Monthly Archives: July 2022

July 1, 2022

By David Snowball

Dear friends,

As you read this, Chip and I will be on vacation in Door County, the idyllic peninsula just north of Green Bay, Wisconsin. While I’m sure there have been years when she and I more needed time away, I surely cannot remember when. I was introduced, this year, to the term “trauma-informed pedagogy” and to the realization that perhaps three-quarters of our young people have taken a few more hits than they’re currently capable of managing.

Having managed their mental health for the past year, we’re going to work on our own for a week or two.

Door is a remarkably good place to be offline, internet-free, unavailable by text or email … and breathing.

So our plan is simple: eat, breathe, laugh, love, repeat. “Go and do likewise,” the man said.

We’ll have a side of cherry pie in your honor.

Our colleagues have stepped up splendidly this month to make up for my disconnection. Devesh shared two pieces – on the importance of faith in investing and a review of how his own essays have stood the test of the bear market – as did Lynn Bolin, who is entering retirement now and working to help other folks make sense of the experience. Mark provides some exceedingly thoughtful analysis of portfolio performance in the 1970s, looking at how a half dozen different strategies might have served a retirement investor. Charles celebrates the return of real returns on risk-free investments and highlights new MFO Premium tools to help you manage it all. The Shadow rounds things out with an excellent collection of industry developments (into which I’ve cynically injected just one or two snarky pieces). And I did stay connected long enough to explain why you should care that FPA New Income is now accepting new investors and what a leather-clad kitten with a whip might teach (however painfully).

The month’s clearest thought

From Eric Cinnamond and Jayme Wiggins, Palm Valley Capital Q1 commentary, which I just received:

It’s been well-documented that investors anchor to peak prices, no matter how extreme. On January 27,2022, the Russell 2000 Index reached a decline of more than 20% from its November 2021 peak. At one point in the first quarter, the S&P 500 had fallen 13% from its record high. A February 11, 2022, article from the Wall Street Journal was titled, “The Stock Market Hasn’t Looked This Cheap in Nearly Two Years.” Two whole years, you say? Stock prices were more than 50% lower in March 2020 [than they are today]. A couple of decades ago, if you would’ve told investors that nearly half of publicly traded nonfinancial small caps would be unprofitable and that the median valuation of the profitable ones would be 18x EV/EBIT after they entered a so-called bear market (20% decline), the reaction may have been, “You must be joking,” instead of, “Let’s go bargain hunting.”

While the pullback from November to late January temporarily improved the attractiveness of many small cap securities, the decline did not produce panic or a significant number of undervalued equities, in our opinion. That the drop felt severe to some demonstrates that many investors’ expectations are anchored to high water marks. The modest turbulence in equities in 2022 has not unwound the impact of the last dozen years of Fed excesses, with the pillars of quantitative easing and paltry interest rates, topped off by a fiscal splurge of epic proportions. No, not even close. We are reminded of family vacation road trips when the kids asked if we were almost there before the car had even made it out of our hometown. If investors zoom out to examine the history of market cycles, the scale of the existing bubble should be apparent. Let go of the anchor!

How far from the bottom might we be? There is no shortage of analytics, speculators, and pundits who declare that the market is somewhere between fairly valued and undervalued.

I’m not sure that I’d bet my lunch money, much less the mortgage, on that happy thought. Bear markets tend to involve a period of blind panic in which prices fall much farther (and sometimes much faster) than is purely rational. That happens when people who are been brave and stoic can’t take it anymore and decide to do … well, something! Often, if not always, the panic becomes self-sustaining. So, the bottom can be irrationally low.

The Leuthold Group has a regular “estimating the downside” calculation. They note that valuations often fall into their bottom quartile during a bear; that is, if you look at valuations in the stock market every month from here back to some date and order those from the most expensive months (typically in the late 1990s) to the least expensive ones (typically in the mid-1930s), you might expect a bear market to end once you have valuations in the bottom 25% of all months.

If that pattern holds, there’s a lot of water under our keel.

Based on valuations from 1926 – 2022, the S&P 500 would have to fall 48% from its early June 2022 levels to hit the bottom quartile.

Based on valuations from 1957 – 2022, it would fall another 40%

Based on the “new era, the internet changes everything, all tech all the time” valuations from 1995 – 2022, it would fall another 22%.

Our advice: pick a strategic asset allocation you can live with (mine is 50/50, growth v security), and get on with life. If you feel compelled to turn the stock exposure dial up or down, regularly monitor where long-term investors such as Messrs. Cinnamond and Wiggins (if you’re super chill) or Leuthold (if you’re normally chill) sit.

For the record, their long-term portfolios are 15% and 45% net equities, as of June 2022.

Do good when you can

The Russian invasion of Ukraine proceeds, increasingly focused on mass civilian casualties caused by a combination of “dumb” weapons and horrifying ones (thermobaric warheads, which the Russians cheerfully designate as “heavy flamethrowers”). At sea, a blockade of Ukraine’s grain exports (they export about three-quarters as much as the US does) is causing spiraling prices in developed countries and starvation in poorer ones.

Reportedly the Russian political calculation is that the West will get bored and distracted long before their invasion force collapses.

Please consider supporting the Ukrainian people or, more broadly, the UN’s World Food Programme. Charity Navigator has updated its resource page on Ukrainian Relief to highlight organizations with specific missions and high levels of operational efficiency.

We’ve previously shared suggestions from Victoria Odinotska, a native of Ukraine who is now president of Kanter PR. In Victoria’s judgment, two of the most compelling options for those looking to offer support are Razom for Ukraine (where “razom” translates as “together”) and United Help Ukraine, which has both humanitarian aid for civilians and a wounded warriors outreach.

– – – – –

The other great upheaval was occasioned by the US Supreme Court’s reversal of the 50-year-old decision in Roe v. Wade, which found a woman’s right to terminate an unwanted pregnancy in a right to privacy and personal liberty.  Many states quickly outlawed, or effectively outlawed, the procedure. Charity Navigator has also assembled a non-partisan collection of charities that are effective in helping people navigate this new minefield, from crisis pregnancy centers, adoption organizations, aid for women and children, and women’s health and access centers.

In memoriam: Fayez Sarofim

Fayez Sarofim (1929 – 2022) died in Houston on May 27, 2022. Mr. Sarofim was born in Egypt, emigrated to the United States in the wake of WW2, and became a citizen in 1961. He also founded Fayez Sarofim & Co. in 1958, from which he practiced a particularly effective and patient growth investing discipline.

The plan was two-fold: (1) buy really good stuff and (2) keep it nearly forever. “Nervous energy,” he opined, “is a great destroyer of wealth.” After the 1987 crash, for example, he urged investors to go fishing. That translated to concentrated blue-chip portfolios, both in Dreyfus Appreciation (DGAGX, now BNY Mellon Appreciation, which he managed from 1990 to the end of his life) and Sarofim Equity (SRFMX, the in-house clone that he launched in 2014). The funds’ holdings have an average market cap of $350 billion and an annual turnover of 2-4%.

He was a generous patron of the arts in Houston and a supporter of its medical community.

In memoriam: Morningstar Fund Screener

As part of the transition from “Morningstar dot com” to “Morningstar Investor” (at $250/year), Morningstar has unveiled a new fund screener. It might be described as “streamlined and investor-friendly.” A Morningstar representative put it this way: “The new screener provides an efficient interface to quickly funnel the investment universe by key Morningstar data points.”

From the perspective of a serious non-professional investor, the description might be “dumbed down to near uselessness.” The new screener limits you to about 20 variables, such as a fund’s Morningstar category, Morningstar star rating, Morningstar analyst rating, Morningstar sustainability rating, and expense ratio. Performance queries are limited to a handful of trailing periods; for example, you can ask about the trailing 12 months but not the performance in 2020.

You cannot ask about a fund’s management nor its portfolio nor its risk profile. Some, but not many, of the old screener’s data points can be displayed, but not searched for. You can display, but not screen for, the average economic moat in a fund’s portfolio. You can neither display nor screen for median market cap, portfolio composition, or annual returns in raw or relative terms.

Mutual funds are in direct competition with ETFs, but Morningstar’s screeners have never allowed direct comparisons of the two. The evolution of Morningstar Investor doesn’t change that. The written reply to my question about whether they’re going to unify the two to allow the side-by-side evaluation evoked this response:

We are continually evaluating feedback from users and expect the platform to evolve over time regarding tool usage, workflows, and elements to help individuals become incrementally better investors and align their portfolios with their financial goals.

Uhh … huh?

The general tenor of our community’s reception of the change is captured in a discussion thread entitled, “M* is screwing everything up again.” To be clear: that’s an argument being made by investors on the public discussion board, not particularly by me. But there is a lot of serious, thoughtful concern about the substance of the changes and the perception that Morningstar values “regular investors” in words but not in actions:

… one great idea from a 27-year-old stock analyst. Joe Mansueto thought it was unfair that people didn’t have access to the same information as financial professionals. So he hired a few people and set up shop in his apartment—to deliver investment research to everyone.

The suspicion is that the definition of “everyone” has changed to “every one of the people willing to buy a seat at Morningstar Direct.”

Pricing for Morningstar Direct is based on the number of licenses purchased. For clients in the United States, we generally charge an annual fee of $17,500 for the first user, $11,000 for the second user, and $9,500 for each additional user.

If you don’t have the spare $17,500, please check out MFO Premium. It allows folks with very modest resources to screen funds, ETFs, closed-end funds, and insurance products side-by-side on literally hundreds of criteria. It is not the most polished screener on the web, but it delivers more data for less money than you’ll find anywhere. More importantly, our colleague Charles Boccadoro is passionate about helping people navigate its resources and has been endlessly willing to strengthen it month-by-month, based on actual conversations with real people.


Morningstar had revenues of $1.699 billion in 2021. Hmmm … we raked in about 1/100,000th of that. And yet we persist in our mission of helping as many people as consistently as possible. And so we thank the folks whose financial support have kept the lights on and the electrons flowing. If you’d like to join them, click on the Support Us! link.

See you in August!

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Confession is good for the soul, honest reflection is even better: My mid-year review

By Devesh Shah

Irresponsibility might not be the gravest sin committed by internet pundits, but it’s surely one of the most widespread. We are forever regaled by advice from “the strategist who called the 2008 crash” has announced the 2022 recession will be worse than 2008, though we are spared the messy details about the source’s other 49 missed guesses. It’s the nature of the internet that pundits can live forever on one right guess while being confident that all of their errors will pass from human memory.

Do you remember Elaine Garzarelli, who warned of the 1987 crash ten days before it happened? Personal Finance for Dummies (2006) notes that she’s still “an expert” because of that call and despite a long-term record that is “poor”. Others describe it as “unremarkable,” “mixed” and not enough to keep her from being laid off by Lehman.

