Model Portfolio #6: Merriman’s FundAdvice Ultimate Buy and Hold

(This is the sixth in my series of Model Portfolio Comparisons.)

Paul Merriman also runs his own money management firm. He also writes at FundAdvice.com, which has a lot of interesting articles about investing in no-load mutual funds, with and without market timing. Here is the breakdown of their “Vanguard balanced buy-and-hold portfolio”.

Fundadvice Model Portfolio Breakdown

Asset Allocation For 60% Stocks/40% Bonds
6% S&P 500
6% US Large Value
6% US Small
6% US Small Value
6% REIT
12% International Developed (Pacific + Europe)
12% Int’l Value
6% Emerging Markets
20% Intermediate Term Bonds
12% Short Term Bonds
8% Inflation-Protected Securities (TIPS)

They have other suggested buy-and-hold portfolios for different brokerages, which vary slightly but are still very similar. I find it interesting that the stock portion is perfectly 50/50 domestic/international.

Comments

  1. Does Vanguard’s international value fund actually give you international small/mid cap exposure?

    It’s a huge problem w/ index funds and I’m not sure if that’s correct.

  2. Peter Charles says:

    Thanks this realy helps me out I was looking for a no load plan. Now if I could just sell all this real-estate. What firm do you keep your accounts at?

  3. No, I don’t think VTRIX does. Their International Explorer fund is closed to new investors. Merriman’s other portfolios do advocate Int’l small, so that’s why I included it on the pie chart as an alternative option.

    You’re right, it’s very hard to find an Int’l Small index fund, just like it’s really hard to find a Micro-cap index fund. Maybe we need less index fund investors ;)

  4. The S&P 500 is a strange choice for this portfolio. They already have Large Cap Value, so why get a Large Cap Blend? I would think Large Cap Growth would make more sense if the goal is to diversify.

  5. I think Fidelity offers FSCOX and FISMX as Fidelity Internation Small cap funds. FSCOX was open when I invested last year.

  6. The goal is not to diversify but to overweight in Value because Value has historically outperformed Growth by 4%-5%.

  7. In a recent post (link), Paul Merriman advised a reader to use Wisdom Tree’s Internatinional Small Cap Dividend fund (DLS) which is an exchange-traded-fund for the all important International Small/Mid Cap/Value asset classes. It’s style box looks like this:

    01 00 01
    26 28 13
    17 11 04

    It’s 62.32% Mid/Small Value and 36.08% Mid/Small Growth. It’s an excellent replacement for Vanguards (now closed) International Explorer (VINEX) fund.

    If you purchase DLS through Vanguard’s Brokerage Services (VBS), you can have them set it up so that dividends are automatically reinvested without incurring a transaction cost for reinvesting which is a plus.

    To get around rebalancing, I paired DLS with Forward International’s Small Companies (PISRX) fund (which is NTF through VBS). I use a ratio of 10-33% PISRX & 67-90% DLS for the International Mid/Small Value/Core asset class. I increase/decrease shares of PISRX if I need to rebalance my portfolio.

    For the US micro cap, I use John Montgomery’s Bridgeway Ultra-Small Company Market (BRSIX) in combination with Vanguard’s NAESX for my small cap allocation.

    The rest of my portfolio is based on the Buy-and-Hold Vanguard Strategy that Paul lists on his website. In other FundAdvice articles Paul suggests going outside of Vanguard to fill the International Small Cap asset classes since VINEX closed.

    He added REIT’s recently but in the article mentioned that if you have a well diversified portfolio his research shows that in the 1970-2006 year period REIT’s only added 0.03% to their widely diversified portfolio.

    I also substitute VGTSX (Vanguard Total Stock Market Index) in-lieu of VDMIX (Vanguard Developed Market Index) & VEIEX (Vanguard Emerging Market Index) since VEIEX charges a 0.5% Purchase/Redemption fee (that’s not a load but still it’s 0.5% out of your pocket). That works out well since VGTSX has 58.4% Euro, 26.2% Pacific, & 15.4% EM and VTRIX has 58% Euro, 22.4% Pacific & 17.2% EM & 2.4% other (i.e., almost evenly matched) and you’re not short in EM in this portfolio.

    FYI. VINEX’s style box looks like this:

    03 03 01
    20 26 21
    10 08 09

    The combination of (25% PISRX and 75% DLS) style box looks like this:

    01 00 01
    24 26 19
    14 11 05

    The combo is similar to VINEX with a little more value & SC exposure which are good things.

