A Slight Tweak made to our Model Portfolio Designs

We’re talking a really small tweak here. When you model these changes going back 17+ years, the impact is minor. So, nothing to write home about. This goes back to changes we made in the last year or so. In the last year we decided, with the apparent future increases expected in interest rates, to reduce our already low exposure to fixed income with moderate term length to those of only short term length. To accomplish that, we switched out a fund. DFA Intermediate Term Extended Quality was replaced with DFA Short Term Extended Quality and we made this change across all 8 model portfolios.  (Note that the 100% equity portfolio has no fixed income, so the change didn’t impact it.) The Short Term fund would fluctuate less in different interest rate environments. It would have slightly less overall return – although in the short “increasing interest rate environment” expected it would perform better than Intermediate Term. So how are we modifying our approach? The volatility in our most aggressive portfolios, since they have a very high percentage of stock – is driven by stock not by the small percentage in bonds. Therefore we will keep the Intermediate Term bonds in the Models with 85%, 77% and 70% equities. The 40%, 47%, 55% and 63% portfolios will retain the Short Term bonds since the intent of the less aggressive portfolios is less volatility. When we make these changes and model the performance results going back to 1/1/1999 – the results are almost identical, though, as expected we get a slightly higher return in the most aggressive models with the...

Scale hurts active managers

Any “active manager” can outperform evidence-based investing as long as they are lucky enough to have larger amounts invested in securities or asset classes that are currently out-performing vs. under-performing. Easier said than done!  And you only know if you were successful when all the dust has settled. But it has been done. The article points out that as more people find out about this skilled (actually lucky) manager, that they all want to pile on. But the winning stops when it gets too big, or as the article is titled “scale works against active skill”.  (Or when the luck runs out, whichever occurs first.) Here’s the article….  Swedroe: Scale Works Against Active...

Beware the Names of Mutual Funds

Retail mutual funds are all about sales and marketing and often not much about sound investing. Most of them are continually changing their holdings causing high turnover and expenses. They are under-diversified. They have a high failure rate. If the fund company doesn’t market them enough and the fund has poor returns (often), they will die. The retail fund companies need to sale and market the funds – so they come up with names for the funds that help to sell them. Look over a list. Once you realize it’s all hype, it’s actually funny and maddening at the same time to review the names. The retail mutual funds that do get good returns – well they *did* get good returns and more often than not through lucky guesses. Often investors choose not by name but by recent recent fund performance. Unfortunately good performance is often followed with bad performance. Many investors go through their lives “chasing performance”.  The cycle of jumping on a band wagon, getting disenchanted and then looking for the next bandwagon. The mutual fund that I love to hate the most are “Stable Value Funds”. They are found in many 401k funds. They do tend to be stable. So that attracts people scared of the market. You have no idea how to invest and the word “stable” is very attractive. That’s the problem. They will get perhaps a 1-2% annualized return, while those in a highly diversified global portfolio will be get 7-9% over time. The salespersons selling the 401k plans, and those selling the stable value funds are dooming the employees to a very bad return of their hard-earned dollars...

How to infuse $255,300,000 into our local economy (for free)

True story and numbers.  I am currently speaking with a local company about their 401k plan. I put a scenario together to show them how the numbers add up. I did something new – I looked at how this could impact our local economy! The key difference is that the proposed plan provides 5 model portfolios designed by RIA’s (investment advisors). The assumption is that 99% of the employees would choose one of the models, whereas right now they are all over the map in a typical “big box insurance” plan. They have very “damaging” options like “stable value fund” which is like stuffing money in a mattress.  They have too many choices. They have a broker offering fund education instead of an investment advisor offering advice. The insurance company has inserted their own proprietary products that are impossible to examine for fees. The end result is the average employee gets a lower annual return on average. See the “illustration” (to use a classic insurance industry term) here. The bottom line is that the increased account value over the next 20 years, allows for the employee getting $255,300 more in a 25 year retirement. (More details in the link provided above.) Multiply that by 1,000 employees and the economy gets a $255,300,000 infusion of consumer spending from 2035 to 2060.  That’s a legacy I want to leave behind for our daughter. That’s leaving behind a better world! Yes, I love my family, clients, our community and my job.  What a difference we are making, one client, one 401k plan at a time! Now send us local 401k plan sponsors...