Quick tip for prudent investing: if a story is headlined by the fact that the source got something right, once, but doesn’t immediately highlight their long-term record or the risks associated with following their advice: DO NOT READ THE ARTICLE! It’s simple financial porn, constructive to the author’s ego, destructive to your wealth, and not worth your time.

By the way, that one rule will reduce by 90% the amount of stuff in your newsfeed that you need to attend to. Use the hours you’ll save to read a book or plan a trip with your family.

I hold myself to a higher standard. Like all of my colleagues here, I try hard to assess the evidence available in light of my personal and professional experience. Sometimes I’m right, sometimes I’m wrong and, quite often, I’m somewhere between those two poles. For our mid-year retrospective, I wanted to highlight some of the arguments that I’ve made in my first six months with you here and reflect a bit of how they’ve held up.

February: What is Your Edge?

Takeaways: Markets are complex. Having “an edge” in the market means that you have some special skill or insight that allows you to outthink and outperform hundreds of thousands of full-time professional investors. A true trading and security selection edge is difficult to find. Most people don’t have edge. We should try and be long-term focused and avoid the urge to dabble too much.

Mid-year 2022 Update: Boy! Has this been a year when investors ought to have stuck to their knitting! Everything has been decimated (except a finite Resource equities and Commodities). Tourists in crypto, meme stocks, and even risky fixed income were taken to the woodshed. It’s time to ask once again, “Do I have edge”, in trading or stock selection? If not, come back home to a Balanced Portfolio.

February: Thoughts on Inflation Protection

Takeaways: With inflation raging, investors could protect their portfolios using Inflation-linked Bonds. The preference was I-Bonds >> Short-Dated Tips >> Long-Dated TIPS.

Mid-year 2022 Update:

I-Bonds win: The US Treasury is offering 9.62% annualized coupon until October 2022.

Short-dated TIPS: Year-to-date to June 28th, the Total Return (Price + Coupon) = -1.38%.

Despite inflation, the short-dated TIPS are mildly down because the Federal Reserve raising rates hits bonds of all durations.

But this -1.4% of short-dated TIPS (STIP, VTIP) is actually a victory compared to how the rest of the Fixed Income Assets have performed this year:

Fixed Income Asset YTD June 28th, 2022, Returns (Source: Portfolio Visualizer)
Short Term Treasury -3.6%
Intermediate Term Treasury -8.3%
Long Term Treasury -22.9%
Total US Bond Market -11.5%
TIPS -8.4%
Corporate Bonds -16.8%
High Yield Corporate Bonds -12.0%
Intermediate Term Tax Exempt -8.3%

Short-dated TIPS thus came out as a clear winner among all fixed income publicly traded products.

What about Equity REITs?

Takeaways: I had mentioned in the article that equity REITs have historically been good hedges to inflation BUT the mark-to-market is nasty given the high correlation to broader equities.

Mid-year Update:

Public equity REITs and the S&P 500 total returns are both down about 19-20% this year. No mercy. And definitely a good reason to avoid making TIPS the first weapon in inflation defense.

But what now?

In observing the REITs universe and in conversations with others, there has been a big opening between public equity REITS and private real estate accounts:

  • David Snowball mentioned the TIAA Real Estate Account is up on the Year, a topic covered extensively by Mark Freedman in the MFO Article: Getting Real.

Mark’s article and David’s comment on TIAA had me look up MFO Premium Search engine for Real Estate funds which were up on the year. I found a curious bunch of Private Real Estate Closed End Mutual Funds (some set up as Interval Funds).

I think it’s interest that some of these funds are up YTD. They’ve performed their function. Investing in them is less straightforward for various reasons but it was good to see a few funds live up to their mission. In fact, here are two charts from Bluerock Total Income’s March-22 Semi-Annual Report:

Mind you, reader, the charts refer to Private Real Estate, not public REITs. Nevertheless, the economics eventually should be similar between Private and Public.

Given the sharp sell-off in Public Equity REITs, perhaps one can now think as a good way to protect against inflation. The froth has come off and if inflation persists, it would be nice to see rental income kick in higher for the REITs.

March Article: Overcoming Drawdowns (and Rebalancing)

Takeaway: Use market selloffs as rebalance opportunities.

Mid-year Update: Markets have sold off, rather uniformly, but some opportunities may exist depending on the individual’s portfolio allocation.

Let’s take two simple portfolios:

  1. The 60-40 in US Stock/US Total Bond Market.
    The above work shows that for a person who came in with a $100 portfolio with a 60/40 weight in US Stock Market/US Total Bond Market, the $100 has now become $83.10 (down 16.9% YTD) as a result of the selloff in both assets. If one desired to rebalance to 60/40, that would mean buying $2.16 worth of US Stock Market and selling the same amount in US Total Bonds.
  1. What if you had a 30 Equity/70 Bond Portfolio?
    The $100 would have become $85.80 and the rebalancing would be $1.89 of stock purchase at the expense of bonds.

    The problem this year has been that both STOCKS and BONDS are down leaving us with very little rebalancing opportunities.

    Still good advice over longer periods, but no magic bullet in the “we all fall down” market.

April MFO Article: On Active vs Passive Equity

Takeaway: Active is on the backfoot. Definitely, there are managers who know how to produce alpha, but they are few and far between. I compared five “funds”: Fidelity Growth Company, Fidelity Contrafund, Fidelity Low Priced Stock Fund, Berkshire Hathaway, and the Vanguard 500 Index Investment. I had said that Berkshire’s the only large fund that seemed interesting for its active management skill.

Mid-year Update: Picture speaks a 1000 words

What I have learned this year from MFO:

This above picture is a small and faulty sample. There are many active funds that have outperformed and MFO’s Discussion boards and profile letters have talked about these funds in depth. I look forward to learning more about Active Mutual Fund Managers adding alpha to my portfolio in future years.

Retirement Part 1: The Certainty of Death and Taxes

By Charles Lynn Bolin

“Things as certain as death and taxes can be more firmly believed” was written by Daniel Defoe in “The Political History of the Devil” in 1726. Benjamin Franklin wrote, “In this world, nothing can be said to be certain, except death and taxes” in 1789. Few subjects I have written about elicit such a passionate response as “Roth Conversion” and “Deferring Social Security Benefits.” This article is the first of a three-part series describing my experiences as I retire on June 29th within a few days of age 67.

  • Part 1: “Certainty of Death and Taxes” describes how death, taxes, social security, and Medicare may impact financial retirement plans.
  • Part 2: “Planning the Next 365 Days” is my personal journey in preparing for my new life in retirement.
  • Part 3: “Financial Adjustments in Retirement” is how I am adapting portfolios shifting from earning a paycheck to living on pensions and savings.

According to the IRS, nearly 900 thousand taxpayers converted about $17B from Traditional IRAs to ROTH IRAs in 2019. It is a popular decision. Deferring a Social Security Pension until age 70 increases the monthly benefit by about 8 percent for each year of delay. A U.S. News article by Emily Brandon, “The Most Popular Ages to Collect Social Security,” describes that the number of people waiting to draw social security until full retirement age is increasing. Currently, 36% of men and 31% of women sign up at their full retirement age. Only 6% of women and 4% of men wait until age 70 to begin drawing Social Security.

Abraham Maslow introduced the “Hierarchy of Needs” in 1943 in “A Theory of Human Motivation,” consisting of 1) Physiological (food, water, shelter, etc.), 2) Security and Safety, 3) Social (family, friends, community), 4) Esteem (appreciation, respect, value), and 5) Self-Actualization (personal growth, potential). Figure #1 from Ashy Daniels for the Retirement Field Guide, in “10 Charts About Retirement Every Retiree Should See (2020),” explains why Americans are working longer by dividing the reasons into the “Needs” and “Wants.”

Figure #1: Reasons People Work Beyond Age 65

Please feel free to share suggestions and ideas about retiring on the Mutual Fund Observer Discussion Board. Keep in mind that this is research for my own retirement, and I am still learning the ins and outs.

Aha! Moments in Retirement Planning

I began my career after the military, graduating as a non-traditional student in 1985, and managed to catch nearly every cyclical industry downturn for the next twenty years. I have been through at least two dozen workforce reductions (in which I was mostly fortunate), mergers, acquisitions, shutdowns, and joint ventures. I married Anna more than thirty years ago when we had a combined net worth of close to zero. With a dual-income family, we have built up several pensions, social security, and retirement benefits, and maximizing contributions to savings plans has put us on track for a secure retirement.

In 2008, I used my company’s pension planning service to get estimates of pension benefits at different ages. It was an eye-opener to learn that if I retired at the full age of 62 instead of 57 that my pension would be more than two and a half times larger. Aha! In 2010, I read Retire Secure!: Pay Taxes Later – The Key to Making Your Money Last by James Lange, who is a CPA, Attorney, and Financial Advisor. I followed the advice by creating a lifetime budget. I realized that if everything went according to plan, pensions and deferring social security would put us in a high tax bracket when I started drawing required minimum distributions from traditional IRAs. I immediately switched to a Roth IRA. Aha! Less risk should be taken in traditional IRAs where taxes have yet to be paid, and higher risk should be taken in Roth IRAs where taxes have already been paid. Aha!

The Certainty of Death

Kate Beattie, Senior Retirement Income Strategist at Capital Group, makes the point in “Longevity: Don’t Plan For An Average Retirement” that people planning on retirement should use more than life expectancy when planning on retirement. As the chart below shows, there is a 25% probability that at least one member of a couple will live to age 96, well above the median life expectancy of 84 to 87 years of age.

Figure #2: Life Expectancy Of A 65-Year-Old Married Couple

Source: Capital Group and Society of Actuaries and American Academy of Actuaries, Actuaries, Actuaries Longevity Illustrator, as of May 10th, 2021

CNBC Personal Finance Reporter, Greg Iacurci, describes in this article, new U.S. Department of Labor requirements that 401k administrators provide “lifetime income illustrations” to participants starting in July of this year. These are estimates of the approximate income people will get in retirement if they were to buy an annuity with 401(k) savings at age 67. This is intended to change how people think about retirement savings. Having $500,000 in a 401(k) savings plan is a lot of money, but this NewRetirement Lifetime Annuity Calculator puts it in perspective that it would buy an annuity that pays about $2,000 per month if you elect 75% Survivor Benefits for your spouse and 3% inflation protection.

Survivor Benefits

Women tend to live longer than men, and I want to make sure that Anna is well cared for in case I pass away before her. To this objective, I set up a meeting with our Fidelity Financial Advisor and enrolled in Fidelity Wealth Management Services for a portion of our savings. Our advisor provided us with a list of Certified Public Accountants/Financial Planners to assist with analyzing the tax consequences of various strategies. We interviewed two CPAs and selected one that we are comfortable with.

