Lightning Round Mailbag

My thanks to all of you who emailed me and sent in the questions and suggestions for this blog. I really appreciate all the encouragement and feedback. Unfortunately, between this blog's growing audience and my general lack of free time, I am simply unable to address every question and suggestion with the consideration it deserves. So I'm going to try consolidating a few questions with my brief (but hopefully not completely useless) responses into one post.

1. Reader Question

With a moderate 7 figure net worth, now invested largely in a variety of fixed income, some stocks, in this market, how would you realign to a simpler long term investment strategy?

My Reply

The ultimate simple investing in my mind are Vanguard LifeStrategy funds. Vanguard Target Retirement funds are very good too, but I wish they kept higher bond allocations throughout instead of starting out very equities-heavy. But it's a very small nitpick in the big picture.

But if much of your portfolio is in taxable accounts, there are two obstacles for you to switch to LifeStrategy. First, you are likely to have substantial capital gains which would trigger taxes. Second, LifeStrategy invests in taxable bonds. For a taxable account I would look at Vanguard's intermediate-term or long-term tax-exempt municipal bond funds: VWIUX, VWLUX, and VWALX (which has slightly higher yield but is of lower quality and has some fraction of bonds subject to AMT).

It's hard to generalize advice on switching to a superior investment if that switch triggers taxable event. Obviously, the higher the taxes you would be on hook for, the less incentive there is to change. But if your current invesmtent is truly bad (say, over 1% annual expenses), then even paying very high capital gains taxes will likely be worth it after a decade or two at the most.You have to crunch the numbers on expected benefit from the switch versus taxes paid.

If you decide to proceed with the switch but have a taxable account, then instead of LifeStrategy I would go with LifeStrategy's equity components of VTSMX (US stocks) and VGTSX (international stocks) in ratios of somewhere between 1:1 and 2:1 plus one of the three muni funds I mentioned above in place of LifeStrategy's choice of bond fund, VBMFX.

2. Reader Comment

I just discovered your website/blog and as others have stated it is great. Excellent succinct coverage of time tested investment information. Hopefully you can find the time to keep it up and keep countering the "leeches". Appreciated. Thanks.

My Reply

Thank you for letting me know that this blog is useful to you! As I said, this is the best motivator to keep it going -- which I very much intend to do!

3. Reader Question

Hi LTR, I'm Canadian and common practice here is to devote a large majority of your portfolio to Canadian investments despite the fact that Canada accounts for less than 5% of global market cap. I understand the value of having your investments in the same currency you will eventually require the proceeds in (or hedging against the FX risk), but how much value is there in overweighing local assets (both equity and fixed income) in your portfolio as well? More specifically, how much should one skew their portfolio towards their home country? Although this is an American blog (and a great one!), please help a northern neighbour out with some geographic tips. Thanks!

My Reply

Great question, but unfortunately not one I have ever given much thought since I live in US which makes up a large chunk of world's markets. My initial reaction is that some home bias for an investor living in a "1st world" country (where there is little question of political or legal stability) is not unreasonable for the reason you mentioned. How much should that "some" be, I really don't have a good feel for.

One way to go might be to make all your fixed income investments domestic and use global market weights (or close to them) for equities. That way you retain what is probably at least psychologically important price stability in fixed income investments and satisfy your home bias in the process. That might be especially appropriate now because global bond market is dominated by US treasuries which are clearly overpriced, even to a US investor (who can trivially obtain same ultimate safety of US government-backing but higher yield from other instruments like CDs, I-Bonds, and EE-Bonds). So by keeping all your fixed income choices domestic you get to avoid the clearly overpriced US treasuries.