Step 12: Invest and Relax

Invest, relax and stay balanced

12.2.5

Tax Loss Harvesting

In addition to rebalancing, taxable investors should also consider a tax-savings tool called tax loss harvesting. A market downturn provides you with an opportunity to examine your specific situation and to identify whether you can save on a future portion of ordinary income (as shown below) and on capital gains taxes that are generated each year due to distributions from your mutual funds, rebalancing of your portfolio, or the sale of funds for your cash needs. Each year taxable accounts will generate some capital gains. (see financial dictionary)

Because of the tax offset value of realized capital losses, investors should consider the following strategy after stock markets have experienced a large enough decline:

1. Sell those index funds in your taxable accounts that have declined in value by approximately 10% or more and have a minimum capital loss of about $10,000, based on your average cost basis. This sale will create a realized short term capital loss on the sold funds held for less than 12 months and a long term capital loss on sold funds held more than 12 months.

2. Then immediately invest the proceeds of the sale into a substantially different broad market index fund, such as the S&P 500 (if you are not selling the S&P 500). Please note that many index funds (especially those without transaction costs) have a minimum holding period requirement. For example, the Schwab S&P 500 funds (SWPPX and ISLCX) carry a 2% redemption fee on shares held less than 30 days. Also, since the exact value of proceeds will not be known until the close of the market, about 85% of the proceeds will be invested the same day and the remaining 15% will be invested subsequently.

3. Purchase the original funds back on or after 31 days from the sale of the original funds. This 31 day period avoids the IRS Wash Sale Rule (see p. 55 of this pdf). The IRS Wash Sale Rule states that a wash sale occurs when you sell or trade stock or securities at a loss and within 30 days before or after the sale you: 1) buy substantially identical stock or securities, 2) acquire substantially identical stock or securities in a fully taxable trade, or 3) acquire a contract or option to buy substantially identical stock or securities. If you sell stock and your spouse or a corporation you control buys substantially identical stock, you also have a wash sale. If you buy the substantially identical stock in your IRA, you also have a wash sale. (more on this subject)

After the 31 days, your portfolio will also be reviewed and traded as needed for the purchase of the sold funds and rebalancing, so that your overall risk exposure will be in approximate alignment with the asset allocation of your original index portfolio. Whenever IFA invests additional cash deposits or sells funds for withdrawals, we review the portfolio for rebalancing needs.

4. Report the realized capital losses to your accountant to offset future capital gains and a portion of your income, reducing future tax bills. A gain/loss report from your custodian and/or IFA will indicate the gains and losses for the tax year. Individuals can use up to $3,000 of capital losses to offset their income ($1,500 for a married person filing separately). If you realized $10,000 in capital losses, a taxpayer would be able to apply $3,000 of their net capital loss to reduce their taxable income by $3,000, leaving $7,000 in unused net capital loss. Unused capital losses can also be carried over until they are used up. If net long-term capital loss exceeds net short-term capital gain, the excess becomes long-term capital loss in the following year. If net short-term capital loss exceeds net long-term capital gain, the excess becomes short-term capital loss in the following year. The value of these tax offsets will vary with your income, your existence of long or short term capital gains, changes to the tax code and your state of residence. (see US Income Tax/Capital Gains and Losses)

Tax loss harvesting is not market timing. By transferring the money into another index fund or exchange traded fund, such as an S&P 500 index fund or ETF, investors can remain approximately fully invested (the first day is slightly less because we do not know the exact settlement price of the sales) in a broad market index that is not a substantially identical stock or security. Additionally, certain custodians charge no transaction fees when you buy and sell their specified S&P 500 index fund. However, there are transaction fees to be paid to the custodian (Schwab or Fidelity) for the sale and purchase of most mutual funds or ETFs. No additional compensation or fee is paid to the investment advisor (IFA).

Once you have decided to proceed with tax loss harvesting and have agreed to the concept that your risk level will not be changed during the harvest period, the trades do not have to be urgently executed on any particular day. This can be understood by supposing that you did not harvest and the market goes up 2% the next day. If your position had a 12% loss, it would now have a 10% loss which you could still harvest. If, on the other hand, you had harvested the loss at 12%, the new fund that was purchased would now have a gain of 2% which would offset your realized loss. Due to the non-urgency of this particular type of trade, Index Funds Advisors does not promise same-day execution when client approval is received. While tax loss harvesting is a valuable tool, there are some risks associated with it. As such, one should carefully consult with a financial advisor prior to making the decision to tax loss harvest. Examples of such risks include:

1. If you sell funds at a 10% long term capital loss, buy the S&P 500 index fund and it increases by more than 5% during the 31 day interval, the value of a 10% realized long term capital loss could be offset by a 5% realized short term capital gain from the sale of the S&P 500 fund (assuming a 35% tax rate on short-term gains and ordinary income, and 15% on long-term gains, but not considering your additional state tax, if any). There is about a 20% probability of this occurring, based 50 years of monthly S&P 500 data. For this reason we will only sell funds, or combination of funds, that have losses of about 10% or more.

If you have a 10% short term capital loss from your sale, a 10% short term capital gain from the S&P 500 index fund will be required to offset the tax benefit and it is highly unlikely that the S&P 500 will increase by 10% in one month. In fact, over the last 50 years, the S&P 500 index has increased 10% in one month only 1.7% of the time.

2. During the minimum 31 day interval required to keep the loss, the S&P 500 index fund, or other substitute broad market fund, will almost certainly obtain a different return than the funds you sold, because they are different indexes and not substantially identical stocks or securities. This risk is the only reason the IRS allows this loss to be kept by investors. Due to the short interval of 31 days, the difference in value should be small, but there is a risk of it deviating more than 3%, which may be in excess of the tax benefit of the harvested loss, depending on your state residence. The chart below shows the frequency with which various asset classes beat the S&P 500 by 3% or more, based on 50 years of monthly returns. Over the last 50 years ending 2007, Index Portfolio 90's (an allocation of 11 equity indexes) average monthly return has been 1.14%, with a standard deviation of 4.01%, while an S&P 500 index fund has averaged 0.95% with a standard deviation of 4.13%. On a purchase of $100,000, you would expect the S&P 500 fund to earn about $190.00 less than Index Portfolio 90 over a 31 day period, with a variance relative to the standard deviation of the monthly returns. However, it would be rare that the variance exceeds $2,400, which is the approximate tax credit value of a $10,000 harvested long term capital loss for a California resident (other states will vary). If that occurs, the tax loss harvesting trades would have been done with no benefit to the investor and possibly at a cost. You should be aware of this risk before you pursue any tax loss harvesting.

Figure 12-2

% of Months Asset Class Beats S&P by 3% or More

3. There are transaction fees to be paid to the custodian (Schwab or Fidelity). No additional fee is paid to the investment advisor (IFA).