Anna and I have planned on guaranteed income to meet our living expenses by electing the pension option with 100% Joint and Survivor Annuity for one pension. It lowers my monthly benefit by about 6% but gives me peace of mind knowing that Anna will have both her and my pension for life. The Widow’s Tax refers to women moving into a single tax category instead of a joint after the husband passes away. I took another pension as a lump sum.

Social Security plays a secondary role in providing survivor benefits to spouses and dependents. Someone who is collecting a pension not covered under social security, such as many public service pensions, may have spousal benefits reduced by the Government Pension Offset (GPO). Anna was a school teacher and administrator and is impacted by this program. This is where delaying one’s social security benefits until age 70 increases survivor benefits. In the case of Anna, my delaying social security benefits has a considerable impact on the survivor benefits that she may get.

A widow or widower whose spouse waited until 70 to file for Social Security is entitled to the full amount the deceased was getting — including the delayed retirement credits — so long as the surviving spouse has reached full retirement age.

(“If I Wait Until 70 To Claim Social Security, Will My Spouse Get A Bigger Benefit As Well?”, AARP)

Beware, The Tax Man Cometh

While retirees may be fortunate to have worked and saved throughout their careers so that they can enjoy a secure retirement, retirees will still pay taxes on income from earnings, pensions, social security, and income levels may also impact Medicare premiums.

Stealth Taxes in Retirement

Robert Klein, founder and president of the Retirement Income Center, describes in “Six Stealth Taxes That Can Derail Your Retirement” the taxes that people nearing retirement should be aware of. I describe many of these taxes in this section.

The goal of retirement income planning is to optimize the longevity of your after-tax retirement income to pay for your projected inflation-adjusted expenses. In addition to having adequate retirement assets, there are two ways to achieve this goal: (a) maximize income and (b) minimize income tax liability.

  • Stealth Tax #1: 10-Year Payout Rule
  • Stealth Tax #2: Social Security
  • Stealth Tax #3: Increased Medicare Part B and D Premiums
  • Stealth Tax #4: Net Investment Income Tax
  • Stealth Tax #5: Widow(er)’s Income Tax Penalty
  • Stealth Tax #6: $10,000 Limitation on Personal Income Tax Deductions

Secure Act – 10-Year Payout Rule

The Secure Act changed the inheritance rules for children and grandchildren after reaching the age of majority so that now they have to empty out both traditional and Roth IRAs over ten years after the death. This may cause them to draw out money faster than the required minimum distributions would have been, which potentially increases taxes.

Tax Cuts and Jobs Act – Limitation on Tax Deductions

The Tax Cuts and Jobs Act of 2017 nearly doubled the standard deduction and reduced mortgage interest deductions. The deductions for state and local taxes (SALT) for state and local real estate, personal property, and either income or sales taxes are now capped at $10,000.

Tax Rates and the 2026 Sunset Law

The tax table from the Internal Revenue Service for a couple filing jointly is shown below. The large jumps in tax rate occur at $83,551, where the marginal tax rate jumps from 12% to 22%, and at $340,101, where the rate jumps from 24% to 32%. Managing one’s taxable income around these levels may reduce overall taxes.

Table #1: 2022 Federal Tax Rates

The Tax Cuts and Jobs Act was passed in 2017 and is set to expire in 2025, known as the “2026 Sunset Laws” described by the Federal Employees Tax Planners. If not extended, tax rates will rise in 2026 as follows:

  • 12% tax rate goes back up to 15%
  • 22% tax rate goes back up to 25%
  • 24% tax rate goes back up to 28%

Required Minimum Distributions

Traditional IRAs require that minimum distributions are taken, as shown in Table #2. For every million dollars that a retiree has in Traditional IRAs, they must take $36,496 out at age 72 and pay taxes on it. This is in addition to pensions, social security, and other taxable income.

Table #2: Required Minimum Distribution Rates

(Ben Geier, “IRA Required Minimum Distribution (RMD) Table for 2022”, Smartasset)

Taxes on Social Security

The American Association of Retired Persons (AARP) explains taxes on social security in “How is Social Security taxed?”:

  • up to 50 percent of your benefits if your income is $25,000 to $34,000 for an individual or $32,000 to $44,000 for a married couple filing jointly.
  • up to 85 percent of your benefits if your income is more than $34,000 (individual) or $44,000 (couple).

Net Investment Income Tax (Medicare) 3.8% Surtax

The Net Investment Income Tax (NIIT) came into effect in 2013. It adds an extra 3.8% tax when net income is $250,000 or higher if married. In “Roth IRA Conversion: 7 Things to Know”, Fidelity describes that a conversion to a Roth may trigger the Medicare surtax:

Married couples (filing jointly) with a modified adjusted gross income (MAGI) of more than $250,000 may be subject to a 3.8% Medicare surtax. (The MAGI thresholds are $125,000 for married taxpayers filing separately and $200,000 for single filers.) The surtax applies to net investment income (which includes income from interest, dividends, capital gains, annuities, rents, and royalties, among other things); or MAGI in excess of the income thresholds, whichever is less.

The amount you convert from a traditional IRA to a Roth IRA is treated as income—just like all taxable distributions from qualified pre-tax accounts. Therefore the conversion amount is part of your MAGI, and it may move you above the surtax thresholds. This may cause you to incur the additional Medicare surtax on your investment income.

Roth 401k vs. Roth IRA

Roth 401k’s are subject to required minimum distributions by age 72, but you do not have to pay taxes on the qualified distributions. Roth 401k’s may be rolled over into a Roth IRA to avoid these RMDs. For more information on Roth 401k’s, please read “What Are the Roth 401(k) Withdrawal Rules?” at Investopedia.

When It Might Be Right To Do A Roth Conversion

Mr. Klein further lists the “7 Reasons To Start A Staged Roth Ira Conversion Plan Today” in the Retirement Income Center, as shown below.

  1. Eliminate taxation on the future growth of converted assets.
  2. Take advantage of low federal tax rates scheduled to expire after 2025.
  3. Reduce required minimum distributions beginning at age 70-1/2.
  4. Potentially reduce Medicare Part B premiums.
  5. Reduce widow or widower’s income tax liability.
  6. Reduce dependency on taxable assets in retirement.
  7. Stay focused on retirement income planning.

In “Roth IRA Conversions and Taxes,” Fidelity describes when a Roth conversion might be right for a retiree and offers seven considerations to think about. Whether a Roth conversion is right for you may depend on your outlook for taxes and future returns, and Fidelity has a nifty Roth Conversion Calculator. Fidelity offers situations when a Roth Conversion may be advantageous:

  1. You expect to be in a higher tax bracket in retirement than you are now.
  2. You think the value of your IRA investments is hitting a low point.
  3. You have other losses or deductions to offset the tax due on the conversion.
  4. You don’t need to take distributions by age 72.1
  5. You are moving to a state with higher income taxes.

Allan Roth, founder of Wealth Logic, LLC, a Colorado-based fee-only registered investment advisor, provides a comprehensive description of Roth Conversions in “The Seven Cases to do a Roth Conversion.” He leans toward a Roth conversion if clients answer in the affirmative to the following questions:

  1. Is the Roth pot of money small compared to the taxable and tax-deferred pots?
  2. Is the current marginal tax-bracket low? This could be the case if the client retired before taking Social Security or RMDs, or if they are starting a pass-through business (LLC or Sub-S) with very little income or even losses.
  3. Will the client have a high income in retirement, such as pension income?
  4. Will the RMDs be burdensome if the client doesn’t convert some money to the Roth?
  5. Does the client have any after-tax money in their tax-deferred accounts and if all IRAs are converted, will that allow for future backdoor Roth contributions?
  6. Will the client benefit from a possible state income tax exemption for amounts converted?
  7. Are there some estate planning benefits from conversions?

Roth Conversion Sweet Spot

Matt Bacon from Carmichael Hill describes “The Roth Conversion Sweet Spot,” which is the time between retirement and when a deferred social security pension and RMDs begin.

Income is generally lower than it was during your working years, withdrawals from pre-tax retirement accounts aren’t mandatory, and living expenses can be pulled from taxable accounts with favorable capital gains rates (potentially 0%)!

More Ways to Reduce Taxes

Gifting and charitable donations are more ways of reducing income.

  • Gifting/Early Inheritance: You and your spouse can collectively give your child $32,000/year as a tax-free gift and the same amount for their spouse. Instead of having excess RMDs accumulate value in your account, it can be in theirs at lower tax rates and with no Medicare concerns.
  • Donor-Advised Charities: If you are financially secure and expect to make donations to charities yearly over the next ten years, you might consider bundling the next ten years of donations (for the example, $10,000 x 2 x 10yr= $200,000) and making a donation from an IRA in a single year. The withdrawal would be totally deductible from MAGI, lower the value of the IRA and RMDs going forward, and allow a one-year itemization to get the tax deduction. After that, you have the option of disbursing the money where and when you choose, although it is committed to qualified charities.
  • Direct donation of IRA withdrawal to a charity allows a direct decrease in MAGI for that year.

Understanding Medicare and the Impact of Income

For those of us that are new to Medicare, Fidelity summarizes options concisely in 6 Key Medicare Questions. There are plenty of rules and deadlines associated with Medicare and penalties for being late.

Higher Medicare Premiums for High-Income Retirees

Medicare Premiums are based on your modified adjusted gross income (MAGI). Shane Ostrom, former Director of the Military Officers Association of America, describes what is included in MAGI in These Actions Will Increase Your Medicare Part B Premiums. MAGI is your Adjusted Gross Income from two years ago before deductions plus your tax-exempt interest income. The following items may increase your MAGI:

  • IRA and retirement account withdrawals
  • Roth IRA conversions
  • Withdrawals from insurance annuity policies
  • Withdrawals (but not loans) from the cash value of life insurance
  • The gain from the sale of a home or securities
  • Interest, dividends, and capital gains from held savings and investments
  • Business income
  • Alimony
  • Rental real estate
  • Farm income

The cost of Medicare Premiums goes up for high-income earners, as shown in Table #3. Crossing over an income bracket by even $1 raises your monthly premium to the next level for both you and your spouse if both are on Medicare. The table shows that annual Medicare Premiums for a couple can increase by $2,448 if their income crosses $1 into the next income bracket. High-income earners may pay two to three times the base cost. Another important point is that the income is based on your modified adjusted income from two years ago when a retiree may still have been working and not based on your current lower retirement income.

