|
|
|
|
|
The Muscular Portfolios Newsletter — No. 12 — Nov. 12, 2018
|
|
|
StockCharts.com gets muscular
 By Brian Livingston
I'm extremely pleased to report that StockCharts.com — the best platform for free financial graphing with additional expert and pro levels — has invited me to write a twice-weekly column. It's called "Muscular Investing" (a slight name change to distinguish it from my new book Muscular Portfolios). It appears most Tuesday and Thursday mornings in the free section of the site, which is open to everyone.
For an overview of my mission at StockCharts, look at my introductory column. It summarizes on a single Web page my latest research. This inaugural manifesto is profusely illustrated, like the book itself.
My first regular column, a four-part series, reveals the secrets of the well known Bucket Portfolio by Morningstar Inc. The analysis uses 45-year simulations of the actual asset classes used in this retirement strategy, which was developed by the company's director of personal finance, Christine Benz.
I show that the static portfolio, which never changes the percentages it assigns to its nine different index funds, far underperforms the market return. But with one simple tweak, the revised Bucket Portfolio improves by 3½ percentage points a year. That makes a vast difference in an investor's ending wealth.
Please read "Double the Gain of the Morningstar Bucket Portfolio." (See Figure 1.)
|
|
|
Figure 1. The Morningstar Bucket Portfolio far underperforms the market return. But an easy change massively improves the strategy's financial results.
|
|
When my columns at StockCharts consist of two or more parts, the beginning and ending of every installment will link to the past and future parts. If a future part hasn't been posted yet, the link to it will start working on the date the part is posted. (If you click a link prematurely, you'll see a polite message asking you to wait until the day the desired installment is live.)
With its powerful graphing features, you might think StockCharts appeals only to day traders and other short-term traders. To explore that, I invited viewers of my appearance on StockCharts TV on Nov. 7 to answer a poll. Figure 2 shows that a slight majority of respondents (52%) said they change their investment positions only once or twice a month or less often.
Muscular Portfolios, which require a gradual adjustment in your position no more than once a month, is perfect for these long-term traders. More than 100 million households in the US, UK, Canada, and other countries hold a 401(k) or a similar account. Most 401(k) plans prevent account holders from buying individual stocks — usually only mutual funds and the like are available. Most plans also prohibit their owners from trading more than once or twice a month. These savers are the audience the most in need of a simple growth strategy.
|
|
|
Figure 2. In an online poll, a slight majority of StockCharts respondents said they trade only once or twice a month or less often. It isn't a scientific sample, but the poll suggests that most StockCharts visitors are not day traders but instead are long-term traders.
|
|
To see all of my StockCharts columns as they appear — there are a grand total of three at this writing — visit the Muscular Investing archive page.
|
|
Yahoo Finance TV showcases some old wisdom
The huge streaming video service, Yahoo Finance TV, interviewed me on Nov. 1 about my book and the likelihood of a bear market. (I believe a bad one will hit us within a year or so, if it hasn't already begun.)
The edited version of the interview provides us with a nice little 5-minute clip on asset-rotation strategies like Muscular Portfolios. Can we expect that just the two asset classes most Americans choose between — US stocks and US bonds — will provide the outsize gains we've gotten used to in the past 10 years? Absolutely not! Investors need other asset classes to take advantage of diversification and momentum (Figure 3).
|
|
|
Figure 3. Yahoo's Jen Rogers and her two co-hosts lobbed questions at me on investing. I survived the bright lights, none the worse for wear, I think.
|
|
|
To see the clip, play the YouTube video.
|
|
 Get the book that frees you from Wall Street
Muscular Portfolios has received rave reviews from experts of all kinds:
"This is an amazing book and one which carries my highest recommendation." —DR. HUMPHREY LLOYD, author of While Memory Serves and numerous trading books
To order the book, visit Amazon, Barnes & Noble, or any bookseller.
"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
|
|
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 website and get a subscription for themselves.
|
|
New regulations enable tax-free capital gains
"Opportunity Zones" (OZs, for short) are a little-known feature of the tax-cut act Congress passed on Dec. 22, 2017. The bill established a new way to shelter an unlimited amount of capital from taxation for 10 years or possibly even longer. I wrote about this program in the paid sections of the September 2018 and October 2018 newsletters.
In the past few weeks, a big question mark has been lifted from these zones. The US Treasury Dept. and the IRS jointly issued proposed regulations clarifying which investments should and should not qualify for the tax break.
The potential is vast. The bill empowered every state to declare one-quarter of its lowest-income areas to be OZs. The states chose more than 8,700 census tracts — about 10% of America's land mass. As an example, Figure 4 shows the New York metro area with the selected tracts in gray.
|
|
|
Figure 4. Low-income census tracts covering about 10% of the US are designated as "Opportunity Zones." Map by Develop Advisors/ESRI.
|
|
Like all federal programs, Opportuity Zones have rules:
• Only capital gains that you realized by selling some asser — including stocks, bonds, or even your home — can be invested in an OZ. You must invest the cash within 180 days to get the preferential tax treatment.
• The capital gains tax on your original sale can be deferred until Apr. 15, 2027.
• If you leave your investment in an OZ business for five to seven years, your eventual capital gains tax is reduced 10% to 15%.
• If you remain invested for 10 years, any gains you withdraw from an OZ business are totally free of federal tax, and possibly state and local taxes, too.
Unfortunately for those with small accounts, most OZ funds are open only to "accredited" investors. To be accredited, your household must have over $1 million in investable capital and more than $300,000 of annual income in both of the past two years ($200,000 for singles).
The good news is that help is on the way for middle-class savers. "Crowdfunded opportunity funds are coming," according to Steve Glickman. He's the Washington, DC, CEO of Develop Advisors, which incorporated as recently as Sept. 11, 2018. Its online mapping application generated the image in Figure 4.
