Fidelity Brokerage and IRA Bonuses for New Asset Transfers

fidelity_logoFidelity Investments has a few different bonuses if you transfer a certain levels of new assets over to them. These are handy if you want to move money out of an old 401(k) plan or are looking to try out a new broker. Besides a cash deposit, you can also do an in-kind transfer and move over your existing investments without incurring any capital gains. Please note that for some you must register soon by March 31st, 2017. You can register now and still have 60 days to move over assets.

You must register first using one of the links below. Compare and pick your favorite bonus; you can only pick one per rolling 12 months. Net new assets means external new money in minus money out, and you must keep it there for 9 months or they will clawback the bonus. (This not a guarantee, but I can report that I did not receive a 1099 for my past Fidelity bonus.)

United MileagePlus Bonus Miles

  • Link:
  • Valid for new or existing Fidelity customers.
  • Account types: Joint or individual non-retirement brokerage accounts only
  • Bonus amount: 15,000 miles for $25k+, 25,000 miles for $50k+, and 50,000 miles for $100k+ in net new assets.
  • New accounts or deposits into existing accounts must be funded within 60 days of registration (“qualification period”).
  • Must maintain the minimum qualifying account balance (minus any losses related to trading or market volatility, or margin debit balances) at Fidelity for nine months from the date on which the reward is received. Please allow 6-8 weeks after completed qualifying activity for miles to post to your account.
  • Offer expires March 31, 2017. Offer is limited to one per individual per rolling 12 months and may not be combined with other offers.

American Airlines AAdvantage® Bonus Miles

  • Link:
  • Valid for new or existing Fidelity customers.
  • Account types: Joint or individual non-retirement brokerage accounts only.
  • Bonus amount: 15,000 miles for $25k+, 25,000 miles for $50k+, and 50,000 miles for $100k+ in net new assets.
  • New accounts or deposits into existing accounts must be funded within 60 days of registration (“qualification period”). Please allow 6-8 weeks after completed qualifying activity for miles to post to your account.
  • Must maintain the minimum qualifying account balance (minus any losses related to trading or market volatility, or margin debit balances) for 9 months from the date on which the reward is received.
  • Offer expires March 31, 2017. Offer is limited to one per individual per rolling 12 months and may not be combined with other offers.

Delta SkyMiles Bonus

  • Link:
  • Valid for new or existing Fidelity customers.
  • Account types: Joint or individual non-retirement brokerage accounts only.
  • Bonus amount: 15,000 miles for $25k+, 25,000 miles for $50k+, and 50,000 miles for $100k+ in net new assets.
  • New accounts or deposits into existing accounts must be funded within 60 days of registration (“qualification period”). Please allow 6-8 weeks after completed qualifying activity for miles to post to your account.
  • Must maintain the minimum qualifying account balance (minus any losses related to trading or market volatility, or margin debit balances) for 9 months from the date on which the reward is received.
  • Offer expires March 31, 2017. Offer is limited to one per individual per rolling 12 months and may not be combined with other offers.

Cash Bonus (IRA or Taxable Brokerage Account)

  • Link:
  • Valid for new or existing Fidelity customers.
  • Account types: Nonretirement (individual or joint) or Fidelity IRA (rollover IRA, traditional IRA, Roth IRA, SEP-IRA) brokerage accounts.
  • Bonus amount: $200 for $50k+, $300 for $100k+, $600 for $250k+, $1,200 for $500k+, and $2,500 for $1M+ net new assets. Rollovers from a former employer’s Fidelity-record kept workplace savings plan are not eligible for this offer.
  • New accounts or designated eligible accounts must be funded within 60 days (“the qualification period”). Please allow 2-4 weeks after the qualification period for the bonus award to be credited to your account.
  • Must maintain the minimum qualifying account balance (minus any losses related to trading or market volatility, or margin debit balances) for 9 months from the date on which the reward is received.
  • No stated expiration date. Offer is limited to one per individual per rolling 12 months and may not be combined with other offers.

Apple Store Gift Card

  • Link:
  • Valid for new or existing Fidelity customers.
  • Account types: Joint or individual non-retirement brokerage accounts only.
  • Bonus amount: $300 gift card for $75k+ and $500 gift card for $150k+ in net new assets.
  • New accounts or deposits into existing accounts must be funded within 60 days of registration (“qualification period”). Please allow 4-6 weeks after completed qualifying activity for miles to post to your account.
  • Must maintain the minimum qualifying account balance (minus any losses related to trading or market volatility, or margin debit balances) for 9 months from the date on which the reward is received.
  • Offer expires July 31, 2017. Offer is limited to one per individual per rolling 12 months and may not be combined with other offers.

Fundrise Income eREIT Review 2017: One Year Update


Here’s an update on my $2,000 investment into the Fundrise Income eREIT. Fundrise is taking advantage of recent legislation allowing certain crowdfunding investments to be offered to the general public (they were previously limited only to accredited investors). REIT = Real Estate Investment Trust. This specific eREIT has sold out of its $50 million offering, but Fundrise has since opened regional eREITs called the West Coast, Heartland, and East Coast eREITs. The highlights:

  • $1,000 investment minimum.
  • Quarterly cash distributions.
  • Quarterly liquidity window. You can request to sell shares quarterly, but liquidity is not always guaranteed.
  • Fees are claimed to be roughly 1/10th the fees of similar non-traded REITs. Until Dec 31, 2017, you pay $0 in asset management fees unless you earn a 15% annualized return.
  • Transparency. They give you the details on the properties held, along with updates whenever a new property is added or sold.