Despite the risks mentioned, IFA frequently advises clients to harvest losses under the conditions described above. Of course, your decision to tax loss harvest should be carefully weighed and discussed with your accountant and a qualified fee-only advisor who carries the fiduciary standard to act in your best interest. If you would like to take advantage of IFA’s expertise in tax loss harvesting, or simply learn more about whether such action is appropriate for you, please call 888-643-3133 to speak with one of our many qualified investment adviser representatives.

Any tax or legal information provided is a summary of our current understanding and interpretation of the current income tax regulations and is not exhaustive. Investors should consult their tax advisor or legal counsel for advice and information concerning their specific situation.Neither Index Funds Advisors, Inc., nor any of its representatives, may give legal or tax advice.

12.2.5a

Mutual Fund Distributions

Once you are invested and relaxed, an understanding of distributions of dividends and capital gains is important for taxable investors.

Dividend distributions normally occur quarterly for equity funds (monthly for fixed income funds) and the final quarter of the year is the highest because it also includes capital gains distributions. Fortunately, index mutual funds have a lower tax impact than actively managed mutual funds, so it is relatively less of a concern. The tax implications are only important for taxable accounts. The dates that affect distributions from mutual funds are as follows:

Record Date (for example: 12/12/11) - If you owned the fund making a distribution on this date, the Ex-Dividend Date and Payable Date amounts will apply to you.

Ex-Dividend Date (for example: 12/13/11) - This is when a particular fund makes adjustments for its planned distributions to Shareholders. The value of your account temporarily declines because the NAV (Net Asset Value) of each fund is reduced by the planned amount of distribution on the Payable Date.

Payable Date (for example: 12/16/11) - This is last date when the fund is required to pay the distribution to shareholders, although is most often actually paid earlier. The distribution amount is reinvested automatically in additional shares of the fund (unless you have chosen to receive them in cash).

1) Your account net value will be unchanged because the NAV for each fund is temporarily reduced on the Ex-Dividend Date, but then distributions are reinvested in additional shares (at the lower NAV) on the Payable Date, resulting in an account increase amount equal to the distribution, so it is "a wash" for the value of your account.

2) (For Taxable Accounts Only) Your taxable gains are increased by the distribution amounts whether paid in cash or reinvested. Even if you bought the fund shortly before the taxable distribution, the tax applies to you. This is the process that mutual funds are required to follow to pass along profits to shareholders. Because you are paying taxes on distributions, a positive result is that your cost basis increases by that amount so that future taxes are lower if you eventually sell the fund.
It is IFA’s practice to withhold purchasing those funds in taxable accounts whose estimated tax hits exceed their average return (over the last 50 years) for the time period in question. The estimated tax hits are calculated from the estimated distributions provided by the mutual fund company. In a typical year, IFA will cease purchases of fixed income and REIT funds about one month before the December distribution date, and IFA will cease purchase of international and emerging markets funds about two to three weeks prior to the December distribution data. IFA will cease purchases of all funds in taxable accounts on the Monday prior to the December distribution date and resume purchases on or after the ex-dividend date.
Below is a table for the distributions of December, 2011 indicating when IFA expects to cease making major purchases of funds in taxable accounts per the criteria stated in the above paragraph. These dates may vary for individual clients, depending on client situations. These dates are also subject to change based on information that may be received prior to the distribution dates.

Ticker	Fund Name	Stop Purchase Date
DTMEX	DFA Tax-Managed US Equity	12/09/2011
DTMMX	DFA Tax-Managed US Marketwide Value	12/09/2011
DFTSX	DFA Tax-Managed US Small Cap	12/09/2011
DTMVX	DFA Tax-Managed Targeted Value	12/09/2011
DFGEX	DFA Global Real Estate	11/28/2011
DTMIX	DFA Tax-Managed Int'l Value	12/05/2011
DFISX	DFA Int'l Small Cap	11/28/2011
DISVX	DFA Int'l Small Value	11/14/2011
DFEMX	DFA Emerging Markets	11/14/2011
DFEVX	DFA Emerging Markets Value	11/28/2011
DEMSX	DFA Emerging Markets Small	11/14/2011
DFIHX	DFA One Year Fixed	11/14/2011
DFGFX	DFA Two Year Global	10/31/2011
DFFGX	DFA Five Year Gov't	10/31/2011
DFGBX	DFA Five Year Global	10/31/2011

This is not intended to be a complete explanation of the distribution process, or tax guide, and you should consult your Tax Advisor for your specific situation.

12.2.5b

Cash Withdrawal Considerations

IFA is often in the position of accommodating regular cash withdrawal by its clients. The question is how to best generate cash for withdrawals.

The important general considerations are the following:

Minimization of Transaction Costs: Schwab and Fidelityeach charge unique amounts to process client trades. As of 6/1/2010 prices ranges from $50 a trade to free depending on the Custodian and circumstance. IFA’s policy is to minimize trading costs for clients whenever possible.
Cash Drag: As of 6/1/2010 the current yield on money market cash is essentially zero. While all of the IFA portfolios have a positive expected return, the actual realized return over any short period (say 3 to 6 months) can be positive or negative with almost equal probability. Thus, the decision to hold more cash then needed will often appear to be prudent in hindsight (after a period of negative returns), but the goal of maximizing client’s long-term ending wealth dictates that IFA should strive to minimize cash drag whenever possible.
Minimization of Taxes: Sells of equity mutual funds often result in realized capital gains. Long-term capital gains (for securities held longer than one year) are taxed at the 15% level as of 6/1/2010, while short-term gains are taxed at the client’s marginal income rate. For clients that were tax loss harvested during the market downturn in 2008, loss carry-forwards can be used to offset capital gains.
Risk Maintenance: One of IFA’s primary (if not the single most important) duties is to keep clients at the risk level that they agreed to in their investment policy statement. Every single time a portfolio is traded, the risk level is evaluated, and the trades are chosen to align the risk exposure of the portfolio with the risk capacity of the client. This is done with an eye on the three points above.

There are a few possible ways of addressing cash needs:

Take Cash Dividends

Normally IFA does not encourage clients to rely on dividends because they are very uneven (they are heavily weighted towards December) and they are somewhat unreliable as a source of cash. The reason for this is that DFA (or any responsible fund company) will take steps to minimize cash distributions because they are taxable events and they do not increase shareholder wealth. One way that they can do this, for example, is in their global fixed income funds where currency risk is hedged. If the value of the hedging instrument decreases, it will be used as on offset to interest income on the bonds held, and the resulting cash dividend will be decreased or perhaps not even paid. This happened in 2006.

