How To Retire Early and Live Well With Less Than A Million Dollars [Book Review]

Posted on February 1, 2012 // 8 Comments

I enjoy reading older books about early retirement; I seek to learn from their experiences, but I also look for ways in that their perspective is colored by their own time period. For instance, a book written in the 80s1 – an era of high inflation – would likely assumed that interest rates would be moderately high forever, at least in the 5% range. The tendency to extend recent trends into the future is unavoidable, and something you should consider when reading or making forecasts today.

This is a review of How To Retire Early and Live Well With Less Than A Million Dollars by Gillette Edmunds, a book published in 2000 that was recommended to me by a reader. Edmunds was a former tax attorney and financial journalist who retired in 1981 at age 29.

Unreasonably High Expected Returns
Remember that for both the 1980s and the 1990s, the average annualized total return of the S&P 500 for both decades was around 18% a year. Imagine two decades of such returns, all before the dot-com bust and the housing bust. Edmunds retiring in 1981 turned out to be some of the luckiest timing possible. As a result, a major criticism of this book is the continued expectation of high stock returns going forward. The quoted excerpts below are taken verbatim from the book:

  • Can you retire today? His answer is that “most middle-class Americans, including me, could live comfortably on the investment returns from $500,000.” Perhaps, but with currently-accepted safe withdrawal rates of 3-4%, this would only create $15,000 to $20,000 a year in income. Instead, the book promotes withdrawals rate of 8-10%, which would have left many nest eggs completely wiped out from 2000 to 2010.
  • “An average, educated, experienced investor can reasonably expect to make 10% a year for life.”
  • “Anyone should be able to produce a 7.75% return.”

I bet these assumptions sounded reasonable, perhaps even conservative, in 2000 but they are just bad jokes today.

Owning Non-Correlated Asset Classes
Edmunds tells us not to time the markets, ride out temporary market drops, and to maintain low investment costs. He advises you to hold a variety of “non-correlated” asset classes such as:

  • Real Estate
  • Foreign Stocks
  • US Large Stocks
  • US Small Stocks
  • Emerging Markets Stocks

Edmunds believes that these asset classes are on different business cycles. When one is going up, the other is going down. However, I don’t like the term “non-correlated”, as very few asset classes have negative correlations these days. Low or minimally correlated is a better term. As we saw in the recent financial crisis, when the poo hits the fan correlations can go back to 1 (everything goes down together). However, I agree with the general asset allocation advice of holding different asset classes with minimal correlations. He counts as an early proponent of not holding too much in US stocks (no more than 1/3rd of total portfolio), and an equal amount in foreign stocks (also use for 1/3rd of your portfolio).

I did have an issue with the lack of supporting evidence as to why these assets and not others, as we only get weak arguments like “after owning bonds for about five years, I realized that a portfolio of five different high-return asset classes that excluded bonds had both high predictability and high returns”. I’m sorry, but making a conclusion to stop holding bonds after 5 years of data is just plain bad advice and makes him come off as egotistical.

He ends the book with a philosophical epilogue with the usual “money isn’t everything, enjoy life with family and friends” material. I don’t mean to belittle the importance of this factor, just that I didn’t really learn anything new from it. He does come off as well-intentioned and talks about the effect of his divorce. Despite its flaws, I found this book worth the read as it encompasses the overall philosophy of one person who had been successfully retired for 20 years. Just remember he had a very strong tailwind of high returns, and adjust your own expectations accordingly.

Other “early retirement” books that I’ve reviewed:

Filed Under: Book Reviews, Investing //

The Overnight Rule For Managing Your Portfolio

Posted on January 30, 2012 // 22 Comments

Recently, I came across an investment tip called the Overnight Rule from Carl Richards via the NYT Bucks Blog:

Imagine that all your investment holdings were sold overnight by accident.

You can’t undo the trades, and now all you have is cash.

Would you buy back everything you owned previously again at their current prices? If not, why are you holding them now?

