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In our last blogpost, we discussed key consideration points when deciding between ETFs and Mutual Funds. Now to we will further discuss the decision based on what kind of investor you are.
Typically, the best way for an investor to choose an investment is to use their own goals, financial situation, risk tolerance, and investment timeline to create a strategy. Using that perspective may help to identify appropriate investment vehicles. Consider the following types of investors and their varied objectives. Active investor If you prefer to manage your own accounts and want to trade during market hours to implement your preferred investment strategies, ETFs can offer the flexibility to meet your needs. Similar to stocks and other types of investments, ETFs can be traded throughout the trading day and on margin. Investors also have the ability to set limit orders and sell short. Most open-ended mutual funds can only be purchased at their closing prices, or NAVs. ETFs offer transparency, allowing investors to review holdings daily and monitor portfolio risk exposures more frequently than with traditional open-ended mutual funds. For the active investor, ETFs may may satisfy the investor's need for more trading flexibility and holdings transparency. Long-term investor With a long-term view, investors may not want to devote a lot of time to worrying about the intricacies of an active trading strategy; they might have little use for the potential of buying or selling shares during the day; and they would likely want to minimize transaction costs for regular purchases. Many open-ended mutual funds are available with no loads, no commissions, and no transaction fees. Many brokerages and banks offer automatic investing plans that allow regular purchases of mutual funds. These programs generally do not exist for ETFs. Moreover, open-ended mutual funds are bought and sold at their NAV, so there are no premiums or discounts. While an ETF also has a daily NAV, shares may trade at a premium or discount on the exchange during the day. Investors should evaluate the share price of an ETF relative to its indicative NAV. Finally, any tax benefits that may exist for an ETF are irrelevant for someone saving in a tax-deferred IRA or workplace savings account, such as a 401(k), since taxes are paid upon withdrawal. For the long-term investor, a traditional open-ended mutual fund could be an investor’s preferred option due to low transaction costs and automatic investing options. Investors in a high tax bracket Investors in a high tax bracket who are saving in a taxable account, like a brokerage account, may be interested in investments that offer tax efficiency for their taxable assets. In this scenario, if an investor finds that an open-ended index mutual fund and an index ETF are similar relative to their investment objectives, passive investments—index funds and passive ETFs—have the potential to be more tax-efficient than active funds and active ETFs. Relative to actively managed mutual funds, some actively managed ETFs offer potential tax advantages. However, we caution investors against making long-term investment decisions based solely on any potential tax benefits. Investors should evaluate how an investment option fits with their time horizons, financial circumstances, and tolerance for market volatility, as well as cost and other features. Investors in a high tax bracket may choose ETFs to take advantage of potentially greater tax efficiency. In our last blogpost, we discussed the key differences between ETFs and actively managed Mutual Funds. Now we will show you how to decide if ETFs or Mutual Funds are right for you.
While mutual funds and ETFs are different, both can offer exposure to a diversified basket of securities, and can be good vehicles to help meet investor objectives. Here are some points to consider when weighing vehicle options:
In our next blogpost, we will further discuss how to make the ETF vs Mutual Fund choice based on what kind of investor you are. Q. What are the key differences between ETFs and Mutual Funds? A. The table below summarizes the key differences between ETFs and actively managed Mutual Funds -  In our next blogpost, we will show you how to evaluate and decide if ETF or Mutual Fund is right for you.
The Wall Street Journal asked prominent financiers and leaders how they'd advise young people on money. Here are excerpts of what five of them said.
