THIRTEEN (13) persons attended meeting #8 of the Sacramento Area Bogleheads (Chapter 61). We met Saturday, November 14, 2015 on the patio at Aioli Bodega Espanola, in midtown Sacramento, for the last time this year. Cooler weather is forcing us inside. Members agreed in our last meeting that as challenging an environment this location has been, in a frenetic and noisy midtown neighborhood, moving inside to compete with the restaurant’s Saturday patronage in a dining area defined on three sides by storefront glass, would render speech among attendees problematic and presentations inaudible.
The members who volunteered to assist in identifying potential meeting venues documented several good locations. Starting in December, we will meet at the McClatchy library, 2112 22nd Street, Sacramento, CA., then break at 12:30 and relocate to Kupros or one of the other suggested restaurants for lunch (optional).
Following introductions, the chapter coordinator noted that the PDF document mailed out recently to members (“SacBH_MeetingInfo.PDF”) had been revised to include the 2016 meeting calendar, the address of the new meeting location and driving directions. Public transportation options, including light rail, are detailed for the first time. The library is only a block away from a bus stop and a 10-15 minute walk from light-rail stations serving two different regional transit lines. To comply with Sacramento City Library’s use policy, explicit wording was added to show that our purpose does not involve marketing or sales (i.e. we’re not an investment “seminar”), and meetings are open to anyone who wants to attend them (public).
Greg reminded those present that we were still looking for input on topic ideas for 2016, and help w/arrangements for outside speakers. We may be able to coordinate speaker events with other California chapters.
Three short talks followed the preamble and led to some interesting discussions:
- My Financial Progress – presentation by Chris
- Bogleheads® XIV Conference -brief recounting by jkarnis
- How to Construct a Lazy Portfolio -overview/discussion by Greg
Investor Perspectives (Personal Finance)
- Chris elaborated his personal financial plan, a “progress report” that summarizes his investment/money management goals for the coming year. The document he shared with the group identifies each goal with a future perfect declarative sentence,¹ and enlists a strategy that consists of specific actions and sub-goals needed to accomplish the task. He ends the paper describing what has been accomplished in the past year, and commits himself to “constant improvement” (echoes of W. Edwards Deming).²
- Chris noted that he maintains spreadsheets for all of his accounts, covering income and expenses, dividing all income “according to set percentages” on a monthly basis. He has opened a high-yield savings account at an online bank where the money he sets aside for taxes earns 1.1% APY until needed.³
The chapter coordinator observed that the plan was obviously a result of much thought, carefully reasoned and as comprehensive in scope as the best Investment Policy Statements (IPS), which are constructed to inform an individual’s actions for decades, not just over a 12 month period.4
Jim reported on his experience attending this annual event, noting that it was well organized and worthwhile—he first learned of the existence of Sacramento Bogleheads while he was at the meeting in Philadelphia. He had become aware of BHs by attending The Money Show, meeting Rick Ferri. At the conference, he heard Jack Bogle and others speak over several days, visited Vanguard, and left with a book (The Battle for the Soul of Capitalism, John C. Bogle 2005) which he just finished.5
Jim also voiced concern about whether, in the light of Bogle’s forecast of a 4% equity return over the next decade, investors would get greedy [by reaching for performance, increasing risk in their portfolio ].
How to Construct a Lazy Portfolio
Greg made the following comments about lazy portfolios, with emphasis on the 3-fund and 4-fund approach.6
- Growth/earnings expectations for 2015 – 2025 are low but there are many variables, so not a sure thing.
- Investors should should pick a stock/bond allocation they feel comfortable with and then stick with it over the long term. If one keeps changing the allocation, one’s returns will suffer.
- When establishing the 3 or 4 fund portfolio you can substitute all or a portion of Total Bond with cash, CDs, corporate bonds, TIPS or I-Bonds and still remain true to the strategy.
What kind of investor should consider a lazy portfolio?
- New investors.
- Investors wanting simplicity and who are able to reduce the number of funds without incurring a significant tax penalty when selling existing holdings.
- Investors approaching retirement who want to spend less time managing their investments.
- Investors in retirement who wish to streamline their holdings to accommodate a spouse or heirs, to simplify management or mitigate tax liability
Greg introduced the Callan Periodic Investment Table, a matrix of asset classes ordered from top performing (highest returns) to those assets with the lowest returns for each year. Some asset classes (S&P 500 Growth Stocks in the late 1990s, MSCI Emerging Market in the 2000s) are top performers over one or more years then sink to the bottom, displaced by something else. Emerging markets is a great recent example.