I think this provides a fresh look at your portfolio, as many times we hold investments for irrational reasons. For example, there is the well-documented trait of loss aversion (even though readers of this blog may be immune), where investors really hate selling at a loss, even more than they love selling with a gain.

Perhaps you bought the stock at $20 a share, and it is now at $15 a share. You want to get rid of it “just as soon as it gets back to $20 a share”, so that so you can say you didn’t lose money on it. It’s better to admit the mistake and put your money in something better.

Then there is regret aversion. Perhaps you bought it at $50 a share and now it’s at $400 a share. You get to tell your friends how you bought Apple at $50 a share. You’re afraid it’s overpriced, but you don’t want to miss out if it rises some more. You sit on your gains and choose inaction instead of having to make a hard decision even though your money could be better deployed elsewhere.

Maybe it is company stock from your job, or shares that you inherited from a beloved family member. Whether is it some form of sentimental attachment, inertia, or plain laziness – you may want to consider your reasons for holding them.

There is a small exception to this rule if you are sitting on large capital gains in a taxable account and don’t want to realize them and get hit with the tax bill, especially if the alternative investment is also very similar (ex. mutual funds with similar holdings). However, even in this scenario you want to make sure that you’re not holding a poor investment just to put off a tax bill.

I did not come up with this myself, but read about this rule somewhere online within the last month. I’ve searched for the source but can’t find it, so please let me know if you do. Found it, thanks!

Filed Under: Behavioral Economics, Investing //

Historical Bond Yields vs. S&P 500 Dividend Yield

Posted on January 18, 2012 // 7 Comments

Here’s a chart from a Morninstar article on dividend stock ETFs that caught my eye. It shows the historical relationship between the yield on 10-year US Treasury bonds and the dividend yield on the S&P 500. I am not convinced that this means one should overweight dividend stocks over bonds, but it does provide some historical perspective. The last time the yield differential was around zero was in the 1950s.


Click to enlarge. Source: Morningstar Analysts

Since we are talking about such long time periods, let me throw in this chart showing (ready for this?) the rolling 10-year average annual inflation adjusted total return for the S&P 500 from 1926 through the end of 2011. Credit to Quant Monitor.


Click to enlarge.

 

Filed Under: Investing //

The (Next) Big Short: Current Investments of Michael Burry and Steve Eisman

Posted on January 16, 2012 // 7 Comments

I’ve read parts of The Big Short by Michael Lewis before, but finally re-read the entire thing over the weekend. If you are unfamiliar with this bestseller, it tells the story of the housing bubble through the viewpoint of investors who saw the crisis coming and bet big money on the collapse of subprime mortgages. Lewis portrays these guys as almost heroes, courageous individuals from smaller hedge funds that went against the commonly-held beliefs of the big firms on Wall Street.

Instead of writing the 8,449th review of this book, my question was – what are these characters betting against now? Now, this doesn’t necessarily mean I think they’ll be right, but I’m still curious.

Michael Burry, Scion Capital
Burry no longer accepts money from outside investors (he doesn’t need to), but still invests at Scion Capital using his own money. He doesn’t write a blog or release his recent letters to shareholders to the public, except for a few old ones. He did make a April 2011 lecture at his alma mater Vanderbilt University entitled Missteps to Mayhem where he sees continued problems with the government printing too much money and not tackling our current fiscal problems.

The government’s borrowing of money for the purpose of injecting cash into society, bailing out banks, brokers, and consumers, is a short-sighted, easy decision for a population that has not yet learned that short-sighted and easy strategies are the route to long-term ruin.

He ends his speech with the ominous advice “All that said, I might suggest opening a retail banking account in Canada.” I’m not even sure that’s possible to do as a U.S. citizen… is it?

From this complete transcript of a September 2010 interview with Bloomberg, he states that he believes that “productive agricultural land with water on site is — will be very valuable in the future”, he is bullish on gold due to currency debasement, but he doesn’t have a good feel for the timing of things as it could take a while to play out.