  8. I put together an excel spreadsheet to help me rebalance my portfolio to be inline with merriman’s suggested portfolio.. If you’re interested, it’s available here: http://helix.fantasyland.com/gravybt/

  9. In the errata for Paul’s book “Live it up without outliving your money”, Paul offers two alternatives to investors who don’t have access to the International Small Cap/Value funds: (1) Reduce International equities from 50% to 30% or (2) add a fund outside of Fidelity. In a blog at his website, he answers a readers question for Vanguard by letting them know that they could add the Wisdom Tree DLS ETF. In an earlier post, I suggested pairing DLS with PISRX to get around the rebalancing issue and that has worked well for me. It’s odd that his Vanguard Portfolio still shows a 50% International Equity position despite having an International Small Cap/Value fund. Hopefully he updates it one day or adds a footnote.

  10. Where can you find the historical performance results for Merriman’s various suggested performance?

  11. You can get data from Paul’s annual Ultimate Portfolio Intro (Jan/Feb of each year).

  12. gravybt – thanks very much for the spreadsheet.

  13. The Vanguard International Explorer is not closed. The FTSE all world ex-us small cap is expensive, the ETF is probably a better deal, despite selling at a bit of a premium – now that Vanguard ETFs have no commissions whatsoever. It seems time to go all ETF – any thoughts?

  14. Also VEIEX is available as an ETF, there is some bid/ask spread premium, but no .25% front/back, with lower ER. And, PISRX seems rather expensive – 1.62% ER, .25% Max 12b-1.

  15. At the time that I wrote about VINEX, it was closed but had later opened when the market collapsed. Since that time, I have replaced PISRX/DLS with VINEX. The problem is when funds are closed and you want access to the asset class you have two choices: Make do without, or figure out something (which is what I did, initally using PISRX, WTIFX, and AVALX, then later a combination of PISRX and DLS, and finally with VINEX.

    In the recent flash crash, folks with limits on when to sell, lost big on ETF’s as the security could not be repriced quick enough. I have friends who ended up selling theirs for pennies on the dollar. Of course the true buy-and-hold investor would never put limits on when to buy/sell

  16. Thanks Dan – yes, of course, funds open and close – not a criticism of you at all. Your solution was a smart one! I have been looking at the Domestic Small Cap and SC Value offerings from Vanguard. I am thinking about splitting my asset allocation this way NAESX/BRSIX and VISVX/BRSVX to approximate a DFA approach a little more (without the Advisor Fees!!). BTW the Bridgeway funds are a little high ER-wise, and they would cost $20/purchase. Any thoughts? And yes, I agree with you about ETFs – buy and hold – awesome – otherwise maybe not so good. I have held off on buying them up until now. They are commission free on Vanguard now, the spreads don’t seem too bad and for some, like the All World ex-USA small cap – much, much cheaper. Any thoughts on how to get the small value piece internationally? I can’t figure out why Vanguard doesn’t have a fund in that niche – or Int’l. REIT!

  17. Evan,

    In the International Small Cap allocation, I had originally used a combination of WTIFX / ARTKX / PISRX, then later PISRX / DLS, and finally VINEX.

    In the US Small Cap allocation, I too wanted to approximate a VG / DFA approach and split my allocation this way:

    50/50 between NAESX SC Blend / BRSIX micro cap Blend
    50/50 between VISVX SC Value / AVALX micro cap Value

    I hold BRSIX and AVALX at Firstrade (where I was able to purchase them when they were NTF (No Transaction Fee). BRSIX is now $9.95 per transaction and AVALX is still NTF.

  18. Dan,

    I just spent way too much time looking at small cap/sc value funds and I still come up with BRSIX and BRSVX (looked at AVPAX and ARTVX most closely, along with DFSVX). BRSVX seems to have a better return over 5 years compared with AVALX. Going to find where I can buy them the most conveniently and the most cheaply. Of course direct from Bridgeway is the cheapest. Thanks for the tip on Firsttrade, although I am loathe to have my accounts even more scattered!! ;) I agree with you 50%/50% is a good way to go.

    What is your take on Bridgeway’s LCV (BRLVX) vs VIVAX? VIVAX holds much larger companies – Avg Med. 16.4 vs. 40B. 5 year return is better with B. – that is all the data there is.

    Then there is a BR – MicroCap BRMCX – not sure that it would add all that much – its market cap ($473k) is in between the other two.

