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October-25-16

An Investing Group You Don’t Want to Join

I get depressed whenever I read an article about advisors who lose a large amount of money belonging to athletes. This one is typical. An ex-financial adviser apologized for losing $43 million of his clients’ money. All of his clients were NFL players.

He invested their money in “an entertainment and gambling center”, which included electronic slot machines. These machines were illegal at the time.

Athletes are often victims

Athletes are easy prey and often fall victim to bad advice and outright scams. By one estimate, 60 percent of pro basketball players are broke within five years of retirement.

Clearly, you don’t want to be in a club that invests like pro athletes. That’s an easy decision. Here’s a more surprising one.

Rekenthaler’s position on active management

John Rekenthaler is Vice President of Research for Morningstar. Morningstar is a leading source of independent research on stocks and mutual funds. Many institutions and individual investors rely on its research when selecting stocks and mutual funds for their portfolios.

In an article published on October 21, 2016, Mr. Rekenthaler wrote:

“In Tuesday’s article “The Dying Business of Picking Stocks,” The Wall Street Journal all but buried active stock management. According to the Journal, the great mutual fund battle is over. The index funds have won, leaving actively managed funds reeling for the foreseeable future.

That is correct.”

Mr. Rekenthaler offered different strategies for active fund managers to survive. They included discounting fees (which he did not think would be sufficient), give up stock picking and focusing on putting together portfolios that invest in stocks that share common attributes, and creating funds that offer “solutions”, like “target-date funds, managed-payout funds, global-allocation funds, and targeted-income funds.”

Inflows and outflows

The ramifications of these observations are profound. Most individual investors still use brokers who tell them (with no credible evidence to support their views) they can “beat the market” through stock picking, market timing and selecting outperforming active fund managers. Rekenthaler agrees with those of us who have been beating the drums in the opposite direction for many years.

A recent article in Forbes by Kate Statler nicely summarized the evidence of underperformance by active fund managers when measured against their index benchmark.

Investors aren’t dumb. They are voting with their wallets. Active U.S. funds suffered an outflow in 2015, while passive U.S. funds attracted about $400 billion in flows, according to Morningstar’s global asset flows report, published on March 22, 2016.

Institutions take notice

Institutional investors aren’t dumb either. They’re taking a hard look at this evidence and deciding they don’t want to participate any longer in the process of trying to select active fund managers who can consistently beat the market. The Wall Street Journal published an article about the $35 billion Nevada’s Public Employees Retirement Plan.

When Steve Edmundson, the current Chief Investment Officer of the plan was hired as an analyst in 2005, about 60 percent of its stocks were in index funds. When he was promoted to CIO in 2012, he started replacing active funds with passive ones. By 2015, 100 percent of its stock and bond investments were in index funds.

The expenses of the fund were cut from an estimated $120 million to $18 million. The returns of the Plan have been stellar, beating those of the California Public Employees’ Retirement System, which is the largest public pension in the country, and many other plans with high priced consultants and complex investment strategies.

There are many reasons why other public pension plans don’t follow Mr. Edmundson’s lead. None of them relate to investment performance. There is overwhelming evidence that most state pension plans underperform a simple index based portfolio. It seems that politics and lobbying prevents plan sponsors from following this data and changing their investment philosophy.

Ramifications for you

You’re not similarly constrained. Don’t succumb to the massive advertising and the smug predictions of self-styled experts who encourage active trading. If you’re using a broker, it’s likely you’re following an investment strategy that has been largely discredited.

Being with other gullible investors who ignore the evidence is not an investing club you want to join. If you’re already a member, it’s time to depart.

An Investing Group You Don’t Want to Join blog was originally posted on The Huffington Post website.