Why not just invest in a low-cost REIT index fund? I happen to think most everyone should invest in a low-cost REIT index fund like the Vanguard REIT ETF (VNQ) if they want commercial real estate exposure. I have many times more money in VNQ than I have in Fundrise. VNQ invests in publicly-traded REITs, huge companies worth up to tens of billions of dollars. VNQ also has wide diversification and daily liquidity. But as publicly-traded REITs have grown in popularity (and price), their income yields have gone down.

Fundrise makes direct investments into smaller properties with the goal of obtaining higher risk-adjusted returns. They do a mix of equity, preferred equity, and debt. Examples of real-life holdings are a luxury rental townhome complex and a $2 million boutique hotel. From their FAQ:

Specifically, we believe the market for smaller real estate transactions (“small balance commercial market or SBC”) is underserved by conventional capital sources and that lending in the market is fragmented, reducing the availability and overall efficiency for real estate owners raising funds. This inefficiency and fragmentation of the SBC market has resulted in a relatively favorable pricing dynamic which the eREIT intends to capitalize on using efficiencies created through our technology platform.

Here’s a comparison chart taken from the Fundrise site:


Quarterly liquidity. As noted, the investment offers the ability to request liquidity on a quarterly basis, but it is not guaranteed that you can withdraw all that you request. In addition, you may not receive back your full initial investment based on the current calculation of the net asset value (NAV).

Dividend reinvestment. I chose to have my dividends paid directly into my checking account. However, you can now choose to have your dividend automatically reinvested across currently available offerings.

Tax time paperwork? All you get at tax time is a single 1099-DIV form with your ordinary dividends listed in Box 1a. That’s it; every other box is empty. This is much easier than dealing with the 10-page list of tax lots from LendingClub or Prosper.

Dividend income updates.

  • Q1 2016. 4.5% annualized dividend was announced. This was the first complete quarter of activity, so the dividend was not as large as when funds became fully invested. The portfolio had 13 commercial real estate assets from 8 different metropolitan areas, with approximately $31.5 million committed.
  • Q2 2016. 10% annualized dividend announced, paid mid-July. Portfolio now includes 15 assets totaling roughly $47.25M in committed capital.
  • Q3 2016. 11% annualized dividend announced, paid mid-October.
  • Q4 2016. 11.25% annualized dividend announced, paid mid-January. Portfolio now includes 17 assets and all of the $50 million has been invested.

Screenshot from my account:


Recap and next steps? It has now been over a year since my initial investment in the Fundrise Income eREIT, designated my Real Estate Crowdfunding Experiment #2. I’ve earned $183.01 in dividends on my initial $2,000 investment. The quarterly dividends have arrived on time, I get regular e-mail updates, and it has been nearly zero-maintenance. There is still considerable risk to principal, as with any real estate investment.

I should probably just sit back and collect more distributions but I want to do more “experimenting”. My choices are to either move these funds into another investment or to invest a more significant amount into Fundrise. Therefore, although it is not a wise move for a long-term investor, I have chosen to test out their quarterly liquidity window after only 15 months. I want to see how easy (or hard) it is to take advantage of this advertised quarterly liquidity. I made a request to sell my shares before their 3/15 deadline for Q1 2017, and they will start processing that request at the end of March. I will provide further updates on this process in the future.

High-Cost Index Funds and Low-Cost Actively Managed Funds

Here’s a Vanguard Blog post called Mind fund details, not labels by Frank Kinniry that includes some good reminders about the mutual fund and ETF industry:

  • Low-cost vs. high-cost is more important than actively managed vs. passively managed.
  • Index funds can have high expense ratios.
  • Actively-managed funds can have low expense ratios.
  • You should also evaluate based on “managerial talent”, although that is much harder to judge than costs.
  • Therefore… look under the hood at the asset allocation and expense ratio!

Did you know that the average Vanguard active fund is actually cheaper than the average non-Vanguard index fund or ETF?


A consistent history of low costs and solid, conservative management is why I have overall positive opinions of the Vanguard Wellington and Vanguard Wellesley mutual funds. If you accumulate enough assets to qualify for Admiral Shares, they only cost 0.18% and 0.15% respectively. I wouldn’t necessarily recommend them to my family as my #1 choice, but I wouldn’t tell them to switch out either. I would certainly pick Wellington/Wellesley in a 401(k) plan over a similar allocation towards expensive index funds or an expensive target retirement fund.

Bottom line. There are a lot of expensive index funds out there. Watch out.

Vanguard ETF vs. Mutual Fund Admiral Shares

Building My Portfolio BlocksAllan Roth has a new article called Why ETFs Won’t Replace Mutual Funds. Inside, he offers the following reasons why if you are buying Vanguard funds, he typically recommends the Admiral Shares mutual fund over the ETF.

