Tag: episode-1152

MALKIEL & TUCHMAN: RETIREMENT AUTOPILOT TRANSCRIPT

May 22, 2015

CONSUELO MACK: This week on WEALTHTRACK, putting your retirement portfolio on auto pilot. Financial thought leader Burton Malkiel has joined forces with online investment advisory pioneer Mitch Tuchman to offer retirement portfolios of low cost index funds that automatically rebalance with a human touch. Why they believe the combination will lead to safe retirement landings is next on Consuelo Mack WEALTHTRACK.

Hello and welcome to this edition of WEALTHTRACK, I’m Consuelo Mack. One recurring theme on WEALTHTRACK over the years has been how individual and institutional investors sabotage themselves over time. One way they do it is by chasing hot performance, and buy high, and abandoning investments during market declines and sell low.

The other major way investors hurt themselves over time is by not paying sufficient attention to investment costs. Expenses matter. As one of this week’s guests, famed financial thought leader Burton Malkiel tells us: “One thing I am absolutely sure about is the lower the fee… the more there’s going to be for me as the investor.”

Luckily there are products available to help us avoid both mistakes and more are being created every day. One of them, index funds are already a huge hit with investors and their popularity is growing by leaps and bounds.

According to Morningstar low cost, index based mutual funds and ETFs now have 31% of all fund assets up from just 14% a decade ago.

The other development, to counteract destructive investor behavior is in its early stages. Its automatic investing. It’s being used in target date funds. Some advisors use software that does it in portfolios. And we are now seeing the next generation, with so called robo-advisors. Barron’s recently did a cover story on it called “The New Face of Financial Advice” and highlighted four robo portfolio services: Betterment launched in 2010, Wealthfront launched in 2011, and two recent entries, Charles Schwab Intelligent Portfolios and a hybrid, Vanguard Personal Advisor Services, which requires the involvement of a human financial advisor to provide what Vanguard calls “behavioral coaching” to prevent clients from making those bad market timing decisions.

This week on WEALTHTRACK we are highlighting another service that also combines low cost investing, automatic rebalancing and the human touch.

It’s called Rebalance IRA and there are two personal reasons I am focusing on it. It has two legendary financial thought leaders on its investment committee, with impeccable credentials whom I have had the privilege of interviewing on WEALTHTRACK over the years. They both help develop, oversee and set policies for the portfolios offered to Rebalance IRA clients.

One of them, Charles Ellis has been a highly respected investment consultant to pensions, endowments and governments for decades. He is the author of numerous investment books including the classic “Winning the Losers Game” and “The Elements of Investing”, co-authored with his good friend and fellow financial legend, Burton Malkiel.

Professor Malkiel is also on the Investment Committee and is one of today’s guests. Malkiel is an emeritus Princeton University Economics Professor and author of the classic, “A Random Walk Down Wall Street,” now in its 11th edition.

Our other guest is no slouch himself. He is Mitch Tuchman, Managing Director and Co-Founder of Rebalance IRA which he launched in 2013. Rebalance IRA is a low cost, investment advisory service for accounts of $100,000 on up. As its name indicates it is specifically for retirement accounts and it automatically rebalances their portfolios. It currently has nearly $300 million under management. Before that Tuchman founded MarketRiders, the first online investment advisory service for do- it-yourselfers. It now oversees about $4 billion in accounts. For many years, Tuchman has also been a technology entrepreneur and consultant to numerous Silicon Valley companies.

I began the interview by asking him why he created Rebalance IRA.

MITCH TUCHMAN: I didn’t start off in this business. I moved to Silicon Valley to work at Atari many, many years ago, and after a successful career as a software entrepreneur, I sold a company and I had money to invest, but also a year earlier I had a very interesting experience in life. We had a child who was severely disabled, and I realized I needed to invest this money for 100 years, not just my own retirement, and the gravity of that task was weighing heavy on me as I went to look for options in the financial services industry, and I looked at all the fees and the structures, and I just never found anything that was satisfying to me. So it led to a seven-year career in the investment business, and what I discovered was a completely different method of investing, a whole different language, whole different approach to investing and it was startling to me. As I got more into it, I’m sure this has happened to you, Consuelo, and definitely I know it’s happened to you, Burt, people began to ask you, “What do I do?” because they know you’re someone in the business, and as I was asked I would start saying, “Well, let me see what you’ve got. Show me your portfolio,” and I was again shocked. I would see terribly overpriced mutual funds, horrible allocations, loads, lots of trading, and it began to get very upsetting to me. So I was also experiencing new financial instruments like exchange-traded funds which are innovations, low cost, almost zero trading commissions, and I started to see over time. You know what? The methods of the large endowments and foundations and successful retirement pools, the institutions that Burt has spent his life consulting with, those can now be brought down to everyday investors, and that’s why I got the entrepreneurial bug again and got back into the game of running a company that this time was a convergence of software and financial technology.

