Archives for May 2013

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Are We Still Using the LifeStrategy Growth Fund?

A reader writes in, asking:

“I’m curious if you are still using the LifeStrategy fund? Are you satisfied or do you have second thoughts?”

Yes, we’re still using Vanguard’s LifeStrategy Growth fund for our retirement savings. And yes I am still quite happy with it — precisely because I don’t have second thoughts. I think about it roughly the same way that I think about a savings account — not in the sense that it has the same risk/reward profile, because it most certainly does not, but in the sense that it takes a similar amount of maintenance and mental energy (i.e., none).

I no longer spend any time or mental energy thinking about:

  • Whether or not now is a good time to rebalance,
  • Which fund(s) my monthly contributions should go into, or
  • Whether my asset allocation is precisely right.

I know my allocation is not perfect. But by using an all-in-one fund, I forced myself to accept that ahead of time. And because it requires no maintenance, there is no longer the monthly temptation (which used to occur when making new contributions) to change something here or there in an attempt to make the portfolio slightly better in some way.

Not One-Size-Fits-All

Of course, all-in-one funds are not a perfect fit for everybody. There are plenty of reasons why any given investor might be better off taking the DIY-allocation approach. For example:

  • The fund-of-funds structure is tax-inefficient, which is relevant if you have assets in a taxable brokerage account.
  • Some people will not be able to find an all-in-one fund with an asset allocation that suits their needs (e.g., because they need to underweight U.S. stocks in their IRA in order to make up for the fact that they’re overweighting U.S. stocks in their 401(k) because their retirement plan’s only decent choice is a U.S. stock fund).
  • Some people will prefer to implement a strategy that “tilts” the portfolio in some way (most commonly toward small-cap value stocks or REITs).
  • Some people using an all-in-one fund would still worry about whether the allocation is good enough.
  • And some people with DIY allocations don’t worry about whether their allocation is good enough.

But, yes, our all-in-one fund is continuing to work quite well for us.

Putting CDs to Work in a Mutual Fund Portfolio

A reader writes in, asking:

“You linked recently to an article saying long-term CDs are now a better option than bonds altogether. How do you feel about that? Part of my problem here is that my cash reserves are not very large (about 1.5% of my total assets), and also there’s no way to rebalance within a Vanguard IRA into CDs.”

I do think CDs are relatively attractive right now. For example, Ally’s 5-year CD has roughly twice the yield of Admiral shares of Vanguard’s intermediate-term Treasury fund, despite the fact that the Ally CD has less interest rate risk and (assuming you stay under FDIC limits) the same credit risk. And if you shop around, you might even be able to find a CD that’s better than Ally’s.

You Can Do a Partial Account Transfer

The two issues that people run into when trying to figure out how to use bank (or credit union) CDs in a mutual fund portfolio are that:

  1. Banks don’t offer any good options as far as stock holdings (so you don’t want to move everything to the bank), and
  2. It’s impossible to rebalance with CDs.

Fortunately, neither of these is a problem given that you can do a partial account transfer, even with an IRA. That is, you can keep your current IRA and simply do a direct trustee-to-trustee transfer, moving a portion of the money into a new IRA with the bank or credit union.

For instance, if you decide that CDs offer a good risk/reward ratio, you might choose to transfer an amount equal to just half of your fixed income allocation. This way your stock holdings would be unaffected, and you would still have some traditional bond fund holdings with which you can easily rebalance.

CDs Are More Work

But moving money from one custodian to another does require some effort. And, depending on what happens with interest rates down the line, you might end up wanting to move it back — or to yet another custodian. And even if you leave the money at one bank/credit union, there’s a bit of ongoing work involved in buying new CDs when the current ones mature.

So it’s a question of whether the additional yield is worth the additional effort. (Admittedly, when given the choice between two options, I tend to go with the lazier approach with my own portfolio.) There’s no right answer here. It will depend on:

  • Your personal tolerance for administrative hassle, and
  • The size of your fixed income allocation (the larger the allocation, the greater the dollar value of the additional yield).