Beth Ford, Land O'Lakes CEO I think you have to work for money in order to understand its value. My advice to this generation of young adults would be to get started developing their work ethic even before they start their careers. Find a job, work hard and develop a strategy for managing your money—save for the future, invest your time and money in others and in your community, and spend on what makes you happy and healthy Hank Paulson, former Secretary of the Treasury Among the most important things we've tried to communicate to our children is to live in an environmentally and financially sustainable way which helps protect the planet and your economic security in a world where there is almost certain to be unforeseen adversity and risks. That means consuming less and saving and investing more. As young people make decisions about which jobs to pursue, I always tell them that learning is more important than initial compensation. They can't afford not to learn. They should choose a career that truly fits their skills and interests because, ultimately, they are only going to enjoy something where they can do well and succeed. When it comes to how they spend their money, young adults owe it to themselves to be financially literate, to try to live within their means and never to borrow or invest if they don't understand the terms. Often the terms are framed in technical jargon, which is difficult to understand and unfortunately there are sometimes unscrupulous lenders who take advantage of trusting people. So, they should insist that terms be explained in plain English. Whitney Wolfe Herd, Founder and CEO of Bumble Never be financially dependent upon anyone else in your life. Don't rely on a parent, a spouse or a boss. It will only erode your self worth and negatively impact the important relationships in your life. Instead, learn to save money, make money and then you can rule your own world! Andy Sieg, President of Merrill Lynch Wealth Management There's good news and bad news for young adults today. Thanks to longevity, you could live 100 years or more, though unfortunately your longer financial life may begin under a mountain of student debt. Start by mapping out your priorities and create a plan aligned to your financial goals. This is different for everyone. Early on, stick to a budget, and track expenses to identify areas to reduce them. For those with debt, pay off high-interest, non-tax-deductible first such as credit cards, then more aggressively tackle lower-interest debt such as student loans or a mortgage. Also, take advantage of workplace benefits such as a 401(k) and employer match, as well as health savings accounts. Discipline, early planning and guidance can accelerate your journey to financial freedom and help you achieve more life goals. My wife and I have been in the financial advice business for decades. Our philosophy is to make sure our 16, 13 and 9-year-old children feel informed about the economy, markets and money, and not intimidated by them. We look for natural opportunities to educate them on these topics so that they understand the world. Markets represent opportunity, and it's never too early to start learning the lifelong benefits of good saving and investing habits. Time is one of their best allies. Regardless of what path they take in their lives, we hope to instill an understanding of and appreciation for what the economy and money has the power to do, for them and for others. Abigail Johnson, Chief Executive, Fidelity Investments I've passed along the same advice that I was given when I was a kid: be cautious with leverage. What I mean by leverage is buying assets with borrowed money. It's dangerous and can be financially toxic when people use too much credit card or home equity debt to pay for current consumption. I was taught to have the patience to invest for the long-term and build a portfolio that can withstand market downturns, which also means being responsible with how you're spending money. I call this having an investor mind-set. This means several things, including don't optimize the easy short-term solution at the expense of a harder and less certain—but more promising—long-term opportunity. It means your investment decision process should be analytical, logical, and grounded in empirical data. Calibrate the risks and know which ones, if not properly addressed, can sink your money plans. When the stock market and real-estate prices are going up, leverage can seem like a sure way to boost returns. But when the bull market eventually stalls, as it always does, then too much debt can quickly overwhelm an individual's personal finances, just like it does with a company's balance sheet. I'd encourage this generation to take a long-term view of the stock market and stay appropriately diversified across stocks, bonds, and cash. Pretty boring, I know, but as my Fidelity colleague Peter Lynch says, the most important organ for investing is the stomach, not the brain. Being diversified based on your age, personal circumstances, and tolerance for risk will help you stay the course when market volatility spikes. Asset allocation is still the most important factor in determining the long-term risk and return characteristics of a portfolio. Whether with money or work, I tell young adults to always have a hunger and intellectual curiosity to learn. When I meet with interns and new hires at Fidelity, I encourage them to think of their career paths as a stream of experiences. Don't get caught up with trying to get a specific job title, because a title in one company could mean something completely different in another. Instead, focus on obtaining new skills, more education, and new experiences. Always bring your whole self to work and get involved in the communities where you work and live—if you do this, you'll have a lasting impact and find more meaning in your job. How do you like this service - a price-protection services combs your email inbox for order confirmations and shopping receipts from major retailers and for hotel reservations from selected booking sites, then searches for price drops and claims the refund for you?
If you like it, here are two websites would do it for you - Earny.co It works with more than 15 retailers as well as all Citibank credit cards and all Mastercards (for up to 4 claims per year). It will deduct 25% fee from each refund, or you can pay $9.99 for a monthly subscription. If you link credit card accounts that offer price protection, you can also get refunds on purchases from Amazon.com. Paribus.co It's a Capital One company, it will monitor your inbox for receipts from more than 25 major retailers, but it does not monitor your credit card accounts. Q. Should I include stocks or bonds in my Roth IRA account?