Table #3: Medicare Part B Premiums

(Based on “Part B costs,”

Popular Medicare Options

I searched on the internet to find the most popular plans for those that want full coverage. provides a good summary of the plans available, as shown in Table #4. The most popular options are to have Parts A and B of Medicare and Supplemental Coverage, known as Medigap, or to select a Medicare Advantage. The most popular options are Medigap Plan G and Medicare Advantage. The Medicare site provides Star Ratings for the Medicare Advantage Plans along with the details.

Table #4: Medigap Plans

One of the benefits from my company is to have Alight help us select a plan and get enrolled. Another benefit is assistance with coverage for health care costs, and Alight was helpful in this regard. Based on my own research, I decided on the Medigap Plan G and pre-selected five providers in my area based on Star Ratings before talking to Alight. Linda Wnek (1-884-779-9561, ext 10095) was the representative from Alight, and she was helpful in going through the remaining questions that I had and with the details. To sign up for Medigap, you have to also have Medicare Part B. I applied for this online.

Closing Thoughts

I have been researching the financial aspects of retiring for well over a decade. There have been both pleasant and unpleasant surprises, as described in this article. “Part 2: Planning the Next 365 Days” addresses the realization that I have put too little thought into what I will do when I am retired.

New Income: New Adventures, New Opportunities

By David Snowball

FPA New Income (FPNIX) is a remarkable fund, simultaneously conservative and aggressive. It is an absolute return-oriented fixed income fund that embodies FPA’s corporate discipline:  don’t buy it if you don’t have a margin of safety and the prospect of decent returns. The explanation of the fund’s investment strategy begins with a simple declaration: “We do not like to lose money.” It is simultaneously an unconstrained and a very constrained strategy. It is unconstrained in that it can invest pretty much wherever opportunities arise though at least 75% of the portfolio investments must earn the “High Quality securities” designation, with the remainder likely in cash or Credit Sensitive issues. It is very constrained, though, by a long-standing and non-negotiable absolute return discipline.

The fund, launched in 1984, has never lost money in any calendar year. FPA notes that “since the inception of this strategy, we have earned a positive absolute return in each calendar year, with considerably less portfolio volatility than various measures of investment performance. We hope and expect to continue this positive trend.” In the first six months of 2022, the fund declined (-2.85%) which places it near the top of its Morningstar peer group.

Over the past 20 years, the fund has had a negative downside capture ratio (-12), which means that it tends to rise when the bond market falls, and a negligible correlation to the movements of the US bond market (R2=10).

The fund has returned 2.6% annually over the past 20 years but 6.4% annually since inception. The lower recent returns reflect the fund’s limited opportunity set in a low-inflation, zero interest rate environment. The higher long-term numbers are a reminder that the strategy is quite capable of generating double-digit returns – as high as 21% in 1985 – in high inflation environments which allows it to book real and not just nominal returns.

New Adventures

On July 1, 2022, Thomas Atteberry stepped away from the fund. Mr. Atteberry joined FPA in 1997, comanaging the New Income fund with Bob Rodriquez from 2004 until Mr. Rodriquez’s retirement as a portfolio manager in 2010. In 2015, Abhi Patwardhan joined the team. A year ago, FPA announced Mr. Atteberry’s decision to retire from portfolio management this year. It has long been clear that Mr. Patwardhan was destined to succeed him.

Abhi is the Director of Research for the Absolute Fixed Income strategy at FPA. Prior to joining the firm, Abhi was an investment analyst at Reservoir Capital Group, D.B. Zwirn & Co., UBS Warburg and Donaldson, Lufkin & Jenrette. He earned a B.S. summa cum laude, Economics, and an MBA, both from the Wharton School of the University of Pennsylvania.

He’s supported by a half dozen specialists in various fixed-income fields.

New Opportunities

New Income closed to new investors in 2020. It reopened to new investors on July 1, 2022. We spoke with Abhi on the eve of the reopening about the decision.

We soft closed in mid-2020 because two-year Treasuries were yielding 15 bps, spreads had compressed after the March sell-off and continued to do so. For absolute return-oriented investors, people who are very disciplined, those lower yields dramatically narrowed our opportunity set.

On top of that, we had to consider the size of our asset base, steady inflows and the amount of cash we already had on hand; just we had a lot more cash than opportunities so we initiated a preemptive closing to protect existing investors.

At the same time, we promised that if any of the three – asset base, fund flows or opportunity set – changed substantially, we’d reopen. They have, so we did.

Six months of asset outflows and the opportunities created by “the worst bond market in a century” led FPA to reopen the fund.

Consider the opportunity

You get a clear sense of the team’s perspective on risk management in an “Insights” white paper entitled Risk is where you’re not looking (2019). They note that the 2008 global crisis was catalyzed by excessive consumer debt and a rickety banking system. They observe that those two actors are actually in solid shape just now, but “sovereign and US municipal governments and corporates are more the problem now and that their excessive leverage will either catalyze or magnify the next downturn. The current debt trajectory, in terms of levels and quality of credit, is unsustainable and will inevitably end.” Likewise, corporate debt – nominally “investment grade” – has more than doubled since ’08 to $8.8 trillion, growing at twice the rate of the GDP. That easy money has underwritten the stock market’s prodigious run:

The increase [in corporate debt financing] has aided corporate mergers and acquisitions (“M&A”), leveraged buyouts and share repurchases and supported to some immeasurable level the growth in corporate earnings, all of which have served as drivers of US stock market returns.

Almost foreshadowing the hit film Don’t Look Up (2021)  the FPA team reflected on the strategy of many investors when confronting risk: pretend it’s not there.

Some choose to live in zones at high risk of fires and volcanic eruptions without understanding the risk, while others understand the risk yet live there anyway. We believe many investors in the bond market are living with risk they don’t appreciate and so lack appropriate consideration for what might happen. At some point, fear will reenter the market, and both FPA teams are prepared to follow on its heels to scoop up attractive opportunities.

The thoughts communicated today are not new, but given the continued stretching of the proverbial rubber band, we thought it prudent to spend this time communicating our concern. Fears of a recession have led to corporate bond market weakness in Q4 2018, and with the commensurate increase in lender caution, we are beginning to see investment grade borrowing costs increase. We cannot and never do speak to timing. This may all be a head fake at this moment in time. That, however, does not change the real risk that remains – a risk that someday may be realized.

Michael Lewis discusses unappreciated threats in his new book, The Fifth Risk (2019). Although he isn’t speaking of investing, one of his thoughts seems a fitting way to close. “If your ambition is to maximize short-term gain without regard to the long-term cost, you are better off not knowing the cost.” On the contrary, we seek to maximize long-term gain while knowing the costs, willing as always to sacrifice the near-term in its pursuit.

They semi-celebrate the bond market carnage in early 2022, which at least restored some discipline and some opportunities to the market.

The bond market has had a terrible start to the year. In fact, we are in the midst of the worst bond market in at least 40 years. Inflation led to a significant increase in risk-free rates that has roiled bond markets, resulting in negative returns for nearly all types of bonds. The silver lining of this negative performance is that bonds are now meaningfully more attractive, creating an opportunity to enhance the Fund’s long-term return profile. (First Quarter 2022 Commentary)

For investors struggling to balance the challenge of an inflation-ravaged bond portfolio with anxiety about recession as “the next shoe to fall,” the reopening of FPA New Income comes at a propitious moment. It deserves your attention.

The fund’s homepage is unusually rich with detail.

MFO Premium 2022 Mid-Year Review

By Charles Boccadoro

The next MFO Premium webinar will occur Tuesday, July 12th.

Our premium search tool site helps individual investors and financial advisers 1) sort through the vast number of funds available today based on criteria important to them, 2) maintain candidate lists of promising funds to conduct further due diligence on, and 3) monitor risk and return performance of their current portfolios.

In addition to the recent upgrades, described below, the webinar will highlight fund performance for the first half of 2022. Month ending June data should post Saturday, 2 July.

Since our last webinar in January, significant upgrades include:

  • Quick access analytics, as described in our June Commentary.
  • Logarithmic scaling option in MFO Charts.
  • Added MFO Charts to MultiSearch tool, as described in our March Commentary.
  • Added Calendar Month Ratings to MultiSearch and ability to screen by calendar year return APR and drawdown MAXDD.
  • Added RATE Reference Indices to support annuity modeling in PORTFOLIOS tool.
  • Added additional display periods to help assess Fed Taper and Normalization periods. See Definitions.
  • Added 1, 3, and 5 year Fund Family Ratings to better assess near-term performance of more established families. See Families.

The morning session will be at 11 am Pacific time (2pm Eastern). The afternoon at 2pm Pacific time (5pm Eastern). The webinars will be enabled by Zoom. You are welcome to register for both webinars.

Please use the following links to register for the morning or afternoon session. Each will last nominally 1 hour, including questions.

Here are links to chart deck and video recording from our last webinar.

Hope you can join us again on the call. If you have any topics you’d like discussed, or general questions, happy to answer promptly via email ([email protected]) or scheduled call.

Retirement: Planning The Next 365 Days

By Charles Lynn Bolin

By the time this article is published in Mutual Fund Observer, I will have been retired for one day as I near my 67th birthday. I spent 25 hours this past month listening to audiobooks about the psychology of retirement and an equal amount of time searching the internet for ideas generated from these books. I concluded that I should ease into retirement and plan on what to do for the next 365 days, sometimes called the Retirement Honeymoon Phase. This article is the second of a three-part series describing my experiences as I retire.

  • Part 1: “Certainty of Death and Taxes” describes how death, taxes, social security, and Medicare may impact financial retirement plans.
  • Part 2: “Planning the Next 365 Days” is my personal journey in preparing for my new life in retirement.
  • Part 3: “Financial Adjustments in Retirement” is how I am adapting portfolios shifting from earning a paycheck to living on pensions and savings.

I have spent eleven of the past fifteen years living and working in remote and semi-remote mining camps overseas. These assignments are known as expatriate or “ex-pat” for short, on a fly-in-fly-out schedule where we work for six to eight weeks in the country and have two to three weeks on break. My typical day starts at 3:30 am with a cup of coffee before going to the gym. At 5:30 am, I walk 25 minutes to work instead of taking the bus. I have dinner at 5:30 pm and once or twice per week, join friends for a beer before going to bed early. This has been my schedule for six days per week, with the seventh day taken as a personal day.

What I have enjoyed about this lifestyle is the international travel, challenging work, and the lifelong friendships developed. When one of my ex-pat friends, Frank, learned that I am retiring, he said, “It took me two years to get used to not going to work. Now I am too busy to work!” What I want from this retirement planning is to go immediately into having too much to do when I stop working.

