Monthly Archives: May 2023

May 1, 2023

By David Snowball

Dear friends,

A Tale of Two Cities

Nominally Chip and I reside in the Quad Cities, whose t-shirts describe them as “twice as nice as the Twin Cities.” It’s a lovely and surprisingly diverse urban area with about 450,000 people and an agglomeration of two dozen small cities and towns. Half of us reside in Illinois, just south of the Mississippi River, and half in Iowa, on the river’s north bank.

The Mississippi River actually flows from east to west here. Recently, though, it has been flowing east, west, north, south, and, more than occasionally, up. As I write, the Mississippi is cresting at 22′, about five feet above the level at which we declare a major flood. People in Davenport take notice. That’s one city.

Augustana, perched on a hilly, wooded campus in Rock Island, Illinois, represents the other city.

In the May issue …

Too often, when things get ugly, investors get stupid. And frankly, things might get ugly soon enough. On May 1, Treasury Secretary Janet Yellen wrote to Speaker McCarthy that “our best estimate is that we will be unable to continue to satisfy all of the government’s obligations by early June, and potentially as early as June 1.” That is part of the brinkmanship that the government has had to rely on in the past decade. The scariest headline is not “Yellen says we’ll default.” It’s “McCarthy is not very good at this game.” The point of the game is to get incredibly close to the edge … but not to actually fall over the brink. The 2011 showdown triggered a 10% decline in the stock market over two days – wiping out just under $3 trillion in investors’ portfolios – and cost the U.S. its AAA bond rating. It’s not clear whether Speaker McCarthy has the ability to prevent a repeat.

That’s all quite independent of the normal ugliness attendant to a steadily destabilizing climate, tensions with China, the Russian war on Ukraine, the prospect of inflation paired with weakening economic growth, the probability of a recession, and a possibility of a serious miscalculation by the Fed.

What’s an investor to do? In “Investing without an ulcer,” I use the Ulcer Index – a tool frequently used in equity investing but rarely deployed for funds and ETFs – to identify the global equity funds that have the strongest historical record of producing reasonable returns with the least-possible drama.

Lynn Bolin agrees with the premise that things are looking pretty grim in the short term (his portfolios are near their equity minimums), but he also wants to remind you that there’s always a dawn, and the best time to begin your research for it is now. Lynn shares two articles in a yin and yang sort of way. “Lessons Learned from Past Recessions” reflects on the mistakes he’s made and the lessons he’s learned in investing through seven recessions. In “Looking Beyond the Next Recession,” Lynn outlines which asset classes and specific funds have the best prospects for a serious rebound when the dawn arrives.

Devesh decided to let the data do the heavy lifting this month. In “Let the Data Talk,” he works carefully through the confluence of external economic events – inflation up, Treasury yields up – and investor behavior – a flight from Treasury Inflation Protected Securities funds – to illustrate the magnetic power of simplicity.

Charles reports on Morningstar’s annual investment conference [MICUS 2023] in his piece entitled, “Attendance Required.” This year’s conference featured a prescient audio-visual-computational demo of “Mo,” an A.I. tool programmed with Morningstar research, and several excellent keynote speakers, which remains a MICUS signature, including Larry Summers, the outspoken former U.S. Secretary of the Treasury, NYU Professor Aswath Damodaran, often called “dean of valuation,” and Dan Ivascyn, manager of PIMCO’s iconic Income Fund (PIMIX).

The Shadow, stalwart as always, details a handful of significant manager changes along with way more than a handful of fines, prison sentences, fund liquidations, reopenings, and more. All in “Briefly Noted.”

David Sherman throws down the gauntlet

In response to my April profiles of his RiverPark Strategic Income (soon to be CrossingBridge Strategic Income) Fund and Carl Kaufman’s Osterweis Strategic Income Fund, David took to the MFO discussion board to toss down the gauntlet:

Mr. Snowball and my fellow named firms:

I would like to have a gentleman’s wager of a dinner between all parties for the fund that is considered the best based on the next 12 months in which David Snowball judges as well as determines criteria. Winner pays. Losers show up with winner at Mr. Snowball’s restaurant selection in Davenport environs, New York City, San Francisco, or Santa Fe. We can make it an annual event.

Not “winner takes all” quite so much as “winner takes dinner!”

No word yet from Mr. K. One month’s results suggests that perhaps he should see David a dinner and raise him a bottle of Cabernet. Here’s the head-to-head after one month.

In reality, you would be well-served by investing alongside either manager. We’ll keep you apprised of the results.

Thanks …. and a Quiet Celebration

Twelve years ago this month, we launched the first issue of the Mutual Fund Observer, “a site in the tradition of FundAlarm.” As the antiquated text below notes, FundAlarm was one of the industry’s most independent, critical voices for 15 years, from 1996-2011. I had the privilege of writing for FundAlarm over its last five years. While publisher and curmudgeon-in-chief Roy Weitz knew that his time was drawing to a close, he and over 100 readers were sure that the mission of FundAlarm – to be a thoughtful voice and unabashed champion of “the little guy” – was not.

And so the Mutual Fund Observer was born.

Our graphic design skills were … uhh, modest—sort of “good junior high project” level.

Since then, we’ve hosted 2.3 million readers who’ve visited 23.3 million pages here. To them and you, we’re forever grateful.

Thanks, too, to

It’s more than a little heartwarming to have cause to thank Greg again this month for his support of the Observer, now in its 12th year. Thanks to William and the other William, Brian, David, Wilson, Doug, and the good folks at S&F Investments. Thanks, too, for the second consecutive month, to a generous but anonymous donor. We’ll try to do good on your behalf!

None of which is to skimp on grateful recognition of Gary from West Chester, James (thank you, sir! Life being what it is, I’ve recently recovered from a fall just in time to tear a muscle in my thumb), Marvin from Houghton, Michael from Vegas, and George from the modestly marshy Ipswich, MA. You’re stars!

Chip and I are planning a visit at the end of July to the Scottish Highlands and the Shetland Islands, home of her great-grandfather. Some prospect of seeing the Northern Lights, and a fair chance to visit some puffins. A road trip to the Isle of Skye, where Chip has an unfinished challenge involving an old lighthouse on a crazy, wind-swept spit of land sticking into the Atlantic. We’ve so far tracked down one (allegedly) amazing chocolatier: Iain Burnett, Highland Chocolatier. If you’ve got other leads, we’d be delighted to hear!

In May 2021, I announced my (failed) attempt at stepping aside. Since then, we’ve seen readership drift down just as the need for a calm voice increases. If you’ve got suggestions for how better to reach those most in need of us – young investors are an iconic group – feel free to share your thoughts. We’d love to hear.

In case you’re wondering, the traditional gift on a 12th anniversary is silk. Hmm… other than one fund by that name (the tiny Silk New Horizons Frontier Fund, which has been underwater since inception), I don’t even have a good quip!

As ever,

david's signature

Attendance Required – MICUS Chicago 2023

By Charles Boccadoro

Morningstar held its annual investment conference [Morningstar Investment Conference US (MICUS) 2023] this past week beginning 24 April in Chicago, where tulip gardens bloomed on the city’s walkways. 

COVID impacted the last three conferences: Zoom only in 2020, masks required and temperature taken for attendees in 2021, and joint Zoom and a return to normal for in-person attendees in 2022. This year Morningstar offered no remote option … no Zoom, no recording, just full-on, in-person attendance required to take advantage.

The venue remained McCormick Place, Chicago’s cavernous convention center, but fortunately, in the more modest Lakeside Center with its emerald views of Lake Michigan. Next year, I understand, Morningstar will move MICUS to the waterfront Navy Pier, a less expansive spot closer to downtown.

This year’s conference featured a prescient audio-visual-computational demo of “Mo,” a new AI tool programmed with Morningstar research, and several excellent keynote speakers, which remains a MICUS signature, including:

  • Larry Summers, former U.S. Secretary of the Treasury, its 71st, known for his brilliance and outspokenness,
  • Aswath Damodaran, who teaches at NYU’s Stern School of Business and is often called “dean of valuation,”
  • Dan Ivascyn, chief investment officer at PIMCO and manager of its iconic Income Fund (PIMIX).

Evolving Investor
About 2200 attendees greeted Morningstar’s erudite CEO Kunal Kapoor as he kicked-off the conference under the theme “The Evolving Investor.” Basically, the evolving needs of investors, from youth when growth and accumulation preside, through career and broad demands of family, into retirement with goals of capital preservation, and finally estate planning … how advisors can best guide over a lifetime. As he does every year, Kunal depicted the overall market valuation, which remains about 11% under so-called fair market value, with half the stocks Morningstar follows rated 4 or 5 (aka undervalued). Then, he doubled down on Morningstar’s ratings system, reiterating it remains one of the most important tools in an advisor’s toolbox, helping sift through several hundred thousand investment products available today.

