As the US stock market keeps going up, it feels like everyone is whispering the same thing: We are near a top. It’s easiest to do this with numbers. Here’s a valuation metric that divides the price of the S&P 500 stock index by the median US hourly wage. In other words, how many hours of work does it take to buy a unit of the S&P 500?

Answer: More hours of work than even at the top of the 2000 tech bubble. Found via WSJ Daily Shot newsletter and @ReutersJamie. Original source appears to be BAML (Bank America/Merrill Lynch).

This concerns me of course, but I’m still a buy-hold-and-rebalance investor at roughly 2/3rd stocks and 1/3rd bonds. Sure, we might be at the top. But we could be at new top next week. There are two only possible states: all-time high or drawdown. Here’s a wise observation by @ClementsMoney:

The good news is, many investors are prepared for a stock market decline. The bad news is, they’ve been prepared since 2011.

Commodities are an asset class that some investors include in their portfolio for diversification purposes. Depending on the specific index, you might track the futures market for aluminum, coffee, copper, corn, cotton, crude oil, gold, diesel, lean hogs, live cattle, natural gas, nickel, silver, soybean meal, soybean oil, soybeans, sugar, unleaded gas, wheat, and zinc (image source).

In my experience, when commodities prices have been hot, you see them in a lot of portfolios. When commodities prices have been cold (as they have been recently), you don’t read about them as much. Via ETF.com, there are now a new wave of commodity ETFs that hope to gather assets as the next up-cycle begins.

Here are some of the reasons why people didn’t like commodity ETFs in the past (besides the volatility and poor past performance):

• Higher costs. Expense ratios for most commodity ETFs were above 0.50% annually, with many closer to 1%
• Late K-1 tax forms. Most commodities ETFs issued Schedule K-1 forms at tax time, which not only were an extra form to file but they also tended to come very late in the year. You might have all your 1099s by the end of January, but your K-1 might not trickle in until March or even April.
• Some were actually exchange-traded notes (ETNs), which carried credit risk as they were technically unsecured debt obligations of the issuer. In contrast, ETFs hold securities separately in trust with a custodian. If an ETF issuer fails, you still own the underlying assets.

Here are two new ETFs that address the issues above with (1) have lower costs and (2) a new structure that doesn’t issue K-1 forms:

• GraniteShares Bloomberg Commodity Broad Strategy No K-1 ETF (COMB) – This ETF is technically actively-managed, but is benchmarked against the Bloomberg Commodity Index (BCOM). It is structured as a 1940 Act funds and thus does not issue K-1s. The expense ratio is 0.25%. Fact sheet.
• GraniteShares S&P GSCI Commodity Broad Strategy No K-1 ETF (COMG) – This ETF is technically actively-managed, but is benchmarked against the S&P GSCI commodity Index. It is structured as a 1940 Act fund and thus does not issue K-1s. The expense ratio is 0.35%. Fact sheet.

The 0.25% expense ratio of COMB makes it the cheapest broad commodity ETF available today. (The ETFS Bloomberg All Commodity Strategy K-1 Free ETF (BCI) has an expense ratio of 0.29%.) Now, the following bit from this ETFTrends article brings up the worry that this “no K-1 structure” might produce tracking error against the index.

In an attempt to help investors avoid K-1s, the ETFs do not invest directly in commodity futures but rather gains exposure to these investments by investing a portion of its assets in the GraniteShares BCOM Cayman Limited, a wholly-owned subsidiary of the Fund organized under the laws of the Cayman Islands. The subsidiary is not an investment company registered under the Investment Company Act of 1940 and has the same investment objective and will follow the same general investment policies and restrictions as the funds.

If you don’t buy the futures directly, what are you buying? Are you saying that you are buying a subsidiary that does buy the futures directly? How does that indirect structure change your investment performance? I don’t know and I don’t plan on buying either ETF, but I thought I’d point it out. ETF.com doesn’t seem to be worried:

Technically, both COMB and COMG are actively managed, but in practice, they are mostly passive funds. The futures portion of the portfolio, up to 25%, is held in a subsidiary based in the Cayman Islands and generally reflects the index, while the collateral is held in a cash portfolio holding fixed-income securities that is managed stateside.

The GraniteShares ETFs above only launched 5/22/17 and the last time I checked ETFdb.com only had about $2.5 million in assets so it is too early to make any judgments. The CEO of GraniteShares is William Rhind, who formerly worked at Blackrock/iShares and as the CEO of the popular SPDR Gold Shares ETF (GLD).