Are Bond Funds Unusually Risky Right Now?

If there’s one thing that’s clear from reader emails, it’s that many people are concerned — or even scared — about the riskiness of their bond holdings right now. The questions I keep getting over and over are whether intermediate-term bond funds (e.g., Vanguard’s Total Bond Market Index Fund or Fidelity’s Spartan U.S. Bond Index Fund) are unusually risky right now and whether moving to shorter-term bonds would make a portfolio less risky.

The answer to those questions depends on what you mean by risk.

Risk = Likelihood of Low Returns?

For people who think of risk as the probability of earning negative inflation-adjusted returns, yes, an intermediate-term total bond market fund is unusually risky right now, given how low interest rates are. But from that perspective, a short-term bond fund is even riskier given its lower yield and lower expected return.

Risk = Volatility?

On the other hand, if it’s price volatility (due to changes in interest rates) that makes a bond fund risky to you, then yes an intermediate-term fund is riskier than a short-term fund. But it’s important to understand that from that perspective, a longer-term fund is always riskier than a shorter-term fund. It’s got nothing to do with low interest rates.

In addition, from a price volatility standpoint, I’m not convinced that an intermediate-term bond fund is any riskier than it normally is.

“Autocorrelation” refers to a variable’s correlation to itself from one period to another. For example, a series of data points in which upward movements tend to be followed by more upward movements and in which downward movements tend to be followed by more downward movements is said to have high autocorrelation.

According to the data I’ve seen, interest rates (for both short-term bonds and long-term bonds) have strong positive autocorrelation over short-term periods. For example, according to Yale economist Rober Shiller’s data (and my Excel calculations), from 1871-2011, 1-year interest rates have an 83.6% autocorrelation from year to year. There’s even a 55.5% autocorrelation when you look at the 1-year rate in a given year as opposed to the rate 5 years later. And the autocorrelation for rates on 10-year Treasury bonds is even higher.

In other words, the fact that bond yields have been moving downward over the last few years and now sit well below historical averages does tell us that we should expect low returns from bonds going forward, but it does not tell us that we should assume rates will necessarily rise in the near future. If anything, it would suggest that an extended period of low rates is likely.

Looking Up a Fund’s Holdings

A reader writes in, asking:

“Is it possible to find out exactly what is in a mutual fund? I’m looking for something more complete than the “largest holdings” lists which I can see on Vanguard’s website.”

Mutual funds are required by the SEC to disclose a complete list of their holdings on a quarterly basis. SEC Form N-Q is used to disclose holdings as of the end of the first and third quarters of the fiscal year, and Form N-CSR is used for the end of the second and fourth quarters.

You can look up either of these forms in the SEC EDGAR database. For example, here’s the Form N-CSR for Vanguard’s Total Stock Market Index Fund (as well as several other Vanguard funds) as of December 31, 2012.

Because these disclosures are only done on a quarterly basis — and because the funds have a 60-day window during which they can make the filing — the information provided in these disclosures is not especially timely. As a result, these disclosures will be of little use for certain purposes (e.g., trying to mimic the strategy of an actively managed fund). But they would be useful, for instance, to somebody who is trying to figure out whether a given index fund holds shares a particular company (or group of companies) to which they have ethical or religious objections.

Finding a Fund’s Form N-CSR or Form N-Q

While it only takes a few seconds to look up a fund’s N-CSR or N-Q once you know where you’re going, getting there for the first time isn’t exactly intuitive — at least it wasn’t for me. So let’s quickly walk through it step by step.

