendations in the All-Value Best in Class group.

Q: Do you know how bad the service is at Motif Investing?

I very much appreciate all that you do for your readers, including the Buy-and-Hold portfolio at Motif. However, you can’t control their bad customer service, or lack of it! I have attempted three times to get assistance to no avail. I will be transferring my funds somewhere else. Hopefully I’m an anomaly since you attached your name to this company. Again thanks for all you do!

A: I think it’s important that our readers who are considering using Motif see your comment. I too have had periods of slow responses. I find if I send them an email they respond within 24 hours. As I mentioned in a recent podcast, Chris Pedersen and I will be doing a special report on Motif. I think there are very specific investors who will get the best out of Motif. Without getting into details, I think the best fit is with IRAs. Let me know if they respond to an email. More later.

Q: Could you confirm that you recommend a tax-managed fund in a tax-deferred portfolio?

It has been a while since I have rebalanced my Vanguard Tax-Deferred portfolio (my bad). You now recommend Vanguard Tax-Managed Small-Cap Admiral Shares instead of Vanguard Small-Cap Index Fund Admiral Shares. When I attempted to create the Vanguard Tax-Managed Small-Cap Admiral Shares account I received a warning from Vanguard that these funds are usually not part of a retirement account.

I could not find anything on your website that explains why it is okay to have a tax-management fund in a tax-deferred portfolio. I was not confortable moving forward on my rebalancing without confirmation from you that you do, in fact, recommend a tax-managed fund in a tax-deferred portfolio.

A: I think it’s great they are doing their best to make sure you are doing what’s in your best interest. My focus is the size of the companies and the relationship of price-to-book. In both cases the tax-managed fund is better. Plus the operating expenses in the tax-managed fund are only .09%. The 15-year performance of the tax-managed fund is about .5% a year better than the traditional small-cap fund.

Q: How often are the portfolios re-balanced?

Your recent AAII article, “Power your portfolio with value,” was very interesting. I see that you have factored in 1% management fees. Is management necessary?

A: For purposes of tracking the worst rolling periods (12, 36 and 60 months) the portfolio is rebalanced monthly. I don’t recommend rebalancing any more often than once a year. If the portfolio had been rebalanced annually the return would have been higher.

There are several reasons I have added the 1% management fee. The database that has been used to create the returns is based on the research of Dimensional Fund Advisors (DFA). Their returns are based on small cap and value companies that are specific to the DFA method of identifying those important asset classes. While small cap and value asset classes are well defined, they are not the same as those Vanguard uses to build their index funds. Since DFA funds are only available through DFA approved advisors, I think some management fee has to be applied. While some charge less than 1%, many charge more. I think most charge 1%, depending on the account size.

Also, I have found most investors simply don’t want to do the work to maintain the strategy I recommend, so adding the 1% fee created a more realistic outcome for those who don’t want to manage the process.

Finally, I think the reduction in returns, from imposing the 1% fee, makes the outcome more realistic. When I was an advisor I used a similar table and suggested building a plan based on applying the 1% management fee less another 2%. It was my way of trying to get investors to prepare for the worst while hoping for the best.

Q: Do you have an updated recommendation for an emergency fund?

In your book, “101 Investment Decisions”, the recommendation for emergency funds – that I plan to never touch – is Vanguard’s Wellesley Income fund. Since the book is from 2012, do you have an updated recommendation? I’m saving for a home down payment and estimate it will take at least 2 years until I have enough.

A: When you know you will need the money within 2 years, I don’t think you should take any more risk than a short-term investment grade bond fund. Updating books and popular articles is a big project. If I had thought ahead, we would have suggested readers check the recommendations pages on our website for updates. The “recommendations” tab will lead to my latest recommendations for Vanguard, Fidelity, Schwab, T Rowe Price and TD Ameritrade mutual funds and ETF portfolios. They are usually updated the first quarter of each year. Some of our portfolios have not been updated since early 2016. We hope to have them all updated to 2017 very soon.

Q: Why did you write that an S&P 500 fund is a poor long-term investment?

In your MarketWatch article, (Jan. 14, 2015) you also mentioned Vanguard Index Funds as a group of asset classes that you recommend. Is it still possible to get this information?

A: Check out my Vanguard Index recommendations. This page includes taxable, tax-deferred, emergency and monthly income portfolios.

Q: Do you think that value stocks are worth all the work I’d have to go through, in Australia, to gain exposure to value stocks, including US and international large and small cap value indices?

Given our stock market is quite small, there are no current offerings of ETFs or index funds for large and small value stocks for global or US stocks here, we’re planning to buy these ETFs on the New York stock exchange instead. We already have an international brokerage account set up to do this, and have considered the tax implications.

A: Of all the asset classes, value has produced the best premium. The small cap premium is also meaningful but the addition of value to small cap has had the biggest additional return. As you may have noticed we now offer all-value portfolio ETF recommendations.

Q: Do you set the amount to be distributed based on the balance at the beginning of each year?

I enjoyed your video and plan to implement the flexible distribution plan you outlined, as I am in the distribution phase of my life. I am also curious: do you break it down into smaller chunks so that if the market turns south, you adjust your budget quicker (e.g. 1% of your balance each quarter instead of 4% of the yearly beginning balance)?

A: First of all, my wife and I take our distributions the first of the year to eliminate watching the market during the year. We would likely make more taking the money monthly or quarterly as it allows additional money to compound before it’s distributed. In fact, if you can delay the first year’s distribution, and take the money at the end of the year, it adds a lot more to what your heirs will have. Check out tables 47 and 54. Notice the 50% stocks/50% bonds portfolio in each table. In table 47 the distribution was taken at the first of the year. In Table 54 the distribution was taken at the end of the year. The difference is more than $2,000,000 by waiting until the end of the year based on an initial $40,000 distribution.

Q: For a do-it-yourselfer like me who has enough money and can’t get into DFA funds, are the Admiral Shares the next best thing?