Steve Eisman, FrontPoint Partners
Eisman left FrontPoint in June 2011 and is reported to start his own hedge fund Emrys Partners in 2012. He has gotten the most publicity in recent years for shorting the stocks of certain for-profit colleges taking advantage of easy credit from government student loans. Basically, people who can’t get into traditional colleges are pitched a great future and convinced to take out large amounts of debt that they can’t pay back, all so these pseudo-accredited colleges can profit. Sound familiar? From a 2010 conference speech:

Until recently, I thought that there would never again be an opportunity to be involved with an industry as socially destructive and morally bankrupt as the subprime mortgage industry. I was wrong. The for-profit education industry has proven equal to the task. […] This is similar to the subprime mortgage sector in that the subprime originators bore far less risk than the investors in their mortgage paper.

I also looked for information on Charles Ledley and James Mai of Cornwall Capital, but really didn’t come up with much. They have a website, but there is nothing to see for the public.

Filed Under: Book Reviews, Investing //

Active Mutual Funds, Passive ETFs, & Tax Efficiency

Posted on January 10, 2012 // 9 Comments

When looking at your investment returns, it’s important to calculate your return after the impact of taxes and expenses (management fees, commissions, bid/ask spreads). That number is what you really end up with, but it’s never shown on any year-end statements. ETF provider iShares put out a Managing Tax Challenges brochure that shows the average annualized tax cost for actively-managed mutual funds over the last 10 years. Via Abnormal Returns and Mebane Faber.


(Click to enlarge)

Many actively managed mutual fund managers have had difficulty delivering benchmark-beating, after-tax returns. Figure 1 shows the 10-year average tax cost for active funds and top quartile active funds. What’s striking is that in every case except for mid cap blend and small cap value, top quartile funds’ tax costs (as indicated with a white dot) were equal to or greater than those of the category average (black dot). Even worse, after taking taxes and fees into consideration, the average active fund underperformed its benchmark.

The takeaway is that expenses and tax-efficiency both matter greatly to the bottom line, and passively-managed ETFs are much more tax-efficient than actively-managed mutual funds, possibly enough to counter the performance benefit of active management. For one, being passively-managed on its own means lower turnover (less buying and selling) and thus less taxable events. Second, the ETF structure itself has inherent advantages over open-ended mutual funds. Neither of these traits are specific to iShares, by the way, although they do have some of the most popular index ETFs out there.

I should note that many Vanguard ETFs are simply different share classes of open-ended mutual funds (Example: VTI and VTSMX). Theoretically, this extends the tax-advantages of ETFs to the mutual fund shareholders, as described in Vanguard’s ETF brochure:

Tax advantage. Like other ETF providers, Vanguard can push low-cost-basis shares out of the portfolio through the in-kind redemption process. Our patented share-class system provides an additional benefit. To meet cash redemption requests from non-ETF shareholders, Vanguard can sell high-cost-basis securities to generate a capital loss. These losses offset any current taxable gains and, if not exhausted, can be carried forward to offset future capital gains—a recycling that is not likely within stand-alone ETFs. Theoretically, cash redemptions could trigger a gain instead of a loss; however, Vanguard’s deep tax-lot structure has allowed us to select high-costbasis shares in both good markets and bad, resulting in a high degree of tax efficiency.

As a result, in many cases if I can own Admiral shares of Vanguard index funds that have the same low expenses as the ETF version, I’d rather just own the mutual fund version for the sake of simplicity. For instance, I like making dollar-based transactions at net-asset value (NAV) instead of having to place a market order (potential loss due to bid/ask spread) and also worrying about NAV discount/premiums. It also keeps me from doing silly things like trying to time the market intraday.

Filed Under: Investing, Taxes //

Jack Bogle’s Personal Investment Portfolio

Posted on January 4, 2012 // 12 Comments

While poking around doing research on municipal bond funds, I ran across this 2010 Marketwatch article about the personal portfolio of Jack Bogle, founder of Vanguard.