The taxes owed on dividends are the same regardless of whether the dividends are reinvested. If the dividends are reinvested, the cost basis is increased by the amount of the re-investment. If the dividend paying mutual fund is partially sold to generate cash, the shares that were purchased via re-investment would not be the shares that are sold (assuming first-in first-out accounting). If the dividend paying mutual fund is completely sold immediately after reinvestment of dividends, there would be no capital gains on the newly purchased shares (other than the market movement that occurred between the reinvestment and the sale). To summarize, for a mutual fund that is either left untouched or completely sold, taking dividends in cash will not result in lower taxes. If however, a partial sell of appreciated shares can be avoided by taking dividends in cash, then this may be the appropriate course of action.

The primary advantages of taking cash dividends are the avoidance of transaction costs to sell and the avoidance of realized capital gains (particularly if FIFO accounting is used). These advantages come at the cost of cash drag (especially in December) and perhaps losing control over the risk level of the portfolio. Specifically, REITS and fixed income will normally deplete faster than equities because of their higher yields.

Sell to Create Cash

Mutual funds could be sold to create cash on a regular basis, say once every two months. The number of trades could be plausibly limited (depending on the size of the account) to one trade for each time cash is raised. This would limit the annual trading cost to a max of $300 (One $50 trade every two months). This strategy would minimize cash drag, as there would usually not be more than a single month’s worth of cash outstanding (assuming that the trades are placed fairly close to the withdrawal date.

Here is the wisdom of Ken French on this topic.

A General Method

When creating cash for regular withdrawals IFA examines the estimated trading costs and cash drag for various withdrawal scenarios between two and six months. To do this IFA requires the following inputs:

IFA Index Portfolio™ Number
Portfolio Value
Regular Withdrawal Amount and Frequency
Cost per trade
Expected Return of Portfolio
Expected Return of Cash
Minimum Trade Size

Using these inputs IFA determines how much cash to create.

For example, if the client withdrawals $10,000 monthly IFA will examine creating $20,000 every two months, $30,000 every three months, $40,000 every four months, etc. up to six months. Each scenario is analyzed according to trading costs (both transaction costs paid to the custodian and the additional cost of tracking and reporting the trades to the IRS) and estimated cash drag. IFA will then create cash for the number of monthly withdrawals that minimizes estimated cost. However, we must bear in mind that cash drag is uncertain. IFA does not hold that it knows beforehand how to produce the optimal outcome.

Here is an example of an IFA Withdrawal Strategy:

How much can investors withdraw for living expenses and taxes from their IFA Index Portfolio in retirement? Let's assume an investor is retiring at age 65 and as a very simple rule of thumb, they have estimated their risk capacity by 100 minus their age. That would put the retiree in Index Portfolio 35.

IFA advises that clients put their portfolios on a Glide Path. If you scroll down to Figure 3 from this link, which is set to view Index Portfolio 35, you will see the simulated historical data on Index Portfolio 35. Click the Glide Path ON in the top right corner to view the data with a once a year reduction in risk, then scroll down to the 25 Year row and let us assume investors will be withdrawing from their portfolio for 25 years, until age 90.

Click the number 25 row in the Column A and you can see in Column H that over the last 50 years, the single lowest monthly rolling period return out of 302 25-year (300 month) monthly rolling periods was 7.44% annualized return, and if you look at the histogram below the data, you will see that 95% of the periods had returns in excess of 7.97%.

If you click the date in Column G, to the left of that 7.44% return, it will take you to the IFA Calculator. Here you can enter the estimated value of an index portfolio at age 65 in the Section #3. Enter a Beginning Value. Then go to Section 5, select an annual withdrawal percentage of 6.5%.

If an investor started their retirement in the single worst 25 year period over the last 50 years, with $1,000,000 in Index Portfolio 35 on a Glide Path, at the end of 25 years, they would have withdrawn $2,121,882.06 and there would have been $1,178,459.77 left in their portfolio at age 90. You can try many different senarios in the IFA Index Calculator.

IP35GP

12.2.6

Financial Advice and Overall Wealth Management

Financial advice is a prescription that guides investors to make decisions that best serve their interests. This advice is most effective when the following are carefully taken into consideration.

1. An accurate analysis of the cognitive and emotional strengths and weaknesses of investors that relate to making decisions.

2. The investor's occasionally faulty assessment of their own interests and desires.

3. The relevant facts about investing that are often ignored.

4. The limits of the ability to accept advice and to accept the results of the decisions made over time.

In the article titled Aspects of Investor Psychology by Daniel Kahneman and Mark Riepe that appeared in a 1998 edition of Journal of Portfolio Management, a very good checklist of the responsibilities of investment advisors was provided. It is useful in evaluating which advisor may be best for you. The authors asked, "How frequently do advisors do each of these items?"

1. Encourage clients to adopt a broad view of their wealth, prospects and objectives.

2. Encourage clients to make long-term commitments to investment policies.

3. Encourage clients not to monitor results too frequently.

4. Discuss the possibility of future regret concerning the outcome of their investments.

5. Ask themselves if a course of action is out of character for their client.

6. Verify that the client has a realistic view of the odds, when a normally cautious investor is attracted to a risky investment.

7. Encourage the client to adopt different attitudes towards risk for small and for large decisions.

8. Attempt to structure the client's portfolio to the shape that the client likes best (such as insuring a decent return with a small chance of a large gain). This can be accomplished in a well prepared Risk Capacity™ survey.

9. Make clients aware of the uncertainty involved in investment decisions.

10. Identify the aversion of clients to the different aspects of risk and incorporate their risk aversions when structuring an investment program.

It is clear from step one that if investors want to discover their most likely deterrent to successful investing, they need only to look in the mirror. Advisors who are aware of the above psychological factors are most likely to provide value to their client's investing experience. (See this additional article on Behavioral Finance)

In looking at the overall wealth management of an investor's estate, at least four other areas of concern are important for every investor. An independent team approach is best so that each professional is free to be critical of the others. If these are all at the same firm, you can be far less certain that you will get independent advice. An annual "Personal Board of Directors" meeting is a great idea for this team. The team should have professional in each of these areas:

1. Estate Planning:

Estate Planning - Basics of Estate Planning with Leslie Daff

IFA.tv Show 15
Click to Watch »

After managing their affairs and building their net worth, many IFA clients wonder how to ensure that their families benefit financially from all their efforts? One way is to create a trust.

Or, if you are managing your own trust now do you wonder what happens to your investment assets after you pass away or what happens if you become incapacitated and cannot manage your affairs? If so you may want to take advantage of the trust services offered by Charles Schwab Bank or Fidelity Personal Trust Company.

These trust services allow IFA to continue managing IFA clients’ trust investment assets while Charles Schwab Bank and Fidelity Personal Trust Company execute the administrative fiduciary responsibilities of a corporate trustee, perhaps across generations.

If this is something you want to know more about, ask your estate planning attorney or IFA how you can appoint IFA to continue to act as your investment advisor while perhaps taking advantage of certain tax law. You may also want to specifiy that your assets will be managed in accordance with Mark Hebner's book, Index Funds: The 12- Step Program for Active Investors.

