|
|
|
|
|
The Muscular Portfolios Newsletter — No. 10 — Sept. 11, 2018
|
|
|
 Book ships this month
Our book, Muscular Portfolios, is now expected to ship from Amazon.com and other sites between Sept. 25 and Oct. 2, 2018. (The booksellers may still show the original pub date of "Oct. 9," but the press run is ahead of schedule!)
Retailers are already taking preorders. Buyers will receive their books in the order they were reserved.
Please visit our home page to preorder the book:
Preorder from Amazon or B&N on our home page
"I know of no book for a general investment audience that is more thoroughly researched and backed up by hard data."
—MARK HULBERT, founder of the Hulbert Financial Digest
|
|
This is the first monthly newsletter
In the past three years, as the book Muscular Portfolios has been in development, we've published nine beta-test newsletters, several months apart. Today's newsletter is the first regular monthly issue. You'll receive future issues in the first week of each month. Thanks for supporting our research along the way!
For a description of how Muscular Portfolios work, see our May 2, 2016, newsletter.
|
|
Get up to 10 times more yield on your cash
 By Brian Livingston
Interest rates are rising, but brokerage firms are taking their sweet time giving you higher yields in their "cash sweep accounts." If you sell a stock or a fund — and you don't immediately reinvest the cash into an interest-bearing security — you may be losing 90% of the yield you could be enjoying.
Exchange-traded funds (ETFs) that hold short-term instruments, such as 1-to-12-month investment-grade corporate paper and Treasury bills, offer yields up to 1.9% these days.
But brokerage sweep accounts — which you might not even know your cash was swept into — are giving you as little as one-tenth of that, according to a Wall Street Journal column by Jason Zweig (Figure 1).
|
|
Figure 1. You may be able to get 10 times a sweep yield in a cash-like ETF. Sources: Federal Reserve Board (effective short-term Fed funds interest rate) and Crane Data (yields of money-market funds and sweep accounts). Credit: Jason Zweig, Wall Street Journal.
|
|
"Investors with sweep accounts at the brokerage division of LPL Financial Holdings earn 0.16% on a $250,000 balance. LPL, meanwhile, is making roughly 1.85% on its customers' cash," Zweig writes. "Cash sweeps contributed 25% of LPL's total gross profit in the second quarter, nearly as much as LPL's commission and advisory fees combined."
You may want more gain when you’re in cash for a while
|
|
To be sure, Muscular Portfolios — such as the ones in my forthcoming book — do not use market timing. Therefore, they never switch to 100% in cash. When the S&P 500 begins a bear market, a Muscular Portfolio will gradually rotate out of stocks and into short-term bonds and alternative investments, not 100% into low-yielding cash. (Download my free special report at the end of this newsletter for an explanation of Muscular Portfolios.)
But there are valid reasons why you might hold cash in your account for more than a few days:
• Saving up for a one-time expense. Say you're accumulating a first-home down payment or salting away money for an IRS tax bill. You may want to hold some interest-bearing cash so your hard-earned savings can't go down.
• Ultraconservative liquidity. Some investors like the feeling of having one or two years' worth of living expenses in cash. It reassures them that they can meet their monthly bills without selling stocks during a down market (although the irrationally large cash allocation seriously harms such an investor's performance).
|
|
How to pump up the yield on your cash
Whenever you sell any stock or fund to raise cash — and you're not planning to buy a different security right away — check the interest rates of your brokerage's sweep account vs. the cash-like ETFs shown below.
If the difference in dollars is more than the commission your brokerage firm charges, buy shares of the ETF instead of letting your cash sit in a sweep account.
The following three ETFs are typical of different categories of interest-bearing, cash-like securities. All yields/dividends shown are as of Sept. 7, 2018, according to ETFdb.com. Each category links to an extensive directory at that site.
• SHORT-TERM INVESTMENT-GRADE (IG) CORPORATE PAPER. ETFs such as these hold ultrasafe, interest-bearing securities from corporations with above-average credit ratings:
1.87% yield — ICSH: iShares Ultra Short-Term Bond ETF (annual fee: 0.08%)
• TREASURY BILLS. ETFs in this category hold the safest possible US government obligations with maturity dates only 1 to 3 months away:
1.29% yield — SHV: iShares Short-Term Treasury Bond ETF (annual fee: 0.15%)
• TAX-FREE MUNICIPAL BONDS. These ETFs offer much lower yields but may appeal to high-net-worth individuals who wish to avoid tax liabilities:
0.91% yield — PVI: Invesco VRDO Tax-Free Weekly ETF (annual fee 0.25%)
To be sure, you can seek higher yields by purchasing ETFs that hold junk bonds or IG corporate bonds with longer maturities. But ETFs that own bonds maturing in two, three, or more years have a nasty habit of going down in price when interest rates rise.
For example, SHV's sister fund — SHY, the iShares 1–3 Year Treasury Bond ETF — fell more than 2.2% in less than three months from Mar. 17 to June 12, 2008. That's not very cash-like. For true stability, you want securities that mature in less than one year, even though those debt obligations pay lower yields.
