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May, 2018

AN ALTERNATIVE VIEW
by LARRY

While I have often suggested that when markets are high one is well served to keep a substantial portion of liquid assets in reserve, for instance in money market accounts, to take advantage of the bargains one can then buy when the next big drop occurs, another approach is recommended in a recent American Association of Individual Investors (AAII) essay, "Coming Out Ahead by Doing Less," by Charles Rotblut, CFA, AAII Editor, in AAII.com; May 3, 2018. He advocates a more or less 100% invested at all times method, but keeping to just 5 tried and true mutual funds, all from Vanguard, an investment company that focuses on keeping costs and fees very low.


His picks are:

  1. Vanguard S&P 500 Index Fund, Admiral Shares (VFIAX);
  2. Vanguard FTSE All-World ex-U.S. Small-Cap Fund, Admiral Shares (VFSVX);
  3. Vanguard Intermediate-Term Investment Grade Bond Index Fund, Admiral Shares (VFIDX);
  4. Vanguard Real Estate Index Fund, Admiral Shares (VGSLX); and
  5. Vanguard Small-Cap Value Fund, Admiral Shares (VSIAX).


These funds all have equivalent Investor Shares funds with slightly higher fees but allowing a lower initial investment. I believe the Admiral Shares require a minimum start purchase of $10,000 (except for VFIDX, which I think insists on a $50,000 first investment), whereas it is $3000 for the Investor Shares versions. All such details can be checked out at Vanguard, for which the phone number is: 877-320-3099. They can also be reached online at: vanguard.com.


Mr. Rotblut simply puts 20% of his funds into each of the above assets, with income and capital gains reinvested, then, over time as the markets raise or lower their allocation levels, rebalances the funds as needed to keep them within 15-25% each of the entire portfolio's total. A year or so may go by before he needs to change a thing.

He describes the advantages of his technique as allowing him to do very little to keep things well managed, avoiding the potential mistakes of doing too much, having a well balanced set of funds that generally do not all move up or down at the same time or rate, so that his portfolio withstands downturns better than the market as a whole, and yet allowing for the easy accumulation of wealth. I think funds are automatically taken out of his pay for a 403(b) tax-deferred account (like a 401-k), then distributed equally to the five funds per his pre-set plan.





Financial instruments like these, going back several decades, have on average and when combined provided about a 10% a year average total return, independent of new amounts that might be added later by him or matched by his employer. However, since those later amounts are put into his funds on a dollar-cost-average basis, for instance in similar amounts and once a month or quarter, more shares of each fund are bought when the market prices are lower, reducing their cost bases. The effect can on average increase an investor's total return to typically 11.5-12.5% a year.

Someone who begins an investment strategy near the beginning of his or her career need not worry about making large numbers of investment decisions if an automatic and simple strategy such as Mr. Rotblut's is set up early. In fact, it turns out that those who manage their investments a great deal usually do less well. The problem, as Mr. Rotblut points out, is that the more decisions there are to make, the larger the chance that one will make expensive errors along the way.



A roughly 10% per average year portfolio total return, enhanced then by dollar-cost-average contributions to closer to a 12% mean annual gain and with few other choices along the way, may seem a rather mediocre method and rate of return. After all, there are those in the investment services world who claim returns for their clients of 15-20%. However, many of us turn out to not be as good investors as we think we are. And few if any services really produce such gains, long-term. By making too many little and large mistakes, the majority do not even come close to matching the market's profitability. On the other hand, though there are no guarantees, with a straightforward method and a roughly 12% return, an investor who starts with a total of $15,000 ($3000 in each of five funds), adds in another $10,000 annually in tax-deferred accounts, and does not take funds out till required minimum distributions are called for, in one's seventies, would over a 30-year career invest a total of around $315,000 and could well wind up with over $2,860,000 (per investor.gov). Not bad for a simple, low-maintenance plan. If folks also increase annual contributions when they receive raises or promotions, so much the better!


DISCLAIMER

Larry is not a professional. Don't take him seriously!

Actually, the investment article provided here is for general information only and should not be considered as professional advice, a solicitation to buy or sell any security, or the Word of God. Investors are encouraged to do their own research while considering their personal goals and circumstances, or consult their own professional financial advisors, before making investment decisions. Neither Larry nor LARVALBUG will be liable for any losses sustained by any visitor to this site.

(Disclosure statement: Larry and Val have holdings in some of the suggested assets but do not "make a market" in any of them and do not derive any direct benefit from recommending them, except perhaps for a bit of smug self-satisfaction.)



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