A Unique (and Priceless) Holiday Gift

Photo by Joanna Kosinska on Unsplash

As the holiday season approaches, I wanted to suggest a really unique and priceless gift for those you love. First, let me give you some background.

The smartest portfolios

In 2011, I wrote The Smartest Portfolio You’ll Ever Own. In this book, I gave you the names and weightings of exchange-traded funds you could buy to assemble a portfolio consistent with the research of Eugene Fama and Kenneth French. Their research indicated that portfolios tilted towards small-cap and value stocks were likely to outperform over the long term, albeit at higher risk than portfolios without this tilt.

Before I wrote this book, investors who wanted to implement this strategy had to have sufficient assets to afford to retain advisors authorized by Dimensional Fund Advisors to use funds managed by Dimensional. Both Fama and French have long associations with Dimensional. This requirement placed this portfolio out of the reach of investors with smaller portfolios.

While my book provided an alternative, it’s not easy to implement my recommended portfolios. They include nine separate funds, which should be balanced periodically.

I had long thought how valuable it would be if someone could put together a single fund, with the appropriate tilt towards small-cap and value stocks. I approached major fund families, but couldn’t get any interest.

Finally, technology has made my original concept feasible and it’s now a reality.

The power of Motif

Motif is an online brokerage platform that permits you to assemble a list of funds and bundle them together in one portfolio. That’s precisely what Paul Merriman and his colleagues at the Merriman Financial Education Foundation did when they created a new breed of Target Date Portfolios, using Motif.

Merriman’s Target Date Portfolios differ from Target Date Funds available from major fund families in several significant ways. There’s no fixed income allocation in these portfolios until the investor is 35 years of age. Typical Target Date Funds have an allocation to fixed income of 10% or more from inception.

There’s a strong tilt in the Merriman portfolios towards small-cap, value and emerging markets in the early years.

Simulations run by Merriman demonstrate that the combination of tilting heavily toward small-cap-value and emerging markets in the early years, and then shifting to a balance of bonds and a diversified worldwide portfolio of stocks nearing retirement has “the highest likelihood of success, highest median end balances at age 65, but slightly higher risk in the early and middle years.” This assumes investors can stick to this strategy for a minimum of ten years, and preferably longer.

Note this caveat from Merriman: “Investors need to be aware that there are likely to be many years, even a decade or more, where this approach does not match or beat the S&P 500.”

You can find the Merriman Target Date Portfolios here and can learn more about them by listening to this podcast. Note that they are only suitable for tax-deferred accounts.

If you are persuaded by the simulations run by Merriman, you can purchase the Motif suitable for you for at a cost of only $9.95 per trade.

The priceless gift

Some of the Merriman Motifs have end dates as late as 2085. These Motifs are suitable for investment by a parent or grandparent, who wants to provide for the retirement of their loved one and initiate a tradition of saving for retirement.

Let’s assume you make a single contribution of $3000 to the Merriman Target Date 2085 Motif when your child or grandchild is born and never make any additional contributions. Starting at age 25, your child or grandchild makes annual contributions of $10,000 a year to the same Motif, increased for inflation. Based on simulations run by Merriman at my request, at age 65, the funds in the account are likely worth anywhere from a low of $6.8 million to a high of $18 million.

Even considering the fact that the projected value of the account in 65 years would only have a fraction of the purchasing power of that sum today, you still would have contributed materially to the successful retirement of your loved one.

If you aren’t persuaded by the data underlying the Merriman Motifs, you can follow this same strategy using low cost Vanguard Target Retirement Funds.

Whatever you decide, the key decision is to start early and contribute regularly.

I can’t think of a more unique or priceless gift.

The views of the author are his alone. He is not affiliated with any broker, fund manager or advisory firm.

Any data, information or content on this blog is for information purposes only and should not be construed as an offer of advisory services.

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