Working internationally has allowed plenty of time during travel to read and listen to audiobooks. This article is a result of my personal planning for psychological and social adjustments for retirement. I listened to How to Retire Happy, Wild, and Free: Retirement Wisdom That You Won’t Get from Your Financial Advisor, by Ernie J. Zelinski, Happy Retirement: The Psychology of Reinvention: A Practical Guide to Planning and Enjoying the Retirement You’ve Earned by Dorling Kindersley Limited (DK), and A Couple’s Guide to Happy Retirement: For Better or For Worse…But Not For Lunch by Sara Yogev, Ph.D.

There are many pitfalls in retirement, and mine are going to be related to major changes in my lifestyle as I repatriate to life in a suburb without having to get up so early. We moved to Colorado last year to be closer to family, healthcare facilities, and airports, and I have not spent much time at the new home. It is a shock to go to stores or restaurants and see how much prices have gone up since I have been away. I jump-started retirement by ordering Colorado Bucket List Adventure Guide: Explore 100 Offbeat Destinations You Must Visit! by Don Harris and created a list from the internet of over one hundred places to visit and things to do within a fifty-mile radius of home. As a result of writing this article, I ordered another book to learn from the experience of another retiree, George H. Szlemp, who wrote Retirement: The First 365 Days:: Day-to-Day Advice for Happiness in Retirement. I will read it on my final flight home.

Developing A Shared Vision For Retirement

Abraham Maslow introduced the Hierarchy of Needs in 1943 in “A Theory of Human Motivation,” consisting of Physiological (food, water, shelter, etc.), Security and Safety, Social (family, friends, community), Esteem (appreciation, respect, value), and Self-Actualization (personal growth, potential). Our vision for retirement is that we have enough saved for basic needs for long lives and that we have a margin of safety to cover unexpected events such as inflation and higher healthcare costs with enough to enjoy life’s little pleasures. This vision covers Maslow’s first two needs of Physiological, and Security and Safety. This article focuses on developing a vision for the last three.

The original version of Aesop’s fable, “Ant and the Grasshopper,” believed to be written around the sixth century BCE, is about the cicada (grasshopper) that spent the summer singing and dancing while the ant worked hard storing food for the winter. As winter arrives, the grasshopper asks the ant for food, and the ant tells the grasshopper to dance the winter away. Jean de la Fontaine’s 17th-century retelling of the story is about compassion and charity. My takeaway from the retirement books is to plan for the long term, but remember to stop and smell the roses.

Planning – Self Assessment

Once you have a vision for retirement and have done a realistic self-assessment, you can begin the planning in more detail. Things that should be addressed are lifelong concerns, fears of dependence or abandonment, adopting new passions, skills development, working part-time, and balancing money needs.

My father was a professor, and I had lived in three states by the time I was twelve. I joined the military at age 18 and was stationed in Europe. Anna grew up on a farm and ranch and lived there through high school. Our backgrounds greatly influence what we want in our lifestyles. I like to travel, and Anna doesn’t. Anna loves gardening, and I like spending time in the mountains. Anna and I both have a strong desire for security. We need to take these preferences into account as we plan our retirement.

In general, people nearing retirement have the desire to stay healthy, relax, connect with family, have fun, expand social relationships, continue learning, and give back to society. A good place to look when planning your life in retirement is at what you enjoyed doing during your past, as it is what you are most likely going to have the interest to continue doing in retirement.

I developed a Bucket List of the things that I have enjoyed doing in the past and want to continue or do more with my new freedom. I started with websites about the best attractions and activities within a 50-mile radius of home.

  1. Diet: Cooking and cooking classes, locally-owned restaurants
  2. Entertainment: Breweries and wineries,
  3. Exercise: Gym and nature trails
  4. Family: Day trips, gardening, grandchildren, lunch, vacations
  5. Fun: Sports centers and events
  6. Hobbies: Investing and conferences, writing
  7. Intellectual Challenge: Continuing education, museums, online learning, reading, podcasts, unbiased news
  8. Relaxation: Gardens, parks, theater
  9. Social: Gardening, breakfast, friends, and community
  10. Volunteering: Environmental, community, society

Beware that there are many pitfalls to retirement, which for some people may be the loss of identity, purpose, and sense of accomplishment that we may get from work. The audiobooks helped me prepare a list of potential pitfalls that I need to work on or avoid:

  1. Develop a shared vision for retirement
  2. Assess your individual strengths, weaknesses, and interests
  3. Be patient
  4. Don’t procrastinate
  5. Develop good or better communication
  6. Involve each other in financial and household planning
  7. Having the right balance of dependence and independence upon your spouse.
  8. Plan joint leisure time as well as time separately to pursue personal interests or enjoy friends.
  9. Share responsibilities, especially housework
  10. Stay active together


Retirement is a process and not an event. The more that you have planned for life after work, the less you will have to adjust in retirement. There are the immediate aspects of preparing for retirement, such as discussions with your employer about benefits, finding a replacement, and applying for pensions and Medicare.

In my early career, I was a workaholic. In 2006, I told Anna, “Life is too short to live like this, and I don’t want to do it anymore.” I decided that a change of environment was necessary and chose to work internationally. A couple of years later, Anna told me that I was right that life was too short to do a job that she was not happy with, and she made a career change. We did not realize it during these times, but these career changes were preparing us for retirement.

I began reading a lot of history, science, economics, and financial books. One of my interests was to develop the Investment Model, which involved several years of research. I submitted an article to Seeking Alpha to see if anyone was interested in reading about macro-economic models and have been writing financial articles since then. By the way, the Investment Environment (dashed blue line) is falling to a level that warns to reduce allocation to riskier assets (solid blue line). As inflation started rising, I shifted to my neutral stock allocation of 50%. The Percent of Negative Indicators (solid red line) is now about 30% suggesting that a recession is not imminent, but risks are rising.

Honeymoon Phase

My transition to retirement includes a birthday, anniversary, and Fourth of July celebration. I have my list of things to do when I retire already prepared. The suggestions from some authors for transitioning into retirement are to ease into it but not procrastinate. You are likely to have more time than you anticipate, and you should try to make the most of your leisure time. I have begun having discussions with Anna about taking more of the stress of household work when I get home.

When looking at the costs of items on my wish list, I had to take a step back and prioritize. I decided that it was more cost-effective to upgrade. Here is my list of things to do in the first two months after retirement.

  • Join a gym through the Silver Sneakers program
  • Grill a ribeye steak on our anniversary
  • Help Anna with the landscaping
  • Call friends
  • Make plans to visit family
  • Find activities for when our son and grandson come to see us in October.
  • Finalize retirement preparations
  • Read Colorado Bucket List Adventure Guide: Explore 100 Offbeat Destinations You Must Visit! and Retirement: The First 365 Days:: Day-to-Day Advice for Happiness in Retirement
  • Write an article, “Financial Adjustments in Retirement.”
  • Develop a plan for the Honeymoon Retirement Period
  • Walk in the Benson Park Sculpture Garden and Chapungu Sculpture Park
  • Hike Devil’s Backbone Open Space
  • Visit the tasting room at Sweet Heart Winery
  • Have a beer at the Big Beaver Brewing Company
  • Eat at Mo’ Betta Gumbo and Nordy’s Bar-B-Que restaurants
  • Have breakfast at the Rise Artisan Bread Bakery
  • Ride the Fort Collins Trolley
  • Sign up for unbiased news sources
  • Attend an online investing class

Those who don’t develop interests and habits through the Honeymoon Phase may find themselves disenchanted with retirement as they struggle with the extra time. They may feel like they lost part of their identity when they left work. They may have grown apart from their friends that they knew at work and not developed new friends.

Future Growth

I have identified a lot of possibilities for helping plan a successful retirement. I want to narrow the list down substantially before deciding on my next steps. AARP has online classes covering many topics. I will be researching Massive Open Online Courses, known as MOOCs, which are free online courses covering a wide variety of topics. “Free Online Classes for the Masses” on the AARP website describes how to get started in MOOCs. Udemy is another possible resource that has 185,000 online video classes for a small fee. For those interested in investing, Morningstar has 170 ten-minute online classes for no charge. The MoneyShow has the MoneyMasters Courses offered by financial experts worth looking into.

Planning the Next 365 Days

I have enjoyed work, the amenities that I have had, the people I have known, and the experiences that I have shared. I have prepared for retirement and look forward to it. I am shifting gears from employment being center stage to preparing for a different life which I am only now taking the time to imagine. I have lived overseas for nearly a quarter of my life and will enjoy spending less time in airports and sleeping on planes. I have not seen many of the great sites in the United States, such as Yellowstone National Park, and I look forward to exploring my new home, like walking through Benson Park Sculpture Garden in Loveland, Colorado.

Yellowstone Falls, Yellowstone National Park

Benson Sculpture Park, Loveland, Colorado

The Great Normalization

By Charles Boccadoro

Numerous bear sightings occurred these past several weeks, but with June’s awful performance, the new bear is clear and present. Intra-month, the S&P 500 closed down more than 20% from its previous peak and at month’s end, it closed down level at 20%, similar to the CV-19 bear of March 2020. In June alone it dropped more than 8%. This retraction marks the seventh bear market since 1968 (or tenth since 1926), as depicted in the chart below.

It remains quite astounding what a 3% rise in the 10-year T-Note has done to equity and bond markets over the past 6 months. Some good news? 10-year CDs are now yielding close to 4%.

The previous cycle, CV-19, lasted 2 years, delivered 52% return and the strongest annualized return of the past nine cycles at 23.4%/yr, recovering rapidly from March’s rapid decent, when it felt like an asteroid was upon us. It included six months under-water followed by a period of numerous (13) all time highs, which can likely be attributed to aggressive fiscal (Congress) and monetary (Fed) policies implemented to help society deal with the global pandemic.

The latest cycle, which we will nickname “The Great Normalization,” began in January 2022. It marks a period of rising rates to get back to historical norms and comes at a time of high inflation, likely caused by 1) supply chain shortages as society emerges from CV-19 and Russia’s invasion of Ukraine, and 2) the stimulus and years of zero interest rate policy. Likely too, ends a period of excessive valuations, particularly in so-called meme stocks and growth stocks that have yet to turn a profit.

The table below summarizes full cycle performance since 1926:

The table below provides a breakout of the bear and bull market components of the same cycles. The CV-19 bull nearly doubled investor returns in just 21 months. While short lived, it provided the highest annualized returns of any previous cycle.

For reference, our series on market cycles for US equities, which includes methodology, is summarized here:

Refinitiv will drop month-ending June data tomorrow morning, Saturday, 2 July. Please look for updated MFO Ratings on the MFO Premium site by Sunday afternoon, 3 July (Vancouver BC Time).

Finally, please join us on Tuesday, 12 July for an MFO Premium Mid-Year Review webinar. Per our custom, please register for either the morning or afternoon session.