    Lots to think about – I want to be done, put it all together, rebalance once a year and forget about it!! But, it takes time and thought.

    Evan

  19. Evan,

    John Bogle said that it does matter when you buy something. In my case I have been purchasing AVALX on it’s way down from it’s highs in the past 5 years, so that my basis is well below it’s current market value. Funds that have done well in the past, may not also do well going forward, and yesterdays laggards may be tomorrows leaders — there is a reversion to the mean. Another possibility is to average your way into a position over time. I think you are on the right track though, and you have to be able to sleep at night.

    My preference is to only use non-Vanguard funds for asset classes that I cannot obtain at Vanguard or to “extend” existing asset classes. Another thing you might enjoy reading are the annual reports that John Montgomery (Bridgeway) puts out. They offer a wealth of knowledge and you get a sense of John’s character (person). I wish the E/R for his funds was lower, but I am thankful they are not higher. The more you get into micro caps, the more you can expect to pay for access to that asset class.

    You can compare the relative performance of two funds using a perfchart at stockcharts.com (I just did one using AVALX and BRSVX). One thing it demonstrates is that both funds have done well over time (just depends on when you bought into either one). But overall the funds more or less move in the same direction.

  20. Dan,

    Thanks so much for taking the time to share your thoughts. I agree it definitely matters when you buy something – I try to buy when sentiment is down. I haven’t read Edleson’s book yet (Value Averaging) – it is sitting on my shelf but that is, to some degree, what he is suggesting – buying more when a particular asset has dropped. It seems to me, however, that until one has a very clear asset allocation, then one cannot re-balance, regardless of which method one chooses. But, certainly, buying on the dips as best one can is a good thing. I am paid as an independent contractor so I generally have cash readily available to put into my individual 401-k so I have some flexibility.

    But, I am still working on my asset allocation – one I will stick with. I am modeling it somewhat on Merriman’s model portfolio. I did not find the portfolios in Bernstein’s books to be very helpful as I looked carefully at them. I am now reading the Intelligent Asset Allocator, however.

    I agree with you:

    My preference is to only use non-Vanguard funds for asset classes that I cannot obtain at Vanguard or to “extend” existing asset classes.

    This simplifies things a great deal – otherwise, as you say, one is left searching for the “hot” mutual funds over and over again. NO thanks!!

    And I agree about the ERs of Bridgeway funds – they could be worse!! In order to buy DFA funds one MUST go through an advisor and pay their fees (a bit of a scam, really – there are other ways to “discourage” short term trading) and DFA is a for profit company – their funds are not the cheapest. I will bite the bullet with the higher ERs while trimming down the Vanguard one’s – I will be buying ETFs mostly, accepting the bid spread for lower ERs year after year.

    I have been using Yahoo Finance for charting comparisons. Will have a look at stockcharts. And will also have a look at Montgomery’s annual reports. Thanks!

    I am using MS Money to track all of my investments. Quite frankly I don’t think it works that well in terms of obtaining one’s overall return. But I have not used it as a closed system. I will start over again once I have finally converted my overall accounts to an all index asset allocated, balance every year system!

    BTW – have you considered any adviers? I had a long chat with Dan S. at IFA and decided that I wanted more international exposure and did not want to pay their fee. I also felt somewhat suspicious as they ONLY use DFA funds – are they really best in class – every single one? Particularly when one looks at the ERs of DFA funds vs. Vanguard ETFs! They are very sophisticated but not totally transparent – they have all kinds of models based on the past, based on portfolios that no one has ever owned. They don’t seem that concerned about costs, actually – so confident are they that DFA funds will beat everyone else regardless. For example, they use a Dom/Int’l. REIT fund that has a higher ER than the two underlying REIT funds!! When I asked them why, they gave no answer.

    Also I talked with an adviser at Portfolio Solutions. He was a nice guy. They are cheap. But, the portfolio they recommended to me isn’t that sophisticated, nor does it have the small, value leaning I want, and international is lower than I want (they will not alter it). Also I spoke with Rick F. and I did not like him at all. He seemed really condescending and arrogant – actually, rude, on the phone. His books are very poorly written and filled with little mistakes – but, for someone who isn’t too interested in getting down to the details, O.2% is not an unreasonable amount to pay. They definitely make an effort to keep costs low – ETFs abound. Of course they create trading costs which, for the most part, are entirely avoided at Vanguard.