Interview at least 3 estate planning attorneys in your area and select one that you feel comfortable with. Have the attorney prepare or review your trusts and wills. Be sure to evaluate the role of Charitable Giving and wealth transfer to children, families and/or charities. An IFA representative can assist you in evaluating attorneys. In California, we often refer clients to Leslie Daff. Also see the National Association of Estate Planners and Councils.

2. Insurance:

Value of a Fee-Only Insurance Advisor with Scott Witt

IFA.tv Show 19
Click to Watch »

Find an independent insurance consultant who is not paid by any insurance products. This fee-only insurance advisor can assist you in selecting insurance products without the traditional conflict of interests that exist with insurance brokers for specific insurance products. You may need specialists that cover different insurance needs. Firms like An IFA representative can assist you in evaluating insurance consultants. Here are some examples of Fee-Only Insurance Advisors.

Scott J. Witt (WI)          www.wittactuarialservices.com
Peter Katt (MI)              www.peterkatt.com
David Barkhausen (IL)   www.lifeinsuranceadvisorsinc.com
James Hunt (NH)           www.EvaluateLifeInsurance.org
Glenn Daily (NY)        www.glenndaily.com

3. Accounting and Tax Advice:

Interview several accountants in your area and select one that you feel comfortable with. Accountants who are proactive in tax planning strategies will be able to make sure you are not paying more taxes than you should. An IFA representative can assist you in evaluating accountants. The IRS issued this Tax Tip on January 13, 2009 concerning the choosing of a tax preparer.

Read This Before Choosing a Tax Preparer (from the IRS)

If you will be paying someone to do your tax return, choose a tax preparer wisely. You are legally responsible for what’s on your tax returns even if they are prepared by someone else. So, it’s important to find a qualified tax professional.

The most reputable preparers will request to see your records and receipts and will ask you multiple questions to determine your total income and your qualifications for expenses, deductions, and other items. By doing so, they have your best interest in mind and are trying to help you avoid penalties, interest, or additional taxes that could result from later IRS contacts.

Most tax return preparers are professional, honest and provide excellent service to their clients; you can use the following tips to choose a preparer who will offer the best service for their tax preparation needs.

Find out what the service fees are before the return is prepared. Avoid preparers who base their fee on a percentage of the amount of your refund or who claim they can obtain larger refunds than other preparers.
Only use a tax professional that signs your tax return and provides you with a copy for your records.
Avoid tax preparers that ask you to sign a blank tax form.
Choose a tax preparer that will be around to answer questions after the return has been filed.
Ask questions. Do you know anyone who has used the tax professional? Were they satisfied with the service they received?
Check to see if the preparer has any questionable history with the Better Business Bureau, the state’s board of accountancy for CPAs or the state’s bar association for attorneys. Find out if the preparer belongs to a professional organization that requires its members to pursue continuing education and also holds them accountable to a code of ethics.
Determine if the preparer’s credentials meet your needs. Does your state have licensing or registration requirements for paid preparers? Is he or she an Enrolled Agent, Certified Public Accountant, or Attorney? If so, the preparer can represent taxpayers before the IRS on all matters – including audits, collections, and appeals. Other return preparers can represent taxpayers only in audits regarding a return signed as a preparer.
Before you sign your tax return, review it and ask questions.

You can report suspected tax fraud and abusive tax preparers to the IRS on Form 3949-A, Information Referral, by sending a letter to Internal Revenue Service, Fresno, CA 93888, or call 800-829-3676.

4. Investment Advisors:

Three critical characteristics of investments advisors include independence from all financial products and custodians, the exclusive application of a passive investment strategy and a fair price for their advice. An IFA representative meets all three of these criteria.

5. Life Planning:

Life planning is the art or human side of financial planning. In life planning you discover important goals through a process of questions. Then, using a mix of professional and relationship skills, an advisor resolves the obstacles to those goals, creates a plan, and guides you to the accomplishment of these goals in the most efficient and fastest way possible. At its core, Life Planning encourages investors to be sure they have asked and answered the fundamental question of, “what’s it for – all this money that I’ve given so much to acquire, what exactly is it for?” Stephen Covey encourages “beginning with the end in mind” in his work around The Seven Habits of Highly Effective People. With a better idea of your end-destination in mind, future financial planning decisions including portfolio risk exposure become both more relevant and holistic. George Kinder has pioneered and promoted Life Planning for about 15 years. He suggests that investors carefully answer these three questions. Once you have answered them in writing, your investment advisor will be better guided in assisting you to meet your life goals that apply to areas such as family, creativity, spirit, and service. Here are the three questions:

Assume you’ve got all the money you need. What would you do with it and how would you live?
You just found out you have only five to 10 years to live. How will you live those years?
You’ve just found out you have 24 hours to live. What did you miss? Who did you not get to be? What did you not get to do?

If you would like a good guide to charitable giving, visit the Charity Navigator. Donors often withhold giving because they are concerned the organization is not using the funds in a way they would think is appropriate. Is the CEO being paid more than you think is reasonable? Are the administrative costs to high as a percentage of donations? How does your charity's expenses compare to others. These and other important issues are answered at Charity Navigator. Please review this site before giving.

6. The Glide Path of Life and Your IFA Index Portfolio:

Figure 12-4 below is designed to be a hypothetical illustration of an individual’s financial glide path through life. It illustrates the transistion from living off of your labor (Human Capital) to living off your savings (Financial Capital). Here are the assumptions for the calculation of Human, Financial and Total Capital.

Human Capital is defined as the present value of an individual’s future earnings. Of course, your salary, bonuses, inheritances, talents, skills, education, health and other factors throughout your life will likely vary from our assumptions. (see Human Capital)

Financial Capital is defined as the current value of an individual’s retirement savings.

Total Capital is the sum of human and financial capital and, hopefully, will stay constant or even increase over your life.

We assume that an individual begins working at age 22, retires at age 67 and lives until age 95. Full retirement age had been 65 for many years. However, beginning with people born in 1938 or later, that age gradually increases until it reaches 67 for people born after 1959.

Our hypothetical wage earner’s starting salary is $35,000/year and increases with inflation at 3% annually until retirement at age 67, when it reaches about $132,000. We assume an annual savings rate of 8% of gross salary (but you should strive for 10%), which is contributed to the Financial Capital and invested in the corresponding IFA Index Portfolio shown. In Figure 12-4, every 5 years, the risk level drops down 5 risk units on a scale of 100 IFA Index Portfolios.

IFA is now offering a Glide Path strategy that reduces one index portfolio per year, based on a 100 Index Portfolio scale. To illustrate the Glide Path strategy, we have created this painting.

