Should You Get Out of (Or Into) the Equity Markets?

During conversations with investors I continue to hear apprehension when the subject of stocks is discussed. This apprehension or fear is completely understandable. We hear nothing but bad news from the media, the continuing battle in Washington, the liberal tone of the current administration like it or not, our own budget deficit and ballooning debt, the list goes on and on.

Through all this bad news the equity markets posted solid returns in 2012 and 2013. Will there be down markets in the future? Absolutely, there is no doubt. However, no one can tell you when and which countries and/or sectors will be involved.

The equity markets around the world are random and unpredictable.

This is undeniable. However, the equity markets remain the greatest wealth creator in the world, if properly used. This does NOT mean picking the right stocks or market timing, getting in and out of the market at the right time. Neither of these activities promoted by the Wall Street bullies are in your best interest. These activities benefit the Wall Street bullies and will not improve your returns.

The market returns are there for the taking, they are waiting for you to take advantage.

Listening and taking the advice of the Wall Street bullies is not in your best interest.  These bullies include shows like Hannity or Limbaugh or OReilly who tell you how horrible everything is and try to instill fear.

Your time can be much better spent than worrying about the direction of the equity markets. If you have developed a prudent portfolio and remain disciplined you will succeed long term. This will require the help of an investor coach who will keep you from letting your emotions take control.

Remember the Equity Markets are forward looking:

  • Expectations about the future are in today’s price.
  • Market returns are not strongly correlated with macroeconomic variables such as GDP
  • Markets can provide positive returns even during periods of poor economic performance.
  • Timing markets is difficult.

A study was done looking a past recessions and stock returns. The conclusion there is no correlation between recessions and stock returns.

To succeed in reaching your long term financial goals you need to own equities, as scary as this may seem, globally diversify, no one can tell you which countries and/or sectors will outperform and rebalance, buy low sell high.

If you follow these simple rules you will stop gambling and speculating with your investments and improve your results with less anxiety about the future. If you are younger growth must be your goal, a retiree your goal is to keep pace with inflation. Owning equities in your portfolio is a great solution to accomplish both.

Secrets to a Successful 401(k) Plan

The Wall Street bullies will promote actively traded funds whenever possible. Not because it will help you earn a better return but because they will earn trading fees. Since the 401(k) plan has become the sole source of retirement for most Americans it should be offered more like a pension fund. Each employees will be automatically enrolled in an age appropriate portfolio. From there the employee can change their risk level. Studies have proven that less choice will result in better performance.

Fiduciary Trust Building
Fiduciary Trust Building (Photo credit: ToastyKen)

The fiduciary duty of prudence requires plans and plan fiduciaries to always out the interests of the plan participants and their beneficiaries first. The duty of prudence consists of various responsibilities, including the duty to avoid unnecessary expenses and the duty to provide participants with a selection of investment options that allows them to minimize the risk of significant losses and “sufficient information to allow plan participants to make an informed decision.”I recently released a white paper on the Active Management Value Ratio,  proprietary metric that allows investors and fiduciaries to analyze the cost efficiency of actively managed funds.  The white paper clearly shows that a number of the leading mutual funds used by pension plans are not cost efficient, in some cases even reducing a plan participant’s return. It could be argued that such inefficiency could constitute a breach of fiduciary duty, clearly not a sign of a successful plan.

Plans and their fiduciaries are required to provide plan participants with a sufficient selection of investment options to reduce the risk of large losses and sufficient information to evaluate such investment options and make informed investment decisions. In short, in most cases this simply is not happening.

In  most cases plans are primarily an assortment of expensive, highly correlated equity-based mutual funds that unnecessarily expose plans and plan fiduciaries to unlimited personal liability. Furthermore, in many cases plans fail to provide plan participants with all of the information they need to make informed decisions, resulting in liability exposure for both the plan and its fiduciaries.

Many plans and plan fiduciaries mistakenly believe that they do not face any personal liability by virtue of their mistaken belief that they have complied with ERISA Section 404(c). However, Fred Reish, one of the nation’s leading ERISA attorneys, has testified that over his twenty plus years of ERISA practice, he has never seen a plan properly comply with all of Section 404(c)’s requirements. Consequently, there are a lot of plans and plan fiduciaries that do not realize the risk exposure that they actually have.

The Wall Street bullies have convinced everyone that they know what’s best for your 401(k) plan and your employees. These bullies do not have your best interest in mind.

Please comment or call to discuss how this affects you and your company.

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Learn from the Pathetic Excuses of Active Managers

NO ONE can predict the future. Stock pickers and market timers fail more often than they succeed. In the long run you lose with active managers.

Active vs Passive
Active vs Passive (Photo credit: Wikipedia)

It’s hard to quarrel with the premise.  Jeff Cox, a Senior Writer at CNBC, notes that only 1 in 5 active managers are beating their benchmark year-to-date in 2012, even though this year was “…marked by the same type of headline volatility caused by events in Europe and fiscal concerns closer to home.” 