    I am close to my final scaffold (asset allocation) would you mind if I shared it with you once I have it done – I would appreciate your thoughts!

    Be well – have fun, sleep at night and invest wisely :)

  21. Not sure if it’s still available, do a Google search for “gummy stuff”. This retiree has a boatload of useful spreadsheets for tracking a portfolio. I used the formula for one of them to pull down the price of a security (mutual fund) and update a spreadsheet that I call “prices”. I have other spreadsheets that link to the “prices” spreadsheet and keep track of my portfolio in that manner. I have one spreadsheet each for my Roth, Traditional, Rollover, 401K, and non-retirement and another set for my wife. I balance across everything both for retirement and non-retirement. In Chapter 14 of a Larry Swedroe book on investing on the topic of “The Location Decision” one learns where to hold one’s asset classes. Check with Jonathan (the narrator) and see if there is a way that we can share information – I can give you a template (series of spreadsheets) and you decide if you’d like to use it. It eliminates the need for fancy money tracking specific programs and relies on plain old Excel or even the Star Office (free) version.

    Value averaging is a nice twist on dollar cost averaging.

    If you do decide to go with Firstrade or another low cost broker to get certain asset classes ask them to waive in advance any fee’s associated with closing out your account down the road. Some of them charge $75 to $200 per fund just to close or transfer the funds elsewhere. You can usually get this waived before you invest with them (but get it in writing).

  22. Hi Dan,

    Thanks for the information. I had a look at that gummy stuff website – it was actually kind of discouraging because I could not follow the math, e.g. re: DCA vs Value Averaging. Given the amount of time I am willing to use figuring that stuff out – it is over my head/level of interest.

    Thanks for the offer regarding the spreadsheets!! My email address is evanh at yahoo.com. Perhaps you could send me a spreadsheet as an attachment? I use OpenOffice.org.

    Good idea about the fees. I plan (at this point) to use the two Bridgeway funds, but will buy them at Vanguard for $20 per trade. I guess the last nut to crack will be foreign small value. Maybe just use the VG Int’l. Explorer and be done with it.

    Thanks again!

    Evan

  23. Atlhough, $9.95 does look pretty nice at Firstrade. Evan

  24. The anti-spam word is ‘”frugal” – I like that – I also like that BRSIX and BRSVX are NO FEE at ETrade!! :) I already have an individual 401-k there so, I won’t have to pay any transaction fees! :) Evan

  25. Bridgeway, No Load at TD Ameritrade also. Evan

  26. Oops – There is a transaction fee at TD Ameritrade. None at ETrade. Sorry for the mistake. Evan

  27. When I held BRSIX, I just bought it directly from Bridgeway. No transaction costs or commissions. Online interface is basic, but works.

  28. Thank you Jonathan. Unfortunately, Bridgeway does not offer an individual 401-k (which isn’t surprising), so that is not a good option for me. I spent a bunch of time checking out various sites to see what they charged for the funds. I went on the Bridgeway site and found this:

    “E*Trade Securities offers shares on a “no-transaction fee basis” if your purchase is placed on the internet after you establish an account directly with E*Trade by sending a completed application and an initial investment of $2,000 or more.”

    Maybe I should have looked there first! Sigh, soon this will all be taken care of, my portfolio in place and running smoothly!

    I hope!! ;))

    Evan

  29. If you go outside of Vanguard to purchase some asset classes, it helps to have two (2) or three (3) of them at that outside location to make it easier to balance across all of your asset classes. I am still mulling over bringing everything back to Vanguard for that reason – just to make it easier to periodic rebalancing.

  30. Well, I just had a huge shock. I found out (correctly, I assume) from Vanguard that you cannot link a so-called Brokerage Account with your Vanguard Individual 401-k – which means that one can only purchase Vanguard funds in the account. You can do this with a Roth or regular IRA held at Vanguard, however. So now it looks like I will have to keep another 401-k for any other funds/equities that I want to keep in my 401-k. Vanguard really does NOT have it together with their individual 401-k accounts. It is ridiculous!

  31. DavidAnnArbor says:

    I’d agree with Evan’s comments about Vanguard and the individual 401k. I suspect part of this has to do with complex rules about a 401k that the IRS imposes.
    Also, if someone has so many of these index funds, it causes an investor to not be in the lower expense Admiral class of index funds offered by Vanguard, and shunted into the investor class, until you have at least $10k, or $50k in each fund.

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