If you like low-cost access to the commodities asset class, this looks to be a positive development. I personally choose not to invest in this asset class as I think the long-term returns will be lower than that of equities. (Lower costs should improve the return outlook, however.) Commodities funds may offer the draw of being a diversification “hedge”, but I don’t want to pay the price of lower returns, high volatility, and higher complexity. There are many smart minds that disagree, so do your own research as well.

I’ve seen this Schwab commercial multiple times recently, where Schwab touts that one of its index funds costs “3X less than Fidelity” and “4X less than Vanguard”:

I already knew why it bugged me every time I saw it, but I finally ran the numbers. Never mind that this is one cherry-picked fund. Let’s play their game. The index fund in question is the Schwab S&P 500 Index fund at a 0.03% expense ratio. The comparison is the Vanguard 500 Index Fund Investor Shares (VFINX) with an expense ratio of 0.14%. On an investment of $5,000, this works out to $1.50 a year vs. $7 a year. That’s a difference of $5.50 a year, or under 50 cents a month.

But wait, there’s more. Once you reach a $10,000 balance, the Vanguard 500 Index Fund Admiral Shares (VFIAX) will automatically decrease to an expense ratio of 0.04%. Now the difference is $1 per year. That’s 8 cents a month. Schwab funds have been far more expensive than Vanguard for decades, and now that they are bragging about saving you less than 50 cents a month?

Finally, the only way that Schwab can do this is in the first place is that these index funds are a loss-leader. Here’s an excerpt from the Morningstar article Penny-Pinching Index Fund Investors May Pay a Price, which also warns fundholders before switching index fund providers as the tax hit could take decades to overcome.

Existing shareholders in these funds are clear winners in the fee war. But as this race to the bottom nears its inevitable ending (free beta), these investors’ savings will increasingly be measured in dollars and cents. In my mind, these latest exchanges will likely do more to move the needle for fund firms and brokerages like Schwab. In many settings, these low-cost building blocks are simply loss leaders, a cheap gallon of milk meant to entice consumers into the store in hopes that they’ll grab some Cheetos and a pack of gum before they get to the counter.

I think that Schwab has many positive attributes to point out overall, but this commercial was deceptive. I’m happy that low-priced, broadly-diversified index funds are more readily available, but the idea that Schwab is significantly cheaper than Fidelity or Vanguard is laughable. The real numbers show that you could save more money by regularly buying discounted milk than by switching $100,000 from Vanguard to Schwab.

If you haven’t started investing yet, you will most likely be fine with any low-cost provider – iShares, Vanguard, Fidelity, Schwab. If you’ve already started, the absolute cost difference is too small to warrant a change.

Here’s another reminder that in the world of investing, having low costs is more important than owning “passive” index funds. Why? The simplest argument is that index funds can have high expense ratios.

Anyone can open an account at Vanguard, Schwab, Fidelity, or TD Ameritrade and purchase an S&P 500 index fund with expenses of about 0.05% a year. That works out to $50 a year on a $100,000 balance.

Meanwhile, the following companies have the most expensive S&P 500 index funds on the market. These happily charge you $1,000 to $2,300 a year on a $100,000 balance while investing in the same companies in the same amounts. Credit to Meb Faber for compiling this list.

These could be considered the worst mutual funds out there. Why? If you buy an actively-managed stock-picker fund, at least you have the possibility of outperformance (for a little while at least). You bet on red in roulette even though there is zero and double-zero. With an expensive index fund, you have zero upside. You can’t win. You didn’t even bet on double-zero. Instead, you essentially lit 1% of your money on fire.

Let’s look at the real-world performance of Rydex S&P 500 Fund (RYSYX) and the Vanguard 500 Index Fund (VFINX). Here’s a Morningstar chart showing the relative performance of the Rydex S&P 500 Fund (RYSYX) and the Vanguard 500 Index Fund (VFINX) from the inception of the Rydex fund in mid-2006. This is a “Growth of $10,000” chart, and you can see how the gap just keeps widening over time.

Here’s a quick takeaway from this chart:

• Someone who invested $100,000 in the Rydex S&P 500 Fund (RYSYX) from 5/31/06 to 5/21/17 (~11 years ago) would now have $185,183.
• Someone who invested $100,000 in the Vanguard 500 Index Fund (VFINX) from 5/31/06 to 5/21/17 (~11 years ago) would now have $235,948.
• That is a difference of over $50,000 with no luck involved as both are passive funds that that legally promise in their prospectus to track the S&P 500 index.
• Let me repeat: That’s a difference of $50,000 on a $100,000 starting balance over only 11 years! That is real money; actual dollars that someone will not have to spend in retirement. Imagine what that number could grow into over 30 years of saving.

