Archives for April 2018

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Investing Blog Roundup: Saving on Health Care Costs

Health care is a major budget item for most of us. Unfortunately, as health care consumers we’re not in a very good position to be cost-conscious shoppers. We often do not have information about prices, we often do not have the information necessary to evaluate how important a recommended treatment is, and the person making the recommendation is generally not considering cost as a part of the analysis.

Still, given how much we spend on health care, it’s worth making an effort to be sensitive to costs. Emergency physician Jim Dahle recently shared some tips on how to do so.

Other Recommended Reading

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Retirement Planning Roadmap (Also, Two Books Updated for 2018)

A quick bit of news for today: the 2018 editions of my book about sole proprietor taxes and my LLC vs. S-Corp vs. C-Corp book are now available. Each book now reflects the new 2018 tax law (including the new deduction for pass-through business income, among other things).

So, of the six books that needed updates to reflect 2018 tax law, five are now finished. (Can I Retire? is the one that is still in the works.)

I recently came across a new publication from Vanguard Research, which they are calling their “Roadmap to Financial Security.” In short, it’s a how-to guide to actually creating a retirement plan.

If you’re working with a financial planner for your retirement planning, presumably they have a process of their own. But for people taking a DIY approach to retirement planning, Vanguard’s paper does a good job of laying out an explicit process for creating a plan.

Specifically, it’s a four-step process, with an aim at achieving financial security, which they define as “the peace of mind that results when retirees feel confident that they will attain all of their financial goals and be able to continue doing so in the future.”

Step one is to determine retirement goals. They make a point of noting that for most people there’s not a single goal of “retirement,” but rather four separate categories of goals — basic living expenses, contingency reserve, discretionary expenses, and legacy funding — the magnitude and importance of which will vary from one person to another.

Step two is to understand the risks. They describe five major risk categories: market risk, health risk, longevity and mortality risk, event risk (i.e., major unplanned expenses), and tax and policy risk. Again, the significance of each will vary from one person to another — as will the solutions selected to manage those risks.

Step three is to assess the available financial resources, such as guaranteed income (e.g., pension, Social Security, lifetime annuity), liquid assets, and other resources (e.g., insurance, home equity, work).

And step four is to develop a plan to achieve goals and mitigate risks. This is the step where you bring everything together (i.e., where you actually determine how to deploy those resources to best achieve your goals in the face of the relevant risks).

I like it. It’s nothing fancy (and nothing super detailed), but it’s clear and easy to follow. You’re essentially building a retirement balance sheet. On one side you have the liabilities that you will have to fund (i.e., the goals you intend to pay for). On the other side, you have your financial resources. And you take the time to consider risks — both risks to those resources as well as risks that might increase the size of the liabilities.

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Investing Blog Roundup: Credit Card Signatures to Become Extinct

I use a credit card for nearly every purchase I make. Over the last several years, I’ve appreciated not having to provide a signature for smaller purchases. It appears that in the near future though, signatures will often be unnecessary even for larger purchases.

Other Recommended Reading

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Are Most Investors Better Off with All-In-One Funds?

A reader writes in, asking:

“Investing includes an emotional and psychological component for many individuals. One can suggest a portfolio with proper allocation, but to maintain it, especially with major changes in the stock or bond market may be a difficult matter to actually implement. Would some or most investors be better off with a fund such as a Vanguard Life Strategy Fund with an appropriate allocation rather than the individual components, given that those all in one funds appear to avoid both the euphoric highs, as well as the depressing lows of individual funds?”

If we’re assuming there’s no difference in original allocation (i.e., the person would start off holding either the LifeStrategy fund or an identical allocation via individual index funds), then the upside of an all-in-one fund is that it’s easier to stick with the allocation plan. That has certainly been my personal experience since switching to a LifeStrategy fund 6 years ago, and I have heard from many people over the last several years who have had similar experiences. Conversely, to date I have never heard from anybody who switched to an all-in-one fund and found it harder to stay the course afterward.

Part of this is due to what the reader above mentioned — the fact that an all-in-one fund somewhat camouflages the volatility of the higher-risk holdings by combining them with lower-risk holdings.

Part of it is also due to the simple fact that, with an all-in-one fund, you know everything is taken care of, so you don’t sign in to your account as often. And if you aren’t signed in to your account, you’re obviously not making any changes.

I have also heard a few people say that they found it easier to stick with an all-in-one fund because they knew that the allocation had been designed by a professional. (Though presumably such a benefit would also accrue to people using live advisors or robo-advisors.)

In other words, I’m very confident that many people have an easier time sticking with their portfolio when it consists of an all-in-one fund rather than a DIY selection of funds. And Morningstar’s data on “investor returns” seems to indicate that such ease of implementation does in fact lead to better results, on average. (See this recent study or this article from 2015, for example.)

Of course, all-in-one funds do have some downsides relative to an identical allocation via individual funds. Specifically:

  1. They have slightly higher expense ratios than individual index funds, and
  2. They can cause inefficiencies to arise when other accounts are involved.

For example, all-in-one funds are tax-inefficient if the portfolio includes a taxable brokerage account. Or, if one of the accounts involved is a 401(k) in which there’s only one asset class with a low-cost fund, it may be possible to significantly reduce overall costs by picking that one fund and filling in the rest of the desired allocation elsewhere. Such a plan would be disrupted by the use of an all-in-one fund.

But if we change the original question slightly and we remove the assumption that the DIY investor uses the same underlying initial asset allocation, then I think it’s very clear that most people are better served by an all-in-one fund than by a self-created, self-managed portfolio. Many people who build their own portfolios end up with a mess — overlapping funds, dangerously high allocations to a single stock, funds selected purely on 5-year performance figures, etc.

Most all-in-one funds are going to be quite a bit better than that.

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