Your portfolio … in the Disco Inferno!

By Mark Freeland

Rapidly rising inflation, bear markets, Congressional hearings over political misdeeds, geopolitically related energy price spikes. What next? Bell-bottom pants? The return of disco? These are not echoes of the 70s that people might have hoped for.

We are living in a time with many similarities to that era, including concerns about how to protect one’s portfolio – with cash losing value to inflation and the stock market suffering the worst six-month start of a year since 1970. There are also some differences. The unemployment rate is lower than during the stagflation of the 70s. On the other hand, at least on a nominal basis, bonds in the 70s paid a fair amount of interest unlike now.

All of this suggests that it would be instructive to look at the 70s to see how different strategies performed. While not a perfect match to today, the 70s can still offer some insights.

To address the fact that nominal rates are lower now and bonds are losing real value more quickly, a few of the allocation strategies here are comprised primarily of stocks and cash. If those low bond allocations fared relatively well in the 70s, that gives hope for low/no bond portfolios faring at least as well today.

Rationales for asset allocation

Over the long term, equities beat bonds, yet investors allocate their portfolios more conservatively. Part of the reason is psychological. Part is because risk becomes real when people need to spend down some of their assets.

If people were investing forever with no intention of withdrawing money, they might as well put everything into equities and walk away. That’s somewhat like saying that a rock is the fastest computer – you just can’t tell because it has no I/O.

For the exercise here, the investor is the prototypical retiree who starts withdrawing 4% of a portfolio and adjusts that amount annually for inflation.

 The “experiments”

To recap: we are going to try to simulate the worst-case experience for an investor in retirement. That pretty much summarizes our target window: a crushing equity bear, the end of a long bond bear market, market instability, and incessant price inflation. The question is, what strategy offers the most hope for a retirement investor.

I stipulate “retirement investor” because the interests of folks in the “decumulation” phase of their investing careers are very different from, and almost diametrically opposed to, the interests of investors just beginning. For our readers in their 20s and 30s, the thing you should pray for is a really dramatic decline in stock prices, which will reset the market and set you up for decades of robust returns as you build your portfolios. (And yes, the rest of us will be driving our Buicks slower than usual with our left turn blinkers on just to p*** you off.)

Ten years is a conventional period for looking at performance. The decade I used is 1973 – 1982. This period started with a crushing two-year bear market. That tests resilience to the sequence of return risk. The market had large swings in performance from year to year. That’s good for testing reallocation schemes. Rampant inflation began in 1973 and lasted through 1981. So the decade chosen here neatly coincides with the entire high inflation period.

Six different stock allocations are used, ranging from 40% to 100%.

  • 40% stock – a traditional Wellesley-like allocation, with the rest in bonds.
  • 55% declining to 40% – a target date glide path, numerically similar to those by Rowe Price.
  • 60% stock – a traditional Wellington-like allocation, with the rest in bonds.
  • 75% stock, 16% cash, 9% bond – reduced bond allocation, with cash for four years (4 x 4%)
  • 90% stock – Warren Buffett proposed this in his 2013 shareholder letter; the rest in cash.
  • 100% stock – for comparison

Each of these portfolios is rebalanced annually after the investor make a 4% withdrawal (adjusted for inflation). A second reallocation scheme is also tested with the two bond-light portfolios (75% and 90% stock).

The idea is to use the cash to “protect” against drawing from equities when they are down in value. This “cash buffer” approach is implemented by drawing against cash (then bonds, if any) so long as equities are below their high-water mark in dollars. Once equities recover and surpass their high-water mark, the excess is used to replenish the cash allocation (and bonds if any). Once the value of the entire portfolio exceeds its high-water mark, standard rebalancing resumes, i.e. 90/10 or 75/9/16.

This sounds like a bucket approach. It differs in that traditionally one always rebalances after drawing money from whichever bucket did the best. As Michael Kitces explained a few years ago, that approach is little different from simply using a balanced fund since you are always maintaining the same allocations. The “cash buffer” approach tried here is not the same.

The numbers

Source: Historical Returns on Stocks, Bonds, and Bills: 1928-2021

The investor starts with $100,000 at the end of 1972 and immediately withdraws 4%. The withdrawal amount is adjusted annually for inflation. For bond returns, a 50/50 mix of 10-year Treasuries and investment-grade corporates are used.

The year-end balances for each of the portfolios are shown in the table below. The highlighted cells are discussed in the next section.


  1. Equity exposure matters, a lot. Invest too much in stock (above 75%) or too little in stock (below around the 50% mark) and performance declines. Too much stock and sequence of return risk severely hurts the performance. At the end of 1974 after two years of heavy stock losses, the pure equity portfolio was down to $53,000. It never recovered. With too little stock a portfolio falls behind in the good years. The 40/60 portfolio was leading at the end of 1977. But then equities came roaring back and it fell behind.

    If the stock market goes straight up, as it did between 2009 and 2021 (only in 2018 did it have a modest loss), then the more equity in the portfolio, the better the portfolio’s ending value. But one can’t count on a consistently rising market.

  2. Cash counts. The cash buffer approach can make an appreciable improvement in performance. The 75% stock portfolio using the cash buffer approach ended with nearly as much as it started with. (Unfortunately, that is in nominal dollars; the dollar lost more than half its value over this decade.) The other portfolios did not come close.

    A bit of good news is that when these portfolios are run over the ten-year period ending May 31, 2022, the cash buffer approach still beats conventional rebalancing, at least for the two portfolios tested here. The margin isn’t much, but it inspires confidence that this may be a robust approach to eking out a little higher return.

  3. A “cash stash” is critical. Too small a cash allocation with the cash buffer approach can leave one depleted of cash for years when the market is down. The orange cells in the 90/10 allocation represent years when there was no cash left and subsequent withdrawals were coming from equities. It is somewhat amazing that this approach still managed to outperform the annual rebalancing approach.

    The yellow cell in the 75/9/16 allocation represents the only year in which cash was depleted. Even then, there were still bonds available to protect against drawing from equity. But it was close. One more bad year and the bonds would have been depleted as well. At least based on the decade tested here, 75% equity is a propitious allocation.

  4. A cash stash increases long-term returns. The cash buffer protection of equities in the 75% portfolio was adequate for equities to fully recover and to add value back to cash (and bonds). This happened in the years with the green (okay, “faint sage”) cells.

  5. Where you look determines what you see. The ten-year annualized returns of an equity fund can change dramatically with a shift of as little as three months in the period you’re tracking. That’s one of the reasons that MFO warns against over-reliance on arbitrary comparison periods that are simply based on the number of fingers and toes you have. (Really. That’s why 5 / 10 / 20 is so common.) It’s more informative, we think, to look at performance across entire market cycles when we can: capturing both the bad times and the good times gives a better picture of your actual experience.

    That’s important here because our bottom-line numbers and strategy success rates change if you extend the analysis period by four years, starting with the bear market of 1968 rather than the bear market of 1972. Here’s what we would see then.


Shifting bonds to stocks and cash, thus increasing the allocations of each, has the potential to somewhat improve long-term performance. This is especially true when enhanced with a “cash buffer” scheme that gives some additional protection against drawing down equities when they have declined in value.

However, this is not a magic bullet. As shown with data from the 1970s, one may endure sizeable losses no matter what one does. Perhaps the best one can do is work to reduce those losses until the markets return to more usual times.

Dirty sex, your spanked portfolio and planning for “the next market”

By David Snowball

Many and many a year ago, in the kingdom of ABC, Woody Allen was one of my very first guests. And we consented to take questions from an eager audience of mostly young people. Like ourselves.

The questioner looked like a high school girl and shouted to Woody from the balcony, “Do you think sex is dirty?”

Allen: “It is if you do it right.”

(Dick Cavett, “As the comics say, These kids today! I tell ya.” New York Times, 9/13/2013)

I’d rather hoped that the observation originated with someone rather more wholesome, Groucho Marx or Mae West for example, but we’re stuck with what the historical record gives us.

We might equally ask:

Does your portfolio look like Mistress Cruella just tied it up and took after it with gusto and a flogger?

Answer: Only if you’re doing it right.

Periodic painful losses are not a defect in the investing system. They are a central feature of it. They are utterly integral to any system that attempts to produce returns greater than the projected 3% rate of US GDP growth over the next half-century. As such, they are unavoidable in any portfolio that wants to achieve “real” growth; that is, growth that is something more than running in place.

Sadly, those losses can crush an individual’s dreams and flatten returns for ten years or more, the so-called “lost decades.”

How might you respond to the current bout of painful bruising?

  1. If you have a well-designed strategic investment plan, do nothing. All of the calculations in such plans account for the fact that periodic drawdowns occur. The vaunted “in the long-term the stock market returns 10%” claim includes the effects of long, bloody stretches in the short- to medium-term. In short, if you got it right in the first place, don’t screw it up now.
  2. If your portfolio is an unplanned collage of things best described as “it seemed like a good idea at the time,” build a plan before executing the plan. That is, think before you act. Selling in a panic or buying a fund because it made 30% so far this year – a half dozen unleveraged funds have achieved that – doesn’t get you the 30%. It just compounds the problem you’ve already got.
  3. If your portfolio is taxable, start identifying the cost basis of your shares. You might save further pain in April 2023 by planning some strategic sales now to harvest tax losses. As a reminder: even funds with deep losses can nail you for large tax bills if the managers engaged in frantic trading while the losses occurred.

In general, stock-lite portfolios have outperformed stock-heavy ones this year, though at the price of dramatically lower long-term returns.

The simplest illustration of that trade-off comes from the Fidelity Asset Manager funds, whose portfolios are identical except for the degree of equity exposure they incur. In each fund’s name, the number (Asset Manager 20) corresponds to the amount of stock in the portfolio.

  YTD 3 yr 5 yr Beta
Asset Manager 20% -9.89 1.8 2.7 0.48
Asset Manager 30% -12.01 2.8 3.5 0.64
Asset Manager 40% -13.56 3.7 4.2 0.78
Asset Manager 50% -15.11 4.4 4.9 0.93
Asset Manager 60% -16.50 5.1 5.5 1.07
Asset Manager 70% -17.41 6.0 6.2 1.21
Asset Manager 85% -19.42 7.0 7.1 1.41

Many believe that market conditions have fundamentally changed. The zero-interest / zero-inflation environment that favored speculative investments, growth companies, disruptive tech, and minimal earnings is gone. Reasonable commentators – from T Rowe Price and Leuthold to GMO and Warren Buffett – have argued that your greatest returns now might come from focusing on undervalued, high-quality companies that are growing dividends and are grounded in real assets.