(Quick Link)

IFA implements the Glide Path strategy by reducing the targeted risk level by one level per year. IFA does not automatically place trades on the Glide Path anniversary. Instead, IFA will evaluate the current portfolio against the new targeted risk level, and if the current portfolio is five or more risk levels away from the target, then IFA will proceed with a rebalance. However, if IFA is aware of an upcoming cash need for the client (i.e., investing a deposit or raising cash for a withdrawal), then IFA will postpone the rebalance trades so that both tasks may be accomplished simultaneously, which translates into lower costs for the client.

To see the impact of a Glide Path strategy on the growth of a dollar, the annualized return and the risk over a 50 year period, see the data in Figure 12-3 below presented in the Glide Path mode. By rolling over the annual return bars, you can see that the Index Portfolios reduce by one portfolio per year, from 100 to 51 over the 50 year period. In the Figure 3, you can see the impact of the Glide Path over many different periods.

Figure 12-3

Upon retirement, the retiree withdraws 5% of the accumulated Financial Capital to fund their annual expenses. This amount increases annually with inflation. Please note that a 5% withdrawal rate only meets the portfolio survival test for IFA clients, using the IFA index portfolios. Don't try this alone at home because lesser quality portfolios and investor misbehavior normally require a 4% or less withdrawal rate and industrial strength emotional discipline is needed to adhere to this passive investing strategy over the entire glide path. The 5% withdrawal starts at about $99,000 in the golden years of retirement and replaces 77% of the annual paycheck at age 67. This does not include Social Security benefits expected to be received in retirement.

The rate of return assumed on Financial Capital is determined by using the 83-year historical annualized returns of the changing IFA index portfolios indicated along the glidepath, which is a conservative annualized return because the period begins in 1928 and includes the Great Depression (see www.ifabt.com). If you think there will not be another Great Depression, then your Financial Capital may be higher than shown. Again, don’t try this at home alone. According to Morningstar, even do-it-yourself indexers, who understand many advantages of index funds, have been shown to only capture 82% of the index fund’s returns, due to bad investor behavior. Worse yet, other active equity fund investors have demonstrated that they capture less than 20% of what an advised index investor earns.

We assume that at a given age, the investor is invested in the IFA Index Portfolio that corresponds to 100 minus the investor’s age rounded to the nearest increment of 5 and changes down one index portfolio every 5 years during their life. This 100 minus your age rule is a very rough approximation of the risk capacity and risk exposure levels for investors. Very high risk capacity investors could add approximately 20 and low risk capacity investors could subtract 20 or more from the index portfolio number. To determine your risk capacity and a corresponding risk exposure in the form of an IFA Index Portfolio between 1 and 100, please take the Risk Capacity Survey. To personalize a retirement plan for your situation, see the Retirement Planner below this chart.

Figure 12-4 (Chart Link)

Figure 12-5 (Chart Link)

IFA has implemented its glide path portfolios as the basis for a hypothetical set of Target Date retirement index portfolios. For example, for a retirement with a target date of 2030 at age 67, a 401(k) participant in 2011 would be 48 years old and IFA's Index Portfolio 57 would be used, followed by Index Portfolio 56 in 2012, and Index Portfolio 55 in 2013, etc. The chart below shows how the returns and risks compare between the IFA Target Date Index Portfolios, the S&P Target Retirement Indexes and Vanguard's Target Retirement Funds. Investors and participants in 401(k)s can implement this strategy with the help of an advisor at IFA. Please call us to discuss how: 888-643-3133.

Figure 12-6 (Chart Link)

What are the probabilities that investors will run out of money in their retirement based on the target date strategy? Complete the inputs to the Retirement Analyzer and you will see.

7. Retirement Planner

Do you know what it takes to develop a secure retirement? Use this calculator to help you create your retirement plan. But before you do, here is some basic advice.

Save at least 10% of your annual income while you are still working. Once you retire and start replacing your employment income with withdrawals from your retirement savings, limit those withdrawals to about 5% of the total value of your various accounts. Clients of IFA should be safe at 6% withdrawal rates.

In other words, employees should strive to have about 20 times their annual income at the time of retirement in savings prior to retirement. If you are making $100,000 in your last year of employment, you should have about $2,000,0000 in savings, so that the 5% withdrawals will be close to the 5% or more you earn on your portfolio in retirement. You should plan on paying your taxes out of the 5% withdrawals. As you will see in the calculator below, Social Security and the percentage of your last year of income spent in retirement can alter this rule of thumb, however, you are more likely to under save and over spend. Finally, Murphy's Law does not work in your favor, so the Save 10% and Spend 5% Rule is still great advice.

For Rate of Return Before and During Retirement, a quick estimate can be found by taking 100 minus Your Age, then rounding off to the nearest unit of 5. For example: 100-57= 43, rounded up 45 and see Index Portfolio 45. Click on your choice of Index Portfolio on the top navigation bar. Look up the 50 year annualized return of that IFA Index Portfolio in Figure 2 on that page and enter it as the Rate of Return, or be conservative and use the 81 year return. For example, IFA Index Portfolio 45 has a 50 yr annualized return of 9.16% as of the 50 years ending 2008. For a more accurate estimate, take the Risk Capacity Survey and review the results with an IFA advisor. On average, the IFA Index Portfolios should be reduced every 5 years to the next lower portfolio, as shown above.

Click the View Report button below the Planner to get a printable report of several retirement account balances per year, based on your inputs. View your retirement savings balance and your withdrawals for each year until the end of your retirement. Social security is calculated on a sliding scale based on your income. Including a non-working spouse in your plan increases your social security benefits up to, but not over, the maximum.

Current age

Your current age.

Age of retirement

Age you wish to retire. This calculator assumes that the year you retire, you do not make any contributions to your retirement savings. So if you retire at age 65, your last contribution happened when you were actually age 64. This calculator also assumes that you make your entire contribution at the end of each year.

Household income

Your total household income. If you are married, this should include your spouse's income.

Current retirement savings

Total amount that you currently have saved toward your retirement. Include all sources of retirement savings such as 401(k)s, IRAs and Annuities.

Rate of return before retirement

This is the annual rate of return you expect from your investments after taxes. The actual rate of return is largely dependent on the type of investments you select. From January 1970 to December 2008, the average annual compounded rate of return for the S&P 500, including reinvestment of dividends, was approximately 9.7% (source: www.standardandpoors.com). During this period, the highest 12-month return was 61%, from June 1982 through June 1983. The lowest 12-month return was -39%, which happened twice, once from September 1973 to September 1974 and again from November 2007 to November 2008. Savings accounts at a bank may pay as little as 1% or less but carry significantly lower risk of loss of principal balances.

It is important to remember that these scenarios are hypothetical and that future rates of return can't be predicted with certainty and that investments that pay higher rates of return are generally subject to higher risk and volatility. The actual rate of return on investments can vary widely over time, especially for long-term investments. This includes the potential loss of principal on your investment. It is not possible to invest directly in an index and the compounded rate of return noted above does not reflect sales charges and other fees that funds and/or investment companies may charge.

