“Another lesson I learned early is that there is nothing new in Wall Street. There can’t be because speculation is as old as the hills. Whatever happens in the stock market today has happened before and will happen again.”

Jesse Livermore ( 1877 – 1940) He is considered a pioneer of day trading. At one time, Livermore was one of the richest people in the world; however, at the time of his suicide, he had liabilities greater than his assets.

In This Edition

Inflation is the lesser of two evils
Giving Tuesday
Latest MarketWatch Article
Latest Podcast

Dear Friends,

In this week’s newsletter there are several comments about the stand that Dave Ramsey has taken regarding what a reasonable rate of distributions might be in retirement.

His recommendation is ridiculous and he knows it. And what he has gotten is a million dollars of free press. He also gets a lot of free press when he makes the case for actively managed funds over index funds. Again, he knows better.

It just so happens that George Sisti discussed the active vs. passive decision in his newsletter this month. Here is his take:

When Average Is Above Average

We sometimes hear financial pundits describe index investing as “settling for average” which, apparently, is not an American virtue. If you’re happy with average returns, they say, then indexing is for you. But, if you want to be above average, you need to use an actively managed fund. This analysis fails because of simple arithmetic. Indexing gives you the market’s return, minus the miniscule management fee of most index funds. But the return for active funds, net of their higher fees, almost always trails their index fund competitors.

In “The Arithmetic of Active Management” published in the January/February 1991 issue of the Financial Analysts’ Journal, William Sharpe explains why this is true. Active investors and index investors together own the whole market and as a group will receive the market’s return. If we eliminate the index investors, the remaining active investors still own the whole market and, as a group, will receive the market’s return. After subtracting their higher-than-index fund fees, they must underperform, collectively, the market and their index fund competitors.

The validity of Sharp’s analysis has been confirmed by a multitude of research reports in the three decades since the publication of his article. For the ten years ending October 20, 2023, the Vanguard S&P 500 ETF (VOO), with an annual expense ratio of 0.03% ($3 for every $10,000 invested), finished in the 9th percentile (77th place out of 859 large-cap blend funds), according to Morningstar. For the ten years ending October 20, 2023, the Vanguard S&P 600 ETF (VIOO), with an annual expense ratio of 0.10% ($10 for every $10,000 invested), finished in the 15th percentile (55th place out of 367 small cap blend funds), according to Morningstar.

It sounds counterintuitive and is the opposite of almost everything you hear or read about investing, but just being average each year will give you above average long-term returns. That’s the kind of average return that I’m happy to receive.

The word is getting out. According to Morningstar, index mutual funds and ETFs reported estimated net inflows totaling $468 billion for the 12-month period ended September 30, 2023, while active funds reported estimated net outflows totaling $607 billion over the same period. The largest disparity occurred in the domestic stock category, with active funds shedding $263 billion compared to inflows of $163 billion for index funds.

The index fund debate was settled long ago. Indexing gives you the market’s average return, but the average return for active fund managers, net of fees, is almost always lower than a comparable index fund. This will not change until active funds lower their management fees to match the miniscule fees of index funds. But I’m not holding my breath. There are still too many investors and financial advisors who believe the market beating propaganda from the proponents of active funds, allowing active funds to continue business as usual.

And to add to George’s comments I have to remind readers of one of John Bogle’s best quotes: "It's amazing how difficult it is for a man to understand something if he's paid a small fortune not to understand it."

Inflation is the lesser of two evils

I enjoy reading articles that give me perspective about topics that I find somewhat confusing.

One of those topics is the amount of discontent Americans have during a time when so many things seem to be going well.

I found the Ben Carlson article entitled “Inflation is the lesser of two evils” helpful in understanding some of that discontent.

Giving Tuesday- November 28, 2023

Giving Tuesday is November 28th! First and foremost I would like to thank you all. By listening to our podcasts, using our tools, and sharing our posts you really do contribute to our foundation.

For this year's Giving Tuesday we invite you to consider making a monetary contribution to The Merriman Financial Education Foundation.
https://donate.paulmerriman.com

Latest MarketWatch article-

3 ways investors are tricked — and 6 ways to protect yourself

I want to make three main points.

First, the “facts” of investment history aren’t always what they seem. This can fool us into making flawed decisions.

Second, emotional impatience and wishful thinking can fool us into believing we know more than we do.

Third, Wall Street actively fools us in various ways, and most of the financial media passively goes along. Read Article here.

Latest Podcast

Yes, Virginia you can take 8% distributions in retirement!

Topic 1: The industry has responded loudly to an announcement by Dave Ramsey that he would be comfortable taking 8% a year from a retirement account. Here is what Rob Berger has to say-

"In a recent video answering a caller's question, Dave Ramsey described those promoting the 4% Rule as "stupid," "goobers," and "morons". He described the 4% Rule as stupid and said he's "perfectly comfortable" with an 8% withdrawal rate. In this video, I'll describe his rationale and why I'm "perfectly comfortable" telling him he's wrong."

New Retirement
FICalc
Dave Ramsey Video

Here is the latest from Morningstar on withdrawal rates
And another good article from Amy Arnott from Morningstar

In my discussion I try my best to explain the real thinking by Dave Ramsey.

Topic 2: “ iShares just came out with target date funds as ETFs. What are your thoughts on their returns and their tax efficiency?

Topic 3: Today I listened to my 1st Youtube Paul Merriman video --- your Ultimate Buy & Hold Update 2023. Very intrigued by your strategy as I'm also a DIY investor. Since I'm retired & 62 years old with a wife that will be working for another 3 years, can you direct me towards your more specific information that would be more relevant to my situation?

Topic 4: New study on market timing vs. buy and hold from Vanguard

3 ways investors are tricked — and 6 ways to protect yourself

Yes, Virginia you can take 8% distributions in retirement!

The Lifelong Process of Financial Education with Paul Merriman

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In This Edition Inflation is the lesser of two evilsGiving TuesdayLatest MarketWatch ArticleLatest Podcast

When Average Is Above Average

In This Edition

Inflation is the lesser of two evils
Giving Tuesday
Latest MarketWatch Article
Latest Podcast

Another Dave Ramsey Outrage!