How could this be?  I thought market volatility was a benefit to active managers.  It was supposed to give them the opportunity to demonstrate their investing expertise.  One of the biggest active managers, Principal Global Investors, prepared a research report [hyperlink to:] extolling the virtues of active management.  Here’s one of its key findings:  “Market volatility will offer significant opportunities for active managers to deliver favorable returns.”


Edward Jones agrees.  In its view [hyperlink to:…]: “It appears that controlling volatility and helping to limit losses when times get rough are often the biggest potential benefits active managers may provide.”


So how do active managers explain their dismal performance in a volatile market?  Largely through double-talk.  Gary Flam, an active portfolio manager, notes that it has been “…a tough couple of years for active”.  He explains that investors have to have “a forward-looking view.”


Were Mr. Flam and his active colleagues looking backwards for the past couple of years?  According to Mr. Flam, investors should seek advisors “who can see through the fog of politically driven markets with tight correlations…”  I guess the “fog” obscured the vision of 80 percent of active managers.


Even more nonsensical advice was offered by Jeff Coons, president and co-director of research at another active management firm.  Apparently with a straight face, he advises investors not to judge the industry as a whole but instead “focus on individual managers with sound strategies to navigate bubble and post-bubble markets.”


Do you think it makes sense to ignore the data indicating that 80 percent of active managers failed to beat their benchmarks?  Since you will be looking for a needle in a haystack, how exactly will you determine which individual fund manager is likely to outperform his benchmark prospectively?  Focusing on individual managers with “sound strategies” means you will be basing your decision on past performance.  That might be a good idea if past performance was a reliable indicator of future performance, but it isn’t.  There are numerous studies [hyperlink to:]   showing that manager performance does not persist. To my knowledge, no one has published a peer-reviewed paper showing a methodology for selecting outperforming active fund managers prospectively, with greater accuracy than you would expect from random chance.


Unfortunately, the predicted demise of stock picking (and with it, active management) is premature.  The securities industry has too much too lose.  The partnership between the securities industry and the financial media is too lucrative to change.  While progress is being made, we still have a long way to go until solid data triumphs over hype and pathetic excuses.

Active managers want you to believe that they can predict the future. Past performance proves they cannot. To succeed in investing you should own equities, globally diversify and rebalance. This requires the help of an investor coach to remain disciplined.

Please comment or call to discuss how this affects you and your financial future.

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Indexes Beat Active Funds Again in S&P Study

The Wall Street bullies continue to make money with actively managed mutual funds. This cost will have a negative result in your savings. Please do not empower Wall Street, do  employ a prudent strategy. There are really only three simple rules of investing own equities, globally diversify and rebalance. If you remain disciplined to this strategy you will succeed. Panel Panel (Photo credit: rexhammock)

The study looks at one-year, three-year and five-year time periods. One-year figures can fluctuate significantly and can favor either active funds or benchmarks. However, over longer-term periods the trend of a large percentage of managers failing to outperform their benchmarks remains consistent.Within the U.S. equity space, over the last five years active equity managers in all the categories failed to outperform the corresponding benchmarks with the exception of large-cap value. More than 65 percent of the large-cap active managers lagged behind the S&P 500®, more than 81 percent of mid-cap funds were outperformed by the S&P MidCap 400® and over 77 percent of the small-cap funds were outperformed by the S&P SmallCap 600®, according to the study.

The wall Street bullies want you to believe they can increase your return and reduce or eliminate risk. This is totally untrue.

Please comment or call to discuss how this affects you and your financial future.

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Big and Bigger Lies About Bond Fund Managers

Many investors, left on their own, will avoid pain at all costs. This actually ends up meaning they will sell low and buy high. Just the opposite of what they should be doing. Most of us cannot manage our own portfolio because of our emotions. We must have a prudent process in place and remain disciplined.

Different risk and return of investment for th...
Different risk and return of investment for the different investors (Photo credit: Wikipedia)

In times of economic uncertainty, investors tend to flee to the perceived safety of bonds. Let’s ignore the fact that bouncing from stocks to bonds is a form of market timing. As an investment strategy, market timing has a dismal record.Unfortunately, many investors want the returns of stocks, with the reduced risk of bonds. Those that are looking just for a safe haven invest in “risk free” bonds, like Treasury Bills.Most often, investors looking for higher returns from their bond holdings invest in actively managed bond funds (where the fund manager attempts to beat a designated benchmark, like the Barclays Capital Aggregate Bond Index). They could invest in lower management fee bond index funds of comparable risk, but they believe an active bond manager has the investment skill likely to increase returns over the benchmark index, while taking no more risk. They are paying more for the services of the active fund manager and expect to be rewarded.

The big lie is that actively managed bond funds are likely to outperform index funds of comparable risk. The bigger lie is that actively managed bond fund managers have demonstrable investment skill, permitting them to beat their benchmark index, net of fees.

