Model Mutual Fund Portfolio

Regarding “Model Mutual Fund and ETF Portfolios: Value and Small Stocks Impact Returns” by James B. Cloonan in the March 2012 AAII Journal: Near the end of the article, there is a recommendation to hold a minimum of four different mutual funds. This recommendation runs counter to research by Richard A. Ferri, who points out in “The Power of Passive Investing” (John Wiley & Sons, 2010) that “The more bets that an investor makes on actively managed funds the lower their probability for outperforming the markets.”

The second point I would make is that the Vanguard 500 Index fund (VFINX) is an inappropriate benchmark, considering that the portfolio holds five mid-cap funds and two small-cap funds. While not a perfect benchmark, the Vanguard Total Stock Market Index fund (VTSMX) would be an improvement.

Lowell Herr

James Cloonan responds:

Thank you for your comments. I agree that VFINX is not a benchmark. I think of it as an indication of any advantage, not just of the relative performance of the funds selected, but of the impact of allocation into different areas as opposed to just using the popular S&P 500 approach. See my column in this issue for more on this topic.

I assume you are referring to Chapter 6 of Ferri’s book in your first comment. My interpretation is that additional funds in any one area (large, small, value, growth) reduce the chance of beating the index of that area. I did not intend to suggest that holding four funds in the same area was necessary, but that some diversification between categories was desirable.

Avoiding Inheritance Conflict

Comments posted to “18 Recommendations for Minimizing Inheritance Conflict” by P. Mark Accettura, in the April 2012 AAII Journal:

Having practiced probate and estate law for over 30 years before retirement, I agree with most of your suggestions. However, the idea of appointing co-fiduciaries or a committee as fiduciaries is an invitation to disaster. If the siblings can’t get along when one is appointed, having co-fiduciaries, particularly an even number of them, will only create insurmountable problems.

Harold from Colorado

I think it is better to tell your children what is in your will so they will know what to expect upon your death. This will avoid conflict among the children, as they can discuss what they might consider unfair in the will. I also think it is a good to ask each child if there are any of your personal items that they would like to have, so that distribution can discussed in an open fashion before it is stated in the will.

Michael from Maryland

The Bucket Strategy for Retirement Spending

Comments posted to “Comparing a Bucket Strategy and a Systematic Withdrawal Strategy” by Noelle E. Fox, in the April 2012 AAII Journal:

I think of buckets in a slightly different way: Each represents the source of funds for that particular period of time. This causes me to think about required minimum distributions, Social Security, rental income, dividends, etc., in terms of how each contributes to the income I will need over time. I have not thought so much in terms of the buckets flowing from one to the next, but rather of each providing for retirement at a given point in time—kind of like separate retirements. In general, I do find the idea of buckets to be a bit liberating in that I can have a long- and short-term focus and include riskier assets in my longer-term thinking.

Charlie from Washington

With all due respect to the author and to the concept of buckets, I find it hard to accept the bucket strategy as a credible or reliable way to fund what may be 30–40 years of withdrawals. The main reason for not buying into this strategy is very simple. The rates of return on all buckets are variable and subject to the whims of the stock market and completely out of my control. Retirement is completely about income replacement. My income in retirement has to be there. Most likely, once my wife and I quit working, there will be no going back, so I am not going to assume that the market is going to give me some nebulous rate of return.

David from Maryland