In your recent podcast with Rob Berger, as you were discussing Motif Investing, you said, “…you should be at Vanguard because there are a lot of advantages once you have a certain amount of money to be in their Admiral Shares.” All of my money is at TD Ameritrade, but your statement concerning the Admiral shares is so strong that I’m thinking about putting all of money there.

A: I prefer Admiral shares over ETFs, when they are both available in the same asset class. Mutual funds are easier to trade and can be bought and sold without commissions and spreads. ETFs shares all have a bid-ask spread when traded and in some cases there are commissions. The Admiral Shares at Vanguard have very low expenses, but there are some great asset classes not represented by the Admiral Shares. I think most of the DFA equity funds, for those who qualify, are going to produce better returns than similar Admiral Shares. There is no secret to the DFA advantage – smaller companies and more deeply discounted value.

Q: To work out what I can expect with compounding of my mutual funds at Vanguard, at what intervals does a compound occur – daily, monthly, bi-annually or annually? I am making fortnightly investments of the same amount.

A: My source of mutual fund results is Morningstar.com. It reports daily year-to-date (YTD) returns. At the end of the year, the return includes the increase or decrease in price plus reinvestment of all dividends and capital gains. The reinvestment of dividends and capital gains are tracked based on reinvesting on a day dictated by the fund. That final annual number becomes the annual return from which the long-term compound rate of return is determined. Morningstaralso reports 10 short-to-long-term compound rates of return (from one day to 15 years) on a daily basis.

Q: How can I plan for the long term if I have no idea what rate of return I can expect? What rate of return would you use to build a investment plan for a 27-year-old investor?

A: I hope you will listen to my upcoming podcast on this topic. The answer could be a range of returns, or the worst expected outcome. I favor the approach of “hope for the best but prepare for the worst.” If you are building a long-term “glide path,” your return will be based on both the equity and fixed income portions of your portfolio. The return also will be impacted by assumed expenses. In my Fine Tuning Tables I have built-in a 1% management fee, on top of the assumed expenses of managing the mutual funds. For planning purposes you might use the returns in the Fine Tuning Tables, less 2%. That’s probably not the worst long-term return, but close to it.

Q: I have two questions as they relate to my annual investment into a Vanguard Roth IRA I just started for my 22-year-old daughter: 1) for the 2-value fund portfolio, do you recommend 50-50 small cap to large cap or some other ratio? 2) Thinking of this for the next 20-30 years, would you recommend (as of now – I know things can change) VIOV or VISVX (for small) and VONV or VIVAX (for large) or perhaps a fund and ETF for both caps?

A: I prefer VIOV over VISIX, as the average size company in VIOV is half the size company as VISIX and they both have the same ratio of Price-to-Book. I prefer VIOV over VIVAX as it has a lower Price-to-Book (more value orientation) and a smaller average size company. I think a 50/50 small and large value allocation will produce a 10 to 12 percent return over the long term.

Q: What do you suggest as a mechanism of dollar-cost averaging with ongoing ETF purchases in a brokerage account?

I would like to move about $36K from my Roth IRA with Vanguard into brokerage ETF’s using your best of class recommendations. (Since I don’t have enough invested in this account yet to purchase Admiral Shares of the recommended mutual funds). Might it be simpler to contribute the annual allowance of $5,500 and buy shares as a lump sum during a yearly rebalance?

A: Your idea to fund your Roth IRA at the first of the year is the best approach. Making your contribution the first of the year is the best dollar-cost-average discipline I know. It keeps your commissions to a minimum and your investment starts growing the first day of the year. If you want to make a monthly contribution, I suggest you purchase one ETF each month.

Q: Which state’s 529 Plan do you recommend?

The whole family (grandmas, grandpas, aunts and uncles) are going to put money into a 529 plan for our new daughter.

A: I’m pleased you are making this a family project. Doing this once may encourage the family members to use this account for special occasions. New York and Utah are both good choices, but the state you reside in might make a difference in terms of tax implications. Check out savingforcollege.comdetails. This site will personalize information for several important variables.

Q: What is your definition of risk?

You, like others, talk a lot about risk but few rarely seem to define it in the same way. It doesn’t make sense to eliminate all risk but do you have a simple list of steps to take to keep the risks of investing to a minimum?

A: I love the question as it can open a discussion that could go on for hours. Of course you probably don’t want my answer to go on for hours, so here is as short as I can make it. First the definition from Merriam-Webster: Risk is the possibility of loss or injury. Here is the BusinessDictionary.com definition of risk: A probability or threat of damage, injury, liability, loss, or any other negative occurrence that is caused by external or internal vulnerabilities, and that may be avoided through preemptive action.

The risks I want to address are the risks we take in the process of investing. While risk can be the loss from not doing something (sin of omission), most of us experience risk when we lose money (sin of commission). So my definition of risk is anything that leads to a loss during the steps taken to manage ones investments.

In my article, “The best investment advice ever!” I conclude the best advice I know is, “Never take an investment risk that doesn’t pay a premium for taking that risk over the long term.”

In other words, if you know you are exposing yourself to a loss of money, make sure you can expect an additional return (no guarantees of course) for having taken the risk. y the way, the list of ways to lose money is long. The good news is there is a way to manage almost every one of those losses. Here is a short list of ways guaranteed to cost you money and what you can do about it:

• Paying a commission to buy a mutual fund: Buy a no-load fund where the investor doesn’t pay a commission.

• Paying high expenses to manage a mutual fund: Buy a fund with low operating expenses.

• Putting all your money in one company that can go down or even out of business: Buy a portfolio of many companies. This is also called diversification.

• Putting all your money in one asset class: NASDAQ lost 73% from 2000 to 2002. Buy many different asset classes.

• Paying more in taxes than necessary: Use tax-deferred or tax-free investment vehicles like Roth IRAs and Roth 401ks.

