A few of you are waiting for me to talk about Brexit. Part of me is honored that you care about my opinion. The other part of me is appalled that you care about my opinion. Why would you listen to me?!? 😉 Here goes:

• I don’t know what’s going to happen.
• Nobody else knows what’s going to happen.
• The media makes money when it speculates on what is going to happen and you pay attention to them. So they will continue to speculate.
• Whatever does happen will takes years to unravel at the minimum. That means a lot of uncertainty for a long time. If you sell during times of uncertainty and buy during times of relative calm, you’ll likely be selling low and buying high. Not a very good recipe for investing success.
• If you are truly a long-term investor, then you must know that some crazy things are bound to happen over long periods of time.
• You could see this event as another “stress test” of your plan. The United States also has a big election coming up this year, so you should prepare for even more uncertainty.

Overall, I am not making any changes to my investment plan. Instead, I would try to maintain focus on what you can control. Financially, that means:

• Investing in yourself, your skills, your network, your career.
• Track and/or control your household spending.
• Shore up your cash cushion, emergency fund, whatever you want to call it.
• Managing your investment expenses, including trading costs, management fees, and taxes.

Have you been unsuccessfully searching Netflix for a 72-minute documentary about index funds? Well, your wait is finally over. Game of Thrones, watch your back! 🙂

Also adapted from a book of the same title, Index Funds: The 12-Step Recovery Program for Active Investors systematically attacks the various reasons that people approach individual stock-picking and/or paying for actively-managed mutual funds. For example, there is the idea of picking an all-star manager, the idea of market timing, and the idea of picking individual stocks.

I would warn that content is targeted more towards investors with some experience and less towards novices. They apparently also recognized that the material can be rather dense, and thus also broke it up into 12 parts. Here is Part 1:

Both the book and film were created by Mark Hebner of Index Fund Advisors (IFA), a fee-only wealth management firm that offers mutual funds from Dimensional Fund Advisors (DFA). Found via co-producer Robin Powell. As the book promotes the purchase of DFA funds, which can only be bought through affiliated advisors such as IFA, the material can be seen as self-promotional. However, having read the original book 10 years ago, I did not feel that the content was overly self-promotional. If you focus on the academic research by Nobel Laureates and historical data presented, there is a lot of useful knowledge to be gained.

If you’re interested in more detail, you can buy a physical copy for $8 at Amazon, a Kindle eBook version for $3, or you can navigate through all the content online at IFA.com for free.

From time to time, people ask to send me details of their current portfolio for some advice. I usually decline respectfully as I don’t feel qualified to provide specific investment advice, but I did accept a copy of the general fee schedule for Fidelity Portfolio Advisory Services (PAS) as of March 30, 2016. Here is a scan of the Annual Advisory Fee Schedule:

Note that the Net Advisory Fee = Gross Advisory Fee – Credit Amount. From the client agreement:

Your Gross Advisory Fee does not include underlying fund expenses charged at the individual fund level for any funds in your Account. These fund expenses, which vary by fund and class, are expenses all fund shareholders pay. Some of these underlying fund expenses may be paid to Strategic Advisers or its affiliates and will be included in a Credit Amount, described below.

In other words, the credit amount is the fees and compensation that your advisors get paid in exchange for picking those investments over the other investments that may not pay such fees. It doesn’t make much difference, as these fees are usually passed onto the retail customers anyway, just indirectly through the mutual fund annual expense ratios. As a result, the gross advisory fee is still the minimum amount that the end customer will pay.

Let’s take a look at what this means:

• For a $1 million portfolio invested in a Fidelity Model asset allocation, you’d be paying 1.27% of your assets to Fidelity on an annual basis in exchange for them managing your portfolio. That’s $12,700 a year automatically deducted from your account.
• For a $1 million portfolio invested in a Fidelity “Index-Focuced” asset allocation, you’d be paying 0.85% of your assets to Fidelity on an annual basis in exchange for them managing your portfolio. That’s $8,500 a year automatically deducted from your account.
• The annual fee above does not include underlying fund expenses. The brochure did not include any specific asset allocations, but this will add another layer of expenses. For example, their Fidelity Strategic Advisers® Core Fund (FCSAX) has an expense ratio of 0.67%.

Consider that many institutions believe that for the next 10-20 years, you’d be somewhat lucky to get a 4% return on balanced portfolio after adjusting for inflation. Put another way, let’s say your $1,000,000 portfolio might provide 4% in inflation-adjusted annual income, or $40,000 a year. With Fidelity PAS, your annual advisory fee of 1.2% would equal $12,700. That would already eat up over 30% of that theoretical income and is before fund expenses. All-in, you’re looking at close to 40% of your potential pre-tax return eaten up by management fees.