CONSUELO MACK: So explain what is Rebalance IRA?

MITCH TUCHMAN: So Rebalance IRA is an investment management firm, and we focus on everyday investors who have between 100,000 and a million dollars. Generally they’re over 45, and we manage their retirement assets for them. Our mission is to help people retire with more. They’re not do-it-yourself investors, and we manage their money in a very low-cost way under a fiduciary standard, and we offer them a credentialed, highly-trained advisor and a support person as their team to work with and we execute an investment methodology that I’m sure we’ll talk a lot about because this man sitting next to me is responsible for having invented quite a bit of it.

CONSUELO MACK: Right. So Burton Malkiel, here you are. Sorry. You’re an investment icon, and I’m sure that you get approached many times a day, a week, whatever to get your name on a committee and to get involved in a company because anyone would love to have your reputation behind them. So why did you get involved in Rebalance IRA?

BURTON MALKIEL: Well, because I wanted to put my name behind something I really believed in and I think, as Mitch just said, that most people just get terrible investment advice. They get it from people who are conflicted, who are not necessarily interested in the investor’s best interest but are interested in their own, and therefore, they’re very high-priced and they put investors into the kind of funds where they get an extra commission. So the funds themselves are very high-priced, and so I would only put my name behind something that I absolutely believe in. We use nothing but index funds, low-cost index funds at Rebalance IRA. I believed in indexing from before the time that index funds even existed.

CONSUELO MACK: Existed, right.

BURTON MALKIEL: I believe that there are extra returns available from rebalancing the portfolio periodically, and so my answer is very simple. This was something that operates on principles that I’ve believed in all of my life, and I’m delighted to do that particularly if it’s likely to help individual investors saving for retirement, because if we’ve got a crisis in this country, the crisis is that so many Americans have inadequately saved and inadequately invested for their retirement and are likely to have a much less good retirement than they should have.

CONSUELO MACK: There are other services out there. I mean you are on a board of Vanguard for many years, so there are index companies that offer retirement services. So what’s different about Rebalance IRA?

BURTON MALKIEL: Well, one of the things that Rebalance can do that a Vanguard and a Schwab, which are two other companies that are in the game, can’t do, is that we can be completely unconflicted in terms of the ETFs that we put into the portfolio.

CONSUELO MACK: So open architecture. You can do whatever.

BURTON MALKIEL: So it’s an open architecture. When you go to Schwab who is one of the competitors doing this, you’ll notice that in the Schwab Composite portfolio, there’s nothing but Schwab funds. Vanguard’s a wonderful company, but in the Vanguard portfolio there’s nothing but Vanguard funds. So I think what is really important about Rebalance IRA is that we are simply looking for the best kind of fund at the lowest cost.

CONSUELO MACK: How many portfolios are you offering? How do you make the decisions? I know, Burt, that’s part of your job is to make the decisions of what goes into the portfolios but, Mitch, do you want to tell me about kind of what the model is?

MITCH TUCHMAN: Sure, well, there’s basically six model portfolios.

CONSUELO MACK: Six model portfolios.

MITCH TUCHMAN: They’re book-ended by an income portfolio and a growth portfolio and then the four in the middle, and basically what we’ve done is we have created a growth portfolio of index funds that includes U.S., foreign developed, emerging market. We believe in a small cap tilt as they say in the business and some REITs.

CONSUELO MACK: You’ve got stocks. You’ve got bonds. You’ve got dividends, whatever.

MITCH TUCHMAN: Sure, and then on the income side we have … now this is where Burt and Charlie Ellis who’s also on our Investment Committee, have actually said certain markets are not efficient.

BURTON MALKIEL: Look. I’m an index investor. I believe in indexing. I would start off saying buy a total bond market fund, but if you look at what’s in a total bond market fund, it’s about two thirds either direct Treasury securities or government agency securities.

CONSUELO MACK: Right. This is the Barclays Aggregate.

BURTON MALKIEL: Which are in effect government securities and the yield is, in my judgment, quite inadequate, and so what we have done is, we’ve tried to look at parts of the bond market that are not too risky but give the investor at least some chance of a decent return, and we’ve also used an income, dividend-paying stock substitution for at least a part of the bond portfolio. So there is some interesting things that we’ve done. We generally have a little more of a portfolio composition in foreign and emerging markets than other investors because we start off from the view that a lot of these markets are basically cheaper than the U.S. market. We don’t take big bets on things, but there are people behind this who are putting the numbers into portfolio theory, and we have a little different investment mix than I think many other people would have.