• Putting your money into Ponzi or other fraudulent schemes: Restrict your investments to heavily regulated investments like mutual funds or ETFs.

• Paying the additional expenses of actively managed mutual funds: Restrict your investments to inexpensive index funds.

• Paying for an investment advisor to take care of your investments: Some investors enjoy the process of managing their own money… others don’t. For those who don’t want to take care of the investment details, having someone else do it likely leads to higher returns.

• There are lots of small additional steps but just this handful of suggested steps can lead to having twice as much to spend in retirement, as well as leaving many times more to your heirs or favorite causes.

• Loss and risk are normal, but don’t accept the loss unless it is accompanied by greater returns. Keep in mind that losses are guaranteed, but greater returns can never be guaranteed.

Q: Why are you adding emerging markets funds when their long-term return diminishes portfolio value and adds to volatility?

A: The emerging markets asset class can run either red hot or ice cold. It makes a good candidate for rebalancing. For the 15 years ending 5/5/17 the S&P 500 compounded at 7.7%, while the DFA Emerging Markets Fund compounded at 10.1%. The more risky DFA Emerging Markets Small Cap Fund and DFA Emerging Markets Value Fund compounded at 12.9% and 11.8% respectfully. The Vanguard Emerging Markets Fund is invested similar to the DFA Emerging Markets Fund (large cap) but under-performed slightly with a 9.1% return including dividends and capital gains.

Q: Why don’t you add the QQQ to your portfolio? Don’t these mostly technology companies have a higher expected growth rate than the S&P 500?

A: The NASDAQ (QQQ) has had a terrific return over the past years, but for the 17 years ending 2016, the compound rate of return (without dividends) was only 2.4%. The S&P 500 compounded at 5% including the reinvestment of dividends. What makes QQQ a doubtful buy-and-hold candidate is its very large downside risk. During the 2000-2002 bear market, it was down over 80 at one point.

Q: The Ultimate Buy and Hold chart shows that the S&P 500 has higher risk and lower historic returns than US LCV, so why hold any S&P 500 at all?

I am helping my children and grandchildren make their first investments.

A: For young investors I believe an All-Value portfolio makes sense, but the S&P 500 is likely to hold up better in a catastrophic situation so it’s appropriate for those close to or in retirement. I suggest you compare the Fine-Tuning Tables for the S&P and All-Value portfolios. You can find them here.

For young investors my best work is yet to come. In the coming months we will introduce a group of Target Date Funds that are almost all All-value until age 40.

Q: I happened upon your 1985 book “Market Timing with No-Load Mutual Funds” and wonder, how do you feel about market timing since you occasionally mentioned that you have a portion of your investments in market timing?

I enjoyed the book and wish it could have been updated to cover ETFs and a more up-to-date strategy. I use a somewhat similar strategy that includes a 200-week exponential moving average and the percentage of stocks above their 40-day moving average with some success in a small portion of my retirement account.

A: I am a big fan of market timing but rarely recommend it to do-it-yourself investors, as it is unlikely that they will maintain the timing systems. I only trust trend-following systems.

Since 1995 my best return (including all buy-and-hold and timing portfolios) has come from a hedge fund that combines mutual funds and ETFs with leverage and market timing. The annual return of the hedge fund has been about 2.3 times greater than the S&P 500, with the same downside standard deviation.

The majority of my timing is more conservative, including all the important U.S. and international equity asset classes plus high grade and high yield bond funds. This strategy has worked well, under performing in the best of times and out performing in the worst of times.

I don’t expect writing another book on timing but Les Masonson, author of All About Market Timing,does a good job of showing investors how to use trend-following systems with ETFs.

Q: Could you share your thoughts on rebalancing the portfolio and the frequency of rebalancing?

I really liked your approach to investing and am interested in knowing more about investing for taxable accounts.

A: Here is a link to an article that may help: “6 Things You Should Know About Rebalancing.” If you want to get more complex, check out Larry Swedroe’s “5/25 Rebalancing Strategy.”

Q: When are you going to update your mutual fund recommendations?

A: I’m working on them right now. Some will be out in the next week.

Q: You often mention that one could use a flexible distribution strategy with an ample retirement savings, but how to determine ample?

Is 33.3 x annual expenses ample? 1.5X that? 2X that? It’s probably highly subjective based on risk tolerance but I am curious to know how you think about that question.

A: I love the question. I will be recording a podcast on distributions in the coming month. I will likely do one on fixed distributions and second on variable distributions. I will address your question on the variable podcast. In the meantime you already know most of the A: “It depends.”

From my viewpoint, your suggestion of 33 times your “need for money” is close. I would probably use 40 times. So let’s assume a minimum cost of living, that needs to be taken out of your investments, is $40,000. Let’s also assume you would like to take out a lot more but you don’t need to. Let’s also assume you are concerned (even if it’s a completely emotional feeling) about running out of money before running out of life.

If you waited to retire until you accumulated $1,600,000 it suggests you could easily take out 5% ($80,000) with little risk of using all your savings. And if the market went down for an extended period you could certainly cut back to the $40,000 distribution. I waited until I had at least twice what I needed before I chose to spend the rest of my career working without pay. I think you will enjoy my new distribution tables.


Q: Do you recommend ETFs or mutual funds for a first-time investor?

A: Most first time investors are starting with a relatively small amounts of money, so the answer needs to address achieving maximum diversification with a small investment. ETFs are the best first-time investment. For less than $1000 you can build a portfolio of very low cost ETFs that would require tens of thousands of dollars to build with mutual funds. Plus, ETFs can be purchased on a commission-free basis at several brokerage firms. Here is an article that includes recommendations for three different groups of commission-free ETFs.

Q: Most experts are predicting that the Fed is going to raise interest rates in the coming months. What is the likely impact on the value of stocks during a period of rising interest rates?