 

2014-04-01-Hiresfrontbookcover.jpgDan Solin is a New York Times bestselling author of the Smartest series of books, including The Smartest Investment Book You’ll Ever Read, The Smartest Retirement Book You’ll Ever Read, The Smartest 401(k) Book You’ll Ever Read and his latest, The Smartest Sales Book You’ll Ever Read. He is a wealth advisor with Buckingham and Director of Investor Advocacy for The BAM ALLIANCE.

The views of the author are his alone and may not represent the views of his affiliated firms. Any data, information and content on this blog is for information purposes only and should not be construed as an offer of advisory services.

 

 

By: Dan Solin | 0 comments
October-18-16

Meditation Can Help Your Investing

If you’re a regular reader of my blog posts, you know I espouse “evidence-based” investing. This term refers to investing supported by peer-reviewed articles in respected financial journals. Most objective observers agree that investing in a globally diversified portfolio of low management fee index funds, in an asset allocation suitable for you, is “evidence based.” Relying on self-appointed financial pundits to pick outperforming stocks, time the market or select the next “hot” fund manager, is not.

The benefits of meditation

In other aspects of my life, I also pay attention to the evidence. A number of years ago, I reviewed the data supporting the practice of meditation, and found it compelling.

For those not familiar with meditation, a good place to begin is an excellent book by Jon Kabat-Zinn called Full Catastrophe Living. I summarize many of these studies in the bibliography of my book, The Smartest Sales Book You’ll Ever Read. The benefits include:

  • Increases empathy and compassion;
  • Alleviates depression, fatigue, high blood pressure and insomnia;
  • Reduces risk of cardiovascular disease:
  • Enhances ability to process information;
  • Increases creativity;
  • Reduces pain
  • Increases overall happiness.

Here’s another benefit, which I haven’t seen validated in any study. Meditation can make you a better investor. Here’s how:

The process of meditating teaches you how to calm the mind and reduce anxiety. When your mind is calm, you have the ability to reflect and analyze, without being buffeted by factors that would otherwise create panic and fear.

Short-term thinking

Here’s a timely example of how the financial media encourages short-term thinking that is often harmful to investors. The Motley Fool (among many others) published an article entitled: How the 2016 Presidential Election Could Affect Your Investments. It featured the musings of “experts” giving their views about how the outcome of the election might affect investors.

A far more responsible analysis was provided by Dimensional Fund Advisors in an issue brief not available publicly. It urged investors to ignore the “steady stream of opinions from pundits and prognosticators about how the election will impact the stock market.” Instead, it advised investors not to try to “outguess” the market and cautioned that “it is unlikely that investors can gain an edge by attempting to predict what will happen to the stock market after a presidential election.”

Jim Cramer provided another example of short-term, counterproductive advice in an article in which he told investors when to sell a “hot stock.” He omitted to note his dismal stock picking track record. His viewers would have been better off in a fund that simply tracked the S&P 500 index, rather than following his “Action Alerts PLUS” portfolio for the period from 2001-2016.

Long-term data

When your mind is agitated and buffeted by this kind of irresponsible, discredited advice, it’s difficult to focus on long-term data that could enhance your returns. In their new book, Your Complete Guide to Factor-Based Investing, Andrew L. Berkin and Larry E. Swedroe, the authors note that, from 1927-2015, the U.S. “market beta premium” (defined the difference between the annual average return of the total U.S. stock market and annual average return of the one-month U.S. Treasury Bill) has been 8.3 percent.

This means that investors who simply held an index fund that tracked the U.S. stock market during this time, and didn’t bounce in and out of market reacting to the views of pundits like Cramer and others, most likely outperformed those who did.

The bottom line

Here’s the bottom line: Investing intelligently and responsibly requires the ability to ignore the daily noise. Those who meditate are better able to engage in this process than those who don’t.

Meditation Can Help Your Investing blog was originally posted on The Huffington Post website.