CONSUELO MACK: So Burt, take me through the investment committee meeting. For instance, I’m looking at some of the things and what Mitch just mentioned. So you’re dealing with a portfolio of high-yield corporate bonds, U.S. dollar emerging market bonds, intermediate corporate, small cap as you said, an all-world ex small cap, developed market stocks, emerging market stocks, high dividend yield stocks, REITs. Vanguard Total Stock Market Index is in there as well. So you’ve tried to keep it relatively simple. Right?

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CONSUELO MACK: | WEALTHTRACK Transcript 5/22/2015 – Program #1148

BURTON MALKIEL: We’ve tried to keep it relatively simple, but these are exactly the kinds of things that the investment committee decided upon. In other words, when we first put the portfolio together the first thought was, okay, bonds are going to be a total bond market fund, and for the reasons we’ve just discussed we’re uncomfortable as an Investment Committee with that, and so what the Investment Committee then talked about was, okay, what can we do? And far should we deviate from what’s a total bond market fund? So that would be one of them. The other would be how much should we have in emerging markets. Are emerging markets really very much more risky than developed markets? Are emerging markets really very much more risky than Europe? And in bond defaults we have some emerging market bonds. Well, where are the defaults likely? They’re going to be in places like Greece that are in development markets. So when you ask what the Investment Committee talks about, these are precisely the kinds of things the Investment Committee talks about. You can call it active if you want, but all of the individual instruments are passive, are indexed and are low cost because let me tell you. All of us need to be very modest about what we know and don’t know about financial markets, but the one thing I am absolutely sure about is the lower the fee that I pay to the purveyor of the investment service, the more there’s going to be for me as the investor.

MITCH TUCHMAN: Yeah, let me make one final point about what Burt said. We’ve only made one modestly significant change to the portfolios in several years. So it’s not like we sit around and change percentages. We made a decision to boot out the aggregate bond index for an intermediate, high-grade corporate bond index. We’re not making changes, but we do rebalance so that’s to your question.

CONSUELO MACK: And how often does that happen for events in the markets?

MITCH TUCHMAN: Well, it’s both actually. So we do a calendar rebalancing every year for all the clients.

CONSUELO MACK: At the end of the year or … ?

MITCH TUCHMAN: Well, if you’re not taking distributions … we have clients that are over 70 who are taking distributions. That happens in November like clockwork, and if you’re not taking distributions that happens about right now like clockwork because people are contributing to their IRAs. So we do a calendar rebalancing for everybody depending upon whether you’re distributing, and then second there’s usually a volatility rebalancing, and that happens because the markets begin to ebb and flow and things get dicey, and sometimes the allocations move past a threshold, and when they do that alarm bells are triggered and it’s time to do a rebalancing for most all the clients, and that’s what we do. The important thing about rebalancing is that it always answers the question for the client, “Well, what are you guys going to do when you think the markets are going down? What are you going to do when you think the markets are going up? What are you going to do? What are you going to do?” and that helps clients understand that we’re not sitting around with a crystal ball predicting the future, going, “Which way is the wind blowing?” and trying to make a guess. That we have a process and the process is the process and it’s why large endowments and foundations get great returns. They run under a process. And knowing there’s a process helps our clients feel that these guys are not going to make wild guesses. There’s no cowboys, and it really gets down to peace of mind for the clients, and that’s really our business.

BURTON MALKIEL: So let me just if I could …

CONSUELO MACK: Please.

BURTON MALKIEL: I think it is less well understood than it should be what kind of advantages you get from rebalancing. Let me give you a little simulation that I did with simply two investments, a bond market index fund and a stock fund, starting in 1996 just when Alan Greenspan made his famous irrational exuberance speech. So what we do in this simulation is once a year … we did it at the beginning of January. You could do it anytime. You simply said let’s say you have a 60/40 portfolio, 60 percent stocks, 40 percent bonds, and every year what rebalancing means is you just bring the proportions back down, and that rebalancing once a year added between one and one and a half percentage points to the return. Now you…

CONSUELO MACK: A year. Right? A year.

BURTON MALKIEL: A year. Per year.

CONSUELO MACK: What’s a realistic expectation now for a diversified portfolio as far as annualized returns? It’s come down a lot. Right?

BURTON MALKIEL: My sense is that a diversified portfolio of common stocks, one ought to think of certainly no more than a six percent rate of return. I don’t think it will be the nine to ten percent that we’ve enjoyed over the last 100 years. I think that by getting into some of these other markets like emerging markets we can do a little better than that. I think real estate is still a relatively good investment outlet for people which we access through REIT index funds.

CONSUELO MACK: Through REITs.

BURTON MALKIEL: So I think we might be able to do a bit better than that, but we are clearly in a single-digit world today, and we don’t want to give anybody the impression that it’s 10 percent from now until kingdom come. It just isn’t, and what’s important for people to realize is if they are saving on the basis of thinking that they’re going to get 10 percent rates of return, I don’t think it’s going to happen.