Vanguard Mutual fund advantages

  1. Can buy fractional shares
  2. No premium or discount—all transactions are at net asset value
  3. No spreads between bid and ask
  4. Less cash drag, as dividends are reinvested more quickly
  5. Can do a tax-free exchange from mutual funds to ETFs, but not the reverse
  6. Can do automated dollar cost averaging

In the interest of fairness, I will offer up the following:

Vanguard ETF advantages

  • Lower minimum investment amounts. Usually one share is only about $100, and some brokers even offer fractional shares.
  • No purchase or redemption fees. No short-term trading fee. Vanguard has these on a few mutual funds, for example the Vanguard Global ex-US Real Estate Fund Admiral Share charges a 0.25% fee on both purchases and redemptions.
  • You can easily hold, buy, trade Vanguard ETFs at any brokerage firm. The cost to trade will be as with any stock. (Vanguard mutual funds and ETFs trade free with a Vanguard brokerage account.) You might prefer the customer service of another firm, or you might prefer the convenience of having everything together if you hold non-Vanguard investments. You might already have free trades anyway, for example with the Robinhood app.

Expense ratio is a tie with Admiral Shares. I don’t know if it an official “written in stone” polcy, but Vanguard has a long history of keeping the expense ratios of ETFs and Admiral Shares mutual funds the exact same (mostly $10,000 minimum investment). The Investor Class usually has a slightly higher expense ratio (mostly $3,000 minimum).

Tax-efficiency is a tie. I will add in this reminder that in the case of Vanguard (and only Vanguard as far as I know), the ETF and mutual funds share the same underlying investments and thus the same level of tax-efficiency, utilizing the benefits of both where possible. From the Vanguard ETF FAQ:

Are there any tax advantages to owning a Vanguard ETF®?
Because Vanguard ETFs are shares of conventional Vanguard index funds, they can take full advantage of the tax-management strategies available to both conventional funds and ETFs.

Conventional index funds can offset taxable gains by selling securities that have declined in value at a loss. In addition, they tend to trade less frequently than actively managed funds, which means less taxable income gets passed on to shareholders. Vanguard ETFs can also use in-kind redemptions to remove stocks that have greatly increased in value (which trigger large capital gains) from their holdings.

My money. I hold most of my portfolio in Vanguard mutual funds (Admiral Shares). One reason is that I am old and have a good amount of capital gains in the mutual funds bought before ETFs gained traction. I also hold some Vanguard ETFs, mostly bought back when ETFs were cheaper because I didn’t have enough money to qualify for Admiral shares. (Prior to 2010, the minimum for Admiral funds was $100,000! These days the minimums are mostly a more reasonable $10,000.) These days, I don’t have a strong preference, but I slightly prefer the simplicity of buying mutual funds.

Vanguard ETF tool. If you really want to pick at the details, Vanguard offers their own ETF vs. mutual fund cost comparison calculator. It’s pretty good and even includes things like historical bid-ask spreads.

Bottom line. There are certainly differences between ETFs and mutual funds. It is worth comparing the advantages and disadvantages before making your decision. However, in terms of the big picture, we are talking about relatively small differences. Being low-cost, transparent, and diversified are more important features. Given that both have their relative advantages, both ETFs and mutual funds will be around for a long time.

How to Buy or Sell an ETF: Real-World Best Practices

Building My Portfolio BlocksIn this ETFdb interview with Rich Powers, Head of ETF Product Management at Vanguard, there was a useful bit about the practical mechanics of buying an ETF in your brokerage account. Found via Abnormal Returns.

ETFdb: What would you say are three best practices that investors should keep in mind?

R.P.: The first is to not trade at the open or the close because the markets aren’t very deep during these times. Secondly, avoid market orders at all costs. Finally, investors need to keep their risk/return profile and expectations in mind. A retail investor will have a different set of parameters and risks that they are willing and able to bear, compared to an institutional investor, when selecting a product.

ETFs are an increasingly popular way to build a portfolio and this is good, practical advice from a respected source. I’ll expand with my own commentary below:

Do not trade near the open or close each trading day. The markets are not as liquid during these times, which means that you may get poor pricing. I’ve read elsewhere that you shouldn’t trade during the first hour or the last hour of the trading day. I’ve found this to be a good rule of thumb.

Never use a market order. A market order is like a box of chocolates… you never know what you’re going to get. A limit order simply sets a ceiling on the price you’ll pay to buy (floor on selling). A market order has no theoretical boundary, as you’re saying “just buy/sell it for whatever is the lowest/highest price available at this moment in time”. For example, if you are selling your shares and the bid on an ETF is $100.00 and the ask is $100.20, your market order could still be filled at $90 or even $50 if there is some sort of “flash crash” event. Why take that risk?

You can use a limit order that is as “strict” or “lenient” as you like. I’ve read recommendations to set a limit order for the middle of the bid/ask spread, i.e. $100.10 in the previous example. It isn’t a bad idea, but I don’t use this rule. Let’s say I’m trying to invest roughly $5,000 and thus roughly 50 shares. The difference between $100.00 and $100.10 a share times 50 shares is $5. Am I going to risk not making this buy order over $5? The market could just as easily move upwards to $100.50 as it could go down to $99.50, so any future price movement could dwarf that $5.