Throughout his welcome, he noted how risk tolerance is heavily influenced by the environment greeting the new investor and the importance of assessing what he called “durable risk tolerance.” He announced the elimination of the so-called “q” or quantitative metal ratings, combining those with ratings that literally (manually) are assigned by Morningstar’s (human) analysts. (Here is link to latest ratings methodology.) Using Morningstar products, Kunal hopes to make investing easier and risk management more personalized, recognizing that investors are overwhelmed with data and some have trouble seeing value of advice. He believes direct indexing will be a game changer. And he reminded us that we are about to embark on the greatest generational wealth transfer in history at $84T.

He concluded his welcome with a live demonstration of Mo, which according to Kunal, was programmed in short order (2 months) with all of Morningstar’s research and data, then coupled with an audio-visual user interface to field and answer investing-related questions. He asked it general questions about picking an advisor and “Is the 60/40 portfolio still the right level of risk for my client Sam Morales today?” Mo’s answers seemed responsive and fluent, if a bit canned. Kunal explained the real-time process: ingest speech, convert voice to text, transmit text to open AI model, generate answers from 100 thousand data points, convert text to voice, animate via digital person … pretty cool.

In the display area, I used the opportunity to ask Mo if active funds were better than passive. He answered that they generally were not but could be right depending on the situation. I could not help but feel that Mo represented today’s version of a personal tutor, HAL, or an animated Encyclopedia Britannica, at least.

Credit: Matthew Gilson Photography

A Conversation on Valuation
My first time to hear Professor Damodaran in person. A pure delight. Unassuming. Self-effacing. Yet at same time someone who seems confidant with what he knows and doesn’t know. The author of several books on valuation, he admitted that no valuation is expert. Valuation provides an opportunity to tell a narrative around numbers, to mix numbers and stories, an appeal of both right and left brain.

He believes the painful financial outcome of 2022 was not an aberration, but the beginning of economic normalcy. “When the cost of capital is 10%, companies can’t afford to not have a business plan.” The return to normal in fact will help quality companies distinguish themselves in the market.

The ever-increasing amount and speed of data, he postulates, can make markets less efficient, not more. Like Warren Buffett and Charlie Munger, he believes doing nothing can serve us well, like the 4 weeks of March 2020.

He stated that there are “no more unhappy conversations that those that start with The Fed … We blame the Fed for everything and it makes us lazy.” The problem with high inflation is the attendant uncertainty, which makes it worse than a steady level.

He shared his skepticism about ESG financial products, which he thinks were created as something to sell, not improve returns. “There is no way, impossible, for a constrained portfolio to beat an unconstrained one.” His philosophy is that society should not look to companies to fix environmental issues. It should be the role of policy makers and government. Not doing so reflects a mistrust of institutions.

He’s working on a book about the life cycles of companies, which for most (should) last 25-30 years (e.g., Yahoo). Elon Musk in 2019 was like a teen-ager … looking in the mirror and asking what can I do to screw things up? He stressed the importance of matching the right CEO based on where a company is in its life cycle. A mismatch can be disastrous, like BBB … it needed Larry the Liquidator. Some companies should simply be liquidated, so-called “Zombie Companies;” furthermore, only 60% should be re-investing capital.

To the balance sheet, dividends and buy-backs are exactly the same. To critics who argue companies pay too much for buy-backs, he suggests selling their shares.

He believes inflation is very personal, but we tend to generalize it.

Professor Damodaran sees the economy going forward as more normal … “more of a grind” and he’s optimistic about imminent CAPEX cycle, which he again he describes as more normal than previous cycles when zero interest rate policy (ZIRP) enabled misallocation of capital and lack of price discovery.

On valuation of crypto? He states some things can’t be valuated, only priced, like art. It has no cash flow, so can’t make a valuation.

His website, Damodaran Online, is a wealth of information, all freely available.

Larry Summers, Former US Secretary of the Treasury
The Arie Crown Theater was at its fullest the morning Daniel Needham, President of Morningstar Investment Management, aptly interviewed the former secretary and storied policymaker and academician. Here’s what the secretary revealed:

  • On calling inflation: “It was easy 2.5 years ago. Pretty obvious the bathtub would overflow,” given the amount of stimulus we were injecting. Harder to predict going forward. He believes 4.5 – 5%, well above the 2% Fed goal, “until the economy slows down substantially and readjusts the labor market.”
  • “Price stability is when people aren’t thinking about prices.”
  • On a soft landing and avoiding a recession: “It’s like a 2nd marriage, the triumph of hope over experience.” He thinks the Fed has tough job and setting the right interest rate is “like adjusting the shower temperature in an old hotel.”
  • In addition to interest rate hikes, he believes the current bank failures are helping to restrict credit.
  • On insight government officials have: Often not more informed than NYT, Axios, or Politico. And he acknowledges that press and political authors tend to write about meetings and decisions with more gravity than deserved. “We were just talking.” And regarding Fed and press: “The press is more into the Fed than the Fed is into you [the press].”
  • Despite opinions to the contrary, Larry Summers “would rather be playing America’s hand than that of any other country in world.” American companies represent 60% of the global value. Green transition and self-reliance provide opportunities for growth. He called China: a jail. Japan: a nursing home. Europe: a museum. Bitcoin: an experiment.
  • “The US always does the right thing, but only after exhausting all alternatives.” Overall people should be impressed by US and its extreme capacity for resilience: Carter, Vietnam, Watergate, assassinations, missile crisis, FDR.
  • On markets: Forecasted earnings not pricing in recession. And he does not believe there will be rate cuts. So, he’s bearish equity markets. Valuations equal cash flow (which are down) divided by discount rate (which is up).
  • He’s bullish Biden and the current administration. “I suspect few people in this auditorium take their jobs as seriously as Biden takes his.”
  • On disagreeing with his former bosses, President Clinton and Obama: “Choose your spots.”
  • On fairness to Fed: SVB and FRB had lots of positive reports from analysts. And, most people believed like the Fed when it came to inflation. “The Fed is subject to group think, and it would do well to institute very substantial dissent.”
  • Stimulus generated by COVID blew out the “secular stagnation,” which he coined for the period of slow growth since 2013. “Just like stimulus generated by WWII blew out The Great Depression.”
  • He’s bullish Net Zero 2050 and Australia … people that cross oceans to start new lives represent enormous potential and countries, like Australia, that accept them will reap the benefits.

Credit: Matthew Gilson Photography

A Conversation with Dan Ivascyn, Chief Investment Officer of PIMCO
He runs the world’s largest active bond strategy. PIMCO Income Fund (PIMIX) maintains $120B in assets, about six times more than any other fund in the multisector income bond fund category. Naturally, my number one question for Dan Ivascyn: Has the fund grown too large to ever see its strong positive returns of years past? His answer: An emphatic “No!” Adding, “If we thought so, we would close the fund.”

Below is table from MFO Premium showing lifetime risk and return performance for the six fund’s Dan is listed as managing in our Refinitiv database, as of 28 April 2023, sorted by AUM. Also, the calendar year returns dating back to 2008, PIMIX’s inception, along with its peer returns and the aggregate bond returns. While Mr. Ivascyn even indicated the fund’s size can work to its advantage, it has really only delivered exceptional returns in its early years; that said, it consistently incurs less drawdown than its peers, even during COVID and in 2022.

Mr. Ivascyn admits that the fund looks to minimize risk while creating opportunity, stating that “good risk management is an alpha driver.” His target goal for PIMIX is a top quartile performer based on risk adjusted returns.

The fund prides itself on providing liquidity as an open-ended fund, especially when needed most, during periods of high volatility. He is well aware that more illiquid funds suppress volatility on a mark-to-market basis, but their liquidity ultimately is not free.

When he started at PIMCO as a real-estate credit analyst. He continues to hold a healthy portion of the portfolio in non-agency mortgage-backed securities (once called subprime), which he believes ultimately are “money good” given the high home equity-to-debt of those loans. Interesting then to see him lead a new young interval fund named Flexible Real Estate Income Fund (REFLX).

He credits Bill Gross for PIMCO’s culture of putting clients first and positioning the firm well during the Great Financial Crisis. But he admits “the firm’s foray into equity funds did not go so well.”

Bond funds need to be small or large. Those with mid-level AUM have a tough time.

He thinks bond funds are in a sweet spot and he expects 6-6.5% annual returns from PIMIX going forward, which competes well with equities historically.

A Conference About Investment
This conference remains focused on investment, and I remain impressed by Morningstar’s commitment to offering a quality experience. Each year MICUS gives investors the opportunity to get a pulse on the economy and investing trends, providing access to access to money managers, Morningstar analysts, keynote speakers, and session briefings. Here’s a link to more of this year’s conference, which remains in Chicago, Morningstar’s headquarters.