A: A great question with no great answer. There are so many reasons that the market goes up and down that it is hard to know how much of the move was due strictly to higher interest rates. From 1965 through 1982, Treasury Bill interest rates increased from 3.9% to 14.7%. It was not a great period for stock returns, after including inflation. During that period, the S&P 500 compounded at .5% a yearafter inflation. The index grew at 6.5% a year but inflation ate up almost all the gains. But markets don’t all go up and down together. During that same period the small cap index compounded at 14% before inflation and 7% after inflation. Small cap value compounded at 17.7% and over 10% after inflation.

Q: I only have $150 to invest. How much do I need to open an account?

A: I’m hoping you will be able to invest the $150 in a Roth IRA so it can grow tax-free for the rest of your life and when you retire you will be able to take the money out tax-free. If you might need the money in the next few years, I suggest you keep a money market account, as you shouldn’t be taking risk with money that you know you will need soon.

There are several brokerage firms where you can invest without a minimum and without a commission. One of those is TD Ameritrade. The only minimum is you must be able to buy one share of stock.  Of course, the type of stock
I recommend you to use is an ETF.

Q: It seems like I will make more money investing in individual stocks than diversified mutual funds? At my age, shouldn’t I be taking more risk by investing in individual stocks?

A: Common sense would have most of us believe that, but all of the evidence says no. Very few investors who invest in individual stocks make as much as well-diversified mutual funds or ETFs. The S&P 500 Index has compounded at about 10% a year for almost 90 years. The small cap value index has compounded at more than 13% over the same period. I know very few investors who have made more than 10% long term, and almost none who have made 13% long term. At 10% you double your money about every 7 years, and at 13% every 5-1/2 years.

Of course lots of people take the risk of owning a couple of companies in the hopes of beating the market. It is the nature of humans to think they can do better than others; these humans tend to be overconfident and make costly mistakes. If I can convince you to invest in index funds and ETFs, I think you will have more than you need to enjoy a very comfortable retirement.

Q: What’s the first step I should take to start investing?

A: The best single step I know is go to my website and download my free eBook, First Time Investor: Grow and Protect Your Money. I also suggest you read a second free e-book entitled, 101 Decisions Guaranteed To Change Your Financial Future. If you still have a question after reading those two books, I suggest you email me at paul@PROTECTED.

Q: Some people want to invest in socially responsible funds while others expect companies focused on immoral industries and products to make more money. One that has been recommended is VICEX; should I expect to make more in "vice than nice?”

A: There is nothing special about the returns at VICEX, as it has made less than the S&P 500 over the last 10 years. There is also nothing special about the returns of socially responsible funds, except they may give an investor a sense of wanting to own the portfolio for a very long period of time.

If you are really interested in the best returns long term, I suggest you starting reading about the asset class that focuses on small cap value. I have written many articles on the asset class. Here's one.

Q: Are there any companies investing in or developing technologies for time travel?  

A: I am glad you asked this question as it gives me a chance to make a point that Professor LaBorde and I should make. There is likely nothing more enticing to young investors than a company developing an exciting technology for the future. Here is an article about time travel you might find of interest.

It is hard for a lot of young investors to believe that investing in new technologies has produced a much lower return than one would expect. There is a technology index that has been tracked since 1972. The return is about the same as the S&P 500, but with about twice the risk. One challenge is that many companies will try and fail at whatever the new technology might be. That was true of automobiles, airplanes, computers, software, etc. Investors also get in trouble because the rush into technology stocks often occurs at the peak of the run, not the bottom.

Q: I’d like to explain the “Legacy For a Newborn Child” to my parents, whom I wished had done this 20 years ago. What do you think?

A: There is no risk in the past. One of the interesting challenges in the investment process is it is so obvious what we wish we would have done, or others might have done for us. But now we know that a small annual commitmentof $365 a year for 21 years can be turned into $20 million to $50 million dollars, without having to win the lottery. Your parents may have missed the opportunity but I hope you won’t.

Q: Should I be considering "generating additional income" as I move into retirement? Besides maintaining a diversified portfolio of the asset classes you suggest, is there something additional I should be doing, like adding or migrating to certain types of bond funds and/or adding or mixing in a dividend producing stock fund to the equity side? Many advisers/authors suggest or imply that the portfolio should shift to focus on generating an income stream when entering into the distribution phase. Is this simply suggesting a more conservative stock/bond ratio?

If I follow your lead in moving a year's worth of needed income into a short-term bond fund in the beginning of the year (and rebalance portfolio), do you suggest moving this into an after-tax account short-term bond fund or leave it in an IRA and take monthly distributions?

A: Great questions!  Let me take the last one first. In my own case all the money we use for our cost of living comes from taxable investments. The RMD on my IRAs are used for charitable contributions.

Without knowing all I would need to know about your personal situation, if you’re not sure you will need all the money, and not required to take it out of the IRA, it makes sense to leave the money in the IRA until needed. Maybe you will discover your cash need is less than anticipated. That will allow you to distribute less than planned, thereby reducing the tax impact for taking distributions. (There are some tax situations where it makes sense to take money out of a IRA before MRD).

The idea of moving to more conservative equity funds in retirement is not unusual but my position is to maintain the more diversified equity portfolio (large, small, value, growth, REITs U.S. & international asset classes). If you go the route of using funds that produce more income, from either dividends or interest, don’t forget that most value funds distribute dividends. You might also consider a portion of your bonds in high yield bond funds.

Also, keep in mind that the defensive dividend-based funds can fall as much as 50% in a big bear market so they should not be considered low risk.

Q:  Do you have any concern about the Schiller Ratio being so high and the market in general being so overpriced? It is at a PE ratio just around the level it was pre-2008 crash. Should I be investing more in bonds and wait for the crash or just continue buying stocks in our desired allocation even though the market is so overvalued? Why or why not?