Since I am a long-term investor, I just want the trade to go through within a reasonable price range, so I usually choose a limit order close to the bid. Note that this padding should not be an invitation to get ripped off. I routinely get order fills above my limit price. There is an SEC rule called “best execution“. This is from a now-gone Schwab article that I’ve quoted in the past:

Markets are not allowed to fill orders at a price worse than the market price, even if your limit order allows for it. Building in a little extra room to ensure your order is filled will not cause you to overpay—you should still be filled at the prevailing market price when your order comes to the front of the line.

Don’t try to time the market quotes intraday. I’m replacing Mr. Powers’ third best practice with this one, which is supported by a later quote in the interview:

[…] retail or individual investors probably do not benefit from being able to trade an ETF throughout the day.

Since you have to buy an ETF during the day, you may be tempted to delay your purchase if the market appears to be moving upwards or downwards. “If I wait, the price might go back down a bit!”… or “If I wait, the price might go up some more!”. If you are a long-term investor and not a trader, then just type in your limit order and get back to your life. Most of the time my orders fill immediately. Sometimes the market moves and it doesn’t fill right away. I usually just walk away, only to have it fill minutes later. A few times, I forget and the order expires at the end of the day. In that case, I just spend 2 minutes typing in the order again the next day. Don’t worry about daily movements, you can’t predict them anyway.

Dimensional Fund Advisors Profile + 529 College Savings Plan Access

dfalogoInstitutional Investor has an interesting profile of Dimensional Fund Advisors (DFA). Since DFA doesn’t do much marketing, there are very few articles about them in the mainstream financial media. A rare example is this 2007 article (backup copy) by Michael Lewis for a now-defunct magazine.

DFA funds are similar to Vanguard index funds in that they provide low-cost, diversified, tax-efficient funds that try to capture the market’s overall return. DFA differs from Vanguard in that it tries to beat an index benchmark with various tweaks that target systemic market “risk factors” including size, value, and profitability. (They still believe that prices are efficient and thus don’t pick specific stocks.) They also charge a bit more than pure index funds from Vanguard, Fidelity, Schwab, and iShares.

DFA doesn’t accept money directly from individual investors. You must buy their funds through approved financial advisors or via institutional accounts like 401(k), pension, and 529 plans. Their rationale is that retail investors move their money around too much and at the wrong time. Here’s an impressive statistic:

In 2008, while investors pulled an overall $500 billion from equity funds, the firm had positive flows. It wasn’t because of performance: Dimensional’s funds lost more than the market. According to the group gathered for the September dinner in Austin, clients chose to stay because they understood the firm’s philosophy and the small judgment calls it was making on market portfolios.

DFA is privately-owned and highly academic. DFA executives are “engineers, Nobel Prize winners, physicists, and fluid-mechanics experts”. As such, they are all about the science as opposed to the marketing. The article asks what will happen when the founding members eventually die or leave the firm. Will it have an IPO and be publicly-traded? Will this change the culture to be more focused on short-term profits? Will they someday allow Average Jane investors with $500 to invest? Will the new executives be able to continue the superior performance from understanding market factors?

Succession an interesting question that comes up whenever there is a “special sauce” to your investment’s outperformance. I think Vanguard has done a pretty good job of moving on without Bogle, and I can’t name the current CEO. If you own plain, vanilla index funds there are fewer risks tied to specific people. To simply achieve market return at rock-bottom costs, the current structure should still work 50 or 100 years from now.

DFA doesn’t offer a momentum strategy. The hot trend right now is “smart beta”, and momentum is a big part of that:

It’s instructive to consider other things Dimensional doesn’t have. For example, it doesn’t offer a momentum stock strategy even though the pattern of outperformance is seen clearly in the data. The firm believes a portfolio of momentum stocks generates too much turnover and creates a fund whose characteristics look very different from a market portfolio. Instead, Dimensional uses information on momentum to inform its trading strategies, such as delaying purchases and sales at certain times.

Owning a little bit of DFA funds. I remain intrigued by DFA and their unique culture and methods. Since DFA doesn’t trust us DIY investors (probably rightfully so in aggregate) and many financial advisors charge roughly 1% annually on top of the higher costs of DFA funds themselves, I choose not to invest in DFA funds with my primary portfolio. I’m happy retaining full control and keeping costs as low as possible.

However, I do invest in DFA funds through the Utah 529 College Savings plan. A few other 529 plans also offer DFA funds, but I believe Utah has the biggest selection at a reasonable cost. Here are the currently available options:

  • DFA Global Equity Portfolio
  • DFA Global Allocation 60/40 Portfolio
  • DFA Global Allocation 25/75 Portfolio
  • DFA Five-Year Global Fixed Income Portfolio
  • DFA U.S. Large Cap Value Portfolio
  • DFA U.S. Small Cap Value Portfolio
  • DFA Real Estate Securities Portfolio
  • DFA International Value Portfolio
  • DFA One-Year Fixed Income Portfolio

I kept it simple and picked the all-in-one DFA Global Equity fund. I figure, I’ll let DFA take the wheel and see what happens in 20 years. I don’t have to worry about taxes or withdrawals for a long time. As it’s mostly a low-cost index fund at its core, I don’t worry about the downside too much. I just hope Utah does’t change up their fund options down the road and force me into something different.