 

2014-04-01-Hiresfrontbookcover.jpgDan Solin is a New York Times bestselling author of the Smartest series of books, including The Smartest Investment Book You’ll Ever Read, The Smartest Retirement Book You’ll Ever Read, The Smartest 401(k) Book You’ll Ever Read and his latest, The Smartest Sales Book You’ll Ever Read. He is a wealth advisor with Buckingham and Director of Investor Advocacy for The BAM ALLIANCE.

The views of the author are his alone and may not represent the views of his affiliated firms. Any data, information and content on this blog is for information purposes only and should not be construed as an offer of advisory services.

 

 

By: Dan Solin | 0 comments
October-11-16

Don’t Touch the Third Rail of Your 401(k) Plan

In The Smartest 401(k) Book You’ll Ever Read (which I wrote in 2008), I lamented the sorry state of 401(k) plans.

My recommendations

I noted they were beset with bloated fees. The investment options were often dominated by expensive, actively managed funds, likely to underperform less expensive index funds over the long-term.

I recommended a total overhaul of the system. My suggestions included a requirement that all 401(k) plans offer participants an array of low management fee Target Retirement Funds and a broad range of low-cost index funds, or ETFs, similar to those in the federal employees’ Thrift Savings Plan. I also recommended prohibiting the common practice of “revenue-sharing”, which permits fund families to pay fees to plan sponsors and other vendors to the plan as the price of gaining admission to the investment options offered by the plan.

Limited progress

Since the publication of my book, there has been limited progress in reforming this broken system. Most notably, the Department of Labor — in a move vigorously opposed by the securities industry — enacted a rule requiring advisors to retirement plans to put the interest of plan participants ahead of their own, and to disclose all conflicts of interest.

The plaintiff’s bar, led by Jerome Schlichter, at the St. Louis law firm of Schlichter Bogard & Denton, have brought a series of lawsuits against sponsors of retirement plans, alleging these sponsors breached their fiduciary duty to participants by failing to monitor fees and expenses. These cases resulted in settlements totaling $926,500,000 in 2015.

The increase in litigation against plan sponsors has caused them to review fees, costs and investment options. While there’s still a long way to go, hard working employees will be the beneficiaries of this welcome trend.

Traps for the unwary

While these are positive developments, there remain traps for the unwary. Most plans are still dominated by a confusing array of actively managed funds as investment options. In my 401(k) book, I included a “cheat sheet” to help participants find lower cost alternatives, if available.

My analog efforts have been replaced by a digital one. A relatively new start-up, FeeX, has automated the process of finding out how much you are paying in fees in your plan and other deferred accounts, and suggests lower cost mutual fund alternatives to those you are holding. I previously wrote about FeeX in this blog..

In stark contrast to FeeX, there’s a continuous stream of information in the financial media that is potentially harmful to your retirement returns. One of many examples is this recent article posted on the website of CNBC. The author believes, “A self-directed brokerage account is the most underrated investment option in a 401(k) plan.” He correctly notes this option offers participants a “brokerage window” where they can trade investments (stocks, bonds, mutual funds, etc.) that aren’t in their plan’s official investment lineup.”

I can’t think of a worse idea.

First, participants wouldn’t need access to other investments if the ones in their plans were suitable in the first place.

Second, giving participants the unrestricted ability to trade on their own is a recipe for disaster. Most people are terrible at investing, often buying high and selling low. This depressing chart demonstrates why employees should not be trading on their own if they want to retire at all — much less with dignity.

In my view, self-directed accounts are like giving drugs to an addict. They don’t belong in any retirement plan. If they are in yours, don’t go near them.

They are the third rail in your plan.

Don’t Touch the Third Rail of Your 401(k) Plan blog was originally posted on The Huffington Post website.

 

2014-04-01-Hiresfrontbookcover.jpgDan Solin is a New York Times bestselling author of the Smartest series of books, including The Smartest Investment Book You’ll Ever Read, The Smartest Retirement Book You’ll Ever Read, The Smartest 401(k) Book You’ll Ever Read and his latest, The Smartest Sales Book You’ll Ever Read. He is a wealth advisor with Buckingham and Director of Investor Advocacy for The BAM ALLIANCE.