Cash-like ETFs are not precisely the same as money-market mutual funds, which have a fixed, $1 share price. Short-term ETF prices may go up and down a few cents during the trading day, but they will always end up with a gradual rise in value over longer periods.
Note for investors who like all-Vanguard portfolios: Because cash-like ETFs are not very profitable in a low-rate environment — and Vanguard is newer to the ETF game than some other providers — Vanguard does not at the present time offer a cash-like ETF with maturities of less than 12 months.
Vanguard's money-market mutual fund, VMMXX, has an ultrasafe average maturity of 30 to 60 days. However, VMMXX requires a minimum investment of $3,000. ETFs impose no minimums. VMMXX also charges an annual fee of 0.16%, notably higher than the 0.08% fee of ICSH, shown above.
Conclusion: If you truly need to hold cash in your portfolio for any length of time, you can do better with any of the above cash-like ETFs than the sweep accounts at most brokerage firms.
|
|
You’re reading the PAID newsletter
 With your paid subscription, you're receiving the extra sections of the newsletter below. Free subscribers don't receive the additional material.
Please don't forward your newsletter to others. This subjects us to spam complaints and harms the deliverability of our emails. Instead, ask your friends to go to our website and get a subscription that's all their own.
|
|
The best way to get no-transaction-fee ETFs
Fidelity Investments, the giant brokerage firm, made a splash last month when it introduced two "no annual fee" mutual funds. Keeping your investing costs low is a key to success, but are Fidelity's zero expense ratios the answer?
First of all, the two Fidelity funds cover only two asset classes: US stocks and international stocks. That is not enough diversification to get market-like returns with safety from crashes, as described in the book Muscular Portfolios.
Second, Fidelity's two no-fee securities are mutual funds, not exchange-traded funds. ETFs in many asset classes already have annual fees that are near zero. For example, the Vanguard Group's VTI, an ETF that tracks all US stocks, charges an annual fee of only 0.04%. The difference between that and a zero annual fee is so small as to be "a rounding error," according to a Barron's column by Crystal Kim.
In a taxable account, mutual funds also subject you to taxation you are unlikely to face with an ETF. Mutual funds are required to "make distributions" (declarations) of capital gains each year. You must pay tax on these declared amounts even if you sold no shares of the fund that year. By contrast, ETFs seldom declare such "phantom gains."
Finally, getting two mutual funds with no annual fee might not compensate you for other charges a brokerage firm might seek. The Wall Street Journal's Justin Baer wrote, "Fidelity won't make money on the no-fee funds themselves but hopes the investors who buy them will also put their money in other products that do bring in fees."
Several brokerage firms now offer no-transaction-fee slates with hundreds of ETFs. These are a better deal than no-annual-fee mutual funds, especially if you stick to popular ETFs that have low fees in the first place:
• FolioInvesting.com is a low-price leader. In its free Basic Account, Folio charges only $4 per trade for transactions you schedule in advance into "window trades" that occur twice each weekday. Even better, a Folio Unlimited Account offers $0 commissions on window trades of virtually all ETFs, mutual funds, and stocks in return for a $290 annual membership fee.
• Robinhood.com offers free trades, but with serious limitations. This startup, which was recently valued at $5.6 billion in a March 2018 venture-funding round, requires that you place all ETF and stock orders through a smartphone app. Robinhood has no trading website. You may find other brokerages' websites much easier to use. In addition, Robinhood doesn't offer mutual funds and doesn't support IRA, custodial, joint, or trust accounts.
• The Vanguard Group recently added many no-commission ETFs. In August 2018, Vanguard's brokerage arm began charging $0 commissions on hundreds of non-Vanguard ETFs. (Vanguard's own ETFs already charged no commission.) However, it was rated "the highest-cost online broker" in Barron's 2018 rankings, prior to the additions, because Vanguard's commissions on stocks and other securities are high.
The moral of the story? Don't be lured by free fees on a few items. Look at all the costs of any brokerage firm you're considering trading with.
|
|
Shelter unlimited gains tax-free — no Roth limitations
The tax-cut bill that passed the US Congress on Dec. 20, 2017, included a little-known break that can be huge. It makes investments of more than 10 years in certain low-income areas free from federal capital-gains taxes (and some state taxes).
The program is called Opportunity Zones. The 50 US states and Puerto Rico have selected a number of specific parcels of land — about 12% of all the census tracts in the US — as meeting the definitions of these zones. Here's how the no-tax policy works:
• Tax deferral. Say you sell assets in 2018 or 2019. You invest the cash into an Opportunity Zone (OZ) fund within six months. You can then defer paying any capital-gains tax on the profit until 2026 (i.e., up to eight years).
• Tax reduction. The taxable gain from your original sale is reduced by 10% if your money remains in the OZ fund for five years. The gain is reduced an additional 5% if your money remains for seven years.
• Tax-free gains. If your money remains in the OZ fund for 10 years, any gain you realized upon selling your stake is subject to no federal tax (and possibly no state income tax).