A. Stocks. Here is why: 1) Roth IRA has no RMD requirements which means the investment horizon is longer than traditional IRA. 2) With no tax implications, you should put your most aggressive investment in Roth and let it run and maximize potential tax-free growth. 3) Bonds tend to have moderate returns so its tax bit from traditional IRA account when to take it out is smaller when compared with stocks. 4) If you hold stocks in regular IRA, you might have to sell them for a loss if the market tumbles and you have to take a required distribution, there is less risk of this happening to bonds. Q. How much can I safely withdraw from my retirement portfolio?” A. While there are so many personal variables to factor in, you can actually determine the best annual withdrawal rate, based on the analysis below. The analysis below is based on a portfolio composed of four primary asset classes with annual rebalancing:
A starting balance of $1 million was assumed at age 70. The four-asset retirement portfolio was tested using 15 different withdrawal rates ranging from 1% to 15% for each of the 34 rolling 25-year periods. The results were compiled and averages computed. The impact of taxes was not accounted for. This analysis also assumes the retirement portfolio was not subject to the RMD, which would be the case for a Roth IRA account.  A 6% withdrawal rate is highlighted because it represents the highest withdrawal rate that never produced an ending balance lower than the starting balance of $1 million.
The withdrawal rate of 8% is highlighted because it represents the withdrawal rate that maximized the average annual withdrawal. In this case, it was $103,844. Q. How could I find a financial adviser who acts in my best interest?
A. Here are four ways to find an adviser who acts in your best interest - 1. Look for an adviser who structures his or her business to minimize conflicts of interest. You can find them among fee-only financial planners through the National Associations of Personal Financial Advisors (www.napfa.org). 2. As of Jun 30, 2020, the CFP Board will begin enforcing the new standard that holds a certified financial planner to a fiduciary duty for all the financial advice they dispense. (Under the current standard, CFPs have a fiduciary duty when they engage in financial planning but not more generally when giving advice) 3. As the adviser to sign a fiduciary oath (you can download one at www.thefiduciarystandard.org). It documents the agreed-up standard of conduct in case you get into a dispute, and it's a way to separate the wheat from the chaff because non-fiduciary advisers won't want to go near it. 4. You can also look for firms with Centre for Fiduciary Excellence certification (CEFEX) at www.cefex.org. These firms have agreed to adhere to fiduciary best practices and undergo audits to ensure that they are doing so. For years, advisors have used active fund managers to target factors, including value, low volatility, capitalization size, momentum, dividend yield and quality to obtain higher returns for clients. These days, however, with more than 370 U.S equity smart beta ETFs that feature one or more factors available, advisors have the tools to supercharge their own asset allocation strategies. What does "quality" mean for top providers? Below are some examples:  In last blogpost, we focused on min vol ETFs to reduce investment volatility, now a few other strategies:
Bonds Bonds tend to be less volatile than stocks. When the stock market is expected to be more volatile, investors may want to consider increasing their bond allocation. It is worth noting that the bond market is not immune to volatility. High-yielding Stocks High yielding stocks are another opportunity that investors can explore. The income component of high-yielding stocks tends to make these investments less volatile than more cyclical stocks, which have lower or no dividend yield. Of course, the 2008 financial crisis highlights that even this strategy may not be immune to severe market stress. Some Mutual Funds Some mutual funds that have historically exhibited lower volatility, relative to the broad market, as well as managed account solutions - particularly those with a defensive strategy are good options too. Options Strategies Additionally, there are several options strategies, including straddles, strangles, and other spreads, which can be used to take advantage of expected market volatility. Q. What are the options to reduce my investment's volatility?