The 81-year-old Bogle said that for his personal portfolio he follows an age-based formula. The founder of the Vanguard Group has 81% of his personal assets, including his retirement plan, in bonds and 19% in stocks. […] “I’ve always had in the back of my mind this incredibly simplistic idea, that your bond position should have something to do with your age,” he said.

[…] In his retirement portfolio today, he’s got two-thirds of his bond portfolio in the Vanguard Total Bond Index fund and one-third in the Short-Term Investment Grade bond fund. In his personal portfolio, Bogle’s got two-thirds of his bond portfolio in the Vanguard Intermediate-Term Tax-Exempt bond fund and one-third in the Vanguard Limited-Term Tax-Exempt bond fund.

Now, you have to remember that Bogle is 81 and even though he didn’t take the Goldman Sachs private yacht route, it’s safe to say he doesn’t worry about wringing every last penny out of his investment returns. Of course, I don’t think he’d want to own something that would tank in price, either. I’m sure he thinks of his portfolio as more of a lesson to other investors than anything else. As such, here are my takeaways:

Age in bonds. Bogle said age in bonds, not bet the house on bonds as the article seems to suggest. If you’re 25, that’s just 25% in bonds which provide some needed stability to your portfolio. Look at 2011 year-end returns as just one example. At age 65, that’s 65% in bonds. Even if you think the stock market is going to outperform bonds, do you really want to expose yourself to 70% or 80% stocks in retirement? Even if you don’t follow this rule exactly, it can serve as a rough guide.

(As for the 19% stocks, you can reference this older 2006 Morningstar article where he lists the Vanguard Total Stock Market Index fund as well as some active holdings in Wellington, Wellesley, Windsor, and Explorer. These are sentimental holdings – he was once Chairman of Wellington Management before founding Vanguard – which aren’t index funds but are still very low-cost.)

What kind of bonds? In tax-deferred accounts, he holds the Total Bond index fund (mix of Treasuries, GNMAs, corporates) and some short-term high-quality corporate bonds. In taxable accounts, he holds intermediate to short-term municipal bonds. The Vanguard muni bond funds are actively-managed to maintain diversification across states and counties, and all maintain relatively high credit ratings. I currently hold the same muni bond funds (limited and intermediate). I also own TIPS, which is not mentioned in this article but was in his portfolio as of 2006.

Now, he is obviously pro-Vanguard but an important thing with bonds is low-cost. With Treasuries and TIPS, the credit risk is all the same so you could technically buy them directly yourself. Otherwise, low-cost funds and ETFs are the only thing I hold. Bogle also doesn’t extend his average bond duration very long in any case, which protects you somewhat in the event of rising interest rates. I also gather from this that he does not fear widespread defaults in the muni bond arena. I don’t know where Bogle lives (I think Pennsylvania) but he chooses not to use any state-specific muni bond funds.

Filed Under: Investing //

2011 Year-End Investment Returns by Asset Class

Posted on January 2, 2012 // 7 Comments

I’ve been waiting for some good graphics about the performance of various asset classes for 2011. Got any? I’d try and make one myself, but I’m exhausted from year-end festivities. Below is one from Scotty Barber of Reuters (click to enlarge):

I also saved as a PDF the performance data from all Vanguard mutual funds after the close of the last trading day of 2011 (download link). Selected funds:

Fund Ticker Asset Class 2011 Total Return
Stocks
VFINX S&P 500 1.97%
VTSMX US Total Market 0.96%
VISVX US Small Cap Value -4.16%
VGSIX US Real Estate (REIT) 8.47%
VFWIX International Total Market -14.41%
VGTSX International Total Market -14.56%
VFSVX International Small Cap -20.28%
VEIEX Emerging Markets -19.18%
Bonds
VFISX Short-Term Treasury 2.26%
VIPSX Inflation-Protected Bonds 13.24%
VBMFX Total Bond Market Index 7.56%

As a reminder that being this year’s best performing asset class is no guarantee of for future years, here’s the Periodic Table of Investment Returns from Callan that shows the relative performance of 8 major asset classes over the last 20 years (1991-2010, click to view PDF).

