Dear friends,

Welcome to the New Year. May it be blessed and joyful, full of mirth and mischief (really, what’s life without a bit of mischief?) for us all.

As I finish this essay on New Year’s Eve Day, the stock market is handing out returns with the enthusiasm (and responsibility) of a politician handing out tax cuts or a central banker handing out liquidity boosts. The Vanguard Total Stock Market Index (VTSMX) stands to end the year with a 30% gain.

Heck, it was almost impossible not to make good money this year. Take the case of a hypothetical investor (we’ll call him “Dave”) who starts by randomly deciding to split his investments evenly between US stocks, international stocks, bonds, and cash. And let’s further assume that Dave, being Dave, manages to sink his money into the worst performing domestic stock category (small value) and the worst-performing international (frontier markets) and worst bond (GNMA) and worst money market (national munis) categories. Our sad sack surrogate would still have made more than 10% gains this year.

In a normal world, returns from stocks are a combination of:

• • growth in corporate earnings (roughly zero in 2019) plus
  • dividends (about 1.7%) plus
  • the rate of inflation (2.1%) plus
  • the lunacy of other investors (if the fundamentals justify a 4% rise and the market delivers a 30% rise, lunacy necessarily accounts for 26% of the market’s gain).

Those seeking a term less judgmental than “lunacy” use “animal spirits.” Fair enough. Lyn Alden gave a fair illustration of how spirited animals might become, which she illustrated with the case of Apple and its stock:

Apple’s earnings were flat in 2019, with zero growth. Their phone sales were sluggish, which was partially offset by an increase in service revenue.

Flat earnings, zero growth, sluggish sales, stagnant product lines, glitch products, a rising suspicion that users need to be trapped in the Apple ecosystem to keep them loyal … all surely justifies the 86% rise in Apple’s stock price this year.

US corporate earnings, goosed by tax cuts and Fed interventions, have risen only 35% over the past decade, in which dividends and inflation are stuck at 2%. Meanwhile, the US stock market (measured by the rise of the Total Stock Market Index fund) has risen 241%. Neil Irwin of the New York Times frets about the implications of that past profligacy on our future returns.

But the interesting thing about this current moment in markets is that the prices of different assets look reasonable relative to one another while looking absurdly overvalued relative to those of decades past.

The buoyant stock market makes perfect sense in a world of very low long-term interest rates. The risk is not that one asset ends up being a bubble, but that all of them are.

Yet there’s nothing new about that risk. It has been the reality for the better part of the last decade, reflecting long-building, powerful forces. Market developments in 2019 suggest that they’re not going away in the foreseeable future; instead, it seems that’s just how the world is going to be.

All of which means we should enjoy our big market gains now — because they are essentially presaging a gloomy, even if not disastrous, economic decade to come. (Your Portfolio Is Probably Doing Great. That’s Bad News for the Future, 11/27/2019)

The Power of Click-Bait

In order to parody click-bait journalism and encourage folks to take winter refuge in more sensible pursuits (we suggested read books that are a bit off the beaten path), we wrote a click-bait article title: Reduce your 2020 risks by 50% with this one move!

Within 24 hours, it became the most-read article in MFO history. Here’s the readership data from Google Analytics, showing readers for our most popular and second-most popular articles:

Yep. Nine times as many page-views for the click-bait as for anything else. Our best guess is that computers scan the internet for click-bait, then dispatch fleets of drones to descend and “scrape” the article for some unknown use. 27,000 “readers” on Day One, about 1,000 readers combined between Days 2 and 30.

That explains the continuing flood of bad articles. We argued that you should step away from your keyboard for the three winter months, read books, clear and reset your brain, engage with family. That’s not, we argued, an indulgence. It’s a necessity if you want to enjoy life and avoid making a series of horrendous decisions driven by bad “analysis” and “journalism” that pours from your screen onto the floor.

At base, these article writers must take speculation and present it as certainty. Their confidence buys your attention. That’s painfully illustrated by at least five December headlines announcing the imminence of a stock market collapse: 50% or so, maybe starting in January.

How do they know that?

They don’t.

Why do they say that?

It sells.

Will the market crash? Likely, at some point. Since we don’t know when, why, by how much or for how long, we continue to offer the same guidance:

• • Focus on your real needs, not on the “beat the market” game
  • Take no more risk than you need to meet your objectives
  • Know how much risk you’re taking
  • Remember that cheap, passive, market-weighted funds thrive in rising markets, but suffer in falling ones
  • Entrust your money to managers only if you understand what they’re doing with your money, they have demonstrated the ability to manage risk intelligently and they invest alongside you.
  • Then go enjoy life. Go for a walk and leave your phone behind. (Can you remember growing up where that advice would have been nonsense since phones were … well, phones and securely wired to the wall? Can you imagine how terrified most people would be at the very thought of venturing without that tether in their pockets now?) Make dinner for people you love. Rearrange the living room. Call your mom. Plant a tree. Compliment a stranger. Read a book. Smile, ponder, grow.

We’ve written guides and essays on pretty much all of the investment-related reflections above, and we’ll keep at it.

Celebrating the faith of friends, family and the MFO community

A number of folks this winter expressed a heartwarming, yet nearly inexplicable, faith in my ability to learn.

To you all, thanks and thanks again!

Thanks, too, to the good folks at Long/Short Advisors who shared a pail of delicious cookies. They didn’t survive long enough to make the picture.

Celebrating a world that’s better than we recognize

Yes, I know (climate crisis, political crisis, social media crisis, inequality crisis) and no, I’m not (crazy, Pollyanna).

There’s an interesting paradox; most Americans think our country is moving in the wrong direction, and we’ve consistently believed that – through Republican and Democrat governments – since about the turn of the century. Before then, opinions varied. At the same time, the vast majority of Americans think things are pretty good in their own lives, and that’s been consistently true for decades.

Source: Gallup, Satisfaction with Personal Life (2019)

Here’s one possible resolution to the paradox: our life satisfaction is driven by what we directly experience, our social dissatisfaction is driven by what we’re told. Often enough, the sources of the disturbing news are people who directly benefit from our anxiety, either because it causes us to elect their candidates, fund their organizations or read their prose.

I’ll offer two minor start-of-year heresies for your consideration:

1. 1. outrage is good – it means that we’re not utterly complacent and can, under the best of conditions, set the stage for uniting to address problems.
   2. the sources of our outrage need to be kept in perspective – if we believe that all is chaos, we become attuned to seeing even more chaos, despair and lapse into complaint and inaction. Think of the post-WW1 poets, such as William B. Yeats:

Turning and turning in the widening gyre  

The falcon cannot hear the falconer;

Things fall apart; the centre cannot hold;

Mere anarchy is loosed upon the world,

The blood-dimmed tide is loosed, and everywhere

The ceremony of innocence is drowned;

The best lack all conviction, while the worst

Are full of passionate intensity. (The Second Coming, 1920)

That’s really not productive. And so I asked some folks, mostly smarter than myself, and stumbled across some others, uniformly smarter than me, “what do you see beyond the darkness?”

Tadas Viskanta, Huge gains have been made to alleviate poverty and disease

Tadas is the Director of Investor Education at Ritholtz Wealth Management and publisher since 2005 of the renowned Abnormal Returns which, daily, strives to bring “the best of the finance and investment blogosphere to its readers” through thoughtfully curated links and occasional snark.

