Investing in Funds

Comments on AAII Mutual Fund and ETF Guides, in the February 2021 AAII Journal:

The February 2021 issue on mutual funds and exchange-traded funds (ETFs) is particularly valuable. But it fails to warn readers about a very large difference between mutual funds and ETFs—restrictions on trading frequency.

I regularly use three of the larger fund families for my holdings, and they all carry what I consider to be draconian restrictions on the movements of mutual fund holdings, while none restrict ETF holdings. I have found restrictions ranging from one to three months after a given trade has occurred, and some freeze the account for six months if you violate their perceptions of frequent trading.
—Lou Floyd from Ohio

The editors respond:
Mutual fund companies may set such restrictions or charge a redemption fee if a minimal holding period is not met to discourage frequent trading. Read the prospectus or contact the fund company if you have concerns about trading restrictions on a given mutual fund.

Risk-Averse Strategies

Comments on “How Much Risk Can You Handle and Still Meet Your Goals?,” by Charles Rotblut, CFA, in the March 2021 AAII Journal:

I have wondered for some time if a retired investor is better off with a portfolio of 100% high-performance funds and just accepts that some years the funds will be worth less. The funds would grow at a much faster rate that would more than make up for the downturns. I guess that the return over the years would exceed that of a portfolio made of, say, 40% bonds and 60% stocks. It would be interesting to study the impact of such an investment assuming that the person withdraws the required minimum distribution (RMD) each year.
—Fred Sotcher from California

Charles Rotblut responds:
Fred, the challenge for many investors is not being able to set their emotions aside. The human mind has evolved to be both reactive and risk averse.

As far as portfolio withdrawals and allocations are concerned, I’ve run numbers using inflation-adjusted withdrawal rates. There is less chance of running out of money before death if there is some allocation to bonds. What the success/failure rates don’t show, however, is that a retiree can end up with far more wealth by using a more aggressive allocation during periods when the portfolio doesn’t fail.

You can see my data in these two AAII Journal articles: “Revisiting the Risks of Retirement Spending Rules,” November 2018; and “Five Major Considerations for Early Retirement,” June 2019.

Finding the Right Asset Allocation

Comments on “There’s More to Portfolio Returns Than the Numbers,” by Paul Merriman, in the April 2021 AAII Journal:

The lifetime investment percentage was very revealing. I am an old math teacher with four children. I had almost no extra monthly money until age 51. I hate the very low rates that bond funds earn. Now I am 71, what percent (approximately) of my portfolio should optimally be in each of the investment categories: stocks, bonds, life insurance, gold, silver, real estate, cash?
—Don J. from Colorado

Regarding Don’s comment, I also wonder about the cash/bond allocation recommendation given today’s low rates and expectations for the Federal Reserve to keep them low for some time. Of course, it is possible for rates to go lower or even negative, so any positive rate would be more desirable. I suppose today’s extremely low rates are an elephant in the room.

Merriman’s articles are always excellent, and I greatly appreciate them.
—Gregory D. from Tennessee

Paul Merriman responds:
Don, I have made my choices very clearly in a series of articles. The challenge is for you to understand what I believe are the best equity asset classes and match that to your own set of biases. In the equity part of your portfolio, I believe in a combination of large, small, value, growth, U.S. and international equity asset classes. The amount of fixed income is determined by whatever your glide path (moving from equity to fixed income) might be. In my free book, “101 Investment Decisions Guaranteed to Change Your Financial Future,” the entire appendix is devoted to 10 different glide paths. Visit paulmerriman.com for the free copy.

Gregory, my wife and I keep all of our “cash” in a Vanguard short-term investment-grade bond fund. Yes, we take a very small chance of having a small loss, but the longer-term gains are worth it. Over the last 10 years, the fund compounded at 2.5% and didn’t suffer a losing year. So far this year it is down 0.2%. For the portion of the portfolio that uses bonds as a stabilizing asset class, we use 50% intermediate bonds, 30% short-term bonds and 20% Treasury inflation-protected securities (TIPs). All these bonds are U.S. government bond-based funds.