Schwab Matches Mutual Fund and ETF Expense Ratios, Now $4.95 Trades


Update: Schwab has matched Fidelity’s price cut at $4.95 per trade + $0.65 per options contract, effective March 3, 2017. See press release for details. Everyone is battling for your assets and the ability to scale. (TD Ameritrade also announced a price cut to $6.95 per trade, down from $9.99.)

Original post:

Schwab announced some changes last week regarding their index mutual fund line-up and trade commissions. Here is the press release and a table of the updated mutual fund expenses [pdf]. Here are the highlights:

  • Stock trades now $6.95. Beginning February 3, 2017, the company will reduce its standard online equity and ETF trade commissions from $8.95 to $6.95.
  • Schwab Index mutual fund expense ratios now match their Index ETFs. Starting March 1, 2017, expenses for the Schwab market cap-weighted index mutual funds will be lowered to align with their Schwab ETFs™ equivalents.
  • Schwab Index mutual funds now have no investment minimum. You don’t have to worry about Admiral shares, Premium Class shares, etc.
  • New Satisfaction Guarantee. I’m not sure how this would work in practice, but it says “Simply, if a Schwab client is not satisfied for any reason, Schwab will refund any related commission, transaction fee or advisory program fee paid to the firm.”

Here are the three mutual funds that I would care most about:

  • Schwab Total Stock Market Index Fund mutual fund expense ratio used to be 0.09% while the ETF version cost 0.03%.
  • Schwab International Stock Index Fund mutual fund expense ratio used to be 0.19% while the ETF version was 0.07%.
  • Schwab TIPS Index Fund mutual fund version used to cost 0.19% while the ETF version was 0.05%.

These were pretty big differences, which was why I felt it was rather obvious that Schwab was making their ETFs a loss-leader in order to be slightly cheaper than Vanguard and/or iShares. I’m guessing they are still selling these index products at a loss to gain market share, but it’s nice to see that they have now simplified their expense ratios across the board. The self-directed brokerage option of my 401(k) plan is through Schwab and only allows mutual funds, so this is a positive change for me.

I have been impressed by the committed strategy Schwab has undertaken towards low-cost, index investing. Schwab has an existing profit machine from its traditional services, but hasn’t been afraid to disrupt and even cannibalize itself. The key is that people seem to like Schwab customer service, whereas I would rate Vanguard as “satisfactory”. If Schwab can have top-quality index products and maintain a reputation for better customer service, that would be a great long-term position.

As an aside, you can’t buy shares of Vanguard but you can buy an ownership stake in Schwab. I don’t own any individual shares of Schwab (SCHW) stock as of this writing, but I would not be surprised if it made a good long-term holding. Once interest rates rise, Schwab will start making a lot more money on its customers’ cash balances (which it forces you to hold it their Intelligent Portfolios robo-advisor instead of charges upfront fees). It will be interesting to see how it plays out. I’m just putting this down in writing so I can check back on my prediction later in 2022 and 2027.

How to Minimize Investment Returns – By Warren Buffett

brk2015At the bottom of the Berkshire Hathaway 2016 Annual Report, you may not have noticed that Warren Buffett republished a previous article from the 2005 annual report titled “How to Minimize Investment Returns”. A version become the first chapter (find it here) of The Little Book of Common Sense Investing by Jack Bogle. I am jumping on the bandwagon and republishing this 2007 blog post below as well. 🙂

It’s both a highly recommended parable and it comes at the perfect price of free. Read it if you haven’t already.

Original post:

I just watched the Will Smith movie The Pursuit of Happyness this weekend. I found it ironic that he really didn’t change job types when he joined Dean Witter. Mr. Gardner started out a salesman, and ended up a salesman. But by managing to change his product to financial services, he turned his tenacity and people skills into millions of dollars.

Why is financial services such a lucrative field? This reminded of an excerpt that I had saved from Warren Buffett’s 2005 Letter to the shareholders of Berkshire Hathaway. Although a tad on the long side, I think it provides an excellent “big picture” view of investing the the stock market.

[Read more…]

Berkshire Hathaway 2016 Annual Letter by Warren Buffett


Berkshire Hathaway (BRK) released its 2016 Letter to Shareholders [pdf] over the weekend. Although the financial media will create some catchy headlines, I recommend reading it for yourself. It is only roughly 30 pages long and is always written in a straightforward and approachable fashion. Even if you aren’t interested in BRK stock at all, reading the letter can be educational for individual investors of any experience level. Here are my personal notes and comments.

Bullish on America. This is a repeated theme from past shareholder letters.

From a standing start 240 years ago – a span of time less than triple my days on earth – Americans have combined human ingenuity, a market system, a tide of talented and ambitious immigrants, and the rule of law to deliver abundance beyond any dreams of our forefathers.