You are absolutely right that we need some antidote to all of the bad news One trend I have seen over the past few years is that “good news’ has become a bit of a growth industry. The amazing thing is that the vast majority of people do not see or recognize the huge gains that have been made to alleviate poverty and disease over the past few decades. We, humans, are resourceful creatures. If you leave aside existential threats (for now), humans will adjust. Even when it is a painful thing to do.

Being a master of the links, Tadas offered five. “This Matthew Ridley piece has gotten a lot of play.” (Mr. Ridley is a member of the British House of Lords, gadfly and author of The Rational Optimist. He describes himself as “a climate lukewarmer.”) Other resources for folks seeking a counterweight to pessimism are the Arbutus Foundation’s Reasons to Be Cheerful blog and Oxford University’s “Our World in Data: Research and data to make progress against the world’s largest problems.” Folks looking to add to their book stack might consider Hans Rosling, Factfulness: Ten Reasons We’re Wrong About the World–and Why Things Are Better Than You Think (2018) or Steven Pinker’s Enlightenment Now: The Case for Reason, Science, Humanism and Progress (2019).

It’s interesting to me that the conservative Mr. Ridley’s piece is, in many ways, echoed by the liberal Mr. Kristof’s.

Nicholas Kristof, 2019 has been the best year ever

For humanity overall, life just keeps getting better.

Photo courtesy of the Wikimedia Commons

Nicholas Kristof is an American journalist and political commentator. A winner of two Pulitzer Prizes, he is a regular CNN contributor and has written an op-ed column for The New York Times since November 2001. Kristof describes himself as “a progressive.” His essay, “This Has Been the Best Year Ever” appeared in the New York Times on December 29, 2019.

If you’re depressed by the state of the world, let me toss out an idea: In the long arc of human history, 2019 has been the best year ever.

The bad things that you fret about are true. But it’s also true that since modern humans emerged about 200,000 years ago, 2019 was probably the year in which children were least likely to die, adults were least likely to be illiterate and people were least likely to suffer excruciating and disfiguring diseases.

But … but … but President Trump! But climate change! War in Yemen! Starvation in Venezuela! Risk of nuclear war with North Korea. …

All those are important concerns, and that’s why I write about them regularly. Yet I fear that the news media and the humanitarian world focus so relentlessly on the bad news that we leave the public believing that every trend is going in the wrong direction. A majority of Americans say in polls that the share of the world population living in poverty is increasing — yet one of the trends of the last 50 years has been a huge reduction in global poverty.

The proportion of the world’s population subsisting on about $2 a day or less has dropped by more than 75 percent in less than four decades.

 “Three things are true at the same time,” argues Max Roser, a research director in economics at the University of Oxford. “The world is much better, the world is awful, the world can be much better.”

I also take heart from the passion so many — especially young people — show to make the world a better place.”

Mr. Kristof’s final point provides a segue to …

Sarah Jackson, Twitter makes us better

Photo courtesy of Annenberg School of Communication

Sarah J. Jackson is a Presidential Associate Professor at the Annenberg School of Communication, at the University of Pennsylvania. (It’s my academic field, I can affirm that an appointment at Annenberg is a big honkin’ deal.) Her forthcoming book Hashtag Activism: Networks of Race and Gender Justice (MIT Press 2020) focuses on the use of Twitter in contemporary social movements. The essay from which this is excerpted appeared as “Twitter made us better,” New York Times, 12/27/2019.

It’s impossible to avoid news about how harmful social media can be …ubiquitous Russian bots …privacy violations, election meddling, and harassment.

Despite it all, the way we use Twitter made this decade better.

Rightful critiques of social media, and Twitter, in particular, shouldn’t obscure the significance of the conversations that have happened there over the past 10 years. As we enter 2020, powerful individuals and societal problems can no longer avoid public scrutiny. The online activism and commentary that take place on Twitter are often dismissed as expressions of “cancel culture” or “woke culture.” But a closer look reveals what’s really happening: Many people who lacked public platforms 10 years ago — the young and members of marginalized groups in particular — are speaking up, insisting on being heard.

Like all technological tools, Twitter can be exploited for evil and harnessed for good. Just as the printing press was used to publish content that argued fervently for slavery, it was also used by abolitionists to make the case for manumission. Just as radio and television were used to stir up the fervor of McCarthyism, they were also used to undermine it. Twitter has fallen short in many ways. But this decade, it helped ordinary people change our world.

Mitchell Baker not only (sort of) agrees but runs a global foundation to keep it going.

Mitchell Baker, people are speaking up and speaking out

Mitchell Baker is Chairwoman of Mozilla, the not-for-profit parent of the Firefox internet suite. This excerpt is from a December 2019 letter to Mozilla supporters.

As 2019 ends, I want to come to you with a message of hope. The world today — both online and off — has felt a bit daunting this year.

Which is why I want to tell you there is hope — lots and lots of hope — in the world today. Every day, I see more people speaking up and speaking out to demand change. Every day I see the media doing a better job of holding our big tech company friends to account. Every day I see my friends and colleagues here at Mozilla show up with a growing passion to keep up the fight for good in technology.

Yes, there are problems online and in the world, we must fix — misinformation seeps into too much of our lives, our privacy rights are constantly under attack, the bias in algorithms harms the most vulnerable. Mozilla exists to fight these problems. That is why I care so much about our work and our mission for good. Because at the end of the day, it is up to us to make a change.

When people who care step up with action, that is when change happens. And I see so many of you stepping up. Just think: when Mozilla shipped our first browser — Firefox 1.0 — in 2004, we did it with just 902 staff and volunteer contributors. As of last year, there are more than 15,000 people around the world helping bring Mozilla’s mission to life, the vast majority of those volunteers. This is why I have hope.

A recurrent thread seems to be the recognition that while we (uhhh … those of us subject to the taunt “okay, Boomer”) have let things get seriously awry, our children, inheritors of the problem, seem determined to face it.

Lewis Braham, Millennials take climate science seriously

Lewis Braham is a distinguished financial journalist, author of The House that Bogle Built: How John Bogle and Vanguard Reinvented the Mutual Fund Industry (2011), and a contributor to MFO’s discussion community.

I would say there have been some positive developments in science, particularly in the realm of quantum computing, in the treatments of certain diseases and in the discovery of a living — once thought extinct— giant squid. You can see many interesting discoveries here,

These positive developments, however, must be taken in context with the devastating and increasingly accurate discoveries regarding climate change and the failure of world governments to take them seriously enough. One interesting and I regard as positive change is some millennials are opting not to have children or only have one child because of climate change concerns. Ultimately classical economists would see this as bad news, but such population control is actually good for the planet. So I see it as good news. Millennials take climate science seriously. I’m not sure if this helps but I hope it does and that you have an excellent new year.

A.K. Sandoval-Strausz, Latino immigrants have saved the American city

Photo courtesy of Hachette Book Group

K. Sandoval-Strausz is director of the Latinx studies program and associate professor of history at Penn State University. He’s the author of Hotel: An American History (2007) and Barrio America: How Latino Immigrants Saved the American City (2019). Dr. Sandoval-Strausz’s work was featured on a Marketplace podcast, 12/26/2019.