Any predictions for 2012? 🙂

Filed Under: Investing //

Larry Swedroe Personal Portfolio: Small Value Stock Premium Revisited

Posted on December 26, 2011 // 6 Comments

I’ve written a little bit in the past about including small-value stocks to your investment portfolio. “Small” means companies with a relatively smaller market cap (total market value) – definitions vary from being the bottom 10% by capitalization or being worth less than $1 billion. “Value” stocks are those that tend to trade at a lower price relative to others when measured against markers like earnings, dividend yield, sales, or book value.

This NYTimes article on the portfolio of investment advisor and author Larry Swedroe included some concise examples of how significant this small-value premium has been in the past. For one, small-value stocks outperformed the S&P 500 by about 4% annually from 1927-2010.

Put another way, by making a portfolio using small-value stocks and US Treasury bonds, you could have gotten similar performance to the S&P 500 with much lower risk. Specifically, you could have held 1/3rd small-value and 2/3rd Treasury bonds and had close to the same return as the S&P 500 over a 40-year period from 1970-2010. This chart summarizes:


Source: Buckingham Asset Management, New York Times

Will this “small-value premium” continue to persist? There are a few theories out there. One is behavioral, where small-value companies tend to be the more ignored and unpopular companies and thus are consistently underpriced. Another is based on the fact that small-value companies are simply riskier, and thus investors demand a higher return for holding them.

I happen to believe that there is something enduring about small-value stocks, but the size of my bet on that belief is relatively small – only about 5% of my target stock allocation. But I also know that you need to hold a very strong belief in whatever internal explanation you have for the outperformance. Otherwise, when small-value is the dumps for a while relative to the Current Hot Thing – and it will be, one day – you’ll sell and lose any potential edge.

Filed Under: Investing //

IRA Monte Carlo Revisited: Undo Traditional IRA to Roth IRA Conversions

Posted on December 21, 2011 // 8 Comments

My post yesterday about the varying performance of different asset classes reminded me about a Businessweek article called the IRA Monte Carlo. This is a tax-saving trick for those who wish to convert their Traditional IRAs or old 401ks to Roth IRAs. Here’s a snippet:

1. Let’s say an investor has one traditional IRA with a value of $4 million.

2. The traditional IRA is split up into four traditional IRAs, each worth $1 million.

3. The investor converts all four to Roth IRAs at the beginning of the year.

4. The IRS effectively allows taxpayers to undo the conversion for up to 21 months. So in 21 months the investor looks at the performance of the IRAs. Say two of them go up from $1 million to $2 million and two drop from $1 million to zero. Because the IRAs were split into four, the investor can change her mind on the two that went down and revert those back to traditional IRAs. Thus, she owes taxes on only the two contributions that went up in value, and nothing on the two that went down, cutting her tax bill in half. This lops 21 months of risk off the bet that paying taxes now will be paid off with tax-free appreciation later.

Did that make sense? It was a little confusing for me, so here’s my take on it. Right now, there is no income limit converting Traditional IRAs to Roth IRAs (and paying the taxes owed). Everyone can do it. Basically, in the conversion you pay taxes now on gains at your current tax rate, but then as a Roth IRA your future gains are tax-free. This works out to be a good idea if your future tax rates upon withdrawal end up higher than your tax rates right now.

It boils down to: Pay your taxes now? or pay taxes in the future?

Let’s say you agree your future tax rate will be higher, whether for personal reasons (you think future income will be higher or at least the same) or external reasons (you think Uncle Sam will raise tax rates). The loophole here is that you are allowed an “undo” by the IRS, which you can take advantage of by splitting your big traditional IRA into multiple, smaller, separate traditional IRAs. Then convert the smaller IRAs, and wait up to 21 months:

  • If the value of the converted IRA goes down, then you can undo the conversion and then redo it later, saving you on taxes. For example, if you converted $100,000 in Emerging Markets stocks in the beginning of the year and it went down to $80,000 – would you rather pay taxes on $100k or $80k?
  • If the value of the converted IRA went up – say from $100k to $115k if you invested in Treasury bonds throughout 2011 – then you’re happy because that $15k gain is all tax-free. You just sit back, sip your cocktail, and leave it alone.