A: I always have a list of good news (list A) and bad news (list B) when thinking about my own investments. Presently the lofty Schiller Ratio is on the B list. In the buy and hold portion of my portfolio (half each in equities and fixed income) I totally ignore all the bad news as it would create anxiety to be sitting on a bunch of stocks when the evidence indicates there is a greater risk of loss than gain. On the other hand, in the half of my portfolio that is committed to market timing, (70% in equities and 30% in fixed income) the 15 to 100 different mutual fund or ETF investments I might own are all being tracked daily for the change in trend that indicates the fund should be sold and moved to money market funds. Again, I ignore the 200 plus reasons the market is moving up or down and simply go with the trend, in the trend following portion of my timing account, and move from asset class to asset class in the asset class rotation portion of my timing account.

Bottom line is in both the buy and hold and timing portions of my portfolio, I ignore all the predictive noise and either stay the course or go strictly with the trends or relative strength of the asset classes.

With all of these strategies in place I simply stay the course in all markets.  Both bonds and timing gave me a lot of defense in 2008 but bonds and timing will keep me from capturing the big returns of an extended bull market in stocks.

The one thing I know about my approach is I have no reason to second guess the strategies. If I start mistrusting my strategies it’s probably time to move to an all-bond portfolio.

Q: What are your thoughts and estimates of an ROI(return on investment) that I would receive from never rebalancing vs. annually re-balancing?

You have provided information in various podcasts, especially when speaking about your tables, that if a young investor NEVER had RE-BALANCED their portfolio, they would have been better off than re-balancing every year. As a young investor, instead of re-balancing annually, especially since I'm not risk adverse, does this make sense?

A: I hope to release a study on an all value, all-equity portfolio in the coming months. I’m not sure it will address your rebalancing question but it will appeal to those who have higher risk tolerance.

If we look only at the equity portion of a portfolio, rebalancing is going to lead to a lower long-term return, but the lower return will come from taking less risk. Since you are a young investor I assume you are still making regular contributions to your account. If you continue to add money in equal percentages, you should make more without rebalancing. Please review my 4 fund solution table for more evidence.  http://paulmerriman.com/wp-content/uploads/2015/03/Large-Table-Layout-2-page.pdf

One simple computation reflects the impact of the average 40 year return for the 4 asset classes individually, as well as rebalancing. Based on the average 40-year return of each asset class, there is a 15% higher return without rebalancing. Of course when you are making monthly contributions to these asset classes the difference will be magnified by buying more shares of small cap value during the worst of times.

Q: Why do you have no Precious Metals and/or Commodities in your Portfolios? We are new to your Newsletter and apologize in advance if you answered the question in the past!

A: I have addressed this topic before but I think it’s worth repeating my findings. All of the asset classes I recommend have a long history of earning a high unit of return per unit of risk. Neither precious metals nor commodities have a record of earning high rates of returns for the high unit of risk compared to those asset classes I recommend. I have written many articles and recorded many podcasts focused on performance.  Here is the link:http://paulmerriman.com/performance/

If an investor is looking to precious metals and commodities as a non-correlated asset class, U.S. Government Bonds have a much better track record with much less risk than precious metals and commodities.

Q: What do you think AMD?

A: I think it will double in the next year or fall by 50%. Just kidding! I have no idea what the stock will do for the next week or 10 years. Over the last 10 years it has declined at 11.3% a year (compounded rate of return) while the S&P 500 has grown at 7.6% a year. Probably a better comparison would be the average semiconductor stock at 9.7%.  Of course, if you know how to time your holdings in AMD you could easily make 25% a year. I wish I knew how to do that.  Maybe one of our readers will see how the stock would have done using a 150 day moving average timing system. I suspect it would do better than losing more than 11% a year!

A: The minimums on each Fidelity mutual fund is $2,500, whereas you can put together an entire portfolio of asset classes using the ETFs at Fidelity with $1,000.

Q: I'm surprised you recommend a timing service here... Doesn't that go against everything you promote, such as buy-and-hold index ETFs?

A: Both market timing and buy-and-hold are legitimate investment strategies but very few investors will follow the difficult disciplines of timing. Buy-and-hold is a very simple strategy. First, you identify the asset classes you should hold. Second, you fund those asset classes with no-load low-cost index funds or ETFs. Third, you rebalance once every year or two. That’s it!

Market timing means you have to watch the market on a regular basis. The only timing I trust uses purely mechanical trend-following systems. The problem is the systems results are very different from most investors' expectations. I expect half of the trades to end in a loss (hopefully a small one). Drat! I will spend a lot of time sitting in a money market fund while the market is rising. Drat! I will often buy back into the market at a price higher than I last got out. Ouch! Timing should produce smaller loses in major market declines  and underperform buy-and-hold in rising markets. I could go on and on with the challenges of timing, but I trust you can see how frustrating timing can be. Plus, market timing is less tax efficient in taxable accounts.

Q: Should I start putting money into the Roth 401(k) at Boeing or keep it all pretax contributions? Or some split of the two?

Boeing's VIP 401(k) now offers a Roth contribution option. I'm 36 years old and maxing out my pre-tax contributions up to the IRS limits ($18,000 for 2016), then putting aside more cash in a Roth IRA at vanguard (up to that limit of $5,500 for 2016).

A: I favor the Roth. A deductible IRA or 401(k) offers a deduction against income taxes and therefore leads to a tax refund. Some choose to invest the refund while others decide to spend it. When we use a Roth IRA or 401(K), we do not get a deduction. Instead we get to have the money compound tax-free until we take it out at which point it is distributed tax-free. The end result of a Roth IRA or 401(k) is one is likely investing the amount that would have otherwise been a tax refund.

I vote for doing as much in a Roth as you can, as it means you have put more aside and the tax-free distributions could be a very big deal 30 years from now.

Q: I noticed that your Schwab ETF recommendations have not been updated since Feb 2014... are those recommendations still current?

