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Thursday, August 28, 2014

Brinker's Index Fund Advice History

When did Bob Brinker Start Recommending Index Funds?

The Question:  Today I got this question via email from a reader.

Hi Kirk,

...... Appreciate your input on this. You probably have a good idea when Bob Brinker became a fan of index funds.....

Is Bob Brinker's recollection correct on this? I have serious doubts about it.

On last Sunday's Moneytalk, Bob Brinker took a call from Rich in Novato, CA, at the 20 minute mark of the first hour.

Rich read to Brinker what the Wall Street Journal reported about Warren Buffett recommending a portfolio of 90% S&P 500 Index Fund and 10% short term government bonds.

At the very end of the conversation with Rich, Bob Brinker said something that I have serious doubts about

“Going all the way back to the beginning of the Moneytalk broadcast series going all the way back to 1986, I have continuously stated that if I had to choose one fund for stock market investing it would be a low cost total stock market index fund, and low cost funds are available at places like Vanguard and Fidelity that are total stock market index funds with very very low expenses, and I’ve been consistent on that for 29 years”
In the early to mid-1990's and perhaps even much later, Brinker had no index funds in Marketimer.

He was not emphasizing low cost mutual funds, and I specifically remember he once had the PBHG Growth fund in Model Portfolio I, and I believe it had a 2.0% expense ratio (which I think was his limit for an expense ratio).

I distinctly recall a Moneytalk caller asking him about investing in stock index funds, as the caller was interested in investing that way.

Brinker told him "It's not the way I prefer to do it, but if you are going to do it, at least diversify internationally"

During this time frame, I had the distinct impression that Brinker did not like index investing one bit. He focused a tremendous amount of energy and attention trying to pick actively managed stock funds that would beat the market.

I felt that he joined the index investing crowd only when the evidence became overwhelming that actively managed funds as a rule have a very difficult time beating the index funds.

Now he says that since 1986 he's been saying xyz about index funds.

Maybe I'm wrong, and there are many long-term listeners and subscribers out there who can set the record straight.

Would some of the long time listeners and subscribers please chime in and let me know what Bob Brinker's position on index funds was? I don't think he came onboard the index fund bandwagon until very late in the game.

My Answer (In Progress):

I think his reply is "partially true" at best. 

For starters, Vanguard and Fidelity didn't start their total market index funds until the 1990s.    Vanguard was the first and Fidelity came a few years later.
How do you recommend something in 1986 that didn't exist until 1992?

Also, Brinker's newsletter didn't have them as recommended or model portfolio funds in the 1993 Marketimer newsletter.   

Thus, taken literally, Brinker was not being truthful when he said....
“Going all the way back to the beginning of the Moneytalk broadcast series going all the way back to 1986, I have continuously stated that if I had to choose one fund for stock market investing it would be a low cost total stock market index fund, and low cost funds are available at places like Vanguard and Fidelity that are total stock market index funds with very very low expenses, and I’ve been consistent on that for 29 years
Brinker did list the S&P500 and Extended Market index funds from Vanguard in his 1993 recommended fund list so you could construct the total stock market yourself with these funds (as I do in my newsletter core portfolios) if you had guidance on how to allocate your dollars between the two.  

Before you take any of his advice, you must be aware that Brinker is one of the best self promoters ever to grace the radio waves.   I've followed him for over 20 years and his advice and newsletter seems to me (my opinion) to be designed more to use as sample issues than good investment advice.

In his Marketimer newsletter, Bob Brinker has:
  1. Recommended Model Portfolios
  2. Recommended Mutual Funds
  3. Recommended Individual Issues
  4. Recently added "Active Passive Portfolio."
Three Recommended Model Portfolios:  Bob Brinker has model portfolios that he reports performance for. When you see an advertisement for his newsletter, he advertises how well these portfolios have done.  Currently this aggressive and moderate risk portfolios recommend 100% in stocks while his "balanced" Model Portfolio three is two thirds in stocks which is hardly balanced.
This is excerpts from the November 1993 Marketimer.  Note:
  • Portfolio 3 is not balanced
  • He does not compare the performance to index funds or any other benchmarks.
  • The beta is wrong since it applies to the total value in the portfolios and he calculates it based on % listed.
  • There are NO INDEX FUNDS in any model portfolio!

Here are the model portfolios for the last Marketimer published in the 1990s.  Clearly there are no index funds in any of them.  Brinker sold the idea he could pick funds that beat the market.  If you have time, compare how these model portfolios did vs. the market for the periods shown.  Mark Hulbert and several others calculated Brinker greatly under performed the markets during those periods, probably due to the higher expenses of the funds he recommended.  

Also, if you have the time, calculate how "balanced" his model portfolio three was in December 1999 with roughly $39.7K in fixed income (first two funds) and $67.7K in equities while still advertising the fund as "balanced" allocated evenly between fixed income and equities!

