Choosing Retirement Funds

Comments on “Retirement Allocation Comparison With Vanguard Funds,” by Craig L. Israelsen, Ph.D., in the April 2022 AAII Journal:

There are two other advantages of the investor being able to choose which individual fund(s) are used for each distribution when they have created their portfolio of funds. One is that the investor avoids the additional management expense that a fund of funds always charges. The second is that the investor can choose the funds in which they invest. In my experience, the brokerage (or other) that creates/markets a fund of funds will use their own company’s individual funds inside the fund of funds, even when there can be other better, but similar, funds available.
—Steven H. from California

Which Vanguard funds are included in the 7 Vanguard Fund Portfolio custom portfolios with two different portfolio models: a 40% equity/60% fixed-income portfolio and a 65% equity/35% fixed-income portfolio?
—James C. from Wisconsin

Craig Israelsen responds:
The key point of this article is that allocating a retirement portfolio across multiple funds is a wiser approach that focusing on a single fund, even though it may be an excellent fund (such as Vanguard STAR). There are many good “multi-fund” combinations. That said, the seven funds in this analysis were VMFXX, VWINX, VGSTX, VHT, VGT, VB and VINEX.

Stock Trait Evaluation

Comment on “What Traits Do Individual Investors Consider When Buying Stocks?,” by AAII Staff, in the April 2022 AAII Journal:

Assessing a company’s long-term prospects requires a deeper dive than focusing on fundamental metrics. In my experience, you have to look much more closely at the long-term future macro and micro risks of a company.

Getting a sense of management performance on responding to those risks and the associated past capital allocation is equally, if not more, important regarding a company’s prospects and its stability. One only has to look at managements’ failed past performances to understand risks and their associated squandered capital expenditures resulting in shareholder erosion to understand the importance of equally focusing on the track record of management and their response to risks.
—Al B. from Illinois

Pains Are Worth the Gains

Comments on “The Pains and Gains of Investing,” by Paul Merriman, in the April 2022 AAII Journal:

To me, risk is the probability of permanent loss of value, and a reasonable level of diversification practically eliminates it. I take as a given that my assets are going to suffer a 50% decline from their present value at some point in the future. But I also take as a given that my assets will not stay down. If history can be counted on, stocks will eventually come back and continue rising. I do not consider the 50% drop to be a risk factor; it’s just the nature of investing, markets and the economy in general.

Portfolio C had the biggest drawdown of all the portfolios (60.8%), yet its long-term gains were greatest, turning $10,000 into almost $9.5 million over 50 years. This is the sort of example I use to try to educate my children about investing and staying the course.

I hope the average loss for Portfolio C in Table 3 is a typo!
—Robert A. from North Carolina

I see no reference to rebalancing allocations. Were these portfolios rebalanced? At what interval? It seems to me that the point in time chosen to rebalance could affect performance going forward. Is that the case?
—Wilfred K. from Oregon

Paul Merriman responds:
Robert, the average loss for Portfolio C in Table 3 should be 10.9%. Thanks for the help. [Editor’s Note: The correction has been made online.] One of my goals for 2022 is to write an article and record a podcast on the topic, “All Equities All the Time,” even if it is only done with a portion of a portfolio.

Wilfred, the portfolios were rebalanced annually. We have other tables that reflect monthly rebalancing and, as expected, the returns were lower. Later this year we hope to look at the decision to rebalance every couple of years or not at all.

Mark Your Calendars

Comments on “11 Key Retirement Dates You Should Pay Attention To,” by Charles Rotblut, CFA, in the April 2022 AAII Journal:

Another age to remember is 70½. At this age, individuals can make a qualified charitable distribution (QCD) from an IRA.
—Mark R. from Arizona

Here is a really important date for children and grandchildren: the first day you begin working and have earned income and can begin contributing to an IRA. Obviously, the first day on a real job is not a retirement date, but 50 usually isn’t either. It’s a retirement planning date. So now we have 12 important retirement planning dates, the first roughly 30 years before the second.
—James W. from Illinois