At a time when there are historic discounts for small vs large, value vs growth, and quality vs momentum, we asked the folks at Morningstar to look at which small-cap value funds had the highest quality portfolios. They track 160 portfolios, ranking each on a quality scale of 1 (highest quality) to 100 (junkiest).

Only 10 SCV funds or ETFs earned a quality grade of 50 or lower. Ranked from highest quality down, the top 10 are:

Royce Special Equity RYSEX
Auer Growth AUERX
Roundhill Acquirers Deep Value ETF DEEP
Pacer US Small Cap Cash Cows 100 ETF CALF
Aegis Value AVALX
Hartford Multifactor Small Cap ETF ROSC
Royce Small-Cap Value RYVFX
James Small Cap JASCX
Ancora MicroCap ANCIX
James Micro Cap JMCRX
WCM Focused Small Cap Institutional WCMFX

Of those, we have profiled Aegis Value on a couple of occasions – a truly distinctive microcap value fund that is even on the year and holds a 10% cash stake – and have expressed concern about Auer Growth. The standout of the group is Royce Special Equity, whose managers have a deep commitment to high-quality small-cap names. It has the lowest Ulcer Index score of any SCV fund over the past 20 years, which means it subjects investors to the least-bad worst-case while still producing annual returns over 8%.

Folks wanting exposure to the highest quality companies that also embody reasonable environmental, social, and governance qualities might check the five-star Northern US Quality ESG Fund (NUESX). It has pretty handily tromped its large-cap peers with no greater volatility.

The estimable Dan Wiener warns, “The second half’s going to be a doozy.” Planning now will make the immediate pain more bearable and the long-term gain more pronounced. Dashing about squealing will do neither.

Having Faith in Sensible Investing

By Devesh Shah

Retail investors or advisors serving retail investors can choose to keep it simple with portfolios that follow a handful of easy-to-grasp rules:

  1. Buy assets where there is a genuine underlying source of return (corporate earnings, interest income, and rental income).
  2. Diversify across asset classes so that you don’t depend on any one stream of returns.
  3. Choose asset weights that reflect the investor’s different needs: Income, Growth, Safety, Speculation
  4. Reduce unneeded fees
  5. Be strategic about the impulse to buy and, especially, to sell so that you can keep capital gains taxes reasonably low.
  6. Rebalance across the asset classes when one of the asset classes moves too much.
  7. Hold the portfolio of these diversified assets for decades.

These strategies have worked for investors over a long period, and they will work again in the future, but the first half of the year 2022 has been difficult. All asset classes and strategies which would have followed the above simple and time-proven advice would have suffered sharply. Here is a quick YTD asset performance to mid-June:

Even the most thoughtful of asset managers and long-running, carefully curated portfolios have struggled. To mid-June:

Vanguard Wellington Fund -18.4%
60/40 portfolio -18.9%
40/60 Portfolio -16.4%
David Swensen Asset Allocation -19.4%
Ray Dalio’s All Weather* -14.3%
Berkshire Hathaway -10%

*Ray Dalio’s Bridgewater Pure Alpha fund is up north of 25% for the year, but that’s a hedge fund inaccessible to the hoi polloi.

As the quip goes, “with friends like these, who needs enemies.” The enemies, mind you, have been far more devastating for those who ventured anywhere close to them. To mid-June:

We can go on to do a historical analysis of the current portfolio drawdown to previous ones, but this doctor believes this colonoscopy is not going to find anything we don’t already know.

What can we do then?

In such times, we should have Faith. When the best plans fail, and when the fault is not necessarily in the planning, it’s time to go deeper and invoke FAITH.

The questions that follow are: In terms of investing, what should we have Faith in, or whom should we have Faith in? What is the relation between Faith and science? What happens when we lose Faith? Do the greatest investors also need to have Faith, or are they just very good? Let us now try and answer some of these questions.

What or whom should we have Faith in while investing?

I have been “lucky” to have participated in a large number of crashes during the last twenty-five years of market involvement. Through the ample opportunities provided by the circumstances, I identified three large weak links in my investment process. By “weak link,” I simply mean places where I’ve got to get it right or the whole enterprise is at risk. Getting each one of them right in sequence and together is the key to finding success and peace in investing. The three factors are:

  1. Know thyself
  2. Know thy instruments of investing
  3. Know the system in which investing is supposed to work.

Know thyself is the application of behavioral science to one’s own psychological make-up and present state of mind. Each one of us knows exactly at the time of making an investment (or a trade) whether we are acting out of greed, out of fear, out of the fear of missing out, or if we are acting prematurely. Just as a go-go bull market invokes a certain emotion of hubris, if our investment is worth a lot more, and panic if we are uninvested, a bear market is a familiar place for panic. If one is retired and depending entirely on investment income, a bear market takes on a biblical level of fear. Neither of these emotional swings means that we have forgotten what needs to be done.

During good times, avoid leverage. Slowly take profits and rebalance into underperforming assets, maybe holding more cash.

During bad times, remember what Charlie Munger says, “I have had three times when the market corrected 50% on me, and that’s just the price one pays for being an adult. If it doesn’t happen to you, you are not taking enough risk.”

That’s all one needs to know about getting the bull market and bear market right. Make decisions for the right reasons, stay patient, and ride it through. Therefore, the first layer of Faith has to be in our own behavior. When we know we are playing a cool, rational hand, in good times and bad, we’ve done what we were supposed to.

Know thy instruments of investing is the second weak link in my chain. There are too many products to choose from, and the chances of making mistakes are much higher.

Never before in history has the music of financial democratization been played at a higher volume. The same democracy which has brought us Vanguard and Fidelity funds has also brought us levered and inverse ETFs, two-day option contracts, over 20,000 cryptocurrencies, and everything in between. From Mars, one can observe the procession of investor funerals: betting on volatility ETNs, betting on SPACs, betting on Crypto, betting on meme stocks. The Martian is wondering: Is this investor stupidity ever going to stop?   

When we engage in buying and selling stocks at every turn of the season and surreptitiously engage in trading through complicated financial instruments, we set ourselves up for mistakes. When we choose too much complexity in investing or join the latest craze, we cannot be sure what the results will be.

Investing as a personal investor can be incredibly simple. Don’t borrow on margin, buy asset class beta exposure through index funds, occasionally buy alpha expertise through actively managed funds, and hold a few great companies’ common stocks for decades.

Moreover, we are aware that a portfolio of such nature can only be expected to earn 7-8% over a long period of time on average. Sometimes, it will be up 20% and sometimes down 15%. We are tricking no one by taking leverage through one of the many ways the market offers it easily these days in order to earn higher returns.

The second layer of Faith in investing comes from keeping portfolios simple and using predictable investment instruments. Keep complexity away.

Know the system in which you operate is the third and last challenge.

Assume you did everything you were supposed to do. You behaved rationally, never too greedy, never too fearful. You invested in simple instruments and kept complexity away. You still got crushed in 2022. Down 20% is a common experience for many portfolios this year. Is this a lot? Yes. Is there anything that could have avoided it? Honestly, no.

The third weak link in investing is when we forget that our investing environment and capital market economy is a man-made invention with tons of faults. Yet, we have no choice but to operate within that framework. I don’t get to pick the smoothness of the return profile as long as I am invested in Capital Market’s risky assets.

Many investment products and assets do not share such boom-bust characteristics of the capital market. Whole life insurance policies, TIAA Real Estate Accounts, and other private structures such as Private Equity funds, high-quality residential real estate, and to an extent, gold are assets that buffer the capital market volatility. But this buffer comes at the cost of illiquidity.

However, for the money invested in capital markets, we are fully at the mercy of delusions and fears. Market volatility has been immense in the last twenty-five years. Is there a credible reason why the volatility will be any less going forward?

None that I can think of.

A year like 2022 leaves me with many questions and observations like the ones below:

  1. If I had perfect insight coming into 2022, would I still have liquidated my assets and paid significant capital gains taxes?
  2. If all assets are down pretty much 20%, there is no rebalancing to do either. What is it that I can do to take advantage of the 20% correction in a diversified portfolio? Not much unless I have new cash to add.
  3. No matter how I try to slice and dice, there doesn’t seem to be any way I could have been an unleveraged investor, trying to avoid complexity, and not be down double-digits in 2022 by mid-June.

As I think about the answer to these observations, the third layer of FAITH has to kick in. We must have Faith that sensible portfolios will be able to overcome all adversities in due time.

These systems we live in came about by the collective inputs of people who came before us. This is the best we have got so far. We must have Faith that this system will sustain our needs. Maybe we can leave something better for those who come after us.

We must have Faith that over a long period, virtuous investment behavior will have rewards. And even though there seem to be no easy answers today, there will be an eventual floor to asset declines. Diversification and index-level holdings will see us through the worst of the bear market. Eventually, these assets will earn their normal returns just as they have in the past. We need to have that Faith.

What are the consequences of not having Faith?

Not having that Faith is a few steps from leading us down a dark alley.

We might give up on assets with long-term histories. We might give up on a well-established regulatory framework. Liquidating productive assets and holding cash is also a risk. Inflation diminishes the value of cash every day.

To make up for lost returns, we are likely to slip into a system of weak institutional support. I understand what the believers of cryptocurrencies are trying to do. Some of them even have good intentions. They are trying to diversify their risk by switching from one man-made system to another. They want something more de-centralized, more independent of political forces.

Unfortunately, the crypto environment has been snake oil for most investors who came late to the game. By exchanging trust in the US Federal Reserve with criminal and foolish crypto entrepreneurs, the ignorant among the Crypto faithful went down a deeper abyss. They will never recover their lost assets.

Bear markets turn around. Lost assets are lost forever.

One doesn’t need to look at Crypto or understand the complexities in that industry to know what losing faith means. We have to ask ourselves – are we really as bad as Venezuela? Have we not in America built a somewhat more thoughtful, sensible, and responsive system of checks and balances over almost three centuries? Winston Churchill is said to have observed that “Americans will always do the right thing, only after they have tried everything else.”

Losing Faith in what has worked – in practice, in history, academically, and scientifically – is a very slippery slope we rather avoid.

What role does science have to play in Faith in investing?

Concepts like asset allocation, diversification, buy and hold, tax minimization, and financial planning are not fiction stories from Netflix. These are observed truths that are then backed by academics. Anyone can observe these truths for themselves. Anyone who invests long enough will find these observations to be true. You don’t have to take my or anyone’s word for it.

Scientific analysis is a pre-cursor, a prerequisite to invoking Faith. The system will not help the individual investor who is too leveraged or an emotional basket case with investing. The system will not help those who blow their money on mindless financial inventions. The system requires thoughtful, rational participation, which is a scientific endeavor. The system comes to the rescue of those who are well prepared. That’s what we can have Faith in (eventually).