Now for my personal thoughts. Briefly, in my opinion, the Fidelity PAS marketing materials (sample brochure) promote their high number of sub-advisors and complexity to suggest that they offer something worth paying a lot of money for. In my opinion, I do not see any evidence that one will receive enough additional return to offset the relatively high fees. While I am a Fidelity self-directed brokerage client and use some of their other products and services, I would not invest my own money in this Portfolio Advisory Service. There are many managed portfolio services like Betterment, Wealthfront, Schwab Intelligent Portfolios, and even all-in-one funds like Vanguard Target Retirement funds which I would recommend my own family members first if they chose not to learn how to do-it-yourself.

Here are some helpful resources on owning only bonds of the highest credit quality as part of your portfolio asset allocation.

• David Swensen in his book Unconventional Success argued that alignment of interests is important. With stocks, the exectives want to make profits, and you want them to make profits. With stocks, your interests are aligned. In contrast, the job of bond issuers is to look as creditworthy as possible, even if they are not. This keeps the interest rates they pay lower. With bonds, your interest are not aligned. The safety ratings of bonds usually only get worse – usually quickly and unexpectedly as we saw with subprime mortgages. Ratings agencies are not very good at their jobs, mostly in a reactionary role, and are often paid by the same people they rate.
• Larry Swedroe at ETF.com:
  

  However, he also observes that the primary objective of investing, at least in stocks, is to make money. On the other hand, he makes an important distinction when it comes to the primary objective of investing in bonds, which is to help you stay invested in stocks when the inevitable bear markets arrive.

  And that leads to his conclusion to invest the fixed-income portion of your portfolio in only the safest bonds (such as Treasurys, FDIC-insured CDs and municipals rated AAA/AA).

  The overall idea to is own the safest thing possible when it comes to bonds.

• Daniel Sotiroff at The PF Engineer:
  

  The primary reason most investors own fixed income securities (bonds) is their ability to limit declines in portfolio value during periods of poor stock performance. From this perspective there is another dimension to safety in the fixed income universe that needs to be understood.

  […] Almost all of the non-Treasury securities experienced a drawdown during 2008 which peaked around October and November. Investors holding corporate bonds, intermediate and longer term municipal issues, and inflation protected securities were no doubt disappointed that their supposedly safe assets posted losses. Corporate bonds in particular have the unfortunate stigma of behaving like stocks during crises. Adding insult to injury those disappointed investors were also faced with taking a haircut on their fixed income returns if they wanted to rebalance and purchase equities at very low prices. Thus there is more to risk than the more academic standard deviation (volatility) of returns.

  My interpretation is that he concludes that intermediate-term Treasury notes are good balance of safety and interest rate risk, while short-term Treasury bills are for those that really don’t want any interest rate risk.

• Also see this previous post: William Bernstein on Picking The Right Bonds For Your Portfolio

A reader recently sent me a set of articles by Scott Burns about a person he calls the Rational Gold Investor here and here. I’ve been a long-time reader of Scott Burns because while he has been a steady proponent of passive and low-cost investing, he isn’t afraid to consider other investment alternatives.

Shayne McGuire manages gold investments for the Texas Teachers Retirement Fund, is the 18th largest pension fund in the world with over $120 billion in assets. He does not believe in gold as only a “armageddon” asset, but something that everyone should own a little of as part of a diversified portfolio.

Read the full article, but here are highlights from the interview:

• Gold has never been more under-owned as an asset.
• The supply of gold is difficult to increase.
• Financial leverage in the world economy has never been higher.
• Gold is an asset class that competes against equities and other asset classes, generally on a weaker footing becausen the long run (periods like 25 years) it cannot outperform stocks, bonds or real estate.
• Gold tends to like bad news. If houses go down, it tends to go up. It makes you feel like you’re betting against the home team.
• A lot of peculiar people seem to like gold and that makes people not want to be like them.

In other words, there are legitimate reasons to own some old, even if you don’t believe that the collapse of fiat money is imminent. At the same time, I think it is important to focus on the real numbers:

• The pension fund invests less than 0.5% percent of their assets in gold, and this number has never been higher than 1%.
• The value of all the gold in the world is about 0.6 percent of all financial assets. In 1980, the number was 2.5%.

In other words, the Texas Teachers Retirement Fund only keeps roughly a world market-cap weighting of gold, even if that amounts to roughly $70 million. Here that number is stated as 0.6%, while the previous source I quoted had it at 1.3%. Let’s split the difference and call gold’s world market-cap at roughly 1%.

If you had a $100,000 portfolio, 1% would work out to $1,000, which you could round off to a single 1 oz. gold American Eagle or Canadian Maple Leaf. They also make 1/2 oz, 1/4 oz, and 1/10 oz versions. I like the idea of holding physical gold here because you would have zero ongoing management fees (unlike an ETF), you maintain full control of the gold (away from any government), and you’d be more likely to hold it for the long-term (buy/sell spreads are big). Even if you had a million-dollar portfolio, a 1% allocation to gold would weigh less than a pound and fit inside your clothes or virtually any hiding place.

Buy a little bit of gold, put it somewhere secure, and rest easier knowing you have a slightly more diversified portfolio and a bit of insurance. At the same time, most of your money is still invested in productive assets like solid companies around the world or a rental property.