There’s not many times in life you get to hit the “undo” button. As in the examples given, I would recommend putting different asset classes in your separate IRAs so that you can take advantage of any non-correlated performance. Don’t completely change your investment holdings just for this tax trick, though. Just putting stocks in one and bonds in the other can offer a potential benefit.

Filed Under: Investing, Taxes //

Investment Portfolio Asset Allocation & Performance Update of 2012

Posted on December 20, 2011 // 15 Comments

It’s time for a end-of-year checkup on the ole’ portfolio, as I’m afraid that I’ll forget about it between Christmas and New Year’s. There isn’t much change to my investment portfolio itself, the target asset allocation is the same, and the specific fund holdings are pretty much the same. I’m closer to 70% stocks and 30% bonds now. With only about 7 trading days left, I wanted to see how the various asset classes that I own performed in 2011.

My portfolio is similar to the David Swensen model portfolio, which uses low-cost index funds to gain exposure to specific asset classes. Here is an implementation of the portfolio using actual ETFs in a recommended 70% stocks / 30% bonds breakdown.

30% Domestic US Equity (VTI)
15% Foreign Developed Equity (VEA)
10% Emerging Markets (VWO)
15% Real Estate (VNQ)
15% U.S. Treasury Bonds (IEF)
15% Inflation-Protected Securities (TIP)

The chart below shows the growth of $1,000 invested this way (eMAC) at the start of 2001 until the end of November 2011, as compiled by the financial advisory group ETF Portfolio Management for benchmark purposes.

I have also taken the liberty of updating their annual returns table to including 2011 year-to-date total returns (see highlighted) using Morningstar data as of 12/19/2011.

The weighted year-to-date return of the overall model portfolio is 0.35%, essentially zero for 2011. But from the table, you see that each individual asset class may have moved a lot. European and Emerging Market stocks performed quite poorly (in case you don’t read the news), the S&P 500 looks like it will more or less go nowhere for the year, REITs (Real Estate) did okay, and Treasury bonds did very, very well considering this low-yield environment. Inflation-Protected bonds (TIPS) were the superstar in my portfolio, they saved my bacon.

Another year, another reminder that predicting short-term market movements is way beyond me. 🙂 I continue to be happy with owning various asset classes with long-term expected positive returns, but which tend not to move in sync and thus smooth out the ride.

Next year, I intend to learn more about an income-oriented portfolio as that may potentially work better – at least psychologically – for the early-retirement set. My secret crush, the Vanguard Wellesley Income Fund (VWINX) was up 7.91% in 2011 YTD. It’s a income-oriented actively-managed fund with about 35% in dividend stocks and 65% in corporate bonds – but with a tiny expense ratio of only 0.28% for investor shares, 0.21% for admiral shares.

Filed Under: Investing, Real Estate //

E-Trade Commission Free ETF Trade List

Posted on December 5, 2011 // 4 Comments

E-Trade has decided to join in on the commission-free ETF party, announcing a limited set of ETFs that you can trade with no commission fees effective 12/16/2011. However, to “discourage short-term trading, E*TRADE will charge a short-term trading fee on sales of participating ETFs held less than 30 days.” I tried but couldn’t find how much that fee was on the fees page. Thanks to reader Shraz for the tip.