Looking Beyond the Next Recession

By Charles Lynn Bolin

The Federal Open Market Committee minutes from March state that the staff’s projection “included a mild recession starting later this year, with a recovery over the subsequent two years”. Participants “generally expected real GDP to grow this year at a pace well below its long-run trend rate.” In addition, the Conference Board forecasts “that economic weakness will intensify and spread more widely throughout the US economy over the coming months, leading to a recession starting in mid-2023”.

With a high probability of recession and a high return on short-term cash, I am at my maximum allocation to cash equivalents of 35% and lowest allocation to stocks of 35%. At some point during the next one to three years, I expect to increase my allocation to stocks to 65% as the outlook for the economy brightens. Increasing allocations to stocks too quickly can result in “catching the falling knife” while the market has further to fall, and being too slow can miss a substantial upside.

Some of the biggest investing mistakes that I have made have been during recessions. This article reflects my current strategy. I selected forty-one of the nearly five hundred funds that I track that had some of the highest two-year returns following the end of the Dotcom and Great Financial Crisis bear markets. I have broken these out into risk categories of Moderate, Aggressive, and Very Aggressive based largely on MFO Risk classifications. My intent is to gradually increase allocations to stocks as fixed income ladders mature and the economy improves.

Moderate Funds

Table #1 contains mostly mixed-asset funds, which will benefit in a falling rate environment. I included the T Rowe Price Spectrum Income (RPSIX) and Fidelity Balanced (FBALX) in this Moderate risk category. The funds generally had maximum drawdowns of 25% to 40% and offer more downside protection than an all-equity fund. I intend to exchange more conservative mixed-asset funds for funds like these as I gain confidence that the economy and markets can see the light of recovery.

Table #1: Moderate Fund Performance Twenty Years

Source: Author Using MFO Premium database and screener

BlackRock Global Allocation Fund (MDLOX) looks interesting and is available through Fidelity without a load or transaction fees. Fidelity Capital & Income Fund (FAGIX) does well following a recession as it tends to invest in lower-quality debt, which is in demand as the economy recovers. FAGIX may be an option for investors that don’t want to own high-yield bond funds directly. I like the Vanguard Tax-Managed Balanced Fund (VTMFX) because it invests half in mid- and large-capitalization stocks while minimizing taxable dividends and the other half in federally tax-exempt municipal bonds.

Figure #1: Moderate Fund Performance 2002 to 2010

Source: Author Using MFO Premium database and screener

Aggressive Funds

Table #2 contains aggressive funds (MFO Risk =4), which are mostly domestic equity funds with varying market capitalizations. There may also be opportunities in some sector funds, global and international funds, and convertible securities. I expect emerging markets and small cap funds to perform well relative to domestic markets over the next decade.

Table #2: Aggressive Fund Performance Twenty Years

Source: Author Using MFO Premium database and screener. Blue-banded funds have earned the MFO Great Owl designation for top-tier, risk-adjusted returns over all trailing evaluation periods.

The fund that stands out is American Funds New World (NWFFX), which is an emerging market fund that tends to underweight China with only a 12% allocation. Another fund that I like is the Great Owl Fidelity Actively Managed New Millennium Fund (FMILX and FMIL). I am also inclined toward global and international equity funds because valuations are lower than domestic equity. Growth funds like Saturna Amana Growth (AMAGX), T Rowe Price All-Cap Opportunities (PRWAX), and Fidelity Growth Discovery (FDSVX) will probably do well during the early expansion stage.

Figure #2: Aggressive Fund Performance 2002 to 2010

Source: Author Using MFO Premium database and screener

Very Aggressive Funds

The very aggressive funds (MFO Risk =5) consist mostly of sector funds. They tended to have maximum drawdowns of around 60%. Each recession is different, and these funds need to be evaluated carefully to determine where the opportunities lie. Horizon Kinetics Small Cap Opportunities (KSCOX) catches my attention for its long-term performance; however, it is volatile, so allocations should be relatively small.

Table #3: Very Aggressive Fund Performance Twenty Years

Source: Author Using MFO Premium database and screener

Finally, natural resource and materials funds have tended to well as the economy recovers from a recession.

Figure #3: Very Aggressive Fund Performance 2002 to 2010

Source: Author Using MFO Premium database and screener

Closing Thoughts

There are many great funds listed in this article, but the Lipper Category is as important to me as the fund. I will create a new Ranking System for Early Expansion Funds using these Lipper Categories. There are thirty-four Lipper Categories covered in this article. Approximately two hundred of the five hundred funds that I track are in these Lipper Categories. Ninety-five of these funds have an MFO three-year rating of “5” for top quintile risk-adjusted performance, and sixty-one are classified by MFO as “Great Owls” for best risk-adjusted performance.

In addition to a probable recession, there are other risks that may exasperate the economy. The debt ceiling, which will be reached between June and September, is a huge risk even if an agreement is reached before a default occurs. The Russian invasion of Ukraine has the potential to escalate, and the US–China relationship is frayed. It is far from clear that financial stress from banks has been resolved. Stock returns are seasonally low during the summer months, and the adage, “Sell in May and Go Away,” may have relevance this year. I use a multi-strategy, multi-asset approach and am currently tilted to being defensive.

As I described One of a Kind: American Century Avantis All Equity Markets ETF (AVGE), I plan to increase allocations to this fund as opportunities arise. It is an actively managed Global Multi-Cap Core fund of funds that invests in many of the categories listed in this article but without the history to include in this article.

To help mitigate risk, I have a moderately large holding in the flexible portfolio fund, Columbia Thermostat (COTZX/CTFAX) because it has a schedule (Fact Sheet) to allocate more to stocks as the market falls. As I alluded to in To Sell or Not to Sell? (REMIX, PQTAX, GPANX, COTZX), I have been adding to Columbia Thermostat because it is mostly invested in bonds which will benefit when rates fall with upside for increasing allocations to stocks. It did not make this list because the earlier strategy was less successful before changing to a more gradual approach.

Flows in Money Market, Inflation Linked Funds, and Series I-Bonds: Let the data talk.

By Devesh Shah

Inflation continues to be a hot-button topic. We (and many others) have written about TIPS, TIPS funds, and Series I Bonds. This article is not about adding or altering recommendations. Instead, we let the data do the talking. Instead of prescribing an investment thesis, I want to see how market participants are behaving by watching their actions. Some light commentary will try to connect the images and tables into a narrative. You could be forgiven if you detect an underlying theme that sounds like “a rational flight from irrational complexity”!

1. The Consumer Price Index – Urban Reference Index

 Inflation from April 2010 to April 2020 annualized at 1.63% a year:

But from April 2020 to April 2023, the rate of inflation soared to 5.62% a year:

Annual Accumulated CPI Rate

Calendar Year Annual Accumulated Inflation Rate
2010 1.50%
2011 2.96%
2012 1.74%
2013 1.50%
2014 0.76%
2015 0.73%
2016 2.07%
2017 2.11%
2018 1.91%
2019 2.29%
2020 1.36%
2021 7.04%
2022 6.45%
2023 to April 1.70%

(Data from Y-Charts)

Projected inflation for the whole of 2023 is between 3.5% and 4.5% at this point.

2. Federal Reserve Bank Decisions on Rates (and indirectly Treasury Bills)

In reaction to this sharp increase in inflation, the Federal Reserve has increased its overnight target interest rate:

Increase in Fed Funds Rate led to a predictable increase in short-term Treasury Bills:

3. Money Market Funds.

Many money market funds hold short-term US Government Treasury Bills, bills like the ones above that yield over 5% per annum. Market participants are sharp. People withdrew deposits from banks and invested in money market funds. MFO Premium has 29 funds in the Money Market category with a category AUM of $638 Billion. Here is a subsection of those funds and the data from Y-Charts.

The funds here have an AUM of $616.9 billion. Note that YTD, these funds have had a net inflow of $49.8 Billion, and over the last year, the net fund inflows have been $324 billion. More than half of all assets in money market funds have been added in the last 1 year!

Besides these funds, we know that investors have bought T-Bills and CDs directly as well. Those numbers are not captured in the exhibit above. What emerges is one technique people are using to deal with high inflation:

Federal Reserve raised interest rates to fight inflation >> Short-term Treasury Bills offering higher yield >> Investors moving money into Money Market Funds, CDs, and T-Bills.

4. Series I Bonds

We have talked about Series I Bonds when discussing inflation strategies:

Thoughts on Inflation Protection (Feb 2022), I wish I could give you some TIPS on beating inflation (August 2022), Series I Bonds: A Ray of Hope (October 2022), and Long-dated TIPS Bonds: A Margin of Safety (Jan 2023)

I made a YouTube video from a few years ago: US Government Savings Bonds An Exceptional Deal for the Small Saver Video 39 at

Briefly speaking, Series I Bonds are US Government Savings Bonds. They can be bought only by US taxpayers up to the limit of $10,000 each calendar year. (NB: Tax refunds can be applied for an additional $5000.)

