Our goal is to give our subscribers more value for their time and money than any other investment publication. From time to time, people ask us to quantify what we mean. Here is our response.
We create value for our subscribers in four different ways.
First, our model portfolios provide more efficient asset allocations than the mix of domestic bonds and equities used by many investors. Consider the example of a U.S. dollar-based investor who needs to earn a compound real (after inflation) annual rate of return of 5% after-tax over the next twenty years to achieve his or her goals. If that investor only invests in domestic bonds and equities, his or her optimal asset mix is 20% to the former, and 80% to the latter (based on our assumptions for future returns, risks, and correlations). The expected annual real rate of return on this portfolio is 5.4%, with a standard deviation (a measure of risk) of 8.4%. The probability that this portfolio will, after twenty years, have earned a compound annual real return of at least 5% is 52%. In contrast, we use a mix of eight different asset classes in our model portfolios, including real return bonds, domestic bonds, foreign currency bonds, commercial property, commodities, domestic equities, foreign developed country equities, and emerging markets equities. Our 5% target real return model portfolio has an expected annual real return of 6.7%, with a standard deviation of 8.3%. The difference in expected annual return compared to the two asset class portfolio is 1.3%. The probability of this portfolio achieving its 5% compound annual return goal over twenty years is 78%.
Second, we show subscribers how index products (both mutual funds and exchange traded funds) can be used to implement our model portfolios' allocations to different asset classes. Index funds have two advantages over the actively managed funds used by most investors. First, they have lower annual expenses. Second, because they trade the securities they hold much less often, they generate lower taxes for investors. A recent study from Morningstar quantified the average size of these advantages over the ten years ended in 2003. The average actively managed large cap fund's annual nominal return over this period, after expenses and taxes, was 6.99%. The average large cap index fund's average nominal return over the same period, again after expenses and taxes, was 9.42%. In other words, the average index fund earned 2.43% more each year, after taxes, than the average actively managed fund.
So far, we have an expected gain from better asset allocation of 1.3% per year, and from better implementation of 2.4% per year, for a total expected additional return of 3.7% per year. If your portfolio is worth $250,000 today, that amounts to additional expected after-tax returns of $9,250 per year. If your portfolio is worth $1 million, it amounts to an extra $37,000 per year. Compare that to our subscription price of only U.S. $59 per year. Quite a big benefit, we'd say.
And there's more.
We provide subscribers with information about how to optimally divide their asset class holdings between their taxable and tax-advantaged (e.g., retirement) accounts, and how to optimally harvest losses over time.
We also analyze the impact of different rebalancing strategies on portfolio performance. While not as significant as smart tax management, we have found that the right approach can still materially increase the probability of achieving your long term financial goals.
Finally, each month we make you a smarter investor, who is better able to evaluate the information you receive and the arguments you hear. This leads to better decisions and a higher probability of achieving your long-term financial goals.
In sum, when we say our objective is to provide our subscribers with more value for their time and money than any other investment publication, we're not kidding. We hope you'll join us today.
If you would like to learn more about our monthly content please proceed to: What You Get When You Subscribe.