Scott Burns

Type: Text Feature
Categories: Advice, Business & Finance.

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Advice from a seasoned financial writer on personal investing. A strong advocate of index-fund investing, Scott Burns recommends bypassing high-commission brokerage advice in favor of Couch Potato investing via a series of portfolios he has constructed of varying numbers of index and exchange-traded funds. He recommends specific funds with very low or nonexistent fees. The emphasis is on commonsense financial principles, not glamour stocks or quick returns. Scott wants his readers to invest with a long time frame in mind. He also answers queries on such topics as retirement planning, renting vs. buying, buying life insurance, paying off a mortgage, and much more.
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Scott Burns

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Scott Burns retired from the Dallas Morning News in 2006 after 22 years as its personal finance columnist. He started AssetBuilder, an Internet-based registered investment adviser. He says it's fun to actually manage money as well as write about it.

His business experience includes work with a major management-consulting firm and six years as a director of a publicly traded manufacturing company.

Other media experience includes radio, TV, speaking engagements and seminars. He graduated from MIT with a degree in humanities and biology. 

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Scott claims there's no magic to investing. Following some basic principles and with a little discipline, all of us can construct investment portfolios that will not be subject to the erratic daily trading of the stock market. He is wary of broker advice, because it usually comes at high price, often wiping out any gains that might be made by following it. Scott's column is one of our longest-running features. He is trusted by readers and editors alike for clear and consistent advice.

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  • THE UNIVERSAL RETIREMENT TOOL

    Free-market competition has delivered to working savers what five decades of legislative effort has failed to provide -- virtually <a href="mailto:http://assetbuilder.com/scott_burns/the_age_of_iras">universal access to low-cost investing</a>.

    How low? Try this: The Federal <a href="https://www.tsp.gov/index.shtml">Thrift Savings Plan</a> (TSP) enjoyed by government workers has long been the lowest cost 401(k) plan in the country. It has an annual cost of 3 basis points. That's three one-hundredths of 1 percent. This reduces the cost of retirement saving to essentially trivial levels, enough that the vast majority of the return on investment goes to the actual saver, not the financial services industry.

    The cost of the TSP is so low that the Investment Company Institute, which represents the nation's mutual fund firms, felt compelled <a href="http://www.ici.org/pdf/ppr_tsp.pdf">to declare</a> that the TSP was priced at an artificially low level and could not be used as a model for private-sector plans. That was in 2008. Today, several of the largest financial services firms are competing to offer IRA accounts where it is possible to manage our money for about 10 basis points.

    In comparison, the average expense ratio of all balanced mutual funds is 1.26 percent -- nearly 13 times as much.

    Only a handful of very large company 401(k) plans approach the low cost of the Thrift Savings Plan -- companies such as Exxon Mobil, IBM and Texas Instruments. Yet today anyone, anywhere in America, can invest at about the same cost. This includes the waitress/bartender whose email I answered in <a href="http://assetbuilder.com/scott_burns/how_to_start_as_a_small_investor">a recent column</a>. Equally important, it can be done at many firms.

    Being able to do low-cost investing at multiple firms is important. For many years only one firm made an effort to dramatically reduce fees: Vanguard. It was the first mover in the creation of low-cost index funds. It had the field to itself for several decades. No firm wanted to cut costs as Vanguard did.

    But today index investing has been embraced. Morningstar counts nearly 2,500 index funds today, compared to only 295 at the turn of the century and only 15 in 1990. Better still, the burgeoning exchange-traded fund industry has driven the retail cost of investing down to near-TSP levels.

    Don't get me wrong: Wall Street still manufactures and markets high-cost investment garbage. Financial firms continue to introduce increasingly weird and expensive exchange-traded funds. Today, there are 1,425 exchange-traded funds, according to Morningstar. Many achieve richly deserved obscurity. Some are quietly closed, but others quickly replace them. Many others, as ETF expert <a href="http://assetbuilder.com/scott_burns/etfs_too_much_of_a_good_thing">Rick Ferri has observed</a>, defeat the original purpose of exchange-traded funds. That purpose was to produce duplicates of major asset classes at low cost.