Series I Bonds are neat because the principal can never go down (even in deflation), there is no price fluctuation (the bonds do not trade in the secondary market), and the bonds are not subject to changes in real rates (unlike TIPS they neither benefit nor lose from changes in real rates). In other words, Series I Bonds are simple ways to benefit from high inflation.

If you can tell an American a simple story, and if rings true, they will act with force.

Starting at some point in 2021, investors discovered Series I Bonds. From investing only $345 million in 2020, investors bought $5 billion in 2021, $32.3 billion in 2022, and for the first four months of 2023, $6.8 billion in these bonds. Why? The yields were high.

Juicy coupons from the US Government: On an annual basis, the composite yield on Series I Bonds went from a boring 1-2% zone in 2019 and 2020, to as much as 9.62% in 2022, before declining to 6.48% and most recently to 3.38%

New buyers, as of May 2023, also receive an additional 0.9% real rate in addition to the 3.38% yield for the next 6 months, for a composite rate of 4.28%.

The name is Bond, I Bond.

Treasury Direct data

As we can see from the chart above, American savers know a good deal when it’s on offer. In the last 12 months, Americans have net bought $30.3 Billion in bonds. Hold on to those numbers, as we will find it interesting in the context of TIPS funds net flows in the same period.

5.      TIPS Mutual Funds

In the category of Inflation-Protected Bonds, MFO Premium reports 85 separate funds, with a combined category AUM of $256 Billion. Some of these funds carry international bonds and floating-rate bonds, and some others use options and hedges. I’ve tried to tidy the data to keep it mostly TIPS funds.

Here is my YouTube Video link that explains TIPS:

US Government Inflation Linked Bonds An Overview Video 37 @ and US Government TIPS Technical Details: Video 38 @

I’ve learnt through the last year that TIPS are anything but easy to understand for all but the most sophisticated bond investors. I cannot change that right now. Anyways, this article is not about a recommendation. It’s about observing what the market is doing. Data that follows is from Y-Charts.

So, what is the market doing?

I’ve sorted the TIPS universe into three categories:

Short Dated TIPS (Less than five years to maturity), Intermediate TIPS (Between 0 and 10 years to maturity), and Long Dated TIPS (5 to 30 years in maturity)

Let’s take each category on its own:

Short Dated TIPS (Less than 5 years to maturity)

Short-dated TIPS funds have an AUM of about $93 Billion. The median fund is up 2.5% in 2023, with total returns being as low as 2.1% and as high as 3.3% for the year. In 2022, the median fund was down 4.3%, and in 2021, the median fund was up 5.4% for the year.

2022’s negative return was a massive put-off for investors. Thus, YTD in 2023, short-dated funds have lost $1.2 Billion in assets, and over the last year, the funds have lost $4.4 Billion in AUM.

Look at the various Yields associated with these funds according to MFO Premium’s Lipper Data:

Which number to look at and why? Oh, it can be so confusing! Who cares. Just sell, investors said. Too complicated to bother to understand. The investor votes with her feet, explaining the one-year outflows of $4.4 billion. Series I Bonds are simpler to understand and invest in.

Intermediate TIPS (Between 0 and 10 years to Maturity)

TIPS Funds that have bonds between 0 and 10 years to Maturity have an AUM of about $137 Billion.

The median fund has a total return of +3.6% in 2023. In 2022, the median return for this maturity category was -11.95%, and in 2021, it was up +5.6% for the year. Once again, investors voted with their feet. YTD, they have pulled $4.5 billion from these funds, and over the last year, these funds have lost $23 billion in assets. That’s a substantial percentage of the existing AUM in intermediate TIPS funds.

Even though, with great patience, one can explain to the investor why the cumulative return for these funds between 2021 and 2023 is negative (it’s all about real yields), investors don’t care. A dollar short and a year late.

Long Dated TIPS (5 to 30 years in Maturity)

Long-dated TIPS Funds hold about $10.9 billion in AUM.

The median fund has gained about 5.3% total return in 2023 so far, after a disastrous 2022 where the median fund lost 32% for the year!

Interestingly, both YTD and one-year fund flows have been positive, adding $239 million and $2.9 Billion, respectively.

What explains this move on the part of investors? Maybe, a very small fraction of investors have reached into the longest-dated TIPS bonds as a value or duration play?

Time will tell. My articles and my own portfolio as I have written point to some hope here.

The trouble with some of these longer-dated TIPS and TIPS funds is their high volatility and illiquidity. Many investors, and rightly so, are not comfortable with the idea of their “safe” fixed-income bucket being a volatile addition to their portfolio. Until this volatility persists in long-duration bonds, flows will not come in.

6. Conclusion: TIPS Funds + Series I Bonds Net Flows + Money Market Funds

If our numbers are roughly correct, it looks like we have $240 billion in AUM in various TIPS funds and $53 billion in Series I Bonds. That’s a total investment of about $294 billion in Inflation products excluding direct investments into TIPS.

YTD, investors have sold $5.8 billion in short and intermediate TIPS. Meanwhile, they have bought $239 million in long-dated TIPS and $6.8 Billion in Series I Bonds.

Over the last year, investors have sold $27.8 Billion in short and intermediate TIPS funds to buy $30.3 Billion in Series I Bonds and $2.9 Billion in long-dated TIPS funds.

From these numbers, it seems investors have sold duration in Inflation Products. Selling short and intermediate TIPS funds and buying Series I bonds is reducing duration. Changes in Long-dated TIPS are minimal.

We can say that investors have generally traded out of complexity and into simplicity. Out of difficult-to-understand TIPS funds and into simple US Government saving bonds. Out of difficult-to-understand inflation-linked dividend payments from TIPS funds and into the fully understandable Series I Bonds.

Investors have surprisingly traded out of a product they can buy and sell any day (ETFs and mutual funds) and into a product that requires reasonably long-term holding (Series I Bonds). That is a surprising move by investors who are often chided for their trigger-happy behavior in day trading. Good.

Let us also recall that investors added $324 billion in the last year to money market funds.

All in all, the “market,” as I have narrowly defined by funds and Series I Bonds, prefers to live in very short-dated bonds (nominal and inflation-protected) with almost zero duration. Of course, there are other products, and this article is fairly confined in its analysis to a small set of products.

7. Message for fund developers and investors

Investors like to buy things they can understand that are simple and predictable. There is virtue in keeping it simple. Sometimes, and in some places, life is complex. If you are a lucky investor with significant assets, Series I Bonds will not do because of their $10,000 per year investment cap. One will need to learn the complexities of Real Yields and Duration to invest in TIPS and TIPS funds.

For a fund developer, the message is to stick to the message. Somehow, investors expect yield from fixed income. If we have told investors that TIPS will accrue based on (lagged) CPI, then maybe the funds should pay monthly income based on that CPI. Even though that would be unnatural for TIPS – because the principal accrues, the interest does not walk in – better to pay a floating coupon by selling some TIPS to fund the interest. Investors might be willing to ignore the volatility of the TIPS if they can be certain they will get the realized inflation as expected every month. It’s counterintuitive, but predictability is more important in the case of fixed-income investors.

[NB: I welcome perspectives from readers about how to read the market flows in a different way or if we have some of the numbers or assumptions incorrect. Drop me a note!]

Investing Without an Ulcer

By David Snowball

The good news is, in the long term, things will work out okay.

The bad news is that there are a lot of miserable short-terms between now and then. The most successful long-term investments are ones that allow you to endure the short term with a minimum of trauma.

Or drama. (Comedian Anita Renfroe offers, “Difficulty is inevitable. Drama is a choice.”)

Or ulcers. (Philosopher Marilyn Monroe: “If you spend your life competing with businessmen, what do you have? A bank account and ulcers!”)

Ulcers are to be avoided. We have a way. The Ulcer Index is a distinctive measure of an investment’s risk profile. It was created by Peter Martin and Byron McCann in 1987 as a way of measuring a fund’s downside misery. It encompasses both the depth and duration of drawdowns; a high Ulcer Index is a signal of a deep and/or sustained decline. The MFO Premium definition notes, “A fund with a high Ulcer Index means it has experienced deep or extended declines, or both.” The higher the Index, the longer it will take to get back to its previous high. Your fund might suffer a catastrophic decline that lasts three months or a slow, grinding decline that lasts three years. Both are pains in the portfolio, which the Ulcer Index can measure. In short, the Ulcer Index allows you to quantify your pain.

The Ulcer Index becomes especially important in uncertain markets, such as those we face now. War in Ukraine. Showdown in Washington, with Treasury Secretary Yellen’s May 1st warning that the government could run out of money within 30 days. Recession. Stagflation (ugly word). Fed overshoot. Increasingly unstable global climate.