The views of the author are his alone and may not represent the views of his affiliated firms. Any data, information and content on this blog is for information purposes only and should not be construed as an offer of advisory services.

 

 

By: Dan Solin | 0 comments
October-04-16

A One Fund Investing Strategy

Complexity is the enemy of investors and the ally of brokers. If they can convince you investing is too confusing to deal with yourself, it’s easier to drive you into their waiting arms. Once they have your money, they will likely inundate you with analyst’s reports, “target prices”, stock picking and market timing advice and their purported ability to select the next hot mutual fund manager.

If you are particularly unfortunate, they will persuade you purchase complex, high commission investments, like variable or equity-index annuities, structured notes or non-traded REITS. These investments share the common trait of generating huge commissions for brokers and likely losses or sub-par returns for you.

Legendary mutual fund manager Peter Lynch had this to say about complexity: There seems to be an unwritten rule on Wall Street: If you don’t understand it, then put your life savings into it.”

He’s right. Wall Street touts complex investments because they generate the highest fees. Typically, these investments suffer from “chronic underperformance.”

Fortunately, you have alternatives that could not be more different from complex strategies. Here are some suggestions for investing your retirement and non-retirement money in just one fund. These recommendations are for long term, buy and hold investors only.

Vanguard Balanced Index Fund Admiral Shares (VBIAX)

An allocation of 60 percent stocks and 40 percent bonds is right for many — but not all — investors. If it’s suitable for you, consider the Vanguard Balanced Index Fund Admiral Shares (VBIAX).

The fund has an extremely low management fee of only 0.08 percent. It tracks the two indexes that represent broad barometers for the U.S. stock and U.S. taxable bond markets. It’s broadly diversified, holding 3,140 stocks and 6,733 bonds. Since its inception on November 13, 2000, it has had an average annualized return of 5.75 percent.

It’s a “set it and forget it” investment. It will rebalance automatically to maintain its allocation of 60 percent stocks and 40 percent bonds.

One disadvantage of this fund is that it provides no exposure to international stocks. John Bogle, the founder of Vanguard, does not endorse investing in international stocks. Other experts vigorously disagree.

Vanguard’s LifeStrategy Funds

If you want exposure to international stocks, and are looking at core funds with different allocation options, consider Vanguard’s LifeStrategy Funds.

There are four LifeStrategy funds. The asset allocations available are: 20 percent stocks/80 percent bonds, 40 percent stocks, 60 percent bonds, 60 percent stocks, 40 percent bonds and 80 percent stocks/20 percent bonds. It’s likely one of those allocations will be suitable for you.

The average expense ratio of these funds is just 0.16 percent. The stock portion of these funds has exposure to international stocks. You can get details about holdings and performance here.

A word of caution

Successful investing on your own involves more than picking the right investments. You will need the discipline to stay the course when markets decline, as they inevitably will. You will also have to ignore most of the financial media which features a steady stream of misinformation, designed to create fear and anxiety and to enrich their advertisers — the securities industry.

If you have what it takes, a one fund portfolio could be just the ticket for you.

A One Fund Investing Strategy blog was originally posted on The Huffington Post website.

 

2014-04-01-Hiresfrontbookcover.jpgDan Solin is a New York Times bestselling author of the Smartest series of books, including The Smartest Investment Book You’ll Ever Read, The Smartest Retirement Book You’ll Ever Read, The Smartest 401(k) Book You’ll Ever Read and his latest, The Smartest Sales Book You’ll Ever Read. He is a wealth advisor with Buckingham and Director of Investor Advocacy for The BAM ALLIANCE.

The views of the author are his alone and may not represent the views of his affiliated firms. Any data, information and content on this blog is for information purposes only and should not be construed as an offer of advisory services.

 

 

By: Dan Solin | 0 comments