Rate of return during retirement

This is the annual rate of return you expect from your investments during retirement, after taxes. It is often lower than the return earned before retirement due to more conservative investment choices to help insure a steady flow of income. The actual rate of return is largely dependent on the type of investments you select. From January 1970 to December 2008, the average annual compounded rate of return for the S&P 500, including reinvestment of dividends, was approximately 9.7% (source: www.standardandpoors.com). During this period, the highest 12-month return was 61%, from June 1982 through June 1983. The lowest 12-month return was -39%, which happened twice, once from September 1973 to September 1974 and again from November 2007 to November 2008. Savings accounts at a bank may pay as little as 1% or less but carry significantly lower risk of loss of principal balances.

Percent of income to contribute

The percentage of your annual income you will save for your retirement goals. This should reflect the total you save toward your retirement. This should include any 403(b), 401(k), or 457(b) plans and your employer contributions to these plans. It should also include any other retirement accounts such as an IRA or a Roth IRA and any retirement savings in non-retirement accounts. This calculator assumes that you make one annual contributions at the end of each year, and any withdrawals happen once per year at the end of the year.

Expected salary increase

Annual percent increase you expect in your household income.

Years of retirement income

Total number of years you expect to use your retirement income.

Percent of income at retirement

The percent of your working year's household income you think you will need to have in retirement. This amount is based on your income earned during the last year you will work. You can change this amount to be as low as 50% and as high as 150%.

Expected rate of inflation

What you expect for the average long-term inflation rate. A common measure of inflation in the U.S. is the Consumer Price Index (CPI), which has a long-term average of 3.1% annually, from 1925 through 2008. The CPI for 2008 was 4.0%, as reported by the Minneapolis Federal Reserve.

If you are married checkbox

Check this box if you are married. Married couples have a higher maximum social security benefit than single wage earners.

To include Social Security checkbox

Check this box if you wish to include social security benefits in your retirement planning. Social Security is based on a sliding scale depending on your income, how long you work and at what age you retire. Social Security benefits automatically increases each year based on increases in the Consumer Price Index. Including a spouse increases your Social Security benefits by 1.5 times your individual estimated benefit. Please note that this calculator assumes that you have only one working spouse. Benefits could be different if your spouse worked and earned a benefit higher than one half of your benefit. If you are a married couple, and both spouses work, you may need to run the calculation twice - once for each spouse and their respective income. This calculator provides only an estimate of your benefits.

The calculations use the 2009 FICA income limit of $106,800 with an annual maximum Social Security benefit of $27,876 per year for a single person and 1.5 times this amount for a married couple. To receive the maximum benefit would require earning the maximum FICA salary for nearly your entire career. You would also need to begin receiving benefits at your full retirement age of 66 or 67 (depending on your birthdate). Your actual benefit may be lower or higher depending on your work history and the complete compensation rules used by Social Security.

Click and save for additional retirement planning fill-in forms.

IFA Budget Data Gathering

IFA Long Input Form

Monte Carlo

Monte Carlo is one way of assessing if investors are on track to have their assets last for the expected duration of their lives. It involves the random generation of a large number of future return scenarios and determining if the portfolio was able to survive to the end of the period for each trial, as well as the ending value of the portfolio. The results are heavily dependent on the assumptions. Ideally, it should be run on an annual basis to take updated information into account.

A Monte Carlo simulation requires the following inputs:

Beginning Portfolio Value
The number of years for the projection (age at death minus current age)
Future cash flows (both deposits and withdrawals)
Inflation rate to be applied to the cash flows. Note that if a percentage annual increase is assumed for salary deferrals, this percentage will have the inflation assumption subtracted from it in the report, but the full increase will be applied to the deferrals. Under no circumstances will the salary percentage increase be less than the inflation assumption.
The distribution of returns (i.e., the average and standard deviation of the bell curve)

From the assumed distribution of Returns (e.g., IFA Index Portfolio 50 based on 83 years of data), it generates a large number (say 10,000) of different scenarios of year-by-year returns (trials). Using the cash flows, it calculates the value of the portfolio at the end of each year. If at any point, the portfolio goes negative, the trial ends, and it is deemed a "failure". The overall failure rate is calculated as the number of failure trials divided by the total number of trials. The portfolio survival rate is calculated as 100% minus the failure rate.

Quite often, the results of an initial Monte Carlo run will appear unsatisfactory. Several changes in assumptions can be made to improve the results:

Save a larger percentage of salary.
Spend less in retirement.
Retire later (this is especially helpful since it both lengthens the accumulation period and shortens the drawdown period).
Shorten life expectancy.
Take more risk during the accumulation phase.
Take less risk during the drawdown phase (This will only help if a high failure rate is not due to inadequate return relative to the percentage of the portfolio being withdrawn). Using glide path (steadily decreasing risk over time) is often helpful.
Use 50-year data instead of 83-year data for the risk and return assumptions. However, if you believe that another Great depression followed by a world war is highly likely in your life time, then the 83-year data may be appropriate.

Monte Carlo should be regarded as one item in the toolbox available to investors for the purpose of assessing their financial health. It is best used as a source of guidance in making decisions such as saving more or spending less. Since the results are so heavily dependent on the assumptions, investors who use Monte Carlo should run it on an annual basis, if possible.

Click here to request a personalized Monte Carlo Simulation Analysis from IFA.

“The question isn't at what age I want to retire, it's at what income.” — George Foreman

“Retire from work, but not from life.” — M.K. Soni

“The harder you work, the harder it is to surrender.” — Vince Lombardi

“The gradually declining years are among the sweetest in a man's life.” — Seneca

“Don't simply retire from something; have something to retire to.” — Harry Emerson Fosdick

12.2.6a

Asset Location

An additional way that a passive advisor can add value is not just asset allocation but asset location. Specifically, for a client that has a mixture of taxable accounts, traditional IRAs, and Roth IRAs, it is often helpful to construct a single portfolio consisting of multiple asset classes that are divided up among the different accounts with the ultimate purpose of optimizing after-tax returns. Considerations in deciding which asset classes to place in different account types include the following:

For Roth IRAs where all the investment growth is tax-free, the preference is to put in the asset classes that have the highest expected returns (which is equivalent to the highest risks). Examples include emerging markets and international small value.
For traditional IRAs where the withdrawals are taxed as ordinary income, the preference is to put in the asset classes that are the least tax-efficient. Examples include real estate investment trusts (REITs) and fixed income.
For taxable accounts, the preference is to utilize tax-managed funds wherever possible. Index Funds Advisors currently uses tax-managed funds in the following five asset classes: US large company, US large cap value, US small blend, US small cap value, and international value.