The fund companies represented include WisdomTree, Global X, and db-X (Deutsche Bank). Many of the ETFs are definitely niche products, like a New Zealand Dollar ETF or a Aluminum ETF… meh. There are a few ETFs that may be somewhat interesting, if you like the idea of a dividend-weighted strategy:

WisdomTree Total Dividend ETF (DTD)
WisdomTree LargeCap Dividend ETF (DLN)
WisdomTree SmallCap Dividend ETF (DES)
WisdomTree Emerging Mkts SmallCap Dividend ETF (DGS)
WisdomTree International SmallCap Dividend ETF (DLS)

For context, here’s more information on other brokerage companies with their own specific ETF lists:

If you are the type of investor that wants to buy low-cost, index/passive ETFs with no commmission fees, I would say that Vanguard and TD Ameritrade are the best bets. You could build a low-cost and simple ETF portfolio from Total US (VTI), Total International (VEU), Total Bond (BND), and Inflation-Protected Bonds (TIP) for free at TD Ameritrade. You’d have to either go with a mutual fund version for TIPS or pay a commission for TIP from Vanguard.

Filed Under: Investing //

Jemstep Review: Customized Mutual Fund and ETF Rankings

Posted on November 30, 2011 // 15 Comments

Jemstep is a new website that lets you track your investment portfolio along with providing advice on improving your mutual fund and ETFs holdings. In terms of existing products, you could call it a combination of the all-in-one view of of Mint.com plus the mutual fund ratings of Morningstar.com. However, the key difference from Morningstar is that their Jemscore ranking system is customized for your specific preferences. The weighting of different factors changes with your answers to the topics covered by their “goal preference” survey:

  • Demographics: Age, time to retirement, etc.
  • Risk tolerance: Common risk-questionnaire survey questions about return vs. volatility
  • Fees, Taxes, & Income: Sensitivity to fees, taxes and gains, preference for income vs. total return
  • Fund preferences: Active vs. passive, manager tenure, loads, etc.
  • ETF preferences: Liquidity (volume) preferences, bid/ask spread sensitivity

Investment Account Aggregation
I haven’t entered all of my brokerage accounts, but so far the aggregation service works fine and all my different holdings including individual Treasury bonds shows up fine. Jemstep uses CashEdge for account aggregation, which is well-known and the backbone of several big banks. Although anything with a ticker symbol is tracked, Jemstep only provides rankings for mutual funds and ETFs and not individual stocks or bonds. There isn’t much in the way of asset allocation breakdowns or volatility measurements. (Update: There is an asset allocation chart available in the Portfolio summary page, although it may not pick up all your holdings.) It does track the historical performance of your accounts, which you can compare to a few basic benchmarks like the S&P 500.

Mutual Fund Rankings
I certainly like the idea of a customized ranking system. However, if anything, I don’t know if it goes far enough. The main weakness I see in their ranking system is the same as for Morningstar. Despite my survey answers, overwhelmingly what matters most is recent past performance. The rankings change each month, so if you always want to hold the “best fund” you’lll be left chasing one hot fund after the next. The top-ranked fund will rarely ever be an index fund.

For example, let’s look at my holding of the Vanguard Emerging Market Index ETF, VWO. Instead, it recommends as #1 the iShares MCSI Malaysia ETF (EWM). Okay, the Malaysian market has been doing quite well recently, but would it really be wise to hold a single small country ETF with a 0.53% expense ratio as opposed to one that holds all the emerging economies from China to Southeast Asia to Latin America, all at 0.22% expense ratio? Likewise, Morningstar has EWM at a 5-star rating and VWO at only a 4-star rating. Screenshot (click to enlarge):

Another #1 fund ranked for me was the Yacktman Fund (YACKX). I actually kind of like this actively-managed fund as a “fun money” holding, as the manager takes concentrated bets and isn’t afraid to be different than the crowd (right now, its portfolio is 11% Pepsi and 11% News Corp). But again, right now the past performance of Yacktman looks really great. But some quick research shows that back in 2000, recent performance was awful, and the fund’s assets were only $69 million which means very few people owned it. The fund’s own board of directors tried to oust him (see 2001 Kiplinger’s article). Would Jemstep (or Morningstar) have been recommending it then?

Filed Under: Investing //
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