We used the Ulcer Index as a tool for identifying global equity funds with the most consistent record of generating decent returns with the least possible pain. The list of top performers is remarkably consistent over the past 5-, 6-, 7-, 8- and 9-year periods.

We screened for global equity funds, which returned at least 5% annually for each time period, then sorted by the funds’ Ulcer Index. The top-ranked fund is not the highest-return fund in its peer group; it’s the fund that returns you at least 5% annually with the least drama.

Global investing without an ulcer

Rank 5 year 6 year 7 year 8 year 9 year
1 Ariel Global Ariel Global Ariel Global Ariel Global Ariel Global
2 Franklin Global Div Franklin Global Div Franklin Global Div Franklin Global Div Franklin Global Div
3 SEI Global Mgd Vol American Funds Capital Income Builder American Capital Income Builder Castle Focus Castle Focus
4 Castle Focus SEI Global Mgd Vol SEI Global Mgd Vol MFS Low Vol Global MFS Low Vol Global
5 BNY Mellon Global Equity Income MFS Low Vol Global MFS Low Vol Global SEI Global Mgd Vol SEI Global Mgd Vol
6 iShares MSCI Global Min Vol Castle Focus Castle Focus Vanguard Global Mgd Vol Vanguard Global Mgd Vol
7 SmartETFs Div Builder ETF* Vanguard Global Mgd Vol Vanguard Global Mgd Vol BNY Mellon Global EI BNY Mellon Global EI
8 GS Enhanced Dividend Global BNY Mellon Global EI BNY Mellon Global EI iShares Global Min Vol iShares Global Min Vol
9 Fidelity Global Equity Income iShares Global Min Vol iShares Global Min Vol SmartETFs Div Builder* SmartETFs Div Builder*

*Formerly Guinness Atkinson Dividend Builder Fund, which converted to an ETF in March 2021

“Beauty may be only skin-deep, but gracious goes right to the bone”

The fundamental maxim for beginning investors is this: you can’t count on last year’s returns. Both the SEC and FINRA require the disclosure: “Past performance does not guarantee future results.” While it is true that you can’t count on returns, you can count on risk-consciousness. That is, managers’ risk tolerance is pretty fundamental to their approach to investing. For some, it’s “all offense, all the time.” For others, it’s “Let’s not do anything stupid, people.” As a result, a fund’s risk profile is more stable than its returns profile.

That’s well illustrated in the chart above. Funds that have very low Ulcer Index scores in one period tend to have low Ulcer Indexes in all periods. Forty-three of the 45 cells in our table are occupied by funds that appear multiple times.

The takeaway is simple: if you find a low Ulcer Index fund with acceptable returns (in our case, 5% or more annually), it’s likely that you can anticipate a comparable risk and return profile in the years ahead.

Here’s the nine-year record for our nine best global funds.

  Batting average Annual returns Maximum drawdown Ulcer Index Min/max 3-year rolling average
Ariel Global 1.000 5.8% -15.5% 4.2 1.3 – 12.0
Franklin Templeton Global Dividend 1.000 6.9 -18.6 4.3 -0.2 – 12.8
Castle Focus 1.000 5.6 -20.1 4.7 -1.2 – 12.3
MFS Low Vol Global Equity .800 7.3 -18.3 4.7 -0.2 – 11.2
SEI Global Mgd Vol .800 6.6 -19.3 4.8 n/a
Vanguard Global Mgd Vol .600 7.1 -21.7 4.8 n/a
BNY Mellon Global Equity Income 1.000 7.6 -21.1 4.9 1.5 – 15.6
iShares MSCI Global Minimum Vol Factor 1.000 7.0 -17.4 5.0 -0.1 – 12.5
SmartETFs Div Builder ETF .600 8.5 -20.0 5.5 2.6 – 20.7
MSCI World   7.8 -25.4 7.1 1.9 – 21.7

Vanguard and SEI do not yet have 10-year records. Based on a shorter analysis period (5 years), Vanguard has the group’s weakest record, and SEI has the second-weakest.

How do you read the table? “Batting average” is the percent of times the fund appears; funds batting a thousand qualified as top performers over the last 5-, 6- 7-, 8- and 9-year periods. “Annual returns” are the fund’s average annual return in percentage. “Maximum drawdown” is the fund’s single worst decline over the past nine years. “Ulcer Index” is a metric calculated by factoring the depth and duration of the fund’s worst declines.

Finally, the “min/max 3-year rolling average” examines the experience of longer-term fund investors. A fund’s 3-year rolling average is how it has performed over each of the 85 36-month periods (March 2015 – Feb 2018, April 2015 – March 2018, and so on) in the past decade. It answers the question, “If you’re willing to give your manager three years before deciding to bail, what’s the worst you might anticipate? And what’s the best?” For Ariel, the worst experience for investors willing to hold for three years was an annual gain of 1.3%, and the best stretch saw annual gains of 12%.

The rolling average is another window into a fund’s consistency. There are, for example, five global equity funds – including Ariel Global – with exactly the same nine-year returns but dramatically different three-year rolling averages. One of the funds, Hotchkiss & Wiley Global Value, posted a -9.1% annual loss for a three-year period on its way to 7.2% average gains, while Ariel never had a losing stretch. But the same fund that had the group’s worst stretch also had its best stretch: 23.1% annually over a three-year period. That’s dramatic!

And tell me again: why on earth would you want drama in your portfolio?

The Perennial Winners

Here’s what you need to know about the funds that were top performers in 100% of the periods that were examined.

Ariel Global (AGLOX / AGLYX)

Snapshot: three-star fund, primarily large cap with a strong quality plus low volatility bias, 54 stocks, active share of 97. The “active share” measures the difference between the fund’s portfolio and its benchmark index’s. Scores in the upper 90s mean that the portfolio is almost entirely independent of a passive benchmark.

They say: “We believe investing in undervalued, high-quality businesses with a long-term time horizon is an optimal way to generate strong absolute and relative risk-adjusted returns over a full market cycle. Buying shares of companies suffering from undue neglect, short-term thinking, excessive pessimism, or even a misunderstanding provides a margin of safety.”

Franklin Templeton Global Dividend (LGDAX / LDIFX)

Snapshot: three-star fund, primarily mid-to-large cap with a strong value bent, low vol / high momentum bias (per Morningstar), 101 stocks, an active share of 99.

They say: “The goal is to provide long-term capital appreciation and income with lower volatility than traditional equity portfolios, seeking to combine risk management with upside return potential. Of course, there can be no assurance that this objective will be achieved.

The fund invests at least 80% of its net assets, plus the amount of borrowings for investment purposes, if any, in equity and equity-related securities that provide investment income, dividend payments, or other distributions or in other investments with similar economic characteristics… Both statistical and fundamental risk measures are used to create a diversified portfolio with a lower-than-market risk profile.”

Castle Focus (MOATX)

Snapshot: two-star fund, primarily large cap with a strong quality bias, 21 stocks, an active share of 91.

They say: “Tandem invests in dividend-growing companies that they believe are capable of growing earnings regardless of economic circumstances. The Fund follows Tandem’s Large Cap Core strategy that they have used for private clients since 1991.”

BNY Mellon Global Equity Income (DEQAX / DQEIX)

Snapshot: five-star fund, primarily large cap with a strong value bias, 57 stocks, an active share of 99

They say: the fund focuses on “dividend-paying stocks of companies located in developed capital markets.” Newton Investment Management, the subadviser, and a BNY subsidiary, “believes the pursuit of higher current equity yields and dividend growth can be greatly enhanced through a global, thematic, disciplined approach, avoiding the risky income-enhancing techniques of some managers.”

Low-Ulcer Investing in Other Realms

We applied the same logic and same metrics to a variety of other investment categories. In each case, we started with funds or ETFs that made at least 5% annually over the past nine years and then identified the single lowest-drama fund in the group.

Lipper category   Annual returns Maximum drawdown Ulcer Min/max 3-year rolling average
Emerging Markets Matthews EM Small Company 7.0 -26.0 11.9 -3.0 – 29.0
International Equity Income SmartETFs Asia-Pacific Dividend Builder 6.1 -30.5 10.3 -2.4 – 15.1
International Large Cap AMG River Road International Value Equity 6.1 -19.6 5.0 -0.5 – 11.2
International Value AMG River Road International Value Equity 6.1 -19.6 5.0 -0.5 – 11.2
International Small-to-Mid Fidelity Int’l Small Cap 5.8 -30.0 10.0 -18.2 – 50.8
US Equity Income Vanguard Dividend Growth 10.8 -17.5 4.1 -13.5 – 22.4
US Small Virtus KAR Small-Cap Core (closed to new investors) 14.7 -18.3 5.4 -15.7 – 33.0
US Small FPA Queens Road Small Cap Value (open!) 7.1 -21.9 5.5 -12.0 – 25.9
US Value American Funds American Mutual 9.0 -18.2 4.0 -11.3 – 28.0
Flexible Portfolio (bond) Spectrum Low Vol 6.3 5.5 1.5 4.9 – 12.2
Flexible Portfolio (hybrid) Leuthold Core 5.1 -12.9 4.0 1.3 – 12.3

The clearest outliers identified by this screen are the two flexible portfolios.