It is important for clients to understand that in a tax-hybrid portfolio, each of the accounts will have very different performance. If the client is not comfortable with this performance difference (e.g., a married couple where the wife’s Roth IRA has a higher expected return than the husband’s traditional IRA), then the tax-hybrid portfolio structure may not be appropriate. Furthermore, a good passive advisor will evaluate the purpose of each account to determine if it should be stand-alone or part of a hybrid structure. A special needs trust for a disabled child is an example of an account that should be its own portfolio.

Establishing a tax-hybrid portfolio is only half of the task; maintaining and rebalancing the portfolio through all types of markets and client cash needs requires the skills that the passive advisor brings to the table. For example, if the client has a cash need from a taxable account, confining the sell trades to the single account may throw the portfolio out of balance. A good advisor will carefully consider how to trade all the accounts in unison with an eye towards tax-efficiency, minimization of transaction costs and maintenance of the client’s designated risk level.

12.3

Problems

12.3.1

Active Investors Procrastinate

It is often said that investors procrastinate when it comes to changing their investments. Once a prudent strategy has been identified, investors need to take action and move their investments to the new strategy that meets the four acid tests of expected risk, expected return, expenses, and taxes.

12.3.2

Active Investors “Go It Alone”

A second problem is that investors get in their own way of success. As the legendary investor Benjamin Graham stated, “The investor’s chief problem, and even his worst enemy, is likely to be himself.” An investor may want to consider the fees paid to an index fund advisor as a casualty insurance premium, insuring the investor against himself.

12.3.3

The Media Wants Investors to Worry

The media has a propensity to alarm investors with hyped messages of gloom and doom and make people feel they need to rely on financial news shows and investment gurus for minute to minute updated information on the stock market. It benefits the media to have investors hooked into financial and economic news stories and articles.

This 12-Step Program teaches investors that index funds investing does not require constant vigilance, following daily returns, or listening to today’s star money managers. Readers have learned that prudent investing means not worrying about the ups and downs of the market. It means being able to invest and relax.

Asset Class Allocation
Research has shown that asset class allocation is the most important factor in determining a portfolio’s expected return level. In fact, asset allocation is 100% responsible for the variance in investment performance. Since an index fund is invested solely in the securities or fixed income (positions) that comprise a discrete asset class, it possesses the same rules of ownership, characteristics, and expected performance of the comparable index.

Indexing makes it easier to rebalance and maintain a consistent asset allocation over time, rather than participate in the style drift of active management. An actively managed fund generally does not stay invested in the same asset class, so it cannot reliably capture the performance of any particular asset class. Active managers often buy and sell their fund’s securities due to the pressure to outperform the market, which results in high trading costs and the adverse effects of style drift.

Minimization of Investment Costs
Index funds have minimal investment costs. They do not have the high annual operating expenses of active funds. These consist mainly of investment advisory fees that compensate an active fund for its manager’s efforts at stock picking and 12b-1 fees that reimburse it for its sales and marketing costs. Index funds also do not have the high trading costs characteristic of many active funds. Most of these costs are due to the efforts of active fund managers to implement their stock picking ideas to beat the market. Finally, very few index funds charge commission loads, while most active funds carry some type of load.

The investment costs associated with active funds have generally increased over the last decade, while those of index funds have decreased steadily. Although there is always the natural possibility that this gap will narrow in the future, all evidence indicates just the opposite. The investment advantages of low costs do not depend on Lady Luck.

Minimization of Taxes
By maintaining low portfolio turnover, index funds minimize realized capital gains, which keeps capital gains taxes low. Minimization of capital gains taxes results in a comparatively small difference between an index fund’s pre-tax and after-tax performance. This makes an index fund a tax efficient investment. In fact, investing in index funds, especially tax-managed index funds, results in such low taxation that it is almost like putting your entire portfolio into an IRA. The best way for a taxable-basis investor to minimize taxes and thus more efficiently compound investment wealth is to assemble a portfolio of index funds and keep it for life.

Managers of active mutual funds typically manage money as if taxes don’t matter. As a number of studies have shown, however, taxes do matter. They actually have an enormous negative impact on investment performance. Investors who ignore this and invest in active funds are relinquishing money to Uncle Sam that could otherwise be available to compound into future wealth.

Reliable Investment Performance
An investor who holds a portfolio of index funds is assured of the reliable investment performance of free and efficient financial markets. An index fund invested in an asset class will always earn the returns of that asset class. Thus, indexing is an investment strategy that delivers what it promises to investors.

In comparison, the returns of active funds are erratic and less reliable than index funds, sometimes outperforming the market and sometimes underperforming it. These variations in performance are caused by the market’s unpredictability. They can also result from style drift, when the fund manager modifies the fund’s asset class mix.

Both U.S. and international financial markets are becoming more efficient, which indicates that investors and money managers who engage in stock picking and time timing must take greater and greater risks to beat the market. The more educated investors become on the efficiency of markets, the more that active money managers will have to defend their investment strategies to try to beat the market.

A Simple and Understandable Investment Strategy
Since indexers realize they cannot beat the market, they can focus on building wealth over the long run by holding efficient, globally diversified portfolios. Passive investors stay with their investments and rebalance only when necessary in comparison to active investors who constantly seek ways to beat the market, spending a lot of valuable time reading investment newsletters, reports, magazines, and other media driven publications.

An Easier Way to Track Investment Performance
Tracking the performance of index fund portfolios against their respective benchmarks is simple, since the return earned by an index fund reflects the return of the comparable index. On the other hand, the performance of active funds is more difficult to track against any benchmark. Although many funds are compared to the S&P 500, it is not an accurate comparison.

Increased Leverage and Compounding of Investment Wealth
Indexers can leverage their funds and thus more efficiently compound investment wealth. Since index funds carry no cash reserves, indexers are invested 100% in the market at all times. Indexers are also better able to leverage their funds because they can keep the money invested that an active investor would need to pay the commissions and high annual expenses and taxes associated with active mutual funds. Seemingly small amounts of money continually compound through the years and help to accelerate the accumulation of wealth for indexers.

Invest like Institutional Investors
Large institutional investors such as corporate pension plans and educational endowment funds that invest billions of dollars can certainly afford to hire any money manager in the world. Yet they continue to index a significant portion of their investments. Individual investors can follow the example of these institutions and reap the same benefits by investing in DFA funds.

12.4

Solutions

Invest in Index Mutual Funds

The 12-Step Program to Index Funds has been written for investors who are engaged in any active investing practices, including stock picking, time picking, manager picking, or style picking, with the intent of educating and motivating the active investors of today to transform into active investors of yesterday.