A: Thanks for the heads-up on our oversight. We review and update all of the mutual fund and ETF portfolios in January of each year. We should be sure and note the review date even when we don’t make a change. You shouldn’t make too many changes, as we are not making changes due to economic or market reasons. The only reasons to change are to add a fund or ETF for a previously missing asset class, or when a family has a better fund or ETF to represent the asset class.

Q: What stocks do you recommend to fulfill the international portion of your "Ultimate Buy-and-Hold portfolio"?

A: The international holdings are very similar to the U.S. asset classes: large and small blend and value, real estate, plus a slice of emerging markets. I have done my best to match those asset classes through no-load mutual funds and commission-free ETFs at Vanguard, Fidelity, T Rowe Price, Schwab and TD Ameritrade. Some portfolios do include all the asset classes due to the fund family not having a fund to fill the spot. All the portfolios are under “recommendations” at paulmerriman.com

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 plusVanguard Value Index Admiral Shares or Vanguard S&P Small–Cap 600 Index plusVanguard 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.

Q: Are you still providing copies of the trust you created in 1994 with $10k in a Variable Annuity for your grandson? I'm thinking about establishing similar trusts for my five grand children.

A: Here is the document that we used for one of our younger grandchildren. With each of our grandchildren we have invested $10,000 under a Crummy trust they can’t touch until they are 65. The investment is held in a no-load variable annuity. At 65 they will receive 5% of the trust value each  year for the remainder of their life. At the end of the grandchild’s life, the balance is given to a non-profit that is chosen by the grandchild. While I am happy to share the document, I encourage you to meet with an attorney, as I can’t give legal advice.

Q: I've downloaded the three PDFs of your How To Invest" books, which I am beginning to dig into, but are there other books you would recommend that help beginning investors like myself understand the world of investing? I’m a 22-year-old recent college graduate who's landed a full time job making $53,000 a year. I want to start investing according to your advice but there are many things I don't understand, mainly terms and how they interact with one another. So when you talk about how 'small cap outperforms large cap in the long term,' I have a vague idea of what that means (not to mention the difference between blend vs. value stocks).

A: I suggest you start with "Mutual Funds for Dummies" and the other books recommended at my website. To understand ETFs, try this link. If you are investing outside your company's 401(k), I suggest using a Roth IRA. As you probably know I have recommendations for commission free ETFsat Vanguard, Fidelity, Schwab and TD Ameritrade.  Any of these providers will make it possible to start with a small amount of money. I hope, by the time you finish  “First Time Investor: Grow and Protect Your Money” and “101 Investment Decisions Guaranteed to Change Your Financial Future," you will feel ready to take on your financial future.

Q: My company just added DFA Small Company (DFSTX) to our 401(k)... I am taking full advantage of the new offering. However, most small-cap funds follow the Russell 2000. Is this index of stocks small enough to be considered small cap?

A: The average size company in DFSTX is almost the same as the Vanguard Russell 2000 Index (VTWO).  Plus, they both have about the same average size company and about the same Price to Book ratio. What is interesting is that DFSTX compounded at 10.6% for the last 5 years vs. 9.1% for VTWO.  DFSTX earned a higher return even though VTWO has a lower expense ratio, .15% vs. .37%. How can the DFA fund produce a better return than the Vanguard fund since they represent the same index and the Vanguard has lower a lower expense ratio?

One of the many advantages DFA has over Vanguard is lower turnover. Vanguard index funds are based on tracking specific indexes, which, in the case of VTWO means owning the same companies as the Russell 2000.  When the list of Russell 2000 stocks changes, so does the Vanguard Russell 2000 ETF. That means some stocks are sold while others are purchased. The process of selling some and buying others has a cost. This is called the 'cost of reconstitution'. The reconstitution costs of small cap stocks are much higher than large cap stocks, as the small cap stocks are less liquid. When a lot of money is chasing a small company, the stock can rise quickly. When a lot of shares of small stocks are being sold, the price drops quickly. To know more about the Russell 2000 index, click here.

DFA does not attempt to follow the index, stock for stock, but rather focuses on owning a broadly diversified portfolio of the asset class. They may buy and sell some of the same stocks but are not obligated to do it while everyone else is. This allows DFA funds to experience much lower turnover costs and, in most periods, the lower costs lead to higher returns. Without the obligation to look like the exact index allows DFA to save a lot of money for their shareholders. If you compare the top 25 holdings of each fund you will see how different two funds in the same asset class can be.

Q: When do I rebalance?  Monthly is one thing you recommend. What about percentage of change from the goals? When stock funds get to 53 or 55%, or bonds get to 43%?

A: For the period from 1970 through 2015, rebalancing monthly led to lower returns than rebalancing annually. The reason rebalancing less often is more profitable is due to having more exposure to the riskier asset classes. If you rebalance monthly, you immediately take the excess profits of the more profitable asset classes and move them to the less volatile and less profitable asset classes. If you do a search for “How often should I rebalance my portfolio?” you will find dozens of strategies. Try that search at Investopedia and you have a couple hours of reading material, including information about rebalancing taxable, tax deferred and target date funds.

Q: What is the best source for determining mutual fund asset mix? We are trying to get our house in order with the funds available at TIAA CREF. We notice they have different views on what is small/medium/large or value/blend/growth than some of the other mutual fund groups. What’s the best source of information on all these different asset classes?
A:  I think the best resource for almost all the numbers you need to know is Morningstar. The Morningstar style boxes give a general idea of size and value/growth exposure, but if you go to the “Portfolio” page for each fund, you can get the average size company, price to book ratio, and a host of other important statistics. I plan do a podcast on the topic before the summer is over.

Q: Which article or podcast makes the recommendation not to use REIT in recommended portfolio for a taxable account? I want to use your recommended Schwab ETF portfolio for a taxable account. I thought I read on your website that I should exclude the Schwab US REIT (SCHH) for a taxable account. Love your work. I have convinced a few friends to implement your recommended portfolios for their retirement accounts. Thank you so much.