Our Faith is not built by luck or whims. Our Faith is deeply grounded in science and analysis. Still, and despite the science, sometimes our Faith gets shaken. What good is the Faith that’s never tested!

Is it just the hoi polloi that must hold Faith, or do the greatest investors also depend on Faith?

To the cynic, this might seem an odd thing. “Is investing like going to the temple? Do we have to believe in an unseen force to behave virtuously in this lifetime?”

My short answer is YES. Every significant activity of importance requires Faith. Science, analysis, and thinking can take us on the right path, but it is Faith alone that can open the door.

I want to at once remove a few illusions anyone might have about the financial market gurus who come on television or Twitter and talk in length about their market opinions. The best ones of them are deeply humble. The greater the investor’s returns, the more aware they are of the role of luck in their lives. They also know that without Faith, they would have abandoned their best investments. When they are at their lows, I have seen the best of investors tear up and choke. I have seen them pursue arcane factors like moon cycles and sunspots to determine when the market might finally turn in their favor. The face they bring to the television is not the face when they are on their knees. And when they are on their knees, they are mostly praying. Faith is an essential part of investing for everyone.  

To be great, you have to invest in assets when no one wants them, invest in a big way, and hold on to the investment until everyone wants them. Then you can sell. Do you think the act of holding on to things no one wants is easy? How can it be? It can only be done with tremendous Faith. Ask the greatest investors. Read their work. Strong principles will see you through the bad times and the good times – some things about business don’t change. 


If we’ve been responsible with our investment decisions and kept our portfolios simple, the year 2022 has still been extremely tough. There is really no way to sugarcoat the market returns. It might get worse.

We can try and tinker with many parts of our decision-making process. We can improve our portfolios. But at some point, we have to accept that nothing is going to bail us out right now. At that moment, we need to have Faith.

Faith in our own responsible actions, in our sensible portfolios, and in the man-made system we have been handed down is necessary to not lose the plot.

Losing the plot is a lot worse than being down. The slippery slope can lead to a total loss of assets, an irrecoverable position.

Even the greatest investors reach out for Faith. No one is always right. No market is always friendly. No strategy is always faultless.

Briefly Noted…

By TheShadow

Note to our readers:

On June 3, AlphaCentric and Garrison Point, investment advisor and sub-advisor respectively, to the AlphaCentric Income Opportunities Fund, were fined by the SEC for failing to implement its compliance policies and procedures concerning its role in valuing fund securities. From May 2015 through July 2015 and from January 2017 through February 2019, AlphaCentric failed to implement policies requiring it to assist with the process of determining the fair value of the fund holdings. According to the order, the portfolio manager had purchased small “odd-lot” bonds, and the fund valued those holdings at higher prices provided by a pricing service for larger “round-lot” bonds. Alphacentric and Garrison Point have agreed to pay civil money penalties as well as agreed to other sanctions in this matter.

Fidelity Hedged Equity Fund is in registration. The fund’s principal investment strategies are:

  • Normally investing at least 80% of its assets in equity securities.
  • Investing in common stocks of companies with market capitalizations generally similar to companies in the S&P 500® Index.
  • Investing in “growth” stocks or “value” stocks, or both.
  • Using a disciplined approach focused on minimizing predicted tracking error relative to the S&P 500® Index based on an optimization algorithm and risk model.
  • Employing a disciplined options-based strategy designed to provide downside protection (i.e., offset or mitigate a decrease in the value of the fund’s investments). The extent of this protection will be determined primarily based on the cost of the put options in the marketplace.
  • Managing the options positions in a way that provides diversification of options strike prices and expirations.

The fund will have three co-managers, Zach Dewhirst, Eric Granat, and Mitch Livstone. Total annual fund operating expenses will be .55%.

First Eagle U.S. Smid Cap Opportunity Fund is in registration. The Fund invests, under normal circumstances, in equity securities of small- and mid-cap (“smid cap”) companies which are opportunistic situations for undervalued securities. Expenses have not been set. William A. Hench is the lead portfolio manager of the Smid Cap Fund as well as the First Eagle Small Cap Opportunity Fund. He was the portfolio manager or co-manager of the Royce Small Cap Opportunistic Value strategy and the Royce Opportunity Fund (RYOFX) from 2014-2021. Morningstar described the April 2021 departure of Mr. Hench and his management team as “stunning.”

On April 25, 2022, First Manhattan Corporation launched FMC Excelsior Focus Equity ETF (FMCX). Excelsior Focus is an actively managed, non-transparent ETF that will invest in approximately 25-30 U.S. stocks. As of June 15, 2022, the fund has $68 million in AUM, with two-thirds of that estimated to come from First Manhattan’s partners and employees.

The fund intends to be concentrated on its research team’s best ideas. That 12-person team is led by Himayani Puri, FMC’s Director of Research, and an investor with 26 years of experience. Her most notable prior stint was with Lehman Brothers from 1996-2008. She is a graduate of the Management & Technology dual-degree Program at The University of Pennsylvania with degrees in economics and engineering.

The team’s target stocks are defined as those reflecting corporations with durable competitive advantages and higher than average returns on capital which “treat shareholders like partners” and have opportunities to reinvest excess cash profits at above-average rates of return.

NightShares 100 ETF is in registration. The fund seeks to return the night performance of a portfolio of the 100 largest (based on market capitalization) domestic and international non-financial companies listed on the NASDAQ. The night return is measured from the time when the regular daytime trading ends in the U.S. market (the closing) to the time the market is open on the next trading day in the U.S. The night return is calculated as the percent difference from the opening price today versus the previous day’s closing price. The fund is most suitable to investors seeking to gain exposure to the overnight markets. The fund will be managed by a team of five members. Total annual fund operating expenses will be .55%.

On June 21, 2022, ProShares launched the ProShares Short Bitcoin Strategy ETF (BITI) and Short Bitcoin Strategy ProFund (BITIX), which allows investors to short bitcoin either to hedge their portfolio or for speculation. BITI is designed to deliver the inverse of the daily performance of the S&P CME Bitcoin Futures Index. In October 2021, ProShares launched BITO, the first bitcoin-linked ETF. With a cumulative loss of 67% since inception, BITO both earns its ticker (as in “I got bit-o in the butt-o”) and validates ProShares demure observation that “bitcoin can drop in value.”

The Securities and Exchange Commission has been busy on your behalf lately. Per Citywire and Investment News, the SEC filed their first action under Reg BI, a more restrictive standard for advisors who need to prove that the securities they purchase for a client’s portfolio are suitable. Reg BI requires advisors to assess the alternatives available to the security they’re recommending, and the enforcement action was triggered by an advisor who put one-third of a retired truck driver’s small portfolio into a single “risky, unrated, high-commission-paying ‘L bond.'” The Wall Street Journal (6/10/2022) reports that the SEC is investigating Goldman Sachs over whether the “ESG” in the names of two of their nominally ESG funds was nothing more than window-dressing. A month earlier, German authorities raided the offices of Deutsche Bank’s asset management arm in pursuit of evidence that DB engaged in intentionally deceptive marketing of their ESG products. And a June report by the public auditor of the Upright Growth Fund (UPUPX) addresses a laundry list of deficiencies alleged last fall by the SEC, including an “excessively concentrated” portfolio in which a supposedly diversified fund had one-third of its portfolio in a single microcap stock. The verbs in the SEC report – “miscalculated, willfully violated” and, repeatedly, “failed” – were pretty striking. Reportedly, the management has fixed or is fixing the problems. And the Commission will add 20 enforcement positions to the newly renamed Crypto Assets and Cyber Unit in hopes of protecting investors in crypto markets and from cyber-related threats.

Hmmm … that means that 50 federal agents will be charged with protecting you in a market with a $1 trillion market cap (one year ago: $3 trillion market cap) and 20,002 separate cryptocurrencies. We wish them well.


Driehaus Emerging Markets Growth Fund was reopened to new investors on June 6. The fund closed to new investors on February 28, 2020. Howard Schwab is the lead portfolio manager of the fund.

Invesco International Small-Mid Company Fund has reopened to new investors effective June 28. The Morningstar four-star rated fund is down over 25% YTD. The fund last closed to new investors on April 1, 2016. David Nadel has been the portfolio manager since 2019.

Janus Henderson Triton and Venture Funds will reopen to new investors on or about July 18. Both funds last closed on or about May 15, 2015. Morningstar rates both the Triton and Venture funds with three stars. Jonathan Coleman and Scott Stutzman are co-portfolio managers of the Triton and Venture Funds. Jonathan Coleman has co-managed both funds since May 2013; Scott Stutzman has co-managed both funds since July 2016.

Kennedy Capital ESG SMID Cap Fund has lowered its initial minimum investment from $50,000 to $5,000 effectively immediately.

Nicholas Partners Small Cap Growth Fund has lowered its initial minimum investment for institutional class shares from $100,000 to $5,000 immediately. Minimum subsequent investments are $2,500.


American Beacon Mid-Cap Value Fund is being reorganized into the American Beacon Shapiro SMID Cap Equity on or about October 28, 2022. The reasons for the reorganization are both funds have identical investment objectives and similar principal investment strategies.

JPMorgan International Research Enhanced Equity Fund was converted into an actively managed ETF on June 10. It has the same investment objective and substantially similar investment strategies as its predecessor fund.

Neuberger Berman Commodity Strategy Fund will be converted into an exchange-traded fund (ETF). The Commodity Strategy ETF will have the same portfolio managers and be managed in a substantially similar manner as the Commodity Mutual Fund. The Commodity Strategy ETF will not commence investment operations prior to the Conversion, and its shares are not currently being offered to the public, nor have they been approved for listing on any exchange. It is anticipated that the Conversion will occur during the fourth quarter of 2022.


Abrdn International Real Estate Equity Fund will be liquidated on or about August 18.

American Beacon Continuous Capital Emerging Markets Fund will liquidate on or about July 15.

Anchor Risk Managed Municipal Strategies Fund will liquidate on or about July 7.

DoubleLine Ultra Short Bond Fund will liquidate on or about July 29. The fund never gained much traction in the market, peaking at a few hundred million and collapsing to $10 million today.

Krane UBS China A Share Fund was liquidated on or about June 13, 2022.

Mondrian U.S. Small Cap Equity Fund will liquidate on or about July 8.

Nationwide Emerging Markets Debt Fund will liquidate on or about August 19, 2022.

Savos Dynamic Hedging Fund will liquidate on or about September 30.

Virtus Core Plus Bond and Virtus Preferred Securities and Income Funds will be liquidated on or about July 22.

Virtus Global Dynamic Allocation Fund (formerly known as Virtus AllianzGI Global Dynamic Allocation Fund) will be liquidated on or about July 22.