This Program has provided research and education about the advantages of indexing over active investing. The information that has been presented shows clearly why index funds are best for achieving investors’ goals. With index funds, the stress and pressure of investing melts away, allowing the investor to receive the market returns of a diversified portfolio that is matched to Risk Capacity™, all at a very low cost. Stepping off the emotional roller coaster of active investing, a recovering or reformed active investor experiences a new peace of mind. Instead of panicking, an index funds investor can now invest, relax, and go to the beach.

In order to invest, Index Funds Advisors would be honored to assist you. Because we have demonstrated our understanding of Modern Finance, we have been approved by DFA to purchase their mutual funds for our clients. These funds are not available directly to individual investors. They are designed and priced for large institutional funds. We think of it as an investment club for the "really smart money."

Through our custodians, Charles Schwab or Fidelity Investments, we can purchase these funds for your brokerage or 401k account. We will need to speak to you, deliver the necessary documents to you, such as our ADV, and assist you in establishing an account with us. Each quarter we will review your portfolio and rebalance the asset allocations as needed. If you have any questions, please call us toll free at 888-643-3133.

12.5

Summary

With index funds, the stress and pressure of investing melts away, allowing the investor to receive the market returns of a diversified portfolio that is matched to risk capacity, all at a very low cost. Stepping off the emotional roller coaster of active investing, a recovering or reformed active investor experiences a new peace of mind. Instead of panicking, an indexer can calmly invest without fear or tension.

Just like with the original 12-step program, the first step is to admit you’re powerless and your life has become unmanageable. In this case, the admission of powerlessness is a lack of control or prediction of the market movements. The climbing of the 12 steps leads investors to the light of intelligent risk management and a realization that active investing is a losing game. The painting below depicts this journey.

Painting title: Journey to Tradeless Nirvana

When investors reach this pinnacle of investing insight, they are well on their way to entering what we like to call "Tradeless Nirvana."

"Don't just do something, sit there!"
IFA President, Mark Hebner, visited the NYSE and posed in a Tradeless Nirvana.

Congratulations on completing the 12-Step Program! It’s now time to take action, so you can invest and relax. Call IFA at 888-643-3133.

12.6

Review Questions

Please answer the following questions before moving on to the next Step:

1. Which is NOT a fundamental principle of prudent investing?

    a) stock picking
    b) the need to build efficient portfolios
    c) the importance of long-term investments
    d) passive investing with index funds

2. Why should a portfolio be rebalanced?

    a) To keep risk exposure matched with Risk Capacity
    b) Market changes may change the balance of the portfolio
    c) An investor’s financial situation or investment goals may change
    d) Because all the day traders think it’s a good idea
    e) a, b, and c

3. The most efficient way to invest is:

    a) Pick your 5-10 favorite stocks and trade on these as frequently as possible.
    b) Buy the stocks that have performed the best over the last six months.
    c) Join an investment club.
    d) Invest in a globally diversified portfolio of index funds, and invest for the long run.
    e) Invest only in Treasury bills and Certificates of Deposit.

Now that you have completed the 12-Step Program for Active Investors, you can send an e-mail with your phone number to info@ifa.com. We will call you to review your Risk Capacity Survey and to better understand your complete circumstances relative to your portfolio.

We look forward to your acquaintance and to a long and mutually beneficial relationship. If you have been doing active investing on your own, you now have time for some new hobbies (101 Hobbies).

If you would like to open an account, click here.

Backtested Performance Info

This site is for the use of clients and potential clients of Index Funds Advisors, Inc. and the IFA Network Members. It is not to be used by any other investment advisor or investment professional as an information/marketing materials source, asset allocator, risk capacity or risk tolerance assessment, or for any other purpose. If your financial advisor is using this site without a license from Index Funds Advisors, Inc., they are violating our copyright and their ethics are highly in question. The right to download, store and/or output any material on this internet site, or the Index Funds: The 12-Step Recovery Program for Active Investors book or eBook, is granted for viewing use only and this grant only applies to clients and potential clients of Index Funds Advisors, Inc. and the IFA Network Members. Reproduction or editing by any means, mechanical or electronic, in whole or in part, without the express written permission of Index Funds Advisors, Inc. is strictly prohibited and subject to prosecution under U.S. and International copyright and trademark laws.

DISCLAIMER: THERE ARE NO WARRANTIES, EXPRESSED OR IMPLIED, AS TO ACCURACY, COMPLETENESS, OR RESULTS OBTAINED FROM ANY INFORMATION POSTED ON THIS OR ANY LINKED INTERNET SITE. At certain places on this Index Funds Advisors Internet site, live 'links' to other Internet addresses can be accessed. Such external Internet addresses contain information created, published, maintained, or otherwise posted by institutions or organizations independent of Index Funds Advisors. Index Funds Advisors does not endorse, approve, certify, or control these external Internet addresses and does not guarantee or assume responsibility for the accuracy, completeness, efficacy, timeliness, or correct sequencing of information located at such addresses. Use of any information obtained from such addresses is voluntary, and reliance on it should only be undertaken after an independent review of its accuracy, completeness, efficacy, and timeliness. Reference therein to any specific commercial product, process, or service by trade name, trademark, service mark, manufacturer, or otherwise does not constitute or imply endorsement, recommendation, or favoring by Index Funds Advisors.Your use of this site is acknowledgment that you have read and understood the full disclaimer. Past performance does not guarantee future results.

WARNING: Past performance does not guarantee future results. Investment returns and principal value will fluctuate, so that investors' shares, when sold, may be worth more or less than their original cost. Investing in any mutual fund, index or actively managed, does not guarantee that an investor will make money, avoid losing capital, or indicate that the investment is risk-free. Actively managed funds sometimes outperform index funds. You just don't know in advance which actively managed fund will outperform the appropriate index. Just because a mutual fund is an index mutual fund, it does not guarantee a performance superior to an actively managed mutual fund. There are no absolute guarantees in investing. When reviewing any backtested performance information on this internet site, please read the Disclosure for Backtested Performance Information (click here to read the Disclosure for Backtested Performance Information.) For a copy of the Index Funds Advisors, Inc. Privacy Policy, click here.

Index Funds Advisors, Inc. — 19200 Von Karman Ave., Suite 150 — Irvine, CA 92612
Call Toll Free: 888-643-3133 — Local Phone: 949-502-0050 — Fax: 949-502-0048 — Email:
For several other offices and representative locations, see About Us.

Step 1: Active Investors

Definitions

Problems

Solutions

Step 2: Nobel Laureates

Definitions

Problems

Solutions

Step 3: Stock Pickers

Definitions

Problems

Step 4: Time Pickers

Definitions

Problems

Step 5: Manager Pickers

Problems

Step 6: Style Drifters

Definitions

Problems

Step 7: Silent Partners

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Solutions

Step 8: Riskese

Definitions

Problems

Step 9: History

Definitions

Solutions

Step 10: Risk Capacity

Definitions

Problems

Solutions

Step 11: Risk Exposure

Definitions

Problems

Solutions