A:   I suggest you read this article: http://paulmerriman.com/reits-belong-retirement-portfolio/  Thanks for sharing our work with your friends! I hope you will tell them about my new 2-1/2-hour video. I hope you will go here, purchase access to this video ($10) created professionally for CPAs and their clients, watch the video and share the link with your family members, along with your email and password created for online access.

Q: Is there anyone who provides free market timing advice? You recommend the use of mechanical systems. I know you offer your buy and hold recommendations at no cost, but is anyone offering free marketing timing advice?

A:  You are in luck. There is a fellow I've known for many years who provides free timing signals. In fact, he even provides a free email alert service when there is a buy or sell signal. Bill Lussenheide is a savvy timer who, as most timers, is a real believer in trend following market timing. Check out his site along with the long-term results of his free timing system.

Q: Funds versus ETFs? Advantages/disadvantages of ETFs?

A: Here is a simple comparison of advantages and disadvantages from Vanguard. Another advantage is a $1,000 account can give an investor access to the asset classes that would take about $35,000 with mutual funds. The biggest disadvantage in using ETFs is rebalancing is less efficient than with mutual funds.

Q: Does any one have an ETF of Israeli companies? A recent Forbes issue has an interesting article on Israel’s super secret unit 822 and all the start up firms its alumni have started.

A: Check out this list of 3 Israel ETFs.

Q: Would it make sense to follow your Fidelity ETF recommendations in a Fidelity IRA, if I decided to convert my Fidelity 403b to a Fidelity IRA? I am a 59-year-old retired former school district employee and had a 403b plan with Fidelity while I was working. I have been advised to convert the 403b plan to a regular IRA, which seems like a good idea. Do you think I should do this with Fidelity or transfer to a Vanguard IRA to reduce fees? I have been following your Ultimate Buy and Hold strategy for years. I see that you have recommendations for ETF’s. I have both a Roth IRA account and a regular account with Vanguard.

A: Several years ago I would have suggested you move to Vanguard, but today Fidelity's ETFs are competitive with Vanguard index ETFs. It is actually possible there would be a very small advantage for Fidelity due to slightly better access to small cap asset classes.

Q:  With all the talk about fees, I own TRP Health Sciences (PRHSX) and Mid Cap Growth (RPMGX) in my IRAs and the expenses for each of these are above .75%, so is this reason alone to part with both of these?

I have a "legacy fund" feeling for both and this makes it hard to part with them, but I also realize they just may not be the best fit for my long-term goals.

A: Yes their expenses are high, diversification relatively low, but their returns are exceptional and tax efficiency is high. Of course their tax efficiency doesn’t matter in an IRA, but some of our readers may have these funds in a taxable account.
You might have the same problem I do. I put more than I should have in a hedge fund that has compounded at over 14% a year since 1995. Because I knew the risk of loss was high (about the same as the S&P 500), I regularly used the excess profits to pay for extras in our life. It was a form of rebalancing, as I didn’t spend the profits of the more conservative portion of our portfolio. What I don’t know is how much of your portfolio is held in these two funds. If it’s 5% each, no problem; if it’s 25% each I would recommend reducing the exposure in each. If all of your investments are at T Rowe Price, I have a recommended portfolio of their funds.

Q:  Should I transfer from Vanguard some assets in a 529 for my 4-year-old son to the Utah 529 that utilizes Dimensional Funds?

A:  It looks to me like you could use some of each. I would use DFA for value exposure and Vanguard for large cap blend.

Q:  Have you done any comparisons between BRK.B and the Ultimate Buy and Hold strategy?

A:  Probably the best comparison is BRK.B vs. an all-value portfolio. Over the 15 years ending September 2017, BRK.B compounded at under 10% vs. a combination of large and small U.S. value, large and small international value and emerging market value compounding at almost 3% better per year. And in every value asset class the compound rate of return was higher than Berkshire Hathaway. I used the DFA funds as the benchmark for the value asset classes.  If I used the average return in each of those asset classes, the return was about 1% better than BRK.A, with the average of the mutual funds in those classes.

Q: Is there a Best-in-Class Motif yet?

A:  Yes, we have many best-in-class portfolios at Motif. Start by going to Motifinvesting.com. Go to “Resources” and enter "Merriman diversified" in the community Motifs. There are about 70 different portfolios.

We will be adding a new target-date portfolio at Motif in the next month. The process took longer than anticipated but Chris Pedersen, who is working on the project with us, has been instrumental in building a terrific strategy that is much more focused than I originally conceived the strategy.

The target-date portfolios are set up for those retiring between 2020 and 2085. Chris and I will produce several articles and podcasts on the pros and cons of these portfolios and how investors of all ages might use them---including for newborn children.  For those who want to stay at Vanguard, we will also show how to use Vanguard Target Date funds, along with small-cap value funds to improve long term returns. Stay turned!

Q:  My wife and I plan to put aside money for our grandchildren using your “How to turn $3000 into $50 million” strategy. Speaking with Fidelity, they suggest 3 ways to do it. What do you think?

  1. Set up a custodial account in the name of each grandchild.

Paul: That can work, but I recommend you open an account in your name, and as the grandchild has earned income, move the money from your name to the grandchild’s name in a Roth IRA. That way you can control the account until it goes into the Roth. You could even have the statements come to your address.  By the way, you can open up a custodial Roth if the grandchild is not 18.

  1. Simply wait until the granddaughter has earned income and then invest up to the Roth limits for a period of years.

Paul: The reason I encourage parents and grandparents to invest money at birth is they can take advantage of the early years of growth on behalf of the child.  It doesn’t have to be $3000 at birth. I could be as little as $100, one time.  It could also be an annual amount for a certain number of years. $365 a year, over 21 years, can turn into $20 million in distributions and $30 million to heirs, assuming your grandchild lives to 95.