A. If volatility concerns you, in addition to diversification, there are volatility strategies that may help protect your portfolio. Below we will focus on minimum volatility ETFs, also mention a few other options. What Is a Min Vol ETF? A min vol ETF attempts to reduce exposure to volatility by tracking indexes that aim to provide lower-risk alternatives. Some min vol ETFs accomplish this objective by purchasing securities that exhibit relatively low volatility and concentration risk (i.e., heightened exposure to a particular asset class, investment characteristic, or other risk factor that results from a heavily weighted allocation). It is worth noting that some min vol ETFs may not have lower concentration risk than broadly diversified market indexes. A min vol ETF does not eliminate risk exposure to volatility, and may not prevent a loss in the event of a downturn. Low volatility funds may underperform when the broad market is doing well, and they can experience declines during sharp corrections. However, the expectation for a min vol ETF investor is that any potential losses during a market decline might be smaller relative to other investments that may have more exposure to volatility. As a result, a less risky portfolio could recover more quickly than the broad market after a downturn when stocks recover. Examples of Min Vol ETFs? If you are concerned about a US stock market decline, you may want to consider researching min vol ETFs, the largest of which by net assets are:
If you have global investments and are concerned about some of the volatility risks that have emerged out of China, Europe, and other parts of the world, there are also non-US min vol ETFs. The largest non-US min vol ETFs by net assets are:
In next blogpost, we will mention a few other investment options to reduce exposure to market volatility. Technology firms such as OpenDoor, OfferPad, and Zillow Offers, are looking to make the real estate market more efficient – or more accurately, to leverage technology to take advantage of market inefficiencies.
From the seller’s perspective The process of selling a home is far easier - first, request a bid from one of the platforms simply by filling out a form and uploading some pictures, next, get an offer, which the seller can take without needing to work around the (human) buyer’s needs or whether the buyer will be able to get a mortgage and close on the purchase (and since the platforms all assume they’ll need to fix up the homes anyway, there’s no pressure for sellers to engage in extra maintenance fixes or complex staging to make the house more appealing for sale). From the buyer's perspective The new platforms also make the process of buying simpler, as buyers no longer need to coordinate with sellers, and can simply use the companies’ own apps to open and access a potential new home for a walk through. Q. Are ETFs more tax efficient than mutual funds?
A. The answer is yes, but not for the reason you might think. A recent Morningstar research paper “Measuring ETFs’ Tax Efficiency Versus Mutual Funds“ finds that the overwhelming majority of ETFs (84%) track market-cap-weighted indexes, which means there’s relatively little turnover in the fund to trigger tax events in the first place, with a median turnover rate of just 17% (compared to 48% for the average active mutual fund). However, non-cap-weighted strategic beta ETFs have a turnover rate of 47%, very similar to active mutual funds, while cap-weighted index mutual funds have a turnover rate of only 19% (similar to ETF index funds), which means in practice the turnover factor is less a function of ETFs in particular, and just that the majority of ETFs invest in a different (cap-weighted indexing) strategy than most mutual funds (which are still more actively managed). The real driver of ETF tax efficiency is the structure by which it adds and removes securities held by the ETF, and the ability to “purge” low-cost-basis securities in-kind as part of the creation/redemption process for ETFs (thus why ETFs have a slightly more favorable tax profile than mutual funds even when tracking the same index, and why mutual funds are more prone to tax events when facing net outflows as compared to ETFs). However, it’s important to recognize that ETFs are not immune to tax events, not only because they still distribute any interest and dividends, but because ETFs can still face capital gains distributions (albeit not common). Below is a list of different income producing assets' performance in the past decade. Some are already very expensive, some still have potential.  In our last blogpost, we discussed 3 reasons why CEFs are good for people who seek incomes. Now we will discuss risks associated with CEFs.
As always, it is important to consider the objectives, risks, charges and expenses of any fund before investing. Investing in closed-end funds involves risks:
Q. How to turn my lifetime savings into income?
A. For people who are approaching retirement, they often need a source of steady income as they transition from wealth accumulation to distribution. Closed-end funds (CEFs) are an option worth considering for the following 3 reasons. 1. Nearly all CEFs seek to generate income Most CEFs are designed with the goal of providing a reliable stream of income—a result of actively managing a fund’s portfolio as well as its distributions. CEFs seek to deliver smooth, regular and often tax-efficient distributions. Those that utilize leverage—roughly 70% of all CEFs—do so to further enhance the fund’s income and return potential. 2. Stable asset base fosters efficient portfolio management Unlike open-end mutual funds that sell an unlimited number of shares to investors, CEFs issue a set number of shares at the fund’s launch. Those shares then trade throughout the day on the stock exchange at values that reflect supply and demand. With no need to accommodate cash inflows or outflows daily, this structure provides broad investment flexibility and enables managers to commit to an investment thesis over the long term. In addition, a CEF portfolio can remain fully invested, without the need to retain excess cash that can dilute performance. 3. Help increase portfolio diversification while still offering attractive income Another benefit of a relatively stable asset base is the enhanced ability to include less liquid investments and alternative strategies with a long-term focus—enabling investors to access sectors they may not readily reach through other means. What’s more, many CEFs invest in asset classes not typically associated with income, such as equities. For these reasons, CEFs can help diversify portfolios, potentially boost returns from non-traditional investments, and still offer reliable income potential. In our next blogpost, we will discuss risks associated with CEFs. Q. Could over-diversification dilute my returns? If I already own a S&P 500 fund, why do I need anything else?