Considering the severity of the urban crisis, it is hardly surprising that few people expected the recovery that was already taking hold by the mid-1990s — but interestingly, everyone seemed to agree that cities had been saved by people with lots of money … But they overlooked the indispensable role played by Latina and Latino migrants and immigrants, who had started to repopulate and revive declining neighborhoods at least two decades before the “back to-the-city” movement became a significant trend among prosperous and mostly white Anglo professionals. Hispanic newcomers to U.S. cities were more numerous than the returning yuppies.

Over the course of half a century, Latino migrants and immigrants revitalized the cities of the United States, saving scores of neighborhoods from abandonment and replenishing the population in many places that would otherwise have continued to empty out. Their earnings and expenditures served as a form of large-scale urban reinvestment. As workers, they powered metropolitan economies by performing essential labor at countless offices, construction sites, restaurants, day cares, farms, hotels, and homes, while also allowing thousands of manufacturing firms to keep production in the United States rather than moving jobs overseas. As tenants and homeowners, they made distressed residential real estate viable again by renting, maintaining, and renovating countless houses and apartment buildings. As entrepreneurs and customers, they opened local businesses and served as a clientele for revived inner-city commerce, bringing activity and energy back to once-hushed streets and sidewalks. In fiscal terms, their economic activity produced a rebound in sales tax receipts, property tax revenues, and utility payments, adding billions of dollars to once-strapped city budgets, allowing municipalities to pay teachers, maintenance workers, firefighters, and police officers — though the proceeds of these greater revenues were not necessarily spent in the neighborhoods that these newcomers had done so much to improve. Immigrants also helped reverse the crime wave of the 1970s and 1980s and make cities safer than at any time since the 1950s. In sum, they helped remedy a profound national crisis that most observers thought was hopeless.

And elsewhere, coffee!

Research published in the European Journal of Epidemiology (2019) concluded that drinking as little as two cups of coffee a day can increase your life expectancy by up to two years. That’s based on what’s called a “meta-analysis” of 40 other published studies who drew from the experiences of 3.9 million subjects.

Two cups, two years? The path to immortality might lie before me!

Thanks and thanks and thanks!

Thanks to folks who’ve shared books, cookies, kind words, and inspiration.

Thanks to the 249,393 folks who came by in 2019, sharing part of their year with us as we share as much help as we can offer. Thanks, most especially, to the 2,997 of you who are registered members of the discussion board, an active, snappy crowd.

Thanks to the many folks who stepped up to help us meet the terms of our two modest matching grants in December. Challenge One sought five new members. Charles reports that, as of December 30, we have 20 new members. That’s the best single month in a long, long time and we celebrate the growing recognition of MFO Premium’s value. Challenge Two sought $500 to unrestricted contributions. We received two contributions that each, alone, would more than cover the challenge along with a bunch of non-Premium contributions ranging from $10 – 100. We’re deeply grateful for them all.

Not to name names, but we’d like to recognize folks who sent checks this month: Jon V from Gig Harbor (lovely town and a lovely place to enjoy your retirement), Carlyn of Seattle, Richard, Kevin, Rad (we’re so glad to be helpful!), the good folks at S&F Investments (mug #3 is in the mail!), Sharon (we appreciate your continued support!), Rick (we’re happy you enjoy the Premium site),  Sheila, the Ellie and Dan Fund, and several anonymous donors. Through our PayPal link we heard from Jeroen, John, Sunny (a Happy New Year to you, as well!), William from Arcadia (thanks for the vote of confidence!), Vincent (we’re glad you keep coming back!), Barry (you’re an ace!), Robert G, Raymond, the estimable Victoria Odinotska (who, on November 30^th, “celebrated 30th anniversary of my landing at the shores of United States (in JFK to be precise) with two suitcases and a $100 in my pocket to start a new life.  I have been living a miracle of a life!” A million cheers, Victoria, happy tears and warm hugs), Edwin, Michael, Joseph, Dale, Altaf, Jason, Cynthia, and Charles.

As always, to our loyal subscribers, Greg, the two Williams, James, Matthew, Brian, Joseph, Seshadri, David, and Doug.

And, finally, to Ted “The Linkster” Didesch (1937-2019). We’ll miss you, sir.

Joyfully,

When I first started writing regularly about funds and investing, it was as an analyst for FundAlarm, a site whose publisher proclaimed

Our view of the mutual fund industry is slightly off-center. We help you decide when it’s time to sell a fund, instead of when it’s time to buy. The mutual fund industry is full of broken promises, arrogance, greed, hypocrisy — the list goes on. We try to shine a light in the darker corners, and poke holes in balloons that could use some poking.

In honoring that heritage, we routinely publish a roll call of the wretched, funds that have distinguished themselves by their inability to rise even to the level of honorable mediocrity.

The flip side of that equate are the funds that have achieved outstanding returns without sacrificing protection in falling markets. We’ll identify those funds by using the inverse of the roll call of the wretched methodology:

instead of starting with Three Alarm funds (those that have trailed at least 80% of the peers over the past 1, 3 and 5 year periods), we start with Honor Roll funds (those that have beaten at least 80% of the peers over the past 1, 3 and 5 year periods).

we’ll still use four different measures of downside risk –downside deviation, down month deviation, bear month deviation –

Using the tools at MFO Premium, we’ve identified the 10 best equity-oriented funds of the past decade based on each of three different downside measures.

Lowest 10-year downside deviation

Downside deviation can be thought of “day-to-day downside.” It measures only downward variation; specifically, it measures a fund’s return below the risk-free rate of return, which is the 90-day T-Bill rate (aka cash). Downside deviation doesn’t worry about how the stock market is doing, it just identifies funds which – in any market – return less than money in a savings account would.

Lowest 10-year down market deviation

Down market deviation can be thought of as “the downside in any sort of declining market.” Pure downside deviation includes only fund returns less than zero. Basically, DMDEV indicates the typical annualized percentage decline based only on a fund’s performance during negative market months. So, if the market drops by even 0.1% in a month, we report how each fund did and then project it over 12 months.

Lowest 10-year bear market deviation

Bear market deviation can be thought of as “the downside in a seriously declining market.” Basically, bear market deviation indicates the typical annualized percentage decline based only on a fund’s performance during bear market months. For equity-oriented funds, a bear market month is one in which the market declined by 3% or more in 30 days.

Let’s step back and assess what we’ve done and what we’ve discovered. What we did was:

Step One: identify funds with top tier returns over the last 1, 3 and 5 years – the FundAlarm Honor Roll

Step Two: from among those funds, identify the ones that has subjected their investors to the smallest routine trips and falls (downside deviation), the smallest trips and falls in months where the market was tripping and falling (down market deviation) and the smallest trips and falls in months where the market was falling hard (bear market deviation).

What we found was that the same funds appeared over and over. Apparently, the discipline that limits small, day-to-day trips also points toward funds that protect in far more serious declines. Here, then, is a very short list of very good funds. Each appeared on all three lists. Funds in blue are designated as MFO Great Owl funds, funds that have delivered top quintile risk-adjusted returns, based on Martin Ratio, in its category for evaluation periods of 3, 5, 10, and 20 years.

Akre Focus AKREX

FAM Dividend Focus FAMEX

First Trust Value Line Dividend Index FVD

Madison Investors MINVX

Nuveen Santa Barbara Dividend Growth NSBRX

Parnassus Core Equity PRBLX

Vanguard Dividend Appreciation Index ETF VIG

Vanguard Dividend Growth VDIGX

WisdomTree US LargeCap Dividend DLN

Bottom line: as we’ve found before, dividends matter and quality matters, most especially to investors who are less obsessed about shooting for the stars and more concerned about sustainable gains in good times and manageable losses in bad ones. We commend our profiles of Akre Focus and FAM Dividend Focus (formerly FAM Equity Income) to you, but admit the Parnassus Core Equity has an amazing array of attractions from its long-term ESG focus, stable team, huge insider ownership, and first-rate risk-return profile.