  1. Go to the SEC EDGAR homepage.
  2. Click the link for “search for filings.”
  3. Click the link to search by ticker symbol or fund name, and on the next page enter the ticker of the fund in question in the “fast search” box and click “search.”
  4. On the next page, scroll until you find the most recent thing in the “filings” column labeled either “N-CSR” or “N-Q.” Click the “documents” button next to that listing.
  5. On the next page, find “N-CSR” or “N-Q” in the “type” column and click the red link in the corresponding row. (The link itself could be named anything.) Here’s a screenshot of what you’re looking for (click to enlarge):


Naturally, most funds — especially broadly diversified index funds — have a heck of a lot of holdings, so browsing the list in search of a specific stock or bond will take an exceedingly long time. A much faster approach is to use “control + F” to search the page for a specific word or phrase.

How to Assess a Fund without a Ticker

A reader writes in, asking:

“My 401-k at work has several funds with no ticker symbols, so I cannot find information about them online, not even at Morningstar. The booklet about the plan that I got at my orientation does describe the funds though. What should I look for? And why don’t they have tickers?”

Most likely, these investment options without ticker symbols are actually “collective investment trusts” or “separate accounts.” In other words, these investment options are probably not mutual funds at all, though the basic idea is the same (i.e., a professionally managed pool of money from many investors).

Because these products are not offered directly to retail investors, they have no ticker symbols and different regulatory guidelines. Still, you want to know the same basic pieces of information that you would want to know about a mutual fund. That is, you want to know:

  • What index the product tracks (if any),
  • What the costs are for the product, and
  • What is in the product’s portfolio (i.e., its asset allocation).

This information should be available in your plan documents. (If it isn’t, get in touch with your HR department.)

Because these types of investment options have a lesser degree of transparency than plain-old mutual funds, I’d also make a point of checking the published performance figures to make sure they’re what they should be. That is, if the investment option is designed to track a specific index, I would try to find the performance data for that index (or for another fund that tracks that index) and then compare that performance to the performance figures for this investment option that are disclosed in your plan documents. You don’t want any surprises down the road from finding out that the trust or account isn’t actually doing a good job of tracking what you thought it was tracking.

Portfolio Management vs. Financial Planning

I often hear from investors who are in the market for a financial advisor, but who, despite interviewing several, are struggling to find one who meets their needs. One of the most frequent causes of this difficulty is a failure to understand the difference between advisors who provide portfolio management services and advisors who provide financial planning services.

Portfolio management involves doing the actual portfolio maintenance: setting up the portfolio, rebalancing when necessary, tax loss harvesting, etc. (Just to be clear, portfolio manager is not a technical term, so these people might refer to themselves as wealth managers, money managers, investment managers, or something else entirely.)

In contrast, financial planning is about answering questions: Can you afford to retire? How much can you spend per year in retirement? Is your asset allocation appropriate? When should you claim Social Security? How can you reduce your taxes? Do you need to buy long-term care insurance? Things like that.

What confuses many people is that:

  • From a regulatory perspective, both portfolio managers and financial planners are probably registered investment advisers (RIAs) or representatives thereof, and
  • Either of them can have the Certified Financial Planner (CFP) designation (but neither is required to have it).

Some firms do financial planning. (Examples would include members of the Garrett Planning Network, or Allan Roth’s firm Wealth Logic.) Some firms do primarily — or exclusively — portfolio management. (Examples would include Rick Ferri’s firm Portfolio Solutions or Bill Schultheis’s firm Soundmark Wealth Management.) Many firms do both.

The story I hear over and over from readers is that, having been in the market for financial planning services, they contacted a local CFP and set up a meeting. But, once they arrived at the meeting, it became clear that the CFP was not really interested in providing one-time financial planning services. Rather, the CFP’s goal was to get the investor to sign up for ongoing portfolio management services — something in which the investor has no interest.

The key is to know ahead of time who you’re contacting — what type of business does this advisor usually do? If their website speaks a great deal about their wealth management services and doesn’t say anything about hourly consultations, that should be a good clue. If the advisor’s website doesn’t make it clear, you can check their Form ADV II. (When researching an RIA, checking this document is a good idea anyway.) Or, you can always call the advisor, telling them very explicitly what services you are and are not interested in, and asking if they would be a good fit.

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