Archives for June 2017

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Investing Blog Roundup: No Investor is Fully Passive

On occasion, investors take the “low-cost index funds are good, high-cost actively managed funds are bad” lesson and go a bit overboard with it. I see this periodically in reader emails when a person is considering some particular (thoroughly reasonable) investment decision, but they’re worried that it might “count as active investing.”

As Morningstar’s John Rekenthaler points out this week, we’re all following active strategies, to some degree, with our asset allocation choices. And nobody should necessarily want to be absolutely passive.

Other Money-Related Articles

Thanks for reading!

Stop Reading This Blog.

Admittedly I don’t mean for the headline to apply to every reader. But I don’t mean for it to be just “clickbait” either. I genuinely mean that some of you would be better off unsubscribing from this blog/newsletter.

That probably requires a bit of an explanation.

When I started writing this blog in 2008, the whole idea (i.e., “oblivious” investing) was that:

  1. Most people should stop reading/watching financial news, because such sources of information talk constantly about things that have no real significance to a long-term investor, and
  2. Most people shouldn’t check their investments very often, because doing so can cause unnecessary stress about short-term fluctuations.

What I’m coming to realize, however, is that there’s a group of people who would be well served by discontinuing their intake of even “good” sources of investing information (e.g., this blog, the Bogleheads forum, etc.).

Specifically, based on correspondence with readers, I’m coming to realize that there are some people (quite a lot, actually) who find themselves second-guessing their own investment decisions whenever they’re confronted with a conflicting suggestion from a credible source. This personal characteristic combined with frequent intake of investment information can lead to a problematic situation.

In short, if:

  1. You’re already at a point where you know enough to create and manage a low-cost, diversified portfolio that’s roughly suitable for your risk tolerance, and
  2. Reading about investing is making it harder to manage that portfolio (because it makes you constantly doubt your choices)

…then additional reading might be doing more harm than good. (Plus, reading has a cost in that it’s taking up your time.) Of course, the above two points are an evaluation that only you can make. But it’s worth thinking about at least.

One of the most important lessons in investing is that there is no “perfect” portfolio, but there are many “perfectly fine” portfolios. Once you are confident that you have a “perfectly fine” portfolio, just stick with the plan and let the portfolio do what it is meant to do.

Investing Blog Roundup: Why Do Advisors Struggle to Make Simple Portfolios?

In Monday’s article, I offhandedly mentioned that advisors tend to create complex portfolios for clients. Coincidentally, Allan Roth has an article out this week exploring the reasons (both good and bad) for the complexity we often see in portfolios created by advisors.

Investing Articles

Other Money-Related Articles

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Pick Your Own Asset Allocation

A reader writes in (regarding last month’s article about “total market” investing):

“Your article made me feel much more comfortable with my market-cap weighted portfolio!

However, after reading your email, a news story came out about Wealthfront. Burton Malkiel has written extensively about the merits of market-cap weightings. He and Charlie Ellis helped me build my simple portfolio!

However, it just came out that Malkiel is ignoring his own advice, and has decided to add smart beta ETFs to Wealthfront portfolios. This is a crushing blow. It seems more and more of my favorite investing authors are abandoning the plain vanilla portfolios they have written about for decades, and instead are embracing momentum, value, and small stock overweights in hopes of beating the market.

I am trying very hard to keep it simple and stay the course. But it seems we are losing members of the plain vanilla club every day! Losing Malkiel and Ellis was not fun for me to read about this morning.”

Firstly, advisory firms (including robo-advisors) have an incentive to make their portfolios look smart/complicated. If it’s a simple total market portfolio, people might wonder: why not just handle it on their own? Or why not just use a less expensive target-date fund?

The more important point, however, is that there are no clubs or teams here. It doesn’t work to weigh the names on one side of an asset allocation debate against the names on the other side.

Ultimately you have to weigh the evidence and arguments on each side of the debate and then decide for yourself.

If you decide based on the names on each side, it will always be a struggle to stick with the plan, because on any asset allocation debate there will be experts — credible ones — who disagree with you, regardless of which side of the debate you’re on. And they’ll have convincing-sounding arguments and data backing them up.

For instance on the topic of bonds, several parties I respect greatly have made different arguments.

Personally I would find it impossible to weigh the credibility of one of those parties against the credibility of the others.

In addition, if you decide based on names, you always have to revisit your portfolio decisions whenever a) an expert changes opinion or b) you encounter a new expert with an opinion on the matter.

Conversely, once you’ve made the decision for yourself, you can put it out of your mind and move on with your life.

Reading a new expert opinion or reading about an expert changing their opinion should be roughly as impactful as reading a list of “Top 10 Cities for [People of Your Generation]” in a magazine. Even if your town isn’t on the list, you don’t consider moving. You’ve already made an informed decision, so the writer’s opinion has no impact on where you choose to live.

In short, with any asset allocation decision, regardless of what you end up choosing, the goal is to take your time with the decision, so that ultimately it’s your decision, and you can be confident/content regardless of who agrees or disagrees with you.

Investing Blog Roundup: Creating a Retirement Policy Statement

As we’ve discussed here many times, saving/investing for retirement doesn’t have to be complicated. For most people, a very simple portfolio — even an “all in one” fund — is a perfectly good choice. Managing a portfolio in retirement, however, can be rather more complicated. And of course the portfolio is just a part of the overall financial picture.

This week, Christine Benz of Morningstar discusses creating a retirement policy statement — a short document detailing how you plan to manage your retirement portfolio, as well as a few critical related pieces of information (e.g., planned age at retirement, annual income from other sources, etc.).

Other Money-Related Articles

Thanks for reading!

Don’t Forget About Disability Insurance

A fundamental principle of financial planning is that insurance comes first. If you don’t have the proper insurance, you can do everything else exactly right — save a large percentage of your income, invest that savings wisely, engage in excellent tax planning, etc. — and still end up financially ruined if you find yourself on the unlucky side of a large uninsured risk.

Of course, you don’t need every type of insurance. For example, if there is nobody else who is financially dependent upon you — as would be the case for many people with no children — you most likely have no need for life insurance.

But if you have a job, there’s a good chance you are dependent upon the income from that job — and therefore have a significant need for disability insurance.

A 2014 “actuarial note” from the SSA estimated that, for a person who reached age 20 in 2013, there is only a 6.5% chance of dying prior to full retirement age but a 27% chance of becoming disabled prior to full retirement age.

And the above estimate uses the SSA’s definition of disabled, which states that you must be unable “to do any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months.” There are plenty of people who incur injury or illness that meaningfully reduces their income yet who do not qualify for Social Security disability benefits.

In addition to being difficult to qualify for, Social Security disability isn’t particularly generous in terms of amount paid. You can get an estimate of what your Social Security disability benefits would be (if you became disabled right now) by signing into your online account. The average monthly Social Security disability benefit is $1,172. That’s a heck of a lot better than nothing, but even with other forms of government assistance, we’re talking about a serious financial struggle in most cases.

So how many people actually have private disability insurance? Last year an article by Stuart Heckman in the Journal of Financial Planning looked at the 2013 Survey of Consumer Finances from the Federal Reserve Board to answer that question (and many other related questions). Heckman found that only 30% of households had private disability insurance (i.e., insurance beyond that provided by Social Security). Interestingly, he also found that people who use a financial planner are not significantly more likely to own disability insurance.

My overall point here is just to provide a basic reminder: don’t forget to consider disability insurance. Do you have it? If not, should you?

If you do end up shopping for disability insurance, you should know that there’s a lot of variation from one policy to another. This Bogleheads wiki article provides a brief explanation of the most important considerations.

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