On 9 December 2019, the longest-tenured member of the MFO Discussion Board passed away. Theodore J. Didesch, universally known as “Ted” though he dearly wished for the sobriquet “The Linkster,” died of congestive heart failure.

We mourn his passing even as we celebrate his life. I’d like to share a few words about Ted, interspersed with the comments left by other members of our community on a memorial thread.

FundAlarm launched its “moderated Bulletin Board” in 1998. Ted arrived shortly thereafter. The records of that version of the board are lost now but the Internet Archive’s Wayback Machine first began capturing records of the FundAlarm board in late 2001. And when we look at the first captured page, there was Ted.

For the past 19 years or so, Ted’s daily ritual – almost his devotional – was to rise by 5:00 a.m., set the coffee to brewing, boot up his computer and search the internet for useful story leads. Coffee at hand, he’d spend the hour finding and posting links. He’d return later in the day to see what conversation he’d provoked and to poke the people who vexed him.

There was rather a lot of the latter, then and for the decades that followed.

Mark: Yes we scuffled but all families do. RIP Ted.

Hank: In celebration of Ted – As most here probably know, we were often at odds over the years. He sometimes labeled me “the Trump Basher” (not meant as a compliment) and I often responded in kind – occasionally to excess. Ted was a worthy opponent in any kind of tussle.

But I am so fortunate to say that our last exchange was both cordial and one I will forever cherish as my lasting memory of Ted. It was little more than a month ago, November 12, that I found myself whiling away the hours during a lengthy layover at Chicago O’Hare. I posted some innocuous comment on the board and mentioned my whereabouts. Hours later when I got back home in Michigan and logged-in, there was a warm “Hank: Welcome to The Windy City” from Ted. And he followed it with a smiley emoticon. While Ted frequently used emoticons, readers will recall that he was quite stingy with the smiley ones.:) So I am doubly fortunate to have had the wisdom of his long presence here and also to have had such a memorable and pleasant final exchange to remember him by.

In broad terms, 7,300 days have passed since Ted first started posting. I’ve been around for most of them. To my knowledge, Ted took one sabbatical – he briefly attempted to retire, but it was making him crazy – and, otherwise, missed only about 20 days of posting.

Simon: His eagerness to look out for us all was unstoppable and I will miss (and am already missing) his breakfast briefings in particular. He was a one-man CNBC. Cheers, Ted.

Ted’s last posts to the board came on November 28; not a farewell, not a personal note or complaint, just a full list of stories to follow. His very last, “M*: A Well-Built Balanced Fund for Retirees: (TRRIX).” Few of his sparring partners knew of his illness, none knew of its gravity or could have guessed the imminence of his departure.

That last post was #32,279 for him at MFO. At FundAlarm, he hit 32,000 and was determined to surpass that at his new home online.

And he did. His wife, Lynn, shared with us a bit about her husband.

I am so sorry it took me so long to write you. I’m not that computer savvy and I could not figure out how to get on the MFO site.

I can’t begin to tell you how much I appreciate all of your kindness to me. The flowers you sent were so lovely and the transcript from your discussion about Ted meant so much to my son and me.

Ted loved being a part of the Mutual Fund Observer. He would spend hours doing whatever it was he did. I was never quite sure what he was doing but I know it gave him great pleasure. He had his coffee every morning out of his Mutual Fund Observer mug while he was happily tapping away on his computer.

Thank you so much for everything you have done. It does not seem enough to just say thank you, but I do thank you very, very much.

Sincerely,

Lynn

I share the sentiment, Lynn. It does not seem enough just to say thank you, but thank you, Ted. In your memory, I planted a tree (an oak, renowned for longevity, hardness and the ability to absorb lightning strikes without failing) and posted a link.

The stream of characters on a screen can touch a heart, just as surely the words that flow from the poet or novelist. The daily routine of checking in, seeing familiar names, watching the predictable sparring, can create meaning. It can create a space that’s important, and a community – perhaps a family – that’s very different from our physical ones but no less meaningful.

Anna: Christmas at MFO without Ted pulls at my heart. So long, Linkster, I’ll miss you, your leadership, and your banters.

VirtueRunsDeep: I share so many of the same feelings already expressed here. One thing I will add, is that Ted’s presence through his many posts (he was a force on MFO, to be sure), his presence is a reminder of how we can be connected to people we never meet in person, how we can make virtual-relationships and impressions because of the internet and places like MFO. It’s a reminder (for me) that what we do — even online — might matter. In honor of Ted, I’d like to thank so many of you here who I have read through the years, the ways you’ve challenged me to do more and better financial research, to think about investments (not just money, but investments in people) as an ongoing lifelong experience. Thanks to all. And to Ted: peace.

I’ll leave the closing thought to STB65, whose conclusions I share:

STB65: I want to add my condolences on Ted’s passing. His multiple postings almost always had something of value among them, and flat days were never truly flat. I suspect the site will be a bit smaller, unless others step up their postings of relevant articles and columns. Ted looked at multiple sources for his articles and I don’t know if anyone really will replace him.

The road goes on, but the company of travelers is diminished.

Ah, Rules Based Investing, the magic elixir to investing success! It is the answer to the gloomy conclusions of both behavioral finance scholars and Pogo. Guys with PhDs have taken reams of paper and thousands of hours of computing time to document what Pogo knew 50 years ago: in the search for the source of our problems, we rarely need to look much past our mirrors. Our impulsiveness, fits of greed and spasms of fear, overconfidence, and hesitance, sabotage our portfolios. Rules-based investing attempts to take the emotion out of our decisions by laying out a series of simple triggers and mechanical responses: for a simple example, if the S&P 500 does X, you do Y.

Look up Rules Based Investing on the internet and you find companies wanting to manage your money – to sell you something – a service or a subscription. Rules Based Investing is often associated with quantitative trading such as Smart Beta funds – funds that apply rules faster and more efficiently than you can. Few of these funds have been stress tested during hard times. These rules are usually oriented toward investors who trade frequently. I briefly cover my Investment Model and Ranking System at the start of this article.

While I do use a rules based system for picking funds and making allocations, I am going to look at a broader set of issues over the next several columns. I’ll argue in favor of six rules of investing that I describe are more about rules for lifetime investing. In this month’s essay I’m going to:

1. 1. lay out the six rules that I’ll be talking with you about
   2. review the current financial environment and the funds fit to it, and,
   3. explain the importance of developing a financial plan, Rule #1.

I’ll close by offering some resources for developing a financial plan.

Let’s go!

Six Rules of Investing

These are a broader set of rules that are more important to follow. Below are the most important rules of investing for the individual investor. The topics are broad that I will write these as a series of articles. The goals are inter-related, making financial planning a continuous process that should be done over a lifetime.

