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The Muscular Portfolios Newsletter — No. 13 — Dec. 17, 2018
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Rock your ‘529’ college savings plan
 By Brian Livingston
There are 13.6 million tax-free college savings accounts in the US, and millions more in other countries — but most of the program administrators produce mediocre results. Often called "529" plans, many of these organizations make investors pay high fees while providing account holders with too few asset classes to form a well-diversified portfolio.
Fortunately, there are a few easy ways parents can get great gains out of a 529-type plan, with no fear of market crashes. The techniques can even fund a child's private or religious K–12 school up to $10,000 a year, due to a provision Congress slipped into the December 2017 tax-cut bill.
For the best returns, see my StockCharts column.
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Figure 1. With only a minor effort, any old dog can learn new tricks to pump up the gains of a mediocre college savings plan. Photo by Ermolaev Alexander/Shutterstock.
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Federal Thrift Savings Plan traps 5 million workers
Every employee of the US government is entitled to use the tax-deferred TSP (Thrift Savings Plan). The program has several good features. The fund contributes a small match into employees' accounts — even if the workers contribute nothing — and the Vanguard funds in the plan are very low cost. But the TSP is ultimately frustrating.
The biggest problem is that the TSP offers only five major asset classes, one of which is just a cash-like money fund. Even with that limited set of investment options, however, a website called My Plan IQ has been proving in real time for 18 years how to use momentum to make sure a TSP account is holding only the asset classes that are most likely to go up in the next month.
Figure 2 reflects real-time tracking since 2001. (It is not a backtest.) It shows that a TSP account that was improved with momentum boosted by almost half a percentage point the annualized return of holding all five funds in a static, equal-weight strategy.
Even better, the My Plan IQ formula, which is fully disclosed, never experienced any losses greater than about 11%. By contrast, the static equal-weight portfolio was down a discouraging 21% and 29% in the last two bear markets. (All drawdowns are measured between month-ends.)
For details, read my full article.
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Figure 2. The addition of a simple momentum rule increases your gains and reduces your losses to a tolerable level. Source: My Plan IQ.
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Help your fellow investors find these articles
If you have a blog or a social-media account, please post links to four subjects I've recently revealed (including the two articles that are summarized above):
Rock your '529' college savings plan
https://StockCharts.com/articles/muscular-investing/2018/11/morningstar-bucket-portfolio-1.html
Federal Thrift Savings Plan (TSP) traps 5 million workers
https://StockCharts.com/articles/muscular-investing/2018/11/federal-thrift-savings-plan-tsp-1.html
Double the gain of the Morningstar Bucket Portfolio
https://StockCharts.com/articles/muscular-investing/2018/11/morningstar-bucket-portfolio-1.html
One-page summary of the entire book Muscular Portfolios
https://StockCharts.com/articles/muscular-investing/2018/10/muscular-manifesto.html
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Complete statistics are coming in January
With the US equity market falling into a full-blown correction this month, many readers have asked how Muscular Portfolios are handling the swoon.
After the market closes for the year on Dec. 31, I plan to post complete month-by-month statistics. These numbers will start with the simulations from 1973 through 2015. The data will continue with real-money tracking by an independent third party in 2016, 2017, and 2018. The process of posting all of this data will occupy me for several days in January.
In the meantime, Figure 4 shows how the principle of asset rotation gives a Muscular Portfolio a great advantage. After the Dow Industrials hit an all-time high on Oct. 3, both the DJAI and the S&P 500 (including dividends) have fallen into a correction. The S&P 500 total return is down 10.70% from Oct. 1 through Dec. 14. But the Mama Bear is down only 6.38% during the same 2½ months.
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Figure 4. Real-money tracking shows the Mama Bear Portfolio is far outperforming the S&P 500 during the current stock-market correction. Source: FolioInvesting.com.
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Here's how the Mama Bear's holdings each month side-stepped the correction:
At Sept. 30 close: US small-cap stocks, US large-cap stocks, US REITs
At Oct. 31 close: T-bills, US REITs, US large-cap stocks
At Nov. 30 close: T-bills, US REITs, US large-cap stocks
Notice that asset rotation required you to change only a single ETF on Oct. 31 (or whatever day of the month you choose to reallocate your portfolio). With this one small tilt, the Mama Bear avoided the S&P 500's stomach-churning dive. This is not market timing, with its sudden shifts from 100% to 0% equities. Instead, asset rotation involves a gradual tilt toward whichever index funds rank the strongest, as listed completely free at our website. Asset rotation never requires you to switch 100% to cash.
I hesitate to even show you Figure 4, because it's so short-term. A Muscular Portfolio is deliberately designed to underperform the high-risk S&P 500 during entire bull markets. A Muscular Portfolio loses so much less during bear markets that it surpasses the S&P 500 in the long term. Investing strategies should never be evaluated on any period shorter than a complete bear/bull market cycle — preferably several complete cycles.
You might think that the Mama Bear's outperformance of 4.32 percentage points in 2½ months isn't much. But it's a lot! Just to get back to even, the S&P 500 has to gain 12%. The Mama Bear needs to gain only 6.8%. That gives the Mama Bear a tremendous head start in the months to come.