How To Lose in the Stock Market – Emerging Markets (Lesson #687)
For five consecutive years, from 2003 to 2007, you would have done well to have invested everything in these foreign stocks from less developed counties around the world. In 2003 alone, total returns were 56.28%. At no time during this period was the annual return for Emerging Markets less than 20%!
Most of us would have learned about the fantastic returns of Emerging Markets after the event and probably have still waited a year or two before buying in. The pundits started talking up Emerging Markets in 2005/6, during their 3rd and 4th straight year of outperformance; investors began moving their money into this area in 2007 (from S&P Growth funds—finally convinced that the returns of the 1990s were gone forever).
Bad timing, that. In 2008, investments in Emerging Markets LOST 53.18% — and many investors gave up at that point, pulling their money off the markets into cash or bonds, where at least there had been a small positive return in this dismal year. As it happens, this too will come to be regarded as a serious mistake… Emerging Markets comes roaring back in 2009, returning almost 80%!
This illustrates the importance of being broadly invested across many asset classes. One can’t anticipate the classes that will perform best in any given year or subsequent year.
The 3 Fund Portfolio
In essence, the three-fund portfolio, as articulated by Taylor Larimore starting in a post on the Vanguard Diehards forum at Morningstar in 1998, is Total Stock Market, Total Bond Market and Total International equities.
Taylor lists the many advantages of this simple, broadly diversified portfolio.
|15 Advantages for the three fund portfolio|
|1. Very tax-efficient|
|2. The advantages of simplicity|
|3. No adviser risk|
|4. No fund manager risk|
|5. No style drift|
|6. No “asset bloat” problem|
|7. No tracking error to cause abandonment of the strategy|
|8. No overlap|
|9. No “front running” that reduces sub-index returns|
|10. On the Efficient Frontier (highest return per unit of risk)|
|11. Automatic rebalancing within each fund|
|12. Never underperforms the market (less worry)|
|13. Easy to maintain for the owner, spouse, caregivers and heirs|
|14. More time with family and friends|
|15. Mathematically certain to outperform most investors|
Five (5) pages of notes from the audio transcript has been omitted due to time constraints (my own). In those notes, a lively exchange ensued on several topics. The bottom line is, if you want to hear everything that is said during our meetings, you have to show up!
Sacramento Bogleheads wrote:
Congratulations to bikehikekayak ~ she retired at the end of November!
Congratulations to jay22 and his wife ~ a new baby!
Next meeting: January 9, 2016 7
¹ The declarative sentences in this financial plan convey serious intent, allowing only for a good result. Examples below mirror the grammar (to demonstrate the strength of this format) but are not from the actual content.
- “I will have raised my 401(k) balance to $6,800 and increased my pre-tax contributions to $350 a month by June 30, 2016.”
- “At that time we will have saved nearly $10,000 for a down payment.”
² W. Edwards Deming (polymath, statistician b. Sioux City, Iowa 1900 d. Washington DC 1993)
Brilliant, egotistical and didactic, Deming was certainly the brain trust from which came TQM. Moses had to make do with 10 commandments but Deming was unimpressed; he bestowed 14 key principals (three of these exhort us to “practice continual improvement”.) This improves (of course!) upon the Mosaic tradition’s measly cache of laws. Here are some representative quotes.
‘Create constancy of purpose toward [the continual] improvement of products and services.’
‘If you can’t describe what you are doing as a process, you don’t know what you’re doing.’
‘Long-term commitment to new learning and new philosophy is required of [anyone] that seeks transformation.’ -W. Edwards Deming
³ Chris established an account with MySavingsDirect.com [member FDIC, NY]. There are numerous web sites that rate online banks using various criteria. One that is mentioned often on the Bogleheads forum is Deposit Accounts (linked below). MySavingsDirect was awarded 3/5 stars based on 17 ‘reviews’ and a B+ ‘health rating’ (12/15/2015). The savings rate has been reduced twice in six months. It’s currently 1.00% APY. Check out: My savings direct.
4 A perfect storm of clarity, conciseness and passion, Chris’ one year financial plan merits close study by those who find it difficult to start saving or investing, or who struggle to articulate their own goals. Perhaps he would be willing to create a version for public posting.
5 The Bogleheads® 14 Conference was held in Philadelphia on October 15 – October 17, 2015. For more information about this year’s annual meeting, see this link.
6 Resources: How to Invest | The Lazy Portfolio | The 3-fund Portfolio
- Asset Allocation
- Three-fund portfolio
- How to build a lazy portfolio
- Diversification: It’s All About (Asset) Class
7 The last meeting of 2015 took place on December 12, prior to the date of this post.