Recommended Mutual Funds:  Each issue of Marketimer also has "Bob Brinker's Recommended List of No-Load Funds."  My copy of the November 5, 1993 Marketimer has on
  • Pg. 4: 8 managed funds with expense ratios between 1.00% and 1.84%
  • Pg. 5: 8 managed funds with expense ratios between 1.00% and 1.70%
  • Pg. 6: 6 managed funds with expense ratios between 0.27% and 1.90%
        and 2 Vanguard index funds with expense ratios of 0.20%
I've learned over the years Brinker will often add funds to this list that have done well and are popular AFTER they went up.  I believe he does this so he can say on the radio he has these funds on his recommended list but careful inspection shows he usually doesn't add them to his model portfolios.  Also, when they eventually crash and lose popularity, he'll simple remove them from the list and often not say much about it.  He's done the same for his list of individual issues such as recommending gold via GLD when it was near record highs then deleting it awhile back after gold prices collapsed.

Recommended Individual Issues:  These are individual stocks, ETFs, closed end funds, etc. that he recommends but seldom puts in his model portfolios.  The most famous is the QQQ advice with the recent addition then removal of GLD discussed above.
"Active Passive Portfolio:  Brinker didn't have this in 1993 Marketimer nor was it in the last issue of the 1990s, the December 1999 newsletter.  Here is what he recommended in those issues for model portfolios.

Bottom Line:  Total stock market index funds were not available for purchase in 1986 at either Vanguard or Fidelity.  

Bob Brinker may have had index funds on his list of recommended funds, but index funds were not in his model portfolios or list of individual issues (Not sure ETFs existed back in 1993.)

Brinker can say he's "recommended index funds in his newsletter" since at least 1993 which is as far back as I have issues.  When he sends you a recent sample issue you will see the recently added "Active Passive Portfolio" which you might assume he recommended portfolios with index funds all along which would be a false assumption but one easy to make given what he said on the radio.

If anyone remembers when Brinker first added the active-passive portfolio to Marketimer, please post this in the comments or send me an email.

Check back as I'll probably update this again.

Tuesday, August 19, 2014

Bob Brinker's Model Portfolio III

WARNING!  Bob Brinker's "Balanced" Model Portfolio Three is NOT balanced!

  • A balanced portfolio has half in stocks and half in fixed income that typically goes up when stocks go down
  • Brinker's Model Portfolio 3 is over 2/3rds in stocks!
  • Brinker's Model Portfolio 3 contains "risky" fixed income funds that have a positive correlation to the stock market.  That is the "junk bonds" will typically lose value during a recession when stock prices also fall.

Brinker may show percentages that are 50% in equities and 50% in fixed income and often speaks of how this is to reduce risk during bear markets.  I caution readers that the percentages Brinker recommends are not what he has in these portfolios.  For example, this (repeated below) would lead you to think his "balanced" Model Portfolio III is half in stocks and half in fixed income, but if you look at the dollars he lists each month, he has the portfolio over two thirds in equities, not half!
Here is Bob Brinker's Model Portfolio III, which is a 50% equities/50% fixed income portfolio, "best suited to investors nearing or already enjoying a retirement lifestyle". As of March 4, 2014 Marketimer newsletter:
Akre Focus Fund (AKREX): 5%
Vanguard Dividend Growth (VDIGX): 5%
Vanguard FTSE All-World ex US Index (VFWIX): 5%
Vanguard International Growth (VWIGX): 5%
Vanguard Total Stock Market (VTSMX): 30%
Osterweis Strategic Income Fund (OSTIX): 10%
DoubleLine Low Duration Bond (DLSNX): 20%
Fidelity Floating Rate High Income (FFRHX): 20%
Stock fund vs Bond Funds

Brinker doesn't rebalance his portfolios to 50% stocks.  As a result, when the markets are going up, he can report higher returns than competitors who rebalance.

Here is the composition of Model Portfolio 3 just before the biggest bear market since the great depression:
click images to see full size
Another result that he doesn't talk about is these portfolios give up far more to the downside from their peaks during bear markets.

One of my readers sent me this a few days ago showing the totals for the portfolios and the percentages Brinker shows.  I added a column at the right that calculates the ACTUAL portfolio allocation to each fund. 

That is the portfolios with two thirds in stocks have far more risk than "typical" balanced portfolios like the ones I recommend in my newsletters. See
  •  "Kirk's Two Investment Letters - Which is Best for You?"
    ALL the funds in my core portfolios are at Vanguard but I give ETF substitutions for those who want to use Fidelity, Schwab, etc.... I rebalance about once a year so the costs are tiny and you can avoid those by using the free to trade funds at those fund families, also listed in the newsletter as alternatives.
Another factor is taxes from switching funds, which Brinker does often and I almost never do except for eliminating total bond fund until rates normalize to reduce risk.

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