Spectrum Low Volatility (SVARX) “invests in an array of global fixed income sectors through liquid products and adjusts sector allocations as necessary.” The managers can both hedge against interest rate risk and “selectively use leverage … when conditions are favorable. The Fund’s manager has specialized in low-risk leverage strategies for over 30+ years.” The fund does occasionally have losing years (down 1% in 2018 and 4.4% in 2022) but has never had consecutive losing years or a three-year losing period.

Leuthold Core (LCORX / LCRIX) is a venerable quant portfolio from Leuthold Investment Management. They “believe the most important decision is proper asset class selection and a highly disciplined, unemotional method of evaluating risk/reward potential across investment choices. We adjust the exposure to each asset class to reflect our view of the potential opportunity and risk offered within that category. Flexibility is central to the creation of an asset allocation portfolio that is effective in a variety of market conditions. We possess the flexibility and discipline to invest where there is value and to sell when there is undue risk.” In general, they stay in the 30-70% equity range, depending on the recommendations of their computer models. Those same models lead them to an exceptional array of assets: US equity, international debt, equity hedges, gold, high yield bonds … Since inception, LCORX has captured about half of the S&P 500’s downside and 60% of its upside.

Bottom line

Life is uncertain. Eating dessert first is an excellent impulse. So is learning new ways to manage that uncertainty. This essay offers you two paths. First, there are a bunch of managers – from Rupal Bhansali at Ariel Global to the team at Leuthold Core Investment – who have sterling records for protecting you in bad times and making solid returns in good. They deserve your attention.

Second, MFO Premium – available as a thank you for folks who contribute $120 a year or more – allows you to refine the work I began here. I chose to look at global equity funds that booked at least 5% annually. You could easily decide that your particular needs would be better suited by an emerging markets value equity fund, a multi-sector income fund, or a real returns fund. You might decide that 5% is too piddly and nine years is too long. Heck, you might even decide that you’re more interested in alternative risk measures like a fund’s capture ratio or its minimum five-year rolling average. All of those measures are easily accessible for some 10,000 investment vehicles. Our colleague, Charles Boccadoro, is master of the site and a great partner for folks hoping to learn how best to use it.

For catastrophists, we’ll close with the words of Anita Renfro, whose aphorism opened this essay: “Please allow me to offer a simple financial plan. Invest in chocolate. Buy bars. Lots of bars. If we do enter anything approximating a real financial depression, you will not be able to improve your mood with gold.” Don’t Say I Didn’t Warn You: Kids, Carbs, and the Coming Hormonal Apocalypse (2009).

Investor Life Cycle and Lessons Learned from Past Recessions

By Charles Lynn Bolin

I have made many mistakes investing and am an example that if one reflects upon their mistakes, they can recover. As George Santayana said, “Those who cannot remember the past are condemned to repeat it.”

I received assistance from Murray in writing this article.

In an AAII Newsletter, Warren Buffet’s mentor Benjamin Graham described individual investors as either “Defensive” or “Enterprising/Aggressive” based on how much “intelligent effort” they were willing or able to devote to investing. The Defensive Investor included professionals without much time and young investors without much investing experience.

In this article, I review the “mistakes” that I have made along the “Investor Life Cycle” journey and the “lessons learned” from the seven recessions that have occurred since I graduated from high school. Recessions should not be feared but understood and prepared for. These mistakes should be taken in the context of where I was in the chronology of the Investor Life Cycle, which I summarize as follows:

Pre-Accumulation Stage
Accumulation: Early Career
Accumulation: Middle Career
Consolidation and Preservation: Pre-Retirement
Withdrawals: Retirement
Gifting: Estate Planning

In my journey, I fit into the “Defensive” category through most of the Accumulation Stages and began using more “intelligent effort” as I shifted into the “Consolidation and Preservation” Stage.

This article is divided into the following sections:

Section 1, Investing Life Cycle

Section 2, 1973 – 1982: Secular Bear Market and Stagflation

Section 3, 1983 – 2003: Fabulous Decade(s) Ending in Dotcom Crash

Section 4, 2004 – 2010: Great Financial Crisis & Business Cycle Investing

Section 5, 2011 – 2020: QE & ZIRP – There is No Alternative

Section 6, 2021 – 2023: Preparing for Retirement & There Is an Alternative

The Weekly Market Pulse by Joseph Calhoun on Seeking Alpha (membership may be required) has some good research into past recessions for those interested in more information.

Investor Life Cycle

Since 1973, the deregulation of brokerage commissions, the rise of discount brokers, the increased popularity of mutual funds and exchange-traded funds, and the availability of the Internet and smartphones have revolutionized investing for individuals. “The Future of Capital Markets: Democratization of Retail Investing” by the World Economic Forum describes how recent changes allow retail investors to “take ownership of their financial future” yet exposes newer investors to higher risk.

The Modern Wealth Survey for Charles Schwab by Logica Research shows that of the participants, Americans believe that it takes a net worth, including home equity, of $774,000 to be financially comfortable and $2.2M to be wealthy. FatFIRE Woman has an interesting Net Worth Calculator. The concept behind FatFIRE is “Financial Independence, Retiring Early,” but with enough to have a good quality of life. The calculator shows that the median net worth of households in the 65-year age group is $189,100, including home equity, while ten percent of households at age 65 have a net worth of $2.3 million or higher. Pensions are often not included in net worth calculations and greatly distort comparisons.

This video from CNBC describes that if an investor seeks $70,000 in income from savings in retirement without drawing down the principal, $2.3 million is currently required at age 65 years of age. Saving $2.3M is a challenging but attainable goal for many people if the stars align properly. To achieve it, a person needs to save about $1,200 per month starting at age 25 or about $3,400 per month starting at age 40. Wow! Fidelity’s guideline is to have the equivalent of your salary saved by age 30, three times your salary by age 40, six times your salary by age 50, eight times your salary by age 60, and ten times your age by 67.

I created three scenarios in Portfolio Visualizer, starting with a low balance in 1992 and investing $1,200 per month, and adjusting for inflation. I overlayed my Investor Life Cycle Stages, as shown in Figure #1. Target Retirement Date funds weren’t commonly available until after 2000. The link to Portfolio Visualizer is here. Investing in an S&P 500 index fund would have resulted in $3.2M over the past thirty years, with a drawdown of over 50% during the financial crisis. The Vanguard Wellington Fund (60/40 stock to bond) would have accumulated $2.6M with a drawdown of 33%, while the more conservative Vanguard Wellesley would have returned $2.0M with a drawdown of 19%. At first glance, it sounds like a good strategy to be heavily invested in stocks early in the Investor Life Cycle and to get more conservative as we age to reduce the risk of drawdowns. This is the path that I took.

Figure #1: Growth of $10,000 with $1,200 Invested Monthly Adjusted for Inflation (log scale)

Source: Created by the Author Using Portfolio Visualizer

For the twenty years I was in the Accumulation Stages, the S&P 500 did not outperform either of the two mixed asset funds and was much more volatile. It is only since the Great Financial Crisis ended in 2009 with suppressed interest rates along with massive stimulus that the S&P 500 has significantly outperformed the mixed asset funds. I was overly aggressive during the Accumulation Stages and overly conservative during the “Consolidation and Preservation: Pre-Retirement” Stage.

One of my lessons learned is the role of bonds in a portfolio. During the business cycle, the Federal Reserve raises interest rates to slow down the economy and reduce inflation. Figure #2 shows the Federal Funds Rate, yield on the ten-year Treasury note, and the growth of $10,000 invested in the Vanguard Intermediate-Term Treasury (VFITX). The dashed rectangles show the peak to trough of the ten-year Treasury yield as interest rates fell. Bond prices are inversely related to yields. Vanguard Intermediate-Term Treasury (VFITX) returned 8% to 10% annualized during these three periods of recessions and falling rates.

Figure #2: Fed Funds Rate & 10-Year Treasury vs Vanguard Intermediate Treasury (VFITX)

Source: Created by the Author Using Portfolio Visualizer and St. Louis Federal Reserve Database

Bonds can benefit a portfolio if held to maturity by locking in higher yields to cover withdrawal needs. Secondly, bonds usually have a low correlation to stocks, so when stocks go down, bonds increase in value as interest rates fall. Rebalancing, in effect, “buys low and sells high.” Last year was unusual because of high inflation and rates rising so rapidly that both stocks and bonds lost.