Rule #1: Develop a Financial Plan

Rule #2: Know the Short and Long Term Investment Environment

Rule #3: Manage Risk First

Rule #4: Invest Appropriate for the Business Cycle and Long Term Trends

Rule #5: Understand the Impact of Taxes on Investments

Rule #6: Develop a Simple Investment Process Based on Rules and Guidelines

THE INVESTMENT ENVIRONMENT AND FIT FUNDS

Few people understand was “the long run” actually means when we talk about “stocks for the long run.” The chart below was a surprise to me when I first saw one like it about 15 years ago. It is the inflation-adjusted stock market prices. It took 25 years for stock prices to permanently rise above the level of 1960 when adjusted for inflation. Valuations and inflation have a major impact on long term investing.

FIGURE #1: Inflation-Adjusted Stock Returns

Source: Created by the author based on St. Louis Fed Reserve (FRED) & S&P Dow Jones Indices

The next chart is equally descriptive. It shows the inflation-adjusted 10 year Treasury rate. Inflation-adjusted savings have typically been above 2.5% for most of the past 70 years, but have been very low since the 2007 recession. Note that with inflation rising and bond rates dropping, real interest rates are near zero when adjusted for inflation. This is something that has only occurred three other times in the past 70 years.

FIGURE #2: Inflation-Adjusted 10 Year Treasury Rates

Source: Created by the author based on St. Louis Fed Reserve (FRED) & S&P Dow Jones Indices

As a result of low stock and bond returns and longer lives, companies have shifted responsibility for funding retirement from themselves to their employees; that is, from defined benefit company pension plans to the defined contribution plans. The responsibility for managing one’s retirement is increasingly shifted to individuals in a landscape with increasing complexity, more choices, and higher risk.

In short, “getting it right” is getting both more challenging and more important.

Review of Investment Environment

The Investment Environment has begun to improve, but risks and valuations remain elevated. Bonds are no longer benefiting from falling rates. Fund investors continue to reduce equity holdings in favor of municipal bond funds, in particular. Stock buybacks are supporting the equity markets but that support is declining. As someone nearing retirement, my preference, in this environment, is to hold stock allocations at conservative levels. Below is my Investment Model. The red shaded area suggests that investors should remain conservative, but the dashed blue line shows that the investment environment is improving.

FIGURE #3: Investment Environment

Source: Created by the Author

Investing according to the business cycle is about managing risk. Figure #4 below from Fidelity shows a conceptual impact of the strategy. An investor takes less risk in the late stage of the business cycle and loses less during bear markets which leaves him better prepared for the recovery stage.

FIGURE #4: Conceptual Results of Investing According to the Business Cycle

Source: Fidelity

Several investment advisers suggest that there is the possibility of higher inflation and a weakening dollar related to higher budget deficits and falling rates. The impact is that gold and commodities may do well. I monitor but don’t react until I see trends developing.

Review of November Funds

An investor should be able to summarize his or her investment strategy on a napkin. Here is my rules based system. Each month, I extract about a thousand funds from the Lipper database using the Mutual Fund Observer screens. The funds are ranked based on momentum, risk, risk-adjusted returns, yield, and quality factors. The top funds are grouped into four buckets based on risk and additional buckets for inflation, commodities, income, global bonds, global stocks, and defense. I follow Benjamin Graham’s guidelines of never having more than 75% in stocks nor less than 25%. To be diversified, I own funds from at least six of the buckets.

Risks in the economy are related to global negative yields, high budget and debt levels high valuations, the potential for interest rates to rise, weakening dollar, and inflation potential. I have adjusted the Ranking System to better account for these risks. The top-ranked Objectives and funds are shown in Tables #1 and #2. The Bear column refers to the average category performance during the past two recessions.

It is noteworthy that the bond funds in Bucket #2 have had negative returns over the past three months. Bucket #3 (balanced, income, Healthcare, and flexible portfolios) is where I prefer to be concentrated at this time. For Bucket #4, I think it is too early to move into growth funds and prefer Equity Income. I prefer quality debt but do own corporate bond funds. It is also interesting to note that the Global Equity Funds lie between Buckets #3 and #4 for risk (Ulcer Index) and Risk Adjusted Returns (Martin Ratio). I believe that this is due to the high budget deficits, falling interest rates, and higher valuations in the U.S. It is a trend worth monitoring.

For diversity, I like international income funds and global real estate. Top Ranked value, equity core, and income have returned about 8% over the past three months compared to 6% for low volatility funds.

TABLE #1: Top Ranked Lipper Objectives

Source: Created by the Author based on Mutual Fund Observer

TABLE #2: Top Ranked Funds for Top Ranked Lipper Objectives

Source: Created by the Author based on Mutual Fund Observer

I selected two funds from each bucket and set up Portfolio Visualizer to select one or more funds from each of the buckets excluding commodities and to assign allocations. The link to Portfolio Visualizer can be found here. The resulting portfolio is shown using MFO Portfolio since June 2018. The Portfolio is rated “Conservative” (MFO Risk = 2). The Ulcer Index (length and duration of drawdown) is low (less than 1). The Martin Ratio (risk-adjusted return) is high (10.2). Overall the returns were 10.1% annualized with a maximum drawdown of less than 3%. Some of the rules built into my Ranking System are evident from the results (Momentum, Risk, Risk-Adjusted Returns, Momentum, Yield, and Quality). Age and Fund Family Rating are part of the Quality Index and are used to ensure a proven track record. The Great Owl Classification is part of my Ranking System. Another rule that I use is to restrict sector funds, riskier funds, and Closed End Funds to 5% allocation per fund or less. The yield for the portfolio is 3.0%.

TABLE #3: Model Portfolio

Source: Created by the Author based on Mutual Fund Observer

Figure #5 shows the performance of this portfolio since January 2018. The portfolio performed well in 2018 being defensive, and well in 2019 due to falling rates and the rebound in equities. How will funds perform in 2020? Will they behave more like 2018 or 2019? I have no crystal ball but build my portfolio based on the anticipation of low market returns with high volatility.

FIGURE #5: Performance of Model Portfolio

Source: Portfolio Visualizer

Figure #6 is the efficient frontier for the funds in the portfolio for the time period starting January 2018. The Blackrock Muni Assets Fund (MUA) is a closed end fund with a yield of 4.5%. Closed end funds typically have higher volatility. The funds in the lower-left corner are the low risk, low reward funds in Bucket #1. As the funds move to the upper right they become higher volatility, higher reward.

FIGURE #6: Efficient Frontier of Model Portfolio

Source: Portfolio Visualizer

I have done an end of year rebalance from intermediate bonds and equities to short-term bonds and money market funds. I expect a run of the mill correction in 2020 and use model portfolios as shopping baskets of funds to buy when the next correction occurs.

RULE #1: DEVELOP A FINANCIAL PLAN

My first exposure to financial planning was about a decade ago when I read Retire Secure!: A Guide To Getting The Most Out Of What You’ve Got by James Lange. I developed two habits inspired by the book. I developed a lifetime budget complete with expenses, estimated returns, and inflation. I also switched contributions to my Roth 401k because earnings will grow tax-free as long as I have them and heirs can inherit them without paying taxes.

Later, I started using the Fidelity Retirement Tool which takes into account pensions and retirement dates, social security, inflation and market conditions. Plans should have a margin of safety built into them for inflation, health care costs, longevity, and market volatility. I talked over the results with a Fidelity advisor and moved funds from my employer-sponsored account into a traditional IRA which has more funds available to choose from.

Following simple rules of retirement planning such as starting early, building up to a savings rate of 15% of your income or more, maintaining emergency funds, having enough insurance, keeping debt low, and investing appropriately will allow many people to have a more secure retirement.

