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The Muscular Portfolios Newsletter — No. 11 — Oct. 9, 2018
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 Write a review at Amazon
Oct. 9 is the official publication date of Muscular Portfolios. Everyone who preordered the book should have received it in their mailbox by that date. The book qualifies for Amazon Prime, so you can get it with 2-day free shipping or overnight, if you wish.
Now — if you have a copy of the book — write a quick review at Amazon. We love 5-star reviews, but if you can honestly give it only 4 stars, we'll still be friends. We just want to get the word out to as many people as possible. Thanks for your support!
Order from Amazon or Barnes & Noble
"The investing book of the decade ... Investors will be profiting from these methods for ages to come."
—HUGH TODD, CEO of ETFScreen.com
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Your feedback is great
 By Brian Livingston
I'm very gratified by the feedback from people who've read my book or this newsletter. I read every comment that comes in, and I try to repeat the information in the newsletter when other people would benefit from the answer.
Here's some Q-and-A that arrived this month. This stuff will eventually make its way onto a new FAQ page at our website — but you're reading it here first.
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Which funds represent small-cap equities best?
Q. "In Newsletter #5 [May 2, 2016] — Method 2, 'How to follow the portfolios if my site is down' — you include a link for the Mama Bear that has in it the tickers VTWO and TLT. They do not appear on the Muscular Portfolios Web page. Shouldn't the newsletter say VIOO and VGLT?" —Michael M.
A. During advance reviews of the manuscript, Vanguard's Russell 2000 ETF (VTWO) was originally used to represent US small-cap equities. That's what got into our beta-test newsletter in 2016. However, before the book went to press, we chose the S&P 600 small-cap index (VIOO) for the Mama Bear Portfolio instead. We also chose the small-cap growth and value subsets of the S&P 600 (VIOG and VIOV) for the Papa Bear Portfolio.
The S&P 600 consistently outperforms the Russell 2000. The difference is almost 2 percentage points annualized, as shown in Figure 1. The S&P 600 also suffers smaller losses than the Russell 2000 during bear markets.
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Figure 1. The S&P 600 small-cap index consistently outperforms the Russell 2000. The difference is almost 2 percentage points annualized.
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The main reason for the S&P 600's outperformance is that the Standard & Poor's Index Committee includes primarily those small-cap stocks that are profitable. The Russell 2000, by contrast, encompasses every small company, including many that are unprofitable and a drag on performance. The S&P 600 uses a simple version of what experts call a "quality filter."
A similar process resulted in Vanguard's VGLT long-term Treasury bond fund being selected for the book, rather than iShares' TLT. VGLT has a lower annual fee than TLT and roughly similar performance.
For more information on why these funds were selected, see Newsletter #9. Also see the Mama Bear and Papa Bear pages at our website.
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Pixel phones need fixing to support redirection
Q. "The tiny links in your book, like bri.li/1000, work on my desktop computer, but not on my Google Pixel phone." —S.Y.
A. The Pixel phone doesn't natively support redirection. That hurts Web address shorteners such as "bri.li" that let you enter a short address to go to a Web page with a very long address. The solution is to configure your Pixel browser to support tiny links as a "Desktop site," as shown in Figure 2.
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Figure 2. Users of Pixel phones must configure their browsers to view links as a "Desktop site," as shown at left. This supports redirection by "Web address shorteners" such as bri.li.
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The book Muscular Portfolios includes 576 footnotes. All of them have a tiny bri.li version, so no one has to enter by hand the long destinations, some of which are hundreds of characters long. (We're lookin' at you, Google Books.)
If you have any further problems, you can visit the book's 1st edition notes page. It shows both the tiny and the long versions of every destination found in the book's footnotes.
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What other people are saying...
"The biggest obstacle to long-term investment success is 'the dogma that you must beat the S&P 500 during bull markets.' So writes Brian Livingston in his new book Muscular Portfolios: The Investing Revolution for Superior Returns with Lower Risk. I couldn’t agree more."
—Mark Hulbert, founder of the Hulbert Financial Digest, in MarketWatch, Oct. 1, 2018
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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 our deliverability.
Instead, ask your friends to go to our home page and get a subscription for themselves. Easy!
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SPECIAL REPORT:
Are equity funds better when active or passive?
US equity funds often promote the idea that active management (selecting stocks using indicators) is more profitable than passive funds (index funds that hold all the stocks of a particular category, such as large-caps). But a new study of the past 15 years (2003 through 2017) shows that index funds perform just as well as active funds — especially when the lowest-cost funds in both groups are compared against each other.
"There is no statistically distinguishable difference between the performance of actively managed funds and passively managed funds," according to the findings of David Nanigian, associate professor of finance at California State University, Fullerton. His paper is posted on the Social Sciences Research Network (SSRN).
Figure 4 shows that active funds in the cheapest one-fifth of annual fees slightly outperformed the cheapest one-fifth of passive funds. About 46% of dollars invested in US equity funds are in those in the lowest-cost fifth. The study weighted its results by the dollar value of each fund.
The study separately compared all low-cost funds, and then only active and passive funds that have similar low fees as each other. Passive funds outperformed active funds by 0.22 and –0.04 percentage points, respectively. Neither figure is statistically different from zero. (The study measured each fund's "alpha," which is its outperformance after adjusting for the four Fama-French-Carhart equity factors: market, size, value, and momentum.)
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Figure 4. Active funds perform no better, statistically, than index funds. Source: David Nanigian (2018).
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The implications of these findings are huge for Muscular Portfolios. The menu of funds that Muscular Portfolios select from each month (as shown in the tables on the website) are ultra-low-cost index funds that keep your expenses down.
If actively managed funds can't do better than passive funds, there's no reason to try to replace an index fund in a portfolio's menu with a "better" active fund that might exist somewhere.
Differences in performance might arise due to random chance. But, on average, index funds extract as much of the profit from a given equity class as actively managed funds do.
For more information, see "The Historical Record on Active vs. Passive Mutual Funds" at SSRN paper 3246151.
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The most profitable locations for opportunity zones
In my Sept. 12 paid newsletter, I revealed that totally tax-free capital gains will be available for investors who take advantage of "opportunity zones" (OZs).
Most OZ funds for investors are open only to "accredited investors." That means your household must have $200 million to $300 million of annual income and $1 million or more of investable capital.
However, Fundrise is a "crowdfunding" site that is now assembling a waiting list for investments as low as $25,000. That ain't nothing, but it's a lot easier to come up with $25,000 than $1 million. The wait is necessary because the US Department of Treasury and the IRS are not expected to release formal regulations to permit opportunity funds until the end of 2018.
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Figure 5. Profits held in an opportunity fund for 10 years can be withdrawn with no capital-gains tax. Image credit: Fundrise.
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Fundrise has helpfully published an analysis of what it considers the 10 most profitable cities for OZ investments, based on each area's five-year home-value increase.
If you have money you can leave alone for 10 years — perhaps for future retirement needs or a child's college expenses — opportunity zones are worth looking into.
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Free stuff you might enjoy
If you've read this far, you deserve a reward — a free, downloadable 10-page special report that summarizes the book Muscular Portfolios and also the latest advances in financial technology (fintech):
Special report on Muscular Portfolios and fintech
If you missed any of our previous newsletters, links to them can be found in the lower-right corner of our home page.
If you have comments to contribute, start a new email message to a special address that goes directly to author Brian Livingston: Contact us.
Thanks for your support!
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