More on Brokers

Comments on “Online Discount Brokers: Comparing and Contrasting the Older and the New,” by AAII Staff, in the March 2022 AAII Journal:

Disappointed not to see Zacks Trade included. Do any members have experience with this broker? I heard their margin rate is cheaper than the big boys.
—Andrew M. from Texas

I believe investors would want to know if a brokerage receives payment for order flow. Some brokers publicly communicate to investors that they don’t receive it, such as Fidelity. Many do receive it, like Robinhood. Please include in the table whether a broker receives payment for order flow when routing buy/sell orders so investors know if brokers are doing all they can to get the best available price.
—Steven H. from California

Addendum to Broker Guide—Wealthfront Merger:
In late January 2022, UBS reached an agreement to purchase Wealthfront. According to UBS, Wealthfront’s existing clients “will see no immediate change.” In the future, Wealthfront clients will have access to UBS’ products and services, though no specifics have been given. The merger is expected to close “in the second half of 2022.”

Active Versus Passive

Comments on “Be a Wiser Investor Than the Crowd,” by Brian Haughey, CFA, FRM, CAIA, in the March 2022 AAII Journal:

John Bogle’s formulation is still the most persuasive and requires only grade school arithmetic. If you subtract out the holdings invested in the broad indexes, you are left with what constitutes the aggregate holdings of active investors. The latter have their returns reduced by costs of management, trading, research, increased tax drag and behavioral finance mistakes. Those who hold the index incur little to no investment cost and lower taxes, as well as seemingly being less susceptible to behavioral error. So the returns of the investments held by active and passive investors as a whole are equal.
—Richard V. from California

Brian Haughey responds:
Richard, it’s not that simple. The average investor has some advantages over professional investors, who are constrained by an investment policy statement. Many purportedly active funds are simply closet indexers, so it’s no surprise that they underperform, net of fees. Meanwhile, as more investors move into index funds, the market becomes less efficient as those stocks become more overpriced and other stocks tend to become comparatively underpriced. An index fund will offer returns close to the index, but investors who truly have an advantage—behavioral or otherwise—can outperform.

Withdrawal Strategies

Comments on “A New Perspective on Withdrawal and Allocation Strategies for Retirees,” an interview with Wade D. Pfau, Ph.D., CFA, RICP, in the March 2022 AAII Journal:

It’s important when discussing alternative retirement withdrawal strategies to include required minimum distributions (RMDs) from IRA/401(k) tax-deferred plans. The IRS RMD tables are a form of taking a percentage from the prior year-end balance, with the twist that the percent itself increases each year even if the money withdrawn is reduced due to lower prior year-end balances. Either way, you have to live with the RMD amounts and the only control you have is to reduce spending.
—Richard S. from Arizona

None of these articles discuss my plan, which is to withdraw no more than 4% of the previous year’s ending portfolio value with no inflation adjustment while keeping 100% of my assets in equities. Unless the market drops more than 96% (something that has never happened) and I keep withdrawing money, my portfolio can never go to zero.
—Robert A. from North Carolina

Wade Pfau responds:
Robert, you are describing what I call the “constant percentage” strategy. It creates the most volatility for spending but removes sequence risk entirely. Most other variable spending strategies seek to find compromise between constant percentages and constant amounts as the two extremes of the spending spectrum. If you are comfortable using this rule, especially with Social Security as an underlying floor, it is a viable strategy.

Rebalancing in Retirement

Comment on “The Importance of Rebalancing for Retirees and Other Investors,” by Charles Rotblut, CFA, in the March 2022 AAII Journal:

When modeling withdrawals, “buy and hold” is clearly a misnomer; it’s better to distinguish between complete rebalancing and the partial rebalancing that withdrawal affords. A reasonable approach to partial rebalancing would be to withdraw from each holding in proportion to its excess value over its target allocation of the total remaining after withdrawal.
—D.K. from California