The first rule is “Develop a Financial Plan”. It is the basis for knowing how much risk you need to take and the required savings rate to reach your goals.

Partnering with a financial adviser who is well versed in all of the rules, regulations, options, and opportunities facing you makes much more sense than trying to educate yourself from the ground up.

From The 5 Years Before You Retire: Retirement Planning When You Need It the Most (2014) by Emily Guy Birken.

Once you have established your Personal Principles, it is then time to move on to setting your goals. Without goads, life is lived at the behest of a collection of circumstances.

The Ultimate Financial Plan, Jim Stovall and Tim Maurer

Having a disciplined financial plan is a short term sacrifice for long term gains. Just as important, it provides an investor with options to afford to change to more enjoyable work, to go back to school, to buy that house as well as financial security to get through hard times. There are many advantages to developing a financial plan. First, it educates people on how much it takes to retire and hopefully develops a disciplined approach to saving. Secondly, it helps people develop disciplined plans for investing. Thirdly, it can provide a long term view on how to manage risk and taxes.

Developing and reviewing a lifetime financial plan has proven very beneficial to me. It answers many questions but raises even more. I read books about retirement and estate planning, and talk annually with a financial planner. I have built up pensions and will be taking an annuity instead of lump-sum buy out. I am deferring social security partly for the higher payout, but more as another source of insurance for my wife. My wife and/or I are covered with life, health, and/or longevity insurance. In this article, I review some of the factors I have reviewed preparing for my own retirement, as well as some of the things that I still need to consider.

People should save 15% of their income over their lifetimes in order to meet retirement needs, but most fall short of this amount. Saving for retirement should begin as early as possible in life even though starting salary may be relatively low and starting a new career and family take precedence. Saving for many of us is a choice. The old adage to “pay yourself first” means to prioritize a savings plan. If investors save automatically then they are more likely to have enough saved for retirement and emergencies. Sacrificing now benefits the saver as those savings continue to grow with compound interest.

What Help Is Available?

I like the quote below from 10 Best Robo-Advisors of 2020 in which the author recommends that if one does use a robo-adviser that you do also use a professional.

“Disclaimer: Our content is intended to be for informational purposes only and should not be understood as financial advice. We recommend that you consult a professional that can help you achieve your goals when making life’s important financial decisions.”

There are many sources available for getting help in developing a financial plan. A good place to start researching financial plans is with these three Consumer Reports. Finding advisers to meet general planning advice, insurance and estate planning, or tax expertise read What Do the Letters after a Financial Adviser’s Name Really Mean? If you are trying to decide if you want a robo-adviser, human adviser, or a hybrid system take the survey in Find the Adviser That Suits Your Style. If you are looking for a highly rated company or service then Investment Company Guide provides some insights but is a teaser to subscribe to Consumer Reports.

Many of us are locked into one or more investment companies because they manage our employer-sponsored savings plans. I have been with Charles Schwab, Fidelity, and Vanguard for up to 35 years. They each have their strengths. For this article, I looked at the advisory services at Vanguard, Fidelity and Charles Schwab. As one gets older, accumulates more or experiences life’s challenges, he or she may want to consider financial advisory services or managed accounts. Here is a good review of managed accounts at Fidelity and Charles Schwab by Brokerage-Review.com. Smart asset profiles investment companies in Fidelity Wealth Management Review, Vanguard Personal Advisor Services Review, and Charles Schwab Wealth Management Review.

Resources for Developing a Financial Plan

The AARP Retirement Survival Guide, Julie Jason

Tax-Free Retirement (2017), Patrick Kelley

The 5 Years Before You Retire, Emily Guy Birken

IRAs, 401(k)s, & Other Retirement Plans – Taking Your Money Out (2006), by Twila Slesnick, Ph.D. & Attorney John C. Suttle, CPA

The Ultimate Financial Plan, by Jim Stovall and Tim Maurer

Retire Secure!: A Guide To Getting The Most Out Of What You’ve Got, James Lange

What Should I Do with My 401k?: Should I Buy an Annuity?, Tim Clairmont

Closing

I like to manage my own investments using Mutual Fund Observer Premium and other tools. I know my strengths and weaknesses and seek help in financial planning. As I enter retirement, I will continue to experiment with the services described in this article.

I wish everyone a happy and prosperous new year!!!

Disclaimer

I am not an economist nor an investment professional. I became interested in economic forecasting and modeling in 2007 when a mortgage loan officer told me that there was a huge financial crisis coming. There were signs of financial stress if you knew where to look. I have read dozens of books on business cycles since then. Discovering the rich database at the St. Louis Federal Reserve (FRED) provides most of the data to create an Investment Model. The tools at Mutual Fund Observer provide the means for implementing and validating the Investment Model.

By Ira Artman, December 2019

Do we pay attention to the competitive environment? Absolutely. Are we reactive to what one competitor does? Absolutely not…

Investors always have to ask themselves when they see an offering like this [zero fee expense ratio mutual funds], ‘What’s the catch?”‘ The question becomes what else are investors going to be charged in other products? …

Greg Davis, Vanguard CIO

That’s what Vanguard CIO Greg Davis said in August 2018, immediately following Fidelity’s announcement that it would offer no-fee index funds.

Within a month, Fidelity’s new zero-fee funds had taken in nearly $1 billion in assets. By August month-end:

• The Fidelity Zero Total Market Index fund grew to $753.5 million in assets under management; and
• The Fidelity Zero International Index fund attracted $234.2 million.

Three months later, on 19 Nov 2018, Vanguard “hit back” at Fidelity’s zero-fee funds and cut the minimum initial investments needed to access 38 of its cheap Admiral share fund classes from $10,000 to $3,000.

Vanguard also said:

• It had closed the more expensive Investor share classes of those index funds to new investors and expects to roll over all existing money in Investor shares of the funds to Admiral shares by April of 2019.
• It estimated that these moves were expected to deliver an estimated [annual] $71 million in aggregate savings, for investors that rolled their money over to the cheaper Admiral shares.

What Vanguard did not say was that – for investors in its own LifeStrategy funds – Vanguard did not yet have an answer to the questions posed by its CIO —“What’s the catch? … What else are investors going to be charged in other products?”

As summarized on the Bogleheads wiki, the Vanguard LifeStrategy Funds are lifecycle offerings, providing investors with a variety of highly diversified all-in-one portfolios. The products are structured as funds-of-funds, charging only weighted averages of the expense ratios associated with the underlying index funds. The LifeStrategy funds have a fixed target asset allocation.

There are four LifeStrategy Funds – Income, Conservative Growth, Moderate Growth, and Growth. The funds were started by Vanguard twenty-five years ago, in 1994. Each fund invests in other Vanguard index funds – See FIGURE 1, below. The Vanguard Index Funds, in turn, invest in the broad US Bond Market, International Bond Market, US Stock Market, and International Stock Market.

The LifeStrategy Funds offer investors static portfolios with consistent risk profiles:

• Income Fund: 20% stocks/80% bonds
• Conservative Growth Fund: 40% stocks/60% bonds
• Moderate Growth Fund: 60% stocks/40% bonds
• Growth Fund: 80% stocks/20% bonds

The LifeStrategy Funds are large funds. The smallest, Income Fund, has total assets of $4.7 billion, while the largest Moderate Growth Fund has total assets of $17.6 billion. Collectively, the aggregate assets of the four Vanguard LifeStrategy Funds total $49.2 billion, as of Dec 2019.