[…] This economic creation will deliver increasing wealth to our progeny far into the future. Yes, the build-up of wealth will be interrupted for short periods from time to time. It will not, however, be stopped. I’ll repeat what I’ve both said in the past and expect to say in future years: Babies born in America today are the luckiest crop in history.

Berkshire Performance. Another topic that has been touched upon before is that Berkshire is huge and you shouldn’t expect the amazing results from when they were much smaller (19% annualized over the last 50+ years). However, they still plan on beating the S&P 500 over the long-term. If they didn’t, they’d tell their shareholders to move their money elsewhere.

As for Berkshire, our size precludes a brilliant result: Prospective returns fall as assets increase. Nonetheless, Berkshire’s collection of good businesses, along with the company’s impregnable financial strength and owner-oriented culture, should deliver decent results. We won’t be satisfied with less.

According to Morningstar as of 2/24/17, the trailing 10-year total return for BRKA is 9.1% annualized. The trailing 10-year total return for the S&P 500 index is 7.5% annualized. Not bad. (I should also disclose here that I own Berkshire (BRKB) shares in my separate “self-directed” portfolio which is a small percentage of net worth.)

Berkshire Fair Price. Another repeated theme. Buffett is authorized to repurchase large amounts of Berkshire shares at 120% or less of book value. In other words, 1.2x book price is a significant discount to Berkshire’s intrinsic value. If you’re getting close to that number, BRK is probably a “good deal”.

Stock holdings: Not necessarily buy-and-hold forever. This year, Buffett chose to emphasize that he has never promised to hold any particular stocks forever. (It does have no interest in selling its wholly-owned and controlled businesses.) Perhaps it is because he just bought shares of American, Delta, Southwest, and United Continental airlines. The airline industry has quite a rocky performance history. Perhaps it also to explain him selling all of his Wal-Mart shares.

Hedge Fund Bet. You’ve probably heard about this 10-year bet between the S&P 500 and a bunch of hedge funds. Here is my 2016 hedge fund bet update. The short version is that with 9 years down and 1 left to go, the S&P Index fund is up 85%. Of the 5 hedge funds (of funds), the worst hedge fund is up only 3%. The best hedge fund up only 63%. Buffett and the S&P 500 are very likely to win this bet.

I found it noteworthy that Buffett focused on the fact that no other hedge fund manager wanted to take the bet at all. Think about that. Only one guy was brave enough to step up, and how he’s getting bad publicity.

Subsequently, I publicly offered to wager $500,000 that no investment pro could select a set of at least five hedge funds – wildly-popular and high-fee investing vehicles – that would over an extended period match the performance of an unmanaged S&P-500 index fund charging only token fees. I suggested a ten-year bet and named a low-cost Vanguard S&P fund as my contender. I then sat back and waited expectantly for a parade of fund managers – who could include their own fund as one of the five – to come forth and defend their occupation. After all, these managers urged others to bet billions on their abilities. Why should they fear putting a little of their own money on the line?

What followed was the sound of silence. Though there are thousands of professional investment managers who have amassed staggering fortunes by touting their stock-selecting prowess, only one man – Ted Seides – stepped up to my challenge. Ted was a co-manager of Protégé Partners, an asset manager that had raised money from limited partners to form a fund-of-funds – in other words, a fund that invests in multiple hedge funds.

Buffett used to run a partnership where he would take a zero management fee and 25% of profits above a 6% annual return. Hedge fund managers today take 2% of assets annually no matter what and 20% of all positive returns. As usual, in this WSJ article Munger tells it straight:

When Mr. Buffett ran his investment partnerships in the 1960s, he charged no management fees and only took 25% of investment gains after the first 6%. Berkshire Vice Chairman Charles Munger praised that fee model earlier this month at the annual meeting of Daily Journal Corp., where Mr. Munger is chairman.

“I think it is fair and I wish it was more common,” he said of Mr. Buffett’s fee formula. “If it’s a bad stretch, why should you scrape money off the top?”

Rarity of skilled stock pickers. If anyone could identify another good stock picker, it would be Warren Buffett. I don’t recall seeing this claim before:

There are, of course, some skilled individuals who are highly likely to out-perform the S&P over long stretches. In my lifetime, though, I’ve identified – early on – only ten or so professionals that I expected would accomplish this feat.

Best book of 2016. I am currently listening to the Audible version of Shoe Dog by Phil Knight and it’s quite good so far. I’m only at the beginning where he bootstraps his shoe business from his parents’ basement and has the guts to fly all the way to Japan in the 1960s to ask for import rights in person. This book works really well as an audiobook.

The best book I read last year was Shoe Dog, by Nike’s Phil Knight. Phil is a very wise, intelligent and competitive fellow who is also a gifted storyteller.

Shareholder letters from 1977 to 2016 are available free to all on the Berkshire Hathaway website. You can also purchase all of the Shareholder letters from 1965 to 2015 for only $2.99 in Amazon Kindle format. Three bucks is a very reasonable price to have an official copy forever stored in electronic format. (Updated paperback will be re-stocked in mid-April for about $20. Don’t overpay for a stale physical copy.)