The book Muscular Portfolios shows that even Warren Buffett, an acknowledged financial genius, doesn't beat the S&P 500 during bull markets. His entire stunning outperformance since 2000 came from losing less money then the stock market during the 2000–2002 and 2007–2009 bear markets.
We'll have three years of real-money results to post in the coming month. The numbers are provided by FolioInvesting.com. I selected this bargain brokerage firm years ago, specifically because its performance graphs (like the one in Figure 4) cannot be faked. To make Figure 4 clear, I just added headlines and round markers. The lines are exactly as Folio drew them. I'll reveal the whole enchilada in the Muscular Portfolios Newsletter as early as possible in February 2019.
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 Get the book that 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
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 With your paid subscription, you're receiving the extra sections of the newsletter below. Free subscribers don't receive the additional material.
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Get Vanguard index funds for 2/3 less buy-in
As readers of the book Muscular Portfolios know, I recommend that individual investors use ultra-low-cost exchange-traded funds. ETFs report their actual prices throughout the market day. This enables you to check the rankings at our website at 3 p.m. Eastern Time and make any monthly tune-up that's necessary before 4 p.m. the same day. By contrast, mutual funds have opaque values. They don't compute their closing prices until hours after the market closes.
ETFs also have tax advantages. Mutual funds declare "phantom profits" (distributions) near the end of each year. In a taxable account, you must pay taxes on these phantom gains, even if you didn't sell a single share. ETFs almost never subject investors to these taxable events.
But many people own 401(k) accounts or other savings plans that offer only mutual funds, not ETFs. If you're in that situation, the Vanguard Group, which created the first index fund in 1976, has just made it much less pricey for you to get into some of its mutual funds.
For years, Vanguard has offered three kinds of index funds:
- Investor Class mutual funds required a minimum investment of $3,000.
- Admiral Class mutual funds required a minimum investment of $10,000.
- ETFs required no minimum investment.
For individuals who wouldn't or couldn't purchase ETFs, for whatever reason, an Investor Class mutual fund was the only way to get the same performance, for people with $3,000 to $9,999 to invest. But Vanguard's Investor Class mutual funds charged higher annual fees than the firm's ETFs. Vanguard mutual funds with the same low fees as their ETFs were available only to those who had $10,000 or more to buy an Admiral Fund.
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Figure 5. Illustration by Artist_R/Shutterstock.
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For example — as shown in Appendix A of Muscular Portfolios — Vanguard's ETF that tracks the entire US stock market, VTI, charges an annual fee of a mere 0.04%. Until November 2018, a fee that low was available in a Vanguard mutual fund only if you had $10,000 or more to put into the firm's Admiral Shares mutual fund, VTSAX. If you had only $3,000 to $9,999 to invest, you were stuck with the Investor Shares mutual fund, VTSMX, with its 0.15% annual fee — more than triple the expense ratio.
But last month, Vanguard announced that it was dropping the minimum buy-in for 38 of its Admiral Shares mutual funds to $3,000. Because the firm's parallel Investor Shares would no longer have any advantage, the firm has closed them to new investors. The old funds however, may remain available in some institutional retirement plans.
Vanguard plans to automatically convert owners of Investor Shares to Admiral Shares in the second quarter of 2019. The transaction will be tax-free, since investors will simply be switching from one share class to another within what is technically considered to be the same mutual fund. For details, see Vanguard's conversion FAQ.
For a complete list of the 38 mutual funds that are involved in the switcheroo, visit Vanguard's matching funds list.
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Investor beware! Some funds have front-end loads
Just because a mutual fund is from Vanguard doesn't mean you can let down your guard, so to speak. Even Vanguard, the pioneer of index funds, charges fees you might not expect.
For example, 7 of Vanguard's 38 revised Admiral Shares mutual funds charge front-end loads when you purchase them. These fees can be as high as 1.0%. In addition, three of the funds also charge a 0.25% redemption fee when you sell the shares.
To avoid those fees, purchase exchange-traded funds. ETFs from Vanguard — or any other provider — charge no purchase fees or redemption fees. (Vanguard says, "The fee is paid directly to the fund and therefore is not considered a load." But it comes out of your pocket, whatever you may call it.)
The following Admiral Shares charge a 1.0% purchase fee:
VLTCX — Long-term corporate bonds
The following charge a 0.75% purchase fee:
VGAVX — Emerging-markets government bonds
The following charge a 0.25% purchase fee and a 0.25% redemption fee:
VGRLX — Global ex-US real estate
VIAAX — International dividend appreciation
VIHAX — International high-dividend yield
The following charge a 0.25% purchase fee:
VICSX — Intermediate-term corporate bonds
VTEAX — US tax-exempt bonds
For more information, see Vanguard's matching funds list.
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How to access past paid newsletter content
There have been only three previous newsletters that contained both free and paid content:
Paid Issue #12 — Nov. 11, 2018
Paid Issue #11 — Oct. 9, 2018
Paid Issue #10 — Sept. 12, 2018
Within a few months, enough content will have accumulated to warrant a special paid archive on the website. Until then, the above links allow you to read 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.)
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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 book Muscular Portfolios and 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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