The four LifeStrategy funds invest in the Investor Share classes of each of the following four index funds – VTBIX (US Bonds), VTIBX (International Bonds), VTSMX (US Stocks), and VGSTX (International Stocks). FIGURE 2, below, summarizes the symbols used to access these funds, as well as their respective expense ratios and total assets under management (or AUM).

The expense ratios of the four Investor class funds range from 17 bps for the Total International Stock Market Index Fund, to 9 bps for the Total Bond Market Index Fund.

The problem – that is, “the catch” (What else are investors going to be charged in other products?) – for Vanguard LifeStrategy investors– is that Vanguard offers identical funds or ETFs that track the same index and have the same management team, but are much less expensive than the Investor Share classes held by the LifeStrategy Funds.

The expense ratios of the respective Admiral share classes – which now require only $3,000 to open – are 2 to 10 bps cheaper than the corresponding Investor share classes owned by the LifeStrategy funds.

The largest expense differentials (i.e., ‘Investor – Admiral’ in FIGURE 2) can be found among the stock funds (US stock @ 10 bps and International Stock at 6 bps). The bond fund differentials are closer (US bond at 4 bps, International Bond at 6 bps.)

Or to put it another way, if we take the ratio of the respective a) expense ratios of the Investor share classes, over the b) expense ratios of the Admiral share classes, the Investor shares are 3.5 times to 1.2 times more expensive than the respective Admiral share classes — See the ‘Investor/Admiral’ line in FIGURE 2 above.

One might say “So what – what’s a bp here or there”? To make a long story short – not much. Unless, of course, you are talking about billions of dollars. Which we are. So take a look at FIGURE 3, below.

FIGURE 3 shows the weighted average expense ratio (i.e., “ER”) for each of the LifeStrategy funds, based on the expense ratios of the underlying index funds, as previously summarized in FIGURE 1, above. The “weights” are the “Portfolio Allocation” percentages that are listed in FIGURE 1 for each asset type (US Bonds, International Bonds, US Stocks, and International Stocks.) The expense ratios that are weighted are those appearing in FIGURE 2.

All of the other Expense Ratios and Annual Expenses in FIGURE 3, above, are similarly calculated.

The LifeStrategy Funds currently invest in Investor share classes of the various stock and bond index funds. The calculated Investor Class expense ratios for the LifeStrategy Funds match, after rounding to the bp, the expense ratios reported by Vanguard on its website:

• Income 11 bps
• Conservative Growth 12 bps
• Moderate Growth 13 bps
• Growth Fund 14 bps

But what if the LifeStrategy Funds could invest in the cheaper Admiral share classes? Well, their expenses should fall. In aggregate – see FIGURE 2 – a switch from Investor to Admiral shares might reduce investor class expenses from 13.1 bps, on average, to only 6.8 bps.

For the total $49.2 billion currently invested in LifeStrategy Funds, their costs might drop by almost half, from $64.6 million per year to $33.2 million per year — see FIGURE 3. These differentials are summarized in FIGURE 4, below.

EXAMPLE             Expense Investor vs Admiral Differential (ER and Annual $ Fees) for the LifeStrategy Income Fund (VASIX)

VASIX ER Differential = 4.4 bps and Annual $ Fees Differential = $2,068,000 in FIGURE 4, above.

All of the other Expense Ratio Differentials and Annual Fee Differentials in FIGURE 4, above, are similarly calculated.

Saving roughly $30 to $40 million per year is nothing to sneeze at – even for Vanguard. In the Nov 2018 Press Release announcing a lowering of the Admiral Share Class minimums from $10,000 to $3,000, Vanguard touted in the first paragraph of the press release that the lowered minimums would save investors $71 million, which is of the same order of magnitude as the $30 to $40 million estimated in FIGURE 4, above.

So what gives? Why doesn’t Vanguard let its LifeStrategy Funds buy Admiral Share classes?

Because it seems that it can’t.

Mike Piper, author of the ObliviousInvestor blog, corresponded with the head of Public Relations for Vanguard’s US business, in 2017.

Piper: Why don’t the LifeStrategy and Target Retirement funds use Admiral shares as the underlying holdings?

Vanguard PR Department: Vanguard is unable to offer multiple share classes on funds of funds due to the structure in which we operate, and the agreement we have with the SEC regarding multiple share classes. Our funds of funds have no direct costs — the costs are derived only from the ERs of the underlying funds. According to that agreement, we must be able to offer a differentiated cost advantage between share classes. (Therefore, because there is no direct cost associated with a fund of funds — it’s not possible for us to offer such an advantage).

Calls to Vanguard asking “Why don’t LifeStrategy Funds own Admiral Share classes?” produced answers ranging from the wrong  (“There is no relationship between the LifeStrategy Fund costs and the costs of the funds that they own”) to the interesting (“LifeStrategy funds own Investor Class shares because the extra Investor Class fees offset the rebalancing costs of the LifeStrategy Funds”).

Page B36 of the LifeStrategy Fund Statement of Additional Information (“SAI”) says:

… Each [LifeStrategy] Fund will bear its own direct expenses, such as legal, auditing, and custodial fees. In addition, … the Funds’ direct expenses will be offset … by a reimbursement from Vanguard for (1) the Funds’ contributions to the cost of operating the underlying Vanguard funds in which the Funds invest, and (2) certain savings in administrative and marketing costs that Vanguard expects to derive from the Funds’ operations. The Funds expect that the reimbursements should be sufficient to offset most or all of the direct expenses incurred by each Fund. Therefore, the Funds are expected to operate at a very low—or zero—direct expense ratio. Of course, there is no guarantee that this will always be the case. Although the Funds are not expected to incur any net expenses directly, the Funds’ shareholders indirectly bear the expenses of the underlying Vanguard funds…    

The last sentence of the SAI paragraph would seem to rule out the “no relationship” answer.  But there may be some justification for the “rebalancing” response.  Perhaps it does cost $31,281,000 per year (See FIGURE 4) to rebalance the LifeStrategy Funds?

Daniel Wiener, editor of The Independent Adviser for Vanguard Investors, stated in a recent phone call that Vanguard’s statements about fund expense ratios can be confusing.   Re-emphasizing what he observed in a 2019 Citywire article about Vanguard expense cuts, Wiener said that Vanguard’s cuts were ‘old news’:

The prospectus only says this is what Vanguard may charge. Until you have an audited annual report, you don’t know what the fund or ETF has charged. But Vanguard has actually been charging these lower fees for months.

Despite Vanguard’s agreement with the SEC (mentioned by the ObliviousInvestor blog, see above), there are rumors of a possible workaround to the no-multiple-share-class “catch” for funds-of-funds, such as the LifeStrategy VASIX, VSCGX, VSMGX, and VASGX. These rumors were posted on the ‘Bogleheads’ website – www.bogleheads.org.

If so, this workaround solution may be spelled B-N-D-B-N-D-X-V-T-I-V-X-U-S – See FIGURE 1. These are the letters in the symbols of the very inexpensive ETF Shares that are linked to the respective Investor Share Class stock and bond index funds that are owned by the LifeStrategy funds.

According to the ‘boglehead’, posting in Jun 2019:

My family & I met w Vanguard reps last week. Excellent service all around…

Was perhaps the best investment meeting we’ve ever had. I cannot say enough about the superb care & interest taken. Vanguard has always exceeded our expectations & won multi-generational admiration in our family.

