Three

Every news person and no-load fund purveyor says folks are better off investing in no-load mutual funds and things are better still if the investing is done in an index. I’ve looked at this argument in my last two blogs while also arguing that the 4 percent rule was still alive and well, no matter what you hear to the contrary. In other words, one can easily devise a portfolio that will produce 4 percent income (I used 4.2 percent to make the point), inflate the income taken by 3 percent yearly, and wind up with more than one started with at the end.

So, in week one’s piece, we looked at a simply assembled Franklin Templeton portfolio. It produced, from Jan. 1, 2000, through March 31, 2013, $834,506 in income for 12.25 years. The beginning amount was $1 million and the ending value, after withdrawals starting at 4.2 percent and inflating 3 percent annually, was $1,391,049. The first year provided an income of $42,382, and the 2012 withdrawal was $79,072, due to the 3 percent inflation increase each year. No BD on the planet would let an advisor use C shares for a $1 million account, but to keep expenses high, we used C shares.

In my blog a week later, I ran Berkshire for the same period of time, a time that included its worst decade ever. With Berkshire as an investment by itself — and I subtracted a 1.12 percent fee before running the 4.2 percent withdrawals and the 3 percent inflation calculation — an investor would have received $842,313 in income over the 12.25-year period. (The annual amounts were, in fact, similar to the Franklin Templeton portfolio above.) Do you remember the amount left after all withdrawals for 12.25 years? It was $1,452,000, proving that Warren Buffett is, indeed, a great investor, even in difficult and volatile times.  And I would not use Berkshire alone in a portfolio, but since I do use it in mixed portfolios, I charged an advisory fee

This week, I ran an index (really, an ETF called SPY that represents the S&P 500). I added no fees — any advisor worth his or her salt would be embarrassed to add fees to a 12.25-year single-index investment, right? I used the same time period and the same withdrawal and inflation rate as in the earlier two runs. Indeed, all was the same except for the total ending value and the total amounts withdrawn. The ending value was $682,846, and the total amount withdrawn over the 12.25 years was $448,715. Compared to the Franklin Templeton portfolio or Berkshire alone, this is a horrible result, although it would seemingly please the no-load and index advocates.  

If you have investing chops and use a mix of funds (I use a Franklin Templeton fund in many of my portfolios, and I use Berkshire in some too, along with others), you can make customers happy with excellent returns, and you’ll find that the 4 percent-plus-inflation income strategy, or even my 4.2 percent strategy, works nicely in a good portfolio. On the other hand, If you don’t do better than the S&P and don’t like portfolio work, you might consider using third-party managers, like Weatherstone (at (800) 690-5918), Curian (at (405) 519-5014), BTS (at (339) 223-4078), and W.E. Donoghue (at 401-954-7220). Or you can use strategies you will be able to manage easily from The Sherman Sheet (phone Gordon Case at (888) 957-3438) and/or from Dynamic Portfolio Strategies (phone Charlie or Kate White at (877) 377-7872).

If you have decent portfolio skills, by all means, do your stuff. But if you look inside your psyche and worry that you don’t, there are plenty of good ways to help customers; quite a few are listed in the foregoing paragraph. Readers know that I love portfolio work; even so, I use many of the third-party managers and advisors above to compliment my own stuff.