CONSUELO MACK: One of the things that I’ve talked to Charlie Ellis about, who is also on your advisory committee, is the fact that we’ve kind of got to really change our attitudes towards retirement. We’ve got to work longer. We’ve got to save more. Spend less. I mean all of the things that none of us really want to hear as well, but obviously at Rebalance IRA you’re cognizant of those realities too, and so it sounds to me as if a goal is to, number one, avoid the permanent impairment of capital which is to avoid losses. So it’s almost more of a value tilt. Right? If something goes up too much, you’re going to pare it down. So there is a value tilt to the entire portfolio.

BURTON MALKIEL: Right. Absolutely. Absolutely. That’s what rebalancing does.

CONSUELO MACK: Right, and so that’s where you can get the edge over the index, over the typical benchmark indexes, and it’s to prevent us from making stupid mistakes.

MITCH TUCHMAN: If you ask any investor, name the top five investment mistakes you’ve made, and then they will sheepishly name them, and then you say, “If you had all that money back in your account, how much would your net worth be?” and they just shake their head. Way higher. Charlie wrote a book called Winning the Loser’s Game.

CONSUELO MACK: The loser’s game.

MITCH TUCHMAN: Winning the Loser’s Game. The loser’s game is playing to win, and investing is about playing not to lose. If you work really hard not to lose money, you end up ahead of 90 percent of the people.

CONSUELO MACK: How much attention do you pay to income? Because if you look historically, over 40 percent of returns in stocks have come from dividends. How important is that in the Rebalance IRA portfolios?

BURTON MALKIEL: It’s extremely important, and again probably one of the things where we will differ from some other portfolios is that we even have almost as a separate asset class dividend-paying stocks, dividend growth stocks because we think that that is extremely important, and I think it’s probably the way today that people ought to concentrate in order to get income, because they won’t get it from a total bond market portfolio.

MITCH TUCHMAN: And one of the silver linings of having a global portfolio is that coming into this year after the U.S. had run so much and dividends were down below two percent, it was the international funds that were over three percent. So the dividends have been paying off very well in a foreign developed country ETF.

BURTON MALKIEL: And the other thing the dividends will do is give you the advantage of dollar cost averaging because what we will do is reinvest those dividends, and that is a wonderful way of making your assets grow.

CONSUELO MACK: Great. Last question I ask everyone on WEALTHTRACK is if you had one investment to make in a long-term diversified portfolio. This is assuming we all have long-term diversified portfolios. What’s the one investment we should all have in it? Mitch, do you want to take it first?

MITCH TUCHMAN: Well, actually why don’t you start, Burt, because I liked your answer to that, and I had a way to hitchhike that.

BURTON MALKIEL: Well, if I had only one thing that I could buy, I would buy a world equity stock fund. That is a stock fund that had U.S., that had Europe, that had Japan, that had emerging markets, that had the entire world.

MITCH TUCHMAN: Okay, so I’m going to hitchhike off of that. I’m going to agree, and that is VT, Victor Tom. It’s a global index fund put out by Vanguard.

CONSUELO MACK: Vanguard.

MITCH TUCHMAN: But one of the things we do for our clients is we say let’s open up a Roth IRA for your child, and let’s put 500 bucks, $1,000 in it and just buy VT, and for a child that’s one of the greatest gifts you can give them. Not so much an iPhone and not the next crazy outfit. You put it in a Roth IRA, and that kid will watch the power of compounding and start to understand how this works.

CONSUELO MACK: Excellent. Thank you both so much, Mitch Tuchman for joining us and Burton Malkiel. It’s great to have you back on WEALTHTRACK.

BURTON MALKIEL: Thank you very much. My pleasure.

CONSUELO MACK: At the close of every WEALTHTRACK we try to give you one suggestion to help you build and protect your wealth over the long term. This week’s Action Point picks up on the one investment recommendations of both Malkiel and Tuchman. It is contribute to a young person’s Roth IRA.

As we have discussed numerous times on WEALTHTRACK there is no greater investment strategy than the power of compounding and the more time it has to work the higher the returns. What better way to make a long term difference in a child or young adult’s life than to put shares of a low-cost global mutual fund or ETF in a Roth IRA. It will be a gift that keeps on giving.

Next week, as WEALTHTRACK celebrates its official tenth anniversary…it’s a big one…we are delving into two big investment trends: the move to passive investing, which this week’s guests are passionate proponents of, and specifically the hugely popular exchange traded funds, or ETFs. ETF.com’s CEO, Matt Hougan and Northern Trust’s Head of Global Equity, Matthew Peron will explain why not all ETFs are created equal..and how to tell the difference.

To see this program again and ten years worth of our other Financial Thought Leader and Great Investor guests, go to our website WEALTHTRACK.com. 

Also please share your thoughts with us on Facebook and Twitter. Thank you for watching.

Have a great weekend and make the week ahead a profitable and a productive one.

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