Also, I heard that their Target & LifeStrategy Funds may be moving to ETFs in the next few years, which makes sense in so many ways. Mutual funds will always be there, but adjustments to those all-in-ones that they steward make good sense…

The Vg reps told us that last week & it was presented as fresh news.

Mutual funds will always be available at Vg. ETFs will always be available at Vg. But, there’s a migration over to ETFs inside Target & LifeStrategy expected over the next couple of years.

Or, at least, that’s what I heard them say!

If the conversion within the LifeStrategy fund-of-funds – from Investor Shares to ETFs – occurs, it would seem to follow the tax-free conversion process that was described to the SEC, approved by Vanguard’s board, and explained on Vanguard’s website.

As described in the Vanguard Funds Multiple Class Plan filed with the SEC in 2013:

1. 2. Conversion into ETF Shares. Except as otherwise provided,
      a shareholder may convert Investor Shares, Admiral Shares, Signal Shares
      or Institutional Shares into ETF Shares of the same fund (if available),
      provided that: (i) the share class out of which the shareholder is converting
      and the ETF Shares declare and distribute dividends on the same schedule;
      (ii) the shares to be converted are not held through an employee benefit
      plan; and (iii) following the conversion, the shareholder will hold ETF
      Shares through a brokerage account. Any such conversion will occur at the
      respective net asset values of the share classes next calculated after
      Vanguard’s receipt of the shareholder’s request in good order. Vanguard
      or the Fund may charge an administrative fee to process conversion
      transactions.

As explained by Vanguard in an ETF “FAQ”:

Can I convert my conventional Vanguard mutual fund shares to Vanguard ETF Shares?

Yes. Most funds that offer ETF Shares will allow you to convert from conventional shares of the same fund to ETF Shares. (Four of our bond ETFs—Total Bond Market, Short-Term Bond, Intermediate-Term Bond, and Long-Term Bond—don’t allow for conversions.)

Conversions are allowed from both Investor and Admiral™ Shares and are tax-free if you own your mutual fund and ETF Shares through Vanguard.

Keep in mind that you can’t convert ETF Shares back to conventional shares. If you decide in the future to sell your Vanguard ETF Shares and repurchase conventional shares, that transaction could be taxable.

If you have a brokerage account at Vanguard, there’s no charge to convert conventional shares to ETF Shares. If you have questions, contact us.            

Time will tell if Vanguard can deliver on the boglehead-predicted inclusion of  ETF shares in the LifeStrategy funds.  If not, then Vanguard may need to greet its new LifeStrategy fund-of-fund investors with a rarely heard salutation:

• “Welcome to Vanguard. We can get it for you retail!”

NOTES

[1] Greg Davis, Bloomberg News, “Vanguard exec: Investors should look for ‘the catch’ in Fidelity’s no-fee funds”, https://www.investmentnews.com/article/20180803/FREE/180809965/vanguard-exec-investors-should-look-for-the-catch-in-fidelitys-no, 8 Aug 2018.

[2] Fidelity, “Fidelity Rewrites the Rules of Investing to Deliver Unparalleled Value and Simplicity to Investors”, https://www.fidelity.com/about-fidelity/individual-investing/fidelity-rewrites-the-rules-of-investing-to-deliver-unparalleled-value-and-simplicity-to-investors, 1 Aug 2018.

[3] Andrew Jones, “Fidelity zero-fee funds attract almost $1bn in first month”, https://citywireusa.com/professional-buyer/news/fidelity-zero-fee-funds-attract-almost-1bn-in-first-month/a1151844, 8 Sep 2018.

[4] Ian Wenik, “Vanguard hits back at Fidelity’s zero-fee funds with Admiral cuts”, https://citywireusa.com/professional-buyer/news/vanguard-hits-back-at-fidelitys-zero-fee-funds-with-admiral-cuts/a1177374, 19 Nov 2018.

[5] Vanguard Press Release, “Vanguard Shareholders To Save Estimated $80 Million Through Broader Access To Low-Cost Admiral Shares”, https://pressroom.vanguard.com/news/Press-Release-Vanguard-Lowers-Investment-Minimum-of-Admiral-Shares-111918.html, 19 Nov 2018.

[6] Bogleheads wiki, https://www.bogleheads.org/wiki/Vanguard_LifeStrategy_Funds, last edited 9 Jul 2018.

[7] Financer.com, https://financer.com/us/vanguard-lifestrategy-income-fund, 30 Nov 2019.

[8] James Chen, Investopedia, https://www.investopedia.com/terms/b/basispoint.asp, 29 Jul 2019.

A ‘bp’ or basis point refers to a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 1/100th of 1%, or 0.01%, or 0.0001.

[9] Vanguard, LifeStrategy Funds, https://investor.vanguard.com/mutual-funds/lifestrategy/#/, accessed Dec 2019.

[10] Mike Piper, “Why Don’t Vanguard’s Target Retirement and LifeStrategy Funds Own Admiral Shares?”, https://obliviousinvestor.com/vanguard-target-retirement-lifestrategy-admiral-shares, 24 Jul 2017.

[11] Vanguard, “Security starts with you (and us)”, http://pages.e-vanguard.com/180719SP, 2018.

[12] Bogleheads/newcollegeman, “RE: Insights from Vanguard”, https://www.bogleheads.org/forum/viewtopic.php?f=10&t=282782#p4580477, 6 Jun 2019.

[13] Daniel Wiener, Phone call with Ira Artman, 24 Dec 2019.

[14] Vicky Ge Huang – Citywire, “Vanguard announces fee cuts on 10 ETFs”, https://citywireusa.com/professional-buyer/news/vanguard-announces-fee-cuts-on-10-etfs/a1204641, 26 Feb 2019.

 [15] Financial Times/Lexicon, Definition of a Boglehead, http://markets.ft.com/research/Lexicon/Term?term=Boglehead, “Bogleheads are those who follow the investment principles of Jack Bogle, founder of Vanguard, the low-cost … fund specialist. Boglehead principles aim at modest, simple, investment and savings plans. To invest like a Boglehead you should build a simple portfolio based on index investing. For example, a typical holding would be a stock market index tracking fund (either through an index-tracking mutual fund or an exchange-traded fund), a global stock market index fund, and a bond index fund. Bogleheads, typically, do not favour alternative investments such as hedge funds. Bogleheads are also long-term investors and do not believe in trying to time the market.”

[16] Boglehead/newcollegeman, “RE: Insights from Vanguard”, https://www.bogleheads.org/forum/viewtopic.php?f=10&t=282782#p4580477, 6 Jun 2019.

[17] Board of Directors, The Vanguard Group, “Vanguard Funds Multiple Class Plan”, https://www.sec.gov/Archives/edgar/data/1409957/000093247113007109/multipleclassplanvanguardfun.pdf, 22 Mar 2013.

[18] Vanguard Group, “Common ETF Questions – Can I Convert?”, https://investor.vanguard.com/etf/faqs#convert, accessed Dec 2019.

[19] 20^th Century Fox, “I Can Get It For You Wholesale”, https://en.wikipedia.org/wiki/I_Can_Get_It_for_You_Wholesale_(film), https://www.classicfilmfreak.com/2015/08/20/i-can-get-it-for-you-wholesale-1951-with-susan-hayward, Movie Poster, 1951.