Ask The Expert with Larry Swedroe, April 2008 Issue

This is the 5th issue of the Ask The Expert column by Larry Swedroe. You can see Larry’s full biography and important disclaimer below. If you are interested in having your question answered by Larry, please send me an email via the contact page.

Now, let’s get to the questions and answers (please note that the emphases and links are mine).

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Question from Anthony Carr:

In your 2nd book, “What Wall Street Doesn’t Want You to Know“, you stated that 40% of institutional investors use passive management strategies — do you have an updated percentage?

Also, I am an approved advisor to use DFA funds and I intend on creating my own newsletter. I like the way you use quotes to precede each chapter in your book, do you have a list of usable, pertinent quotes?

I believe that figure is still in that range, though moving up. You can see that in the growth of the index fund industry as well as the ETF industry.

And yes I keep a personal list of epigrams, over 500. And I am talking to a publisher about either creating a calendar with a quote for each day, or even a book of them.

Question from Katie:

My husband and I filed jointly income tax, we both have 401K at work, and we opened a traditional IRA at the bank more than 2 years under both names, but I want to open another traditional IRA but this time is under my name only and put $3000.00 into the account, but they said I have to have $10,000 in order to open another account? is it right?

Can I open one more account without my husband name on it? we are both over 50 years old. Our income for this year range from $60,000 - $100,000

Kate. First it is not possible that you have a joint IRA as that is illegal. IRAs can only be in one person’s name. The beneficiaries can, however, be multiple and you can designate different percentages for each.

There are no limitations on how many different IRA accounts you can open, just limitations on how much you can contribute in any given year. Also, you should fully fund the maximum you can contribute every year, to the extent you are able.

Finally, if you have a choice between a Traditional IRA and a Roth IRA you should choose the Traditional if you believe the tax rate on withdrawal will be higher than it is today and the Roth if you believe the tax rate is going to be higher at withdrawal. Otherwise they are basically identical vehicles.

Question from PT at Prime Time Money:

1. I have my entire 401K invested in a target-date fund (2040) through Schwab. What is your opinion on these types of mutual funds (including the fees)?

There are several benefits of these funds; simplicity being among them. Also if they are well structured they are also well diversified, including international equities. And they automatically rebalance. I would recommend them only if they use passive funds like index funds and also have low costs like Vanguard’s funds. No reason to pay higher expenses.

There is a negative for these funds for investors who have a choice of location. To the extent possible you want to fill up your tax advantaged accounts with fixed income and then if have any remaining room add equities. If by holding a mixed fund (both stocks and bonds) and that causes you to hold bonds in taxable accounts then you have a mistake in location. The exception is that you want to hold REITs in tax advantaged accounts because they are highly tax inefficient.

Finally, you should be sure that the asset allocation fits your particular ability, willingness and need to take risk. Funds with similar target dates can have very different asset allocations.

2. Considering US company stocks are only a small percentage of the world’s available stocks. Doesn’t that make you poorly diversified by following the 15-20% international stocks rule of thumb?

First, the US is is not a small percentage of global equities. It is above 40%. Second, in my opinion that is a bad rule of thumb anyway. I believe investors should consider having 50 percent of their equities in international stocks and have at least 30 percent.

As you note the world allocates its capital so that the US is now less than 50 percent of the global equity. It is also important that when you are considering your asset allocation you take into account a very important asset that is not on your balance sheet. For those that are working their labor capital should be considered. That is one reason that younger workers should have higher equity allocations — they have a high percentage of their “net worth” is labor capital. Thus they can take more equity risk.

For retirees they have no labor capital that diversifies equity risk and thus should have a lower equity allocation (of course they also have a shorter horizon, and probably a lower risk tolerance). Unless that labor capital is portable outside the US (unlikely) then you should diversify that risk.

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Past Issues of Ask The Expert

• 03/2008 - Ask The Expert with Larry Swedroe, March 2008 Issue
• 02/2008 - Ask The Expert with Larry Swedroe, February 2008 Issue
• 01/2008 - Ask The Expert with Larry Swedroe, January 2008 Issue
• 12/2007 - Ask The Expert with Larry Swedroe, December 2007 Issue

About Larry Swedroe

Larry Swedroe is a principal and director of research at Buckingham Asset Management, LLC, an SEC Registered Investment Advisor firm in St. Louis, Missouri (www.bamservices.com). He is also principal of BAM Advisor Services, LLC, a service provider to investment advisors across the country, most of whom are affiliated with CPA firms. However, his opinions and comments expressed within this column are his own, and may not accurately reflect those of Buckingham Asset Management or BAM Advisor Services.

Before joining Buckingham in 1996, Larry served as senior vice president and regional treasurer at Citicorp and vice chairman of Prudential Home Mortgage. Larry is author of The Only Guide to a Winning Investment Strategy You’ll Ever Need (updated and re-released in 2005), as well as five other books. Most recently, he authored Wise Investing Made Simple (2007).

His Books

• The Only Guide to a Winning Investment Strategy You’ll Ever Need
• What Wall Street Doesn’t Want You to Know
• Rational Investing in Irrational Times
• The Successful Investor Today
• The Only Guide to a Winning Bond Strategy You’ll Ever Need
• Wise Investing Made Simple
• The Only Guide to Alternative Investments You’ll Ever Need

Disclaimer

• Mr. Swedroe’s opinions and comments expressed are his own, and may not accurately reflect those of the firm, nor Moolanomy and its owner.
• Not all questions will be answered
• By submitting a question, you grant us the right to publish your question.
• The answer is given based on the information provided in your question. Please seek professional assistance for more personalized advice.

If you are interested in having your question answered by Larry, please send me an email via the contact page.

This post was featured in:

• The Festival of Stock #84 hosted by Value Investing, and a Few Cigar Butts. For more information please visit the Festival of Stocks.