In Table #1, I summarize Fidelity Freedom (target date retirement) Funds and Fidelity Asset Manager funds. Both are invested globally. Target Date Retirement Funds decrease the allocation to stocks as an investor gets closer to retirement. The Asset Manager set of funds holds a relatively static stock-to-bond allocation. The Target Retirement Date funds have the advantage of simplicity by being able to invest and forget. The Fidelity Asset Management in the form of the Bucket Approach is better, in my opinion, if you are willing to invest the “intelligent effort” to understand your lifetime financial needs, your risk tolerance, and how the funds perform. Note that the short-duration Fidelity Freedom funds have a higher drawdown than the low stock-to-bond Fidelity Asset Manager funds.

Table #1: Fidelity Target Date Retirement and Asset Manager Funds

Source: Created by the Author Using MFO Premium MultiSearch

1973 – 1982: Secular Bear Market and Stagflation

I was oblivious to the Secular Bear Market in the 1960s and 1970s while serving in the military overseas and as a non-traditional student. I studied this time period in hindsight because the specter of a secular bear market and sequence of return risk (drawdowns during a recession) could be devastating for a retiree.

Table #2 contains some of the factors that characterize secular bull and bear markets. Blue is favorable, and red is unfavorable. Following the stagflation of the 1970s, tax rates, inflation, borrowing costs, and valuations fell and helped set up the 1983 to 2002 period for strong growth. The coming decade faces many headwinds, and the IMF estimates that global growth over the next five years will be at the slowest pace in the past three decades.

Table #2: Factors Impacting Secular Growth (Averages for Time Periods)

1983 – 2003: The Fabulous Decade(s) Ending in Dotcom Crash

Taxes falling from a high level and deregulation set the stage for growth in the 1990s (Fabulous Decade) with low inflation, rising productivity, high savings rate, and more globalization. Sound monetary policy led to stability. The Soviet Union collapsed in 1991, leading to higher globalization. To produce a balanced budget, taxes were raised, and federal spending was restrained. Scandals like Enron and WorldCom led to the Sarbanes-Oxley Act being passed, which mandates practices in financial record keeping. Parts of Glass-Steagall legislation were repealed in 1999, which some people argue contributed to the coming financial crisis.

All good things must come to an end, and valuations climbed to extreme levels leading to the bursting of the Dotcom Bubble. John Bogle, Founder of the Vanguard Group and promoter of low-cost index funds, wrote Enough: True Measures of Money, Business, and Life. In 1999, Mr. Bogle was “concerned about the (obviously) speculative level of stock prices.” He reduced his equity exposure to about 35 percent of assets, which he held through the time of writing Enough in 2010. Valuations matter.

Globalization and corporate consolidations and restructurings had some negative impacts on some industries. Entering my mid-30s with no retirement savings had as large of a psychological impact on me as the bursting of the dot-com bubble. What I did right was to find an employer with good benefits, invest the maximum amounts in savings plans, create emergency savings, pay off all debt, complete an MBA between layoffs, and focus on advancing my career.

Mr. Bogle advocated keeping investing simple. The legendary manager of the Fidelity Magellan Fund, Peter Lynch, advocated “buy what you know.” Charles Ellis, Author of Winning the Loser’s Game, advised that investors “can benefit from developing and sticking with sound investment policies and practices.” I keep these lessons close to heart. During the turbulent 1970s and 1980s, I learned to build a “Margin of Safety” into retirement plans.

2004 – 2010: Great Financial Crisis & Business Cycle Investing

During this time period, easy credit led to the Housing Bubble with increased risk-taking in subprime loans/mortgage-backed securities resulting in the Great Financial Crisis (GFC). There were bank failures, government bailouts, and massive stimulus (TARP, ZIRP, and QE). Median household wealth fell 35% during the financial crisis. The Bernie Madoff Ponzi scheme collapsed and decimated many people’s retirement plans. The Dodd-Frank Wall Street Reform and Consumer Protection Act overhauled financial regulation in response to the GFC.

During my Middle Career Accumulation Stage, a mortgage loan officer told me that there was a financial crisis coming, and it would be bigger than anything anyone had ever seen before. I researched it and learned about subprime loans. I was ill-prepared (financial literacy) to adjust for a financial crisis, but I lowered my allocation to 40% stocks and 60% bonds. However, I made the mistake of getting back into the market too aggressively. I caught the proverbial “falling knife.” The Columbia Thermostat (COTZX/CTFAX) did not perform well during the Great Financial Crisis because its strategy was to invest in all stocks or bonds. They refined their strategy to gradually increase allocations to stock as the market fell. I like this approach and increased allocations to the fund last month.

Realizing that market conditions and events can be predicted to an extent was a turning point for me. I became more interested in business cycles and managing risk and modified my “buy and hold, low-cost index” approach to include a more active tilt.

I took a career change within the same company and worked internationally for ten of the next fifteen years. It was a refreshing and enjoyable change. I asked my company benefits department to prepare estimates of retirement benefits at ages 57, 59, and 62. I was surprised that there was such a huge increase in benefits for working just a few additional years, mostly because you continue to contribute to the plan instead of withdrawing. The same concept applies to Social Security benefits.

I read and adhered to Retire Secure!: A Guide To Getting The Most Out Of What You’ve Got by James Lange which led me to create a lifetime budget. I gained the understanding that if everything went according to plan, I would be in a high tax bracket in retirement because of the required minimum distributions from Traditional IRAs and switched to Roth contributions. Medicare premiums are also adjusted for high income levels.

In Thinking, Fast and Slow, psychologist Daniel Kahneman describes the concept that the pain of a loss is more than the pleasure of a gain. My biggest mistake was probably not having a Financial Advisor earlier. I view the Financial Advisor’s primary role as pushing investors into appropriate levels of risk and keeping them from panicking and selling when losses inevitably occur. Other benefits include investment selection and education about the consequences of taxes.

The best thing that Anna and I did financially was to help our son develop his talents, select a good university, get scholarships, and graduate with no student debt, along with helping him learn good savings habits. He was able to take a better path along the Investment Life Cycle than we did.

2011 – 2020: QE & ZIRP, There Is No Alternative

In the aftermath of the Great Financial Crisis, quantitative easing and artificially low interest rates helped keep the economy stable and growing with low unemployment. This was detrimental to savers and bond returns. Partisan brinkmanship in 2011 over the debt limits resulted in Standard & Poor downgrading the United States’ credit rating and more market volatility. Internet and Smartphone use grew along with cyber threats and fraud. S.2155 – Economic Growth, Regulatory Relief, and Consumer Protection Act, passed in 2018, increased to $250B the threshold at which banks receive enhanced supervision and likely contributed, along with mismanagement, to the failure of Silicon Valley Bank.

I underestimated the impact of quantitative easing and massive stimulus and was too conservative after the financial crisis. I built an investment model to optimize the stock-to-bond allocation based on risk and growth potential. It uses a macroeconomic approach. The bulk of my assets were in employer-sponsored savings plans, and while investment options were good, they were limited. Allocation was a more important variable to me than fund selection. I eventually was able to transfer employer-sponsored savings to Traditional and Roth IRAs with more funds available.

During the Pre-Retirement Stage, I consolidated accounts and reduced the number of investment companies that I use, but I believe in diversifying across investment companies as well as asset classes. I adopted a strategy to have 50% allocated to stocks dropping to 35% during “Risk Off” times and rising to 65% during “Risk On” times. I increased savings using “Catch Up” contributions and the backdoor Roth. I was introduced to Mutual Fund Observer and MFO Premium, with their rich risk and reward metrics, and I use them as the basis of fund selection.

2021 – 2023: Preparing for Retirement & There Is an Alternative

During the COVID pandemic, I was traveling through empty airports, and it was surreal. Flights were canceled, and more than once, I was quarantined in some remote country. I was overly conservative in investing. I started using Fidelity Wealth Management to manage a portion of my retirement savings because I like their philosophy of investing according to the business cycle. The other benefit is to have support for my wife in case of my untimely death.

I retired in June of 2022 at the age of sixty-seven. Working beyond normal retirement was very beneficial to retirement savings. I updated wills and estate plans and selected a CPA for tax planning. Based on my financial plan, I took one of several pensions not adjusted for inflation as a lump sum payment so that I have control over it and can pass it along as an inheritance. The lump sum payment came at the end of 2021 after the stock market had already fallen. Sometimes it is better to be lucky than good. I deferred the Social Security Pension to increase the inflation-adjusted benefits and the efficiency of a Roth conversion, and yes, I worry about the Social Security shortfall. The higher monthly payments and survivor benefits have a higher value to me than lifetime benefits tradeoffs.