The 2015 Annual Letter discussed his optimism in America and his “Big 4” stock holdings. The 2014 Annual Letter discussed the power of owning shares of productive businesses (and not just bonds). The 2013 Annual Letter included Buffett’s Simple Investment Advice to Wife After His Death.

Municipal Bonds vs. US Treasury Bond Yield Comparison

As a follow-up to my post on the risks of investing in bonds, I should share that a slight majority of my personal bond holdings are in short-term and intermediate-term municipal bonds. Why? Well, here are some considerations if you are choosing between holding highly-rated municipal bonds and US Treasury bonds right now.

The Blackrock Blog has an article discussing potential effects of tax reform on muni bonds and also their latest Municipal Market Update [pdf]. Here is my interpretation of their points:

Lower individual tax rates would reduce the value of tax-exempt mutual fund income. However, the tax equivalent yield (TEY) of municipal bonds would likely remain higher than that of Treasuries. The calculation is straightforward. For example, at a 28% marginal tax rate, if a municipal bond earned 2%, that would be a tax-equivialent yield of 2/(1-0.28) = 2.78%. Here’s the chart from Blackrock:


It is highly unlikely that the tax-exempt status of municipal bonds will be removed. State and local government need low-cost muni bonds to finance improvements in infrastructure. It is possible that the tax-exemption could be capped, but even in that case the market impact would be manageable.

Here’s the ratio of AAA-rated GO Muni bonds to Treasuries over the last 12 months (Source). As you can see, the ratio hovers around 90% to 95% without compensating for taxes.


Here is a chart of the muni and Treasury bond curves as of 1/31/17:


Their overall conclusion:

We also expect any market correction required to overcome a drop in the highest tax rate or cap on the tax-exemption would be manageable, and continue to believe munis hold an important place in a diversified portfolio.

Purely my opinion… I don’t bother speculating on future tax reform. I’m not an economist, so I can admit that I don’t know the future. I do know that even in the 25% or 28% marginal tax brackets, right now the tax-equivalent yields of muni bonds are higher than Treasuries by a significant gap. At higher marginal tax brackets, the gap widens further (again, see top chart above).

Municipal bonds are not considered as safe as US Treasuries, and smart people can argue as to how close the risk levels are. I personally think the yield gap is greater than the risk gap, enough that I’d rather be in munis, but others may disagree. Why would this happen in a mostly “efficient” market? My personal view is that the entire world (including entire countries and sovereign funds) relies on US Treasuries as their “safe and liquid” asset, pushing yields downward, while the benefits of muni bonds are only available mostly to US individual taxpayers.

Sometimes I think I should just buy a “total bond” fund (tracks all taxable, nominal US investment grade bonds) and forget about it. But then I look at the yield difference. As of today 2/21/17, Vanguard Total Bond Index has an average duration of 6.1 years and 2.50% yield. Vanguard Intermediate Tax-Exempt has an average duration of 5.2 years and 2.07% yield (tax-exempt). At 28% federal tax rate, that is equivalent to 2.88% taxable. At 43.4%, that is equivalent to 3.65% taxable. (These numbers are for Investor Shares; the gap is even bigger if you have $50,000 and can buy Admiral Shares.) Add in the fact that I have limited space in tax-deferred IRAs and 401(k) accounts, and all this is why I pick munis for my taxable accounts.

Understanding the Risks and Downsides of Bonds

pie_flat_blank_200To get the full return of any asset class, you’ll have to own it through the good times and the bad times. The good times are easy, but getting through the bad times requires deeper understanding and faith. You’ll usually hear this about holding stocks through their inevitable drops and crashes. But recently, many bond funds have dropped in value instead. Here’s a somewhat-reassuring chart from A Wealth of Common Sense comparing historical drawdowns between the S&P 500 stock index and 5-Year US Treasury bonds:


Even so, having an investment that is supposed to be “safe” wobble 5% can still be worrisome. If Bank of America or Chase Bank announced tomorrow that their customers with balances above FDIC limits would lose even 1% of their excess deposits, there would be a huge crisis due to the perceived level of safety. A recent post by Longboard Funds makes an interesting claim: “…investors destroy more of their bond returns than their stock returns.”

This statement reminded of my surprise when reading this Bogleheads forum post on 11/14/16:

Bonds have been dropping every day [recently…]
Why? I thought they were a stable fixed investment.

S/he wasn’t alone, and I received a couple of similar e-mails, but I was struck that this person had been a member of the forum for over 2 years, made over 600 posts, and had previously detailed their asset allocation very specifically: “Brokerage account 65/35 | VG total Market 35% | VG total Intl 12% | VG small cap value 12% | VG Reit index 6% | VG Total Bond 35% | TSP Account 75/25 | C Fund 45%, S 15%, I 15%, G 25% | EE Bonds = Emergency Fund” Why did they buy all these things? No doubt from reading a lot of well-meaning advice from well-meaning people.