Isn’t that horrible? Now, consider that the reason why someone would buy these funds in the first place was probably due to a human advisor putting their client in such a fund. Therefore, there is the possibility of another layer of advisor fees on top of the fund expense ratios. (Or they could be options in a bad 401(k) plan. It would be really scary if these were the best options on a plan menu.)

I can’t understand how these companies can get away with charging so much for doing so little. According to Morningstar, the State Farm S&P Index fund (SNPBX) currently has $1.4 billion in assets and the Invesco S&P 500 Index fund (SPICX) has $1 billion in assets. Billions of dollars? Why are so many people buying this stuff?!

The standard investment advice is the older you get, the more bonds you should hold in your portfolio. There are various rules of thumb like “Age in Bonds” or “Age minus 20 in Bonds”, and so on. On the other hand, stocks have higher historical long-term returns, so shouldn’t we keep as much in stocks as we can?

It’s not just about the long-term average return, you also have to worry about the sequence of returns. I’ve shared a hypothetical example of sequence of returns risk before, but Will Street Project has a great post called Why Drawdowns Matter that illustrates this effect using real-world numbers.

From 2000 to 2016, the overall total return of the S&P 500 Index (large US stocks) and the Barclays US Aggregate Bond Index (broad US bonds) was roughly the same. The sequence for stocks was bad then good. The sequence for bonds was basically a slow, gradual line upwards. Stocks thus lagged bonds for most of the period but caught up and even surpassed bonds a bit by the end.

Here’s what would have happened if you started with $100,000 in either the S&P 500 or the US Aggregate Bond Index and kept on buying $500 per month:

Here’s what would have happened if you started with $100,000 in either the S&P 500 or the US Aggregate Bond Index and kept on selling $500 per month.

The difference is that in the top chart you are adding money (and thus buying stocks at a lower price during the bear markets), while in the bottom chart you are taking out money (and thus selling stocks at a lower price during the bear markets).

It is important to note that things would look different if stocks shot up initially and then tapered off, as opposed to stocks struggling initially but then going back up at then end of the period. However, we can’t control the sequence of returns in our own retirements, so we have to be prepared.

One solution is to hold more bonds (or single-premium immediate annuities). Another solution is to use a dynamic withdrawal strategy so that you’re taking out less money during a down market.

Instead of watching the entire 6-hour Berkshire Hathaway (BRK) annual shareholder’s meeting, I first read through the WSJ highlights and then watched selected parts of the Yahoo Finance replay which interested me.

One interesting topic was about Warren Buffett and Charlie Munger’s directions to their heirs. Buffett has famously directed his wife to put 90% of her assets into a Vanguard S&P 500 index fund and 10% into US Treasuries. In contrast, Munger has told his family “not be so dumb as to sell” their Berkshire stock. Why do they differ?

You can see this question at the 1:39:55 marker in the video. Here are my notes:

• Buffett initially tries to deflect this question by stating that 100% of his BRK stock will be given to charity. However, there would be nothing stopping her from buying BRK shares (or any other investment) at a later time, so that doesn’t really answer the question.
• Both Buffett and Munger have previously stated that they believe that Berkshire will likely perform better than the S&P 500 in the future.
• Buffett’s wife will have more money than she needs. Maximizing upside is not important. Downside protection is most important.
• In terms of investment performance, both are quite unlikely to suffer permanent loss, but the S&P 500 is still a little bit more reliable than BRK. There is still some chance that there could be a change in culture or executive leadership that might damage the company. Someone might succeed in breaking up Berkshire into parts.
• The 10% in short-term US Treasuries (essentially cash) goes even further, in case there is long severe depression or even if the stock exchange is closed, there will be cash on hand to handle things.
• In terms of human issues, it would be a news event if she had BRK shares and sold them. The media would care. Talking heads would offer alternatives. However, if she holds the S&P 500 index fund, that is so boring that it is quite likely nobody will ever bother her again. From all that I have read, never being bothered again sounds like something she would enjoy. (Most people don’t even know her name or what she looks like.)
• Munger concedes that the S&P 500 as well-constructed as a diversified portfolio of large companies. In terms of performance, it is “all but impossible for most people [to beat].” However, he’s still telling his family to stick with Berkshire.

Buffett and Munger are exceptionally rational as opposed to emotional. Therefore, both answers will most likely work out fine. Sometime in the next 50 years, the stock market will probably drop 50% again. The fact that Buffett thinks the S&P 500 is safer than even Berkshire is something to remember the next time there is a stock market crisis.

At the same time, Munger’s comments should make a current BRK shareholder feel more secure in holding shares for decades to come. Even with Buffett’s shares going to charity, there will still be a large chunk of shareholders with a long-term view.