Enhanced Just-the-Basics

Important Announcement Regarding
Changes to the VQR Strategy

Over the past several quarters, we've grown concerned about the impact of Vanguard's increasingly restrictive fund policies (see weblog comments  from June 30). Seven of the twenty-six stock funds tracked in VQR have either been closed or had their minimum investment amounts increased to levels which are no longer affordable for many readers. Unfortunately, many of these now-restricted funds are those largely responsible for VQR's excellent historical performance.

Because of this concern, we went back and looked at how VQR would have performed had these restricted funds been unavailable since 1996, when our original testing period began. For comparison purposes, bear in mind that the "original" VQR (with all of the now-restricted funds included as options) averaged an annual gain of 13.5% from January 1996 — June 2004. But with those funds removed, that average return falls to just 10.3%.

That's marginally ahead of the 9.0% average return of the market as a whole, but after considering the negative effects of the occasional redemption fee and so forth, it's not a compelling margin. As a result, we went back to the drawing board to see what we could do to improve the situation. Here's a step-by-step walk through of where we suggest you go from here.

1. CONSIDER SWITCHING TO OUR UPGRADING STRATEGY

Before launching into a discussion of the change we're recommending, let us first of all say that this is a prime opportunity to reassess if a Enhanced Just-the-Basics strategy is still the best choice for you. We think it's quite likely that SMI's Fund Upgrading strategy  will continue to provide better long-term returns than a Enhanced Just-the-Basics strategy. If you're willing to monitor the recommended funds listed in SMI each month, we encourage you to transition to Upgrading. (See Upgrading: Easy as 1-2-3  for details on how to make this transition.)

2. IF YOU DECIDE THAT A QR STRATEGY IS STILL FOR YOU, MOVE YOUR ACCOUNT TO FIDELITY

If you wish to continue with a Enhanced Just-the-Basics strategy, we have completed additional research indicating that Enhanced Just-the-Basics would also have been quite successful if undertaken with the Fidelity family of mutual funds. The average annual return of 14.0% a "Enhanced Just-the-Basics" (EJtB) strategy would have earned since 1996 significantly outdistances the 9.0% turned in by the overall market. Since the whole idea of Enhanced Just-the-Basics is to provide a low-effort enhancement to our index-following Just-the-Basics strategy, this is the key criterion signaling that a Enhanced Just-the-Basics (EJtB) strategy is worth transitioning to. In fact, in only one year since 1996 did the standard JtB portfolio outperform the results of the back-tested EJtB portfolio. Thus, for those continuing with a Enhanced Just-the-Basics strategy, the first step is to transfer your account(s) to Fidelity.

3. BEGIN MAKING THE TRANSITION AS SOON AS POSSIBLE

We suggest contacting Fidelity right away (800-343-3548) to get the necessary forms (which are also available via the Fidelity website). Once your forms are completed, Fidelity will take care of the rest.

Our goal is to have this transition complete so the new EJtB strategy can begin on November 1. When you transfer your account(s) to Fidelity, the easiest thing to do is initially leave the account invested in cash. On or before November 1, we will post on this page the initial EJtB recommendations to be held for Nov-Dec. At that point, you can buy the appropriate funds in your new Fidelity account(s). After this "transition quarter," we'll get back on the regular calendar quarter schedule with new recommendations the first week of January 2005.

4. CONCLUSION

We recognize that it's an inconvenience to move your account. However, after reviewing the alternatives, we feel it is in the best interests of our readers to make the change. It's unfortunate that Vanguard has made so many restrictive changes to these funds, but given that they have, it's encouraging to have another seemingly attractive alternative available.

Again, we urge you to consider whether an Upgrading portfolio might be a better choice. But if you choose to continue with a Enhanced Just-the-Basics strategy, moving your account to Fidelity and following the new EJtB strategy is our recommendation.

If you have questions or comments regarding this transition, a new "Enhanced Just-the-Basics Transition" message board has been created. Also, keep an eye on this main Enhanced Just-the-Basics page for any updates or notices.