  1. Set up a Roth in my name with my granddaughter as sole beneficiary.

Paul: There are a couple of reasons I prefer the account in her name. I think your grandchild will have better long-term control if the IRA is originally in her name rather than as a beneficiary on your account. If there is a change in the regulations, it is likely to be regarding how an IRA is taxed at death.

Q:  Is there a place for fixed-income annuities for senior citizens, given the fact that I would be just getting my money given back to me over time? If not, what would be a strategy "to take some off the table" but still get a return?

A:  First let’s address you “just getting your money back.”  When you sign an immediate life annuity, the insurance company guarantees a certain payment over your lifetime. The payment is normally monthly. Yes, part of the money you get back is what you put in, and part of the money is from what was earned on the investments made with your money. Another source is from people who died in the early years of their contract, since that money goes to the insurance company, not the heirs of the contact owner. If you live much longer than expected, the insurance company will continue to pay even though they may have exhausted your investment, as well as the earnings your investment made.

Why are the Target Date Portfolios using a 70% US and 30% International when Paul normally recommends a 50:50 split?  

We chose 70/30 US/International split because there are lower-cost, more diversified small-cap-value US funds, and we thought many investors would be more comfortable with that split and able to stick with it through difficult market conditions.

 

What if I want to follow Paul's Target Date glide path, but use a different US/International split, or have a different ending percentage of equities and fixed income at age retirement.  Is that available as an easy adjustment in the Google Sheet?  

Based on your requests, we've added the ability to customize both the US/International split and age 65 Equity/Fixed-Income proportions in the Glide Path Asset Allocations.

 

Why is the glide path asset allocation fixed and unchanging after age 65?  

We feel strongly that someone entering retirement should talk to an adviser, and that different situations will necessitate different approaches throughout retirement.  There's no one-size fits all solution.  DIY investors may chose to switch to one of Paul's Ultimate Buy and Hold portfolios with the equity/fixed-income percentage they think is right for them.

For the Monte Carlo simulations in the Achieving Success with Target Date Funds article, do the $10,000/year contributions remain constant, or do they increase each year with inflation? The analysis assumes the $10,000/year contributions increase each year with inflation.  

 

What if I can only save $2,000/year? How would I adjust the resulting end-balances in the article? 

They scale one-for-one, so since $2,000 is one fifth of $10,000, you'd divide the final median balances by five.

 

Paul's Ultimate Buy-and-Hold portfoliorecommends a very balanced and broadly diversified approach, whereas the Target Date Portfolio is heavily tilted toward small cap value and emerging markets. Is the Target Date Portfolio allocation the new Ultimate Buy and Hold recommendation?

No.  The article lays out four options ranging from conservative (Vanguard-like), to moderate (adding 10% to 20% SCV) to aggressive, which is the new Target Date glide path at Motif.  The new Target Date recommendation takes more risk by investing in the more volatile small-cap-value and emerging markets asset classes early on, but history suggests that leads to significantly higher returns over a 20 to 40 year time frame which is what a young investor has ahead of them.  In the end, you need to decide which is right for you.  That's why Paul has the fine tuning tables for Ultimate Buy & Hold and All Value. You could also use the comparison table in the TDF articleto make a similar choice.  

 

In the article, Achieving Success with Target Date Funds, it says that adding an investment of $3,000 at birth adds only about $10M to the end balance.  I thought Paul said I could turn $3,000 into $50Macross a lifetime. Why is it only $10M? 

Paul's article about turning $3,000 (or $365 for 21 years) into $50M assumed it was invested all in small-cap value for 95 years.  It also assumed a 12% compound annual return. The analysis in the “Achieving Success with Target Date Funds” article assumes the same kind of early investment(s), but uses Monte Carlo simulated returns in a portfolio of all small-cap value plus emerging markets then diversifies adding the rest of the Ultimate Buy and Hold asset classes as well as fixed income in the later years.  It also only runs to age 65.  Even so, the initial $3,000 investment at birth more than doubles the end balance for someone who contributes $10k/year (increasing with inflation) throughout their working years.

 

Why do the Target Date Portfolios not use RZV for US Small-Cap Value?  

In preparation for the Target Date Portfolios release, we reexamined the US Small-Cap Value options and found that a combination of SLYV and VBR reduced the expense ratio, increased the number of equities in this category from <150 to >1,000, and provided index diversity (CRSP and S&P 600 Small Cap Value indices).  We will be updating the Best-in-Class ETF recommendations and funds in the rest of Paul's Motifs soon.

 

Paul recently did a podcast in which he made a case for VIOV being a better choice than VBR for US small-cap value.  Why are you recommending VBR as part of the Target Date Portfolio? 

 In that podcast, Paul was only considering Vanguard funds.  When we take a broader look at all ETFs, we feel that SLYV (or IJS for taxable accouts) is a better choice of fund for the S&P Small-Cap 600 Value index.  VBR is based on the CRSP US Small Cap Value index which also complements SLYV nicely.  VBR holds 842 stocks, of which only 236 overlap with SLYV's 442, so together they provide exposure to 1048 stocks, and the overlap is only 16% by market capitalization weighting.

 

Have you changed the selection criteria for best-in-class ETFs?  

Yes.  We have expanded our analysis to include additional factors shown by academics to influence returns.  The primary factors are still size and value, but we added momentum and quality since these can help or hurt getting the expected premiums from size and value.  All of this is covered in the updated article found here.

 

When the Motifs are updated with the new small-cap value funds, are there reasons to not adopt or accept the update?  

There is a fee to rebalance, so if you plan to rebalance once per year, you could wait and do it then to avoid the additional fee.  In a taxable account, there may also be capital gains associated with selling the old fund to pick up the new one.  Lastly, you may prefer the smaller, more value-oriented RZV original fund even though it's less diversified and has exhibited negative momentum in the past.  The choice is yours.