A. This is a good concern and valid question, and the answer is yes, because when you over-diversify, you simply create redundancy, for example, if you might own 50 ETFs, and ends up with Apple in all 50. On the other hand, when you try to streamline and become more efficient, you could hurt yourself too. For example, if you own a S&P 500 fund, you may wonder why do I need another fund that represent the U.S. stock market? The reason is, S&P 500 only includes 500 companies, and it's cap-weighted which means it places more money on the biggest companies. So the performance of the bottom 450 companies makes little difference when they are dwarfed by the top 50 companies' performances. If you want to diversify, you need to own stocks from those 450 companies, plus other middle and small companies' stocks. Q. What's the best performing China focused ETFs?
A. Volatility related to trade tensions with China have left nearly all of the top-performing funds tied to the region over three years with short-term losses. Here is a list of the best 20 China region focused funds you can check out, note that not all funds are created equal and expense ratios for some of them are quite high as well ... Q. Is it a good idea to "let winners run" therefore not to rebalance my portfolio? A. There answer is NO. In the chart below, you can see the performance of the seven-asset portfolio where each asset class was equally weighted with an allocation of 14.29%. One version of the portfolio was never rebalanced and the other version was rebalanced at the end of each year. It shows 20-year rolling period performances for both versions. The big question: should we "let winners run" therefore not to rebalance portfolios?  It’s a logical idea to let winners run by not rebalancing — but it’s short-sighted.
1) The problem comes when the outperforming asset class suffers a correction (which they all do) and their large losses are experienced by a larger-than-originally-specified portion of the portfolio. 2) Moreover, how is anyone capable of knowing how long an asset classes will continue on a hot streak? For these two reasons, rebalancing each year is advisable. Q. I have a custodial account with my child who is turning 18 this year, what should I do with it?
A. The rules on transferring ownership of your child's custodial account to him vary by state and account. There are two key ages: a) the age of majority (often 18) b) the age of termination on the account (usually 21) When children reach the age of majority, the account can be transferred into their names only with custodian consent. Otherwise, they can remove the custodian from the account at the age of termination. You can ask your brokerage firm what ages apply to your child's accounts and the steps you need to take at each point. Q. What are the downsides of owning real estate inside an IRA?
A. While most of IRA money invested in various traditional investment vehicles, direct-owned real estate (the owner has direct title to the property) inside an IRA could provide a substantial amount of flexibility. However, while the allure of non-traditional, non-stock-market-based investments like direct real estate can be an attractive proposition for many investors – especially in times of increased market volatility – such investments can also create unique planning challenges not normally associated with traditional investments. Here is a great article that discusses all the potential pitfalls of direct-owned real estate properties inside an IRA, it's worth everyone's read if you are interested in this topic. Q. If I buy a fund from Vanguard, can I avoid 12b-1 fees?
A. No. First, let's see what is 12b-1 fee? The fee derives its name from Rule 12b-1 of the Investment Advisers Act of 1940, which permits fund companies to act as distributors of their own funds. These fees pay brokers and firms for selling the funds — and platforms like custodians or brokerages that provide shareholder services. Clients can pay this fee out of both mutual funds and ETF assets — it goes to cover distribution (marketing and selling), and sometimes shareholder services, which include responding to client inquiries and providing information about investments, according to the SEC. Vanguard has built a reputation for driving down costs and improving fund transparency, but it accepts these fees from clients invested in third-party funds on its retail and robo advisor platforms. It does so even as regulators and industry advocates raise concerns over their usage. Q. What are the major risks I should consider when I add bonds to my portfolio?
A. There are many risks in a bond fund, here are the major ones every bond investors should consider -
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