    Fortunately, we can regard the majority of ETFs as useless garbage. We can ignore them. All we need to know is that there are no more than 10 asset classes we should consider for investment, and that most people will be fine with no more than six. Those ETFs are generally available from about four sources: Vanguard, iShares, Schwab and State Street. And we can often buy them commission-free.

    The accompanying table, for instance, shows how to build my <a href="http://assetbuilder.com/lazy_portfolios/Returns/couch_potato_portfolios/margarita">Couch Potato Margarita</a> portfolio on four of the largest platforms: Ameritrade, Fidelity, Schwab and Vanguard. Investing in no-commission exchange-traded funds only, Schwab takes the prize for the lowest cost at 0.07 percent. Fidelity is the most expensive, with an average portfolio cost of 0.25 percent. (If you can make an initial investment of $2,500, however, you could use Fidelity Spartan mutual funds rather than ETFs and cut the cost in half, to 0.12 percent.)

    On the Web:

    -- Scott Burns, "How to Start as a Small Investor" (5/2/13): � HYPERLINK "http://assetbuilder.com/scott_burns/how_to_start_as_a_small_investor" �assetbuilder.com/scott_burns/how_to_start_as_a_small_investor�

    -- Scott Burns, "ETFs: Too Much of a Good Thing?" (2/12/12): � HYPERLINK "http://assetbuilder.com/scott_burns/etfs_too_much_of_a_good_thing" �assetbuilder.com/scott_burns/etfs_too_much_of_a_good_thing�

    -- Federal Thrift Savings Plan: � HYPERLINK "https://www.tsp.gov/index.shtml" �tsp.gov/index.shtml�

    -- Investment Company Institute, "The Federal Thrift Savings Plan: A Model for the Private Sector?" (2008): � HYPERLINK "http://www.ici.org/pdf/ppr_tsp.pdf" �ici.org/pdf/ppr_tsp.pdf�

    -- Ameritrade ETFs: � HYPERLINK "http://research.tdameritrade.com/grid/public/etfs/commissionfree/commissionfree.asp" �research.tdameritrade.com/grid/public/etfs/commissionfree/commissionfree.asp�

    -- Fidelity ETFs: � HYPERLINK "https://www.fidelity.com/etfs/overview" �fidelity.com/etfs/overview�

    -- Schwab ETFs: � HYPERLINK "http://www.schwab.com/public/schwab/investing/accounts_products/investment/etfs" �schwab.com/public/schwab/investing/accounts_products/investment/etfs�

    -- Vanguard ETFs: � HYPERLINK "https://personal.vanguard.com/us/funds/etf" �personal.vanguard.com/us/funds/etf�

    (Questions about personal finance and investments may be sent by email to �HYPERLINK "mailto:scott@scottburns.com"��scott@scottburns.com�. Please visit �HYPERLINK "http://www.assetbuilder.com"��www.assetbuilder.com� to comment on any of his articles, find referenced web links or to discuss personal finance topics on his forums. Questions of general interest will be answered in future columns and on the website.

    (Scott Burns is a principal of the Plano, Texas-based investment firm AssetBuilder Inc., a registered investment adviser. The opinions of this article do not necessarily reflect the views of AssetBuilder Inc. This information is distributed for education purposes, and it is not to be construed as an offer, solicitation, recommendation or endorsement of any particular security, product or service.)

    -- Scott Burns, "The Age of IRAs" (5/23/13): �HYPERLINK "http://assetbuilder.com/scott_burns/the_age_of_iras"��assetbuilder.com/scott_burns/the_age_of_iras�
    COPYRIGHT 2013 UNIVERSAL UCLICK

    published Sunday, June 02, 2013

    BEST PLACE FOR 'SAFE MONEY' MAY BE IN CD-LIKE ANNUITIES

    Q: I read <a href="http://assetbuilder.com/scott_burns/today_the_big_risk_is_in_bondshttp://assetbuilder.com/scott_burns/today_the_big_risk_is_in_bonds">your column</a> about the risk of owning bond funds when interest rates begin to rise. Could you do a follow-up article on where to put our "safe" money? My wife and I are in our late 50s, so we certainly do not want to be 100 percent in stock funds. Our 401(k)s do not allow us to purchase individual bonds that we can hold to maturity, and the money market option pays next to nothing. What is a person to do? -- V.O., by email

    A: Other than a stable value fund, you likely have no options in your 401(k) plans. Sadly, there are no "good old days" options anywhere. All we can do is look for the best safe offer available. Right now that appears to be in CD-like annuity contracts. The highest yield among these can produce a good deal more than the highest-yielding certificates of deposit.