Interest rates have risen, and fixed income now offers a less risky alternative to stocks. I built short-term ladders of CDs and Treasuries as interest rates rose and ladders of Treasuries for the next eight years when Treasury yields were above four percent to match withdrawal (RMD) needs. With the recent bank failures, ten-year yields fell below 3.3%; however, yields on certificates of deposit and Agency bonds rose above five percent, and I have been buying them on the short end of the yield curve. I appreciate an MFO Reader who sent a link to me for Bauer Financial that rates banks and credit unions.

Morningstar’s Christine Benz advocates the Bucket Approach, which I have adopted. Last month, she wrote, “Can You Retire Soon?” She advises us to take higher inflation into account in our financial plans, evaluate spending and guaranteed income to determine a safe withdrawal rate, and to focus on a balanced asset allocation. One important point that she highlights is to use a variable withdrawal rate that is lower in bad times. She adds that balanced portfolios support the highest safe withdrawal rate. Thank you, Christine.

Having guaranteed income (pensions) and emergency savings in Bucket #1 provides safety and allows one to weather the risk of drawdowns. Placing Traditional IRAs in a conservative Bucket #2 is more tax efficient because taxes still have to be paid for withdrawals. I put tax-efficient after-tax portfolios and more aggressive Roth IRAs in Bucket #3 because taxes have already been paid.

Closing Thoughts

I worry about the high risk of a recession starting this year and the political brinkmanship over raising the Federal debt limits. I am “Risk Off.” Financial stress and high yield bond spreads spiked after the Silicon Valley Bank failure but have since receded. Initial claims for unemployment and the delinquency rate on consumer loans have started rising, and banks have been tightening lending standards for consumers since the middle of last year. I believe signs that the economy is slipping into a recession will become more evident during the next six months.

I have been following the recession playbook by reducing risk and buying higher-yielding, high-quality fixed income. I could be wrong. This article shows that I make mistakes like everyone else. Undoubtedly, I will have new lessons to learn, which are yet to be determined.


Briefly Noted

By TheShadow


In a “less than meets the eye” kind of way, the headline is “ESG funds lose $5.2 billion in assets in 2023.” The story behind the story: the Republican temper tantrum had led to outflows from BlackRock, whose ESG Aware MSCI USA ETF alone dropped $6.4 billion. In a defensive reaction, BlackRock reduced the ESG allocation in its model portfolios, which then triggered the outflow.

In an unrelated note, BlackRock CEO Larry Funk received $32.7 million in compensation last year.

Capital Group, the adviser to the American Funds, is launching three more active, transparent ETFs, likely by the end of June. Capital Group International EquityCapital Group World Dividend Growers, and Capital Group Core Balanced ETFs will bring the behemoth’s total to twelve. Reputedly, they’re gearing up for a steady stream of new active ETF launches.

On April 10, James Velissaris, the founder and former chief investment officer of Infinity Q Capital Management, was sentenced to 15 years in prison for his participation in a $1 billion scheme to defraud investors.

In comparative wrist slaps, the SEC ordered Merrill Lynch to pay $9.7 million over hidden currency exchange fees charged to clients and Betterment to pay $9 million for “material misstatements and omissions” related to its tax-loss harvesting service.

And don’t expect to get a human on the phone anytime soon! Capital Group is laying off 300 staff. Lazard anticipates cutting its headcount by 10%. Schwab is trimming a modest 80 jobs as part of its TD Ameritrade integration. AllianceBernstein, Betterment, and BlackRock had already announced reductions in force.

Briefly Noted . . .

Many MFO readers know that Devesh Shah was one of the creators of the original Cboe Volatility Index, famously “the VIX index.” The VIX launched in April 1993. On April 24, Cboe Global Markets announced the launch of the Cboe 1-Day Volatility Index (VIX1D). The VIX Index reflects expected volatility 30 days out. Son-of-VIX will measure S&P 500 volatility over just the current day, which will more accurately reflect … uhh, immediate and short-term trauma? Cboe’s illustration is that the collapse of Silicon Valley Bank and First Republic popped the VIX by 39% but would have seen the VIX1D spike by 163%.

Goldman Sachs will launch the passive Goldman Sachs North American Pipelines & Power Equity ETF to the market in late June. 


Cathie Wood’s ARK Venture fund is slashing expenses! The fund’s total e.r. recently hit 7.7%. The new waivers will bring it down to 2.9%. At launch, they assumed the fund would hit $250 million in assets pretty quickly. Instead, it’s mired in the $14 million range. The fact that the fund has been underwater since its inception and is part of a sprawling empire of thematic funds all run by the same person in the same style might contribute to its lackluster life.

In other ARK adventures, Tuttle Capital has filed to launch two more bad ideas: Tuttle Capital 2X All Innovation ETF and Tuttle Capital 2X Inverse All Innovation ETF. The former attempts to double the daily return of five ARK ETFs, while the latter doubles the inverse of their daily return. It’s the same advisor that recently launched the Inverse Cramer ETF.

Separately, ARK’s Canadian partner – Emerge Canada – has been subject to a cease trade order stopping it from trading any of its ETFs, including ARK’s, for screwing up regulatory filings.

The Brown Capital Management Small Company Fund, which has been closed since October 2013, will reopen to new investors on May 1. Fund assets were nearly $7.5 billion in late 2020 and early 2021, but assets under management have declined over the past couple of years. The fund is rated five stars / Gold by Morningstar.

The Loomis Sayles Growth Fund, rated four stars by Morningstar, is reopening to new investors effective April 25. The fund was closed to new investors as of April 1, 2019.

CLOSINGS (and related inconveniences)

Royce Investment Partners announced share class closings on six funds: Royce Dividend Value, International Premier, Small-Cap-Value, and Smaller-Companies Growth are all closing their Consultant classes; Dividend Value is also closing its Institutional Class and Premier, its R class shares.


The Hennessy Stance ESG Large Cap ETF will be renamed the Hennessy Stance ESG ETF.

On June 1, 2023, iShares MSCI Frontier and Select EM ETF will drop the “MSCI” designation and switch from a passive ETF to an active one.

Morgan Stanley Institutional Liquidity Funds ESG Money Market Portfolio will be rebranded Morgan Stanley Institutional Liquidity Funds Money Market Portfolio, and Morgan Stanley Sustainable Emerging Markets fund is becoming Morgan Stanley Emerging Markets ex China fund. A company spokesman allowed that the changes were made “for commercial reasons.”


Similarly, CCM Core Impact Equity and the CCM Small/Mid-Cap Impact Value Funds are being reorganized into the Hennessy Stance ESG ETF.

City National Rochdale Intermediate Fixed Income, City National Rochdale Government Bond, and City National Rochdale Corporate Bond Funds will be liquidated on May 26.

Ecofin Sustainable Water Fund was liquidated on April 21. Since the fund’s inception, the A share class, with the maximum load, lost 8.64%, according to their website.

Invesco’s board authorized a wide-ranging housecleaning in January. The latest victims will be their PureBetaSM FTSE Emerging Markets ETF, PureBetaSM FTSE Developed ex-North America ETF, PureBeta MSCI USA Small Cap ETF, and PureBeta US Aggregate Bond ETF. All leave this vale of tears on June 23, 2023.

Pioneer Global High Yield Fund, rated two stars by Morningstar, is being reorganized into the Pioneer High Yield Fund, rated three stars.  The reorganization is expected to be completed in the third quarter of 2023.

State Street is reorganizing the $1.7bn SPDR S&P 600 Small Cap ETF into their SPDR Portfolio S&P 600 Small Cap ETF on June 9. They both track the same index, but the surviving fund charges 10 bps less than the decedent, so that’s sort of a gain.

Manager Changes

Paul Jo has left the management team for American Century Quality Diversified International ETF, American Century STOXX U.S. Quality Growth ETF, and American Century STOXX U.S. Quality Value ETF. Apparently, that’s all subsequent to his decision to return to Korea.

Derek Janssen is retiring from Fidelity at year’s end. He has been responsible for the Fidelity Small Cap Discovery fund and its smaller Fidelity Series clone. Forrest St. Clair joins him during the transition. He co-manages Fidelity Small Cap Value with Gabriela Kelleher, who becomes the sole manager at his departure.

Effective January 1, 2024, Francisco Alonso will stop managing T. Rowe Price Small-Cap Stock Fund and T. Rowe Price Institutional Small-Cap Stock Fund and will become a mentor to the firm’s young equity analysts. He has been managing the funds since 2016 and gained a co-manager, Alexander Roik, for the transition period.

Donald Kilbride, lead manager of the huge, five-star Vanguard Dividend Growth Fund, is stepping off this fund at year’s end. He managed the fund alone from 2006 until Peter Fisher was added as a co-manager in July 2022. Mr. Fisher takes over with Mr. K’s departure. Mr. Kilbride will continue managing the Vanguard Advice Select Dividend Growth Fund.