As an example of the crowdfunding doors that will soon open, Glickman cites Fundrise. It's a nationwide real-estate firm that's assembling a waiting list for buy-ins that can be as low as $25,000.
Opportunity zones are not limited to real estate in urban areas. In an interview, Mebane Faber, CEO of Cambria Investment Management in El Segundo, Calif., said, "If you type kansas [into Develop Advisors’ mapping app], you’ll see a lot of farmland."
To be sure, there are concerns aplenty:
• Some projects may gentrify low-income areas. The nonpartisan but progressive-leaning Center for American Progress and even Forbes columnist Steve Rosenthal have raised issues about the fairness of developments that may go forward.
• You shouldn't invest more than you can afford to lose. An OZ fund can decline in value. Individual projects might even go bankrupt rather than generating profits.
• You shouldn't invest money you might need in the next 10 years. The tax benefit is for long-term investors — say, people who are a decade away from paying a kid's college tuition or retiring — and you’d lose the tax-free status of any invested dollars you removed sooner than that.
Most individual investors should stick with Muscular Portfolios for great long-term gains with reasonable safety. But if paying zero capital gains tax after a decade of locking up your money sounds good to you, read Accounting Today's analysis of the proposed OZ rules.
|
|
How Robinhood.com affords no-commission trading
The book Muscular Portfolios recommends two ultra-low-cost or no-cost brokerage firms for individual investors:
• Robinhood.com is a starter brokerage for people who are just beginning to save and have less than $10,000 to invest. The firm charges nothing ($0) per trade, keeping costs down by requiring that all transactions be submitted via a smartphone. The company maintains no Web server for trades. If you have, say, $5,000 of investable money, paying even $50 a year for trades would consume 1% of your portfolio — too high of a percentage. Using Robinhood avoids that expense.
• FolioInvesting.com is for anyone who has more than $10,000 to invest. The firm's fully functional website is ideal for specifying trades in percentages, not "shares." For example, you can simply enter ABC, 50%, XYZ, 50%. The website automatically calculates the dollars and shares for you. As an ultra-low-cost brokerage, Folio charges only $4 for "window trades." These are orders that you can safely place when the market is closed. The firm executes your order during market hours when trading costs are reasonable, not at the opening bell, when costs can be very high. Folio also offers no-commission trades to users who pay an annual fee.
Despite Robinhood's smartphone-only approach, it's no garage startup. Its venture-capital infusions give the private firm a stunning $5.6 billion valuation. That makes it a "unicorn" among Silicon Valley success stories. The company says an initial public offering is in its future.
|
|
|
Figure 5. Robinhood.com accepts transactions solely from smartphones, not through a website, and supports its expenses using "payments for order flow." Photo by Piotr Swat/Shutterstock.
|
|
Bloomberg News created a ripple by reporting in an Oct. 15, 2018, article that Robinhood supports its commission-free service by accepting payment from market makers who then execute the actual trades. The Wall Street Journal reported a similar story in its Nov. 10–11 issue.
That business structure isn't unusual. It's called "payment for order flow." It's routinely used — as the reporters for both Bloomberg and WSJ acknowledged — by E-Trade, Charles Schwab Corp., TD Ameritrade, and other brokerage firms.
If the payments are reasonable, retail customers may get a better price when buying and selling shares via the market makers. Customers would typically receive a worse price if the orders had gone straight to an exchange that charges higher fees. The WSJ article included a table showing that more than 90% of typical retail orders save money via market makers. This benefit is called "price improvement."
The real issue isn't payment for order flow (although it's a murky subject that cries out for reform). Robinhood didn't invent the practice, but the firm appears to rely heavily on it to support its no-fee business model. The concern is that — unlike E-Trade and other brokerage firms — Robinhood doesn't publish how much price improvement its customers are getting. This makes it impossible to say whether Robinhood's no-commission trades actually save investors money, compared with investors paying a larger brokerage firm $4.95 to $6.95 per trade (with only pennies, not dollars, associated with a market maker).
I appeal to Robinhood to start publishing its price improvement figures soon. There's nothing wrong with a brokerage accepting payments from market makers, if the middlemen can truly get retail investors better prices for their small trades.
I'll write more about this when additional facts come to light. In the meantime, I continue to recommend Robinhood only for people who have less than $10,000 to invest. With that small of a stake, a novice investor is best off with my book's "starter" formula, known as the Baby Bear Portfolio. That strategy involves no more than two trades per year: only a year-end rebalance back to 50/50 is ever needed. Making only two transactions a year — with the low balances that a starter portfolio assumes — won't cost a new saver much at Robinhood or any other brokerage.
|
|
How to access past paid newsletter content
There have been only two previous newsletters that contained both free and paid content: Issue #10 in September 2018 and Issue #11 in October 2018.
Within a few months, enough paid content will have accumulated to warrant a special paid section on the website where you can sign in and read it. Until then, I'll give you the links right here, so you can go back and review the paid content in any previous newsletter.
(Past free newsletters can be accessed from the links in the lower-right corner of any page at our website.)
Paid Issue #10 — Sept. 12, 2018
• Get up to 10 times more yield on your cash
• The best way to get no-transaction-fee ETFs
• Shelter unlimited gains tax-free — no Roth limitations
• Are cryptocurrencies a safe way to diversify?
• Study says advisers are going away like travel agents
Paid Issue #11 — Oct. 9, 2018
• Your questions, answered
• Which funds represent small-cap equities best?
• Pixel phones need fixing to support redirection
• SPECIAL REPORT: Are equity funds better when active or passive?
• The most profitable locations for opportunity zones
|
|
|
|
|
|
|
