Looking for Quality ETFs

Comments on “The Individual Investor’s Guide to the Top ETFs 2022,” by AAII Staff, in the February 2022 AAII Journal:

The variation on the standard disclaimer after the four exchange-traded fund (ETF) tables in this article says, “While past performance is no indication of future performance, it may attest to the quality and consistency of fund management.” To this point, starting with John Bogle and Charles Ellis, research has consistently found that actively managed funds do not outperform the underlying indexes while passively managed ETFs provide considerable advantages to lower the cost of buying, holding and selling funds. Thus, the key factors in screening ETFs are lower costs and relative performance.
—Barry J. from Texas

Young investors are very lucky to have low-expense-ratio index ETFs. It makes investing much easier and less expensive than when I was young. Maybe I should say that ALL of us are lucky to have such ETFs.
—Robert A. from North Carolina

Diversifying Using Asset Class Groups

Comments on “Asset Class Group Performance: Large Caps Lead in 2021,” by Charles Rotblut, CFA, in Dispatches in the February 2022 AAII Journal:

If one’s goal is “above-average” performance, then the chart shows pretty conclusively that, at least for the last 10 years, stocks (especially domestic stocks and large caps) are almost always above the median and bonds are almost always below. Emerging markets stocks are a more mixed bag, but more often below the median. Based on this limited time frame, and if investing for anything more than the short term, the simple message would appear to be: “Buy domestic large-cap stocks.” It would be interesting to see the trends for longer time periods.
—James H. from Minnesota

Since the modern portfolio management process was invented, financial advisers have recommended that investors 1) diversify their allocations between equities and fixed-income funds in proportion to their goals, lifestyle and risk tolerance, and 2) use a mix of funds to tailor exposure to volatility because different asset classes have low correlations, i.e., fixed-income funds perform better when equities perform worse. The chart supports that theory. For example, in 2015 and 2018, fixed-income funds performed better than equities, while in the other eight of 10 years equities trounced fixed income. The seven funds in each row could be used to create a portfolio tailored to an investor’s risk profile.
—Barry J. from Texas

Retirement Spending

Comments on “Personal Consumption Rates After Retirement,” by Adam Scheg, in Dispatches in the February 2022 AAII Journal:

At some point, we will stop flying and sell our airplane, and perhaps later we will stop using our RV and sell it. Whether the recreational pursuits that follow will be more or less expensive is hard to say. If I look at our current health limitations, and what is likely to come with aging, it seems to be common sense that personal consumption must decline. However, if we were to continue to cultivate generosity, perhaps the redirection of “fun” money to charitable causes might keep things on par. I’m reminded of this John Newton quote: “Our work is great; our time is short; the consequences of our labors are infinite.”
—Stephen P. from Georgia

This pattern of declining expenditures is in line with my observation of my parents and in-laws. First go-go, then slow-go and finally no-go.
—John L. from New Jersey

The Health and Retirement Studies are extremely detailed expenditure reports prepared annually by the survey’s participants. But who maintains this detailed spending information? Frugal people do, not spendthrifts. Think about the people you know. If the person spends like there is no tomorrow, how likely are their records to be detailed and accurate enough to be able to fill out these very detailed questionnaires annually?

Those who then analyze the surveys and conclude that retirees spend less in retirement fail on multiple accounts. They do not get a good cross section of spendthrift behavior, only frugal behavior, and they compound this error by reporting the average results, which erroneously claim that the average represents retirees en masse.

It would help if those who use these studies recognize that they are dealing with a subset of retirees that doesn’t reflect the vast number of Americans: those who do not track their spending and therefore do not participate in these studies.
—James S. from Colorado