• Unlimited investment amounts. Unlike an IRA or a Roth, the legislation places no limits on the amount of investment you can put into an OZ fund or the amount of gains you can shelter from tax. Nor are households above a certain income level prohibited from benefiting.
Unlike a Muscular Portfolio, which has built-in protection from market crashes, investments in Opportunity Zones can be very risky. You could lose your entire investment if an OZ fund fails or goes bankrupt.
For this reason, only a small percentage of one's wealth should be involved. Even then, you shouldn't put all your chips on any single real-estate development. Instead, you should buy shares in a fund that's diversified across numerous developers with successful track records.
Which OZ funds are available? The IRS and Treasury are expected to complete regulations defining Opportunity Zones by the end of 2018. Until then, many details are unknown. But a few financial vehicles are already taking shape:
• Proposed exchange-traded funds (ETFs). Mebane Faber, CEO and CIO of Cambria Investment Management — sponsor of 10 unrelated ETFs — revealed in the transcript of an Aug. 1 podcast that his firm has reserved the ticker symbol OZ for a possible launch. Other ETFs will certainly spring up.
• Private-equity firms. Virtua Partners, a real-estate investment firm, announced what it called the first private-equity OZ limited-liability company. The Virtua Opportunity Zone Fund LLC intends to raise $200 million for qualifying projects.
Because Opportunity Zones are made up of low-income census tracts, there is a possibility that real-estate speculators will be rewarded with tax-free income for projects they would have located in distressed areas anyway, according to a Forbes column by Steven Rosenthal. Some investments may gentrify neighborhoods, turning them from affordable housing into high-priced enclaves.
However, the Urban Institute — a nonprofit that seeks to bolster neighborhoods — found that only 4% of Opportunity Zones are at risk of being gentrified, according to Faber's podcast. The other zones are presumably run-down industrial or commercial areas that are not primarily residential.
OZ funds are clearly designed for well-capitalized real-estate developers with extra cash who can afford to wait 10 years before withdrawing their gains. But new ETFs and LLCs will make the tax-free benefits available to ordinary investors as well. If you have a wad of cash you can afford to lose, a thorough legal analysis is available in a Skadden Arps PDF. As details become clear, they will be described in future paid editions of the Muscular Portfolios Newsletter.
|
|
Are cryptocurrencies a safe way to diversify?
Digital currencies — including Bitcoin, Ethereum, Ripple, and literally hundreds of others — are a new phenomenon that's given investors a lot of excitement.
Unfortunately, this is the kind of excitement you don't want. Cryptocurrencies (from the Greek kruptos, meaning hidden or secret, and Middle English curraunt, in circulation) have no intrinsic value. They rise and fall based on fads and fashions.
A bubble in cryptocurrencies in late 2017 peaked on Jan. 7, 2018. The dollar value of all digital coins combined totaled $828.5 billion, according to CoinMarketCap. But today — only eight months later — the market capitalization was down more than 76% (Figure 2).
Figure 2. The combined dollar value of all cryptocurrencies fell 76.4% from Jan. 7 through Jan. 11. Source: CoinMarketCap.
Any asset with such bubbles and crashes is not a reliable way to diversify an individual investor's portfolio. Until digital currencies prove themselves to be a reliable store of value, treat them mostly as a sideshow to serious investing.
|
|
Study says advisers are going away like travel agents
A basic premise of the book Muscular Portfolios is that individual investors can earn more money by managing it themselves. Using a simple computerized formula, individuals can enjoy market-like returns without fear of crashes, while keeping in their own pockets the typical wealth manager's all-in fees of 2%, 3%, or more.
Now an academic paper predicts that wealth managers will give way to free or inexpensive mechanical investing:
"Treanor [2014] stated that the banking sector is likely to see more change in the following 10 years than it did in the past two centuries because of innovations in financial technology, or FinTech. Wealth management services provided by banks and other traditional providers are, therefore, facing significant challenges from new technology-based providers that provide better access, lower fees, or improved processes."
The paper's authors, Kokfai Phoon and Francis Koh, say, "Our answer is a qualified 'yes,' " to the question of whether automated formulas will replace traditional stock-pickers. "This is a wake-up call for all wealth managers to step up their performance or be replaced."
As Barron's wrote in an unsigned editorial on Aug. 27: "The bull market hasn't extended to the stock prices of the stock pickers. Shares of Affiliated Managers Group, Federated Investors, Invesco, and Franklin Resources are all down by more than 25% so far in 2018."
Most travel agents went under in just a few decades, after the ease of making reservations on the Web became obvious. In the same way, financial advisers who charge high fees for an illusion of predictive power are likely to go under when faced with the superior gains of do-it-yourself investing.
|
|
Free stuff you might enjoy
If you've read this far, you deserve a reward — a downloadable 10-page PDF that summarizes my entire 444-page book free of charge:
PDF overview of the book Muscular Portfolios
The PDF is free of charge, and you are welcome to share it with anyone.
If you missed any of our previous newsletters, links to them can be found in the lower-right corner of our home page.
Thanks for your support!
|
|
|
|
|
|
|