Bonds can certainly go down. There are also many different types of bonds. Longboard Funds put the two major risks of bonds into a nice graphic:


This won’t be a bonds primer, but instead I offer up how I try to treat bonds as part of my investment portfolio:

  • I own bonds as a ballast and diversification element in my portfolio. (I also own stocks for inflation-beating growth.) I want relatively low volatility, but there will still be some based on credit and duration risk. I will take a little bit of each type of risk, but not too much.
  • I also own bonds for modest income. I will be satisfied earning only modest interest rates that will roughly match inflation over the long run, and be happy if I earn 1% or 2% more than inflation.
  • In order to take on a small amount of credit risk, I will stick to US Treasury bonds, investment-grade corporate bonds, and investment-grade municipal bonds.
  • In order to take on a small amount of interest rate (duration) risk, I will stick to bond mutual funds with a relatively short duration (less than 5 years). The term “intermediate” could mean anything from 2 years to 10 years, so I’ll have to be careful. As a result, I will be less-exposed to short-term losses if interest rates rise quickly.
  • In order to reduce the risk of any single bond default, I will own a large number of bonds inside a mutual fund or ETF. An exception would be individual US Treasury bonds as they all share the same, highest credit quality available.

Someone else may want to pursue higher bond returns and be willing to take on more risk. You could buy bonds from countries with shakier credit ratings. You could buy bonds from riskier companies. You could buy bonds with longer duration/maturities.

If you look again at that top chart, you can see several drawdowns of around 5% for a 5-Year Treasury. But what about a 20-Year Treasury, or 5-Year Junk Bonds, or international bonds from Argentina or Venezuela? It’s possible for some bond funds to drop 10% or more. If you are buying bonds because you think they are safe, stick to the safer bonds and realize that even they might still drop in price for a while.

Personal Capital Review 2017: Automatically Track Net Worth and Portfolio Asset Allocation


Personal Capital is free financial website and app that links all of your accounts to track your spending, investments, and net worth. You provide your login information, and they pull in the information for you automatically so you don’t have to type in your passwords every day on 7 different websites (similar to Mint). Investment-specific features include tracking portfolio performance, benchmarking, and asset allocation analysis.

Net worth. You can add your home value, mortgage, checking/savings accounts, CDs, credit cards, brokerage, 401(k), and even stock options to build your customized Net Worth chart. You can also add investments manually if you’d prefer. I have a habit of accumulating bank and credit union accounts, so I find account aggregation quite helpful.


Cash flow. The Cash Flow section tracks your income and expenses by pulling in data from your bank accounts and credit cards. This chart compares where you are this month against the same time last month. If you hate budgeting, you may find it easier to view a real-time snapshot of your spending behavior. Their expense categorization tool is not as advanced as, as you can’t for example tell them to always classify “Time Warner Cable” as “Utilities” and not “Online Services” or whatever they do by default. The default is usually pretty accurate, but if it isn’t you have to change it manually.


Portfolio. This is where Personal Capital is better than many competing services, by analyzing my overall asset allocation, holdings, and performance relative to benchmarks. They also analyze your investment fees to see if you can get them reduced. I first signed up for Personal Capital four years ago, and since then my investments have gotten spread out even further. I now have investments at Vanguard, Fidelity, Schwab, TransAmerica (401k), and Merrill Edge. It’s nice to be able to see everything together in one picture.



For comparison, Mint does not allow manual input of investments and it did not break down my asset allocation correctly based on my linked accounts. In fact, all it shows is a big orange pie chart with “99.9% Not Sure” and “0.00 Other”. Not exactly helpful.

Personal Capital considers the major asset classes to be US stocks, International stocks, US Bonds, International Bonds, and Cash. The “Alternatives” classification includes Real Estate, Gold, Energy, and Commodities.

If you have one bank account, one credit card, and a 401(k), you may not need this type of account aggregation service. Life tends to get messy though, and this helps me maintain a high-level “big picture” view of things.

Security. As with most similar services, Personal Capital claims bank-level, military-grade security like AES 256-bit encryption. The background account data retrieval is run by Envestnet/Yodlee, which partners with other major financial institutions like Bank of America, Vanguard, and Morgan Stanley. Before you can access your account on any new device, you’ll receive an automated phone call, email, or SMS asking to confirm your identity.

How is this free? How does Personal Capital make money? Notice the lack of ads. Personal Capital makes money via a optional paid financial advisory service, and they are using this as a way to introduce themselves. (People who sign up for portfolio trackers have money…) Their management fees are 0.89% annually for the first $1 million, which is rather expensive to my DIY sensibilities. They are a legit, SEC-registered RIA fiduciary and currently manage over $3.6 billion. In my opinion, this status improves their credibility as an entity with access to my sensitive information.

Note that if you give them your phone number, they will call you to offer a free financial consultation. If you answer the phone or e-mail them that you don’t want to be contacted anymore, they will honor that request. However, if you simply ignore the phone calls, they will keep calling. Know that you can keep using the portfolio software for free no matter what happens. Therefore, if you aren’t interested, I would recommend simply being upfront with them. A simple “no thank you” and you’re good.

Bottom line. It’s not what you make, it’s what you keep that counts. The free financial dashboard software by Personal Capital helps you track your net worth, cash flow, and investments. I recommend it for tracking stock and mutual fund investments spread across different accounts. I’d link your accounts on the desktop site, but interact daily through their Android/iPhone/iPad apps for optimal convenience (log in with Touch ID or mobile-only PIN).