    The � HYPERLINK "http://www.mrannuity.com" ��"Mr. Annuity"� web page, for instance, currently lists a three-year CD-like annuity guaranteed to yield 2.25 percent and a five-year contract guaranteed to yield 3.05 percent. Both contracts require a minimum investment of $10,000. The highest yield CDs on Bankrate.com at the same time was 1.2 percent for three years and 1.31 for five years.

    Filet mignon will still be off your shopping list at those yields, but 2 percent to 3 percent is far better than what we can earn with the banks that were prime movers in creating the financial crisis. If what's going on was properly recognized and labeled, it would be called "The Grandma and Grandpa Bank Recovery Tax."

    Q: When I retired last year from Mary Kay Inc., I moved about $170,000 to a Schwab rollover IRA because of the incentive Schwab offered. I would like to know how I should invest it. I am 71 and my husband is 73. We have a combined Social Security income of $2,800 a month. We also have around $70,000 in three other investments.

    Here's our problem: My husband believes we should not incur any risk with this money. I would like to be conservative and take as little risk as possible, but try to put a dent in inflation. Our house is mortgage-free.

    The money has been sitting at Schwab for a year in a money market account making virtually nothing. I am thinking of laddering it into CDs just to keep peace with my husband. Any thoughts? -- B.W., Dallas

    A: You may need to try a thought experiment with your husband. Money is lost when we sell something. It is not lost when its apparent value is lower than what we paid for it. Lots of people who have lived in Dallas for a long time have experienced this directly with the home they live in. There have been times when a home's value was below the purchase price, but it didn't matter until the house was actually sold. That was when money was actually made or lost.

    The longer you hold an investment with risk, the greater the probability you will make money rather than lose it. On an annual basis, for instance, you will lose money invested in stocks in about 28 percent of the single years you invest. But when you hold a broad domestic stock index fund for 10 years, the chance of losing money goes down to only 3 percent. Hold for 20 years and the chance is zero.

    So what we all need is a big "bumper" of limited-risk assets in front of our risk assets -- something we can sell in a down year if we need to raise cash for any purpose. The question for your husband is how large a bumper does he need?

    If he can't stand the idea of ever losing money, you could devote 100 percent of your money to building that CD ladder. But you could also build a shorter ladder, say six years, and put the remaining 40 percent of your money in a broad, low-cost index ETF such as Schwab Multi-Cap Core (ticker: SCHB) or Schwab U.S. Dividend Equity (ticker: SCHD). These ETFs are commission-free and have annual expenses of 0.04 percent and 0.07 percent, respectively.

    On the Web:

    -- Mr. Annuity: � HYPERLINK "http://www.mrannuity.com" �mrannuity.com�

    (Questions about personal finance and investments may be sent by email to �HYPERLINK "mailto:scott@scottburns.com"��scott@scottburns.com�. Please visit �HYPERLINK "http://www.assetbuilder.com"��www.assetbuilder.com� to comment on any of his articles, find referenced web links or to discuss personal finance topics on his forums. Questions of general interest will be answered in future columns and on the website.

    (Scott Burns is a principal of the Plano, Texas-based investment firm AssetBuilder Inc., a registered investment adviser. The opinions of this article do not necessarily reflect the views of AssetBuilder Inc. This information is distributed for education purposes, and it is not to be construed as an offer, solicitation, recommendation or endorsement of any particular security, product or service.)

    -- Scott Burns, "Today the Big Risk Is in Bonds" (4/26/13): � HYPERLINK "http://assetbuilder.com/scott_burns/today_the_big_risk_is_in_bonds" �assetbuilder.com/scott_burns/today_the_big_risk_is_in_bonds�
    COPYRIGHT 2013 UNIVERSAL UCLICK

    published Thursday, June 06, 2013

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