Market timing does not work. Those that profess an ability to predict where the market is going are nothing more than confidence men. Investors will be best served by developing a prudent strategy with equities included and remain disciplined.

Please comment or call to discuss how this affects you and your financial future.

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401(k) Participants Pay Dearly for the Crime of Underperformance

Day 236: K'nex
Day 236: K'nex (Photo credit: -Snugg-)

Most 401(k) plan providers use performance as a selling point. These sales people will list of top performing, actively managed funds and sell, sell, sell. What they will not do is sign on as an ERISA 3(38) investment manager and take responsibility for their choices. They will simply replace the poor performers with the new top performers. And the cycle continues on and on. Stop this damaging cycle. Stop empowering the Wall Street bullies.

It is my view that a 401(k) plan that has anyactively managed funds as investment options reflects negligence by both those advising the plan and the plan sponsors who blindly accept this flawed advice. Ellis notes the daunting odds of beating the benchmark. Over a ten year period, only 30 percent of actively managed funds outperform. That percentage falls to 20 percent over a 20 year period.Even those numbers are deceptive. In their seminal analysis of luck versus skill in mutual fund returns, Eugene F. Fama and Kenneth R. French evaluated 819 actively managed funds over 22 years and found that 97 percent could not be expected to beat a risk-appropriate benchmark.

It’s bad enough that only 3 percent of active fund managers demonstrate evidence of investment skill. It’s worse that no one has figured out a way to identify these outperforming fund managers prospectively. And here’s the nail in the active fund managers’ coffin: Even if you could miraculously look into a crystal ball and determine the next outperforming fund manager with investment skill, there’s no payoff. According to Fama and French: “… going forward we expect that a portfolio of low cost index funds will perform about as well as a portfolio of the top three percentiles of past active winners, and better than the rest of the active fund universe.”

Ellis views the charade of relying on advisors to pick outperforming actively managed funds as part of what he calls “the crime of underperformance”. He allocates blame to investment committees, investment managers, investment consultants and fund executives, noting: “No one suspect is guilty; they are all guilty.”

This is also true of investors outside their 401(k) plan. No one can consistently predict the future, so finding top performers is a matter of luck and not skill.

Please comment or call to discuss how this affects you and your portfolio.

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It’s Time to Abolish 401(k) Plans

There is a solution to offering a 401(k) plan designed by the Wall Street bullies. The Wall Street bullies only concern is how to increase the revenues received from the mutual funds in your 401(k) plan. They pride actively managed mutual funds knowing that the top performers will not repeat. They tyhen replace the poor performers in your plan with the new top performers. And the cycle repeats over and over again. Now is the time to stop this cycle of destruction for your plan participants and yourself.
The Wall Street bullies want you to continue to trade because they make money on every trade whether you do or not.

English: Wall Street sign on Wall Street
English: Wall Street sign on Wall Street (Photo credit: Wikipedia)

I know it sounds radical, but I believe it’s time to abolish 401(k) plans. Why? Because they are not working for those they are intended to benefit: employees saving for retirement.

They are working great for brokers, advisors, recordkeepers and others who “serve” these plans. By some estimates, over their lifetime, the average household will pay a shocking $155,000 in fees to have their money “managed” in these plans.

According to the Employee Benefit Research Institute, at the end of 2011, approximately $4.5 trillion was invested in 401(k) plans. That’s enough money to bring out the best sharks Wall Street can muster.

What are employees receiving for these huge fees? Lousy investment choices. Little or no investment advice and terrible returns.

Plan sponsors need to realize that the 401(k) plan they offer is their employees only vehicle for retirement savings. By trusting your broker or agent without an independent analysis is both dangerous and foolish.

Please comment or call to discuss how this affects you and your company sponsored retirement plan.

Posted via email from Curated 401k Plan Content

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Comparisons to Other Mutual Funds Can Be Misleading

Marketing gimmicks in the financial services industry are rampant. Many investors are realizing that they cannot trust wall street as evidenced by the outflow of fund from actively managed funds and inflow to passively managed funds.The main street solution is to own equities, gloablly diversify and rebalance.

Mutual Fund Playas
Mutual Fund Playas (Photo credit: greggoconnell)

Since 100 percent of its retirement funds beat their 5-year Lipper average, investors could believe that T. Rowe Price has found a way to consistently “beat the market”. Is this accurate?Not if you understand how the use of benchmarks can be misleading.

Lipper mutual fund averages are benchmarks that measure the performance of funds in a given category against other funds in that category. The fact that all of the retirement funds managed by T. Rowe Price beat their Lipper averages means they were better than the average performance of the other funds measured by Lipper. While interesting, it tells you nothing about how those funds performed against their benchmark indexes.

Morningstar assigns a benchmark index to each mutual fund it rates. This is the index against which the performance of a given fund can be measured. These indexes are assigned by the Morningstar fund analyst team, based on its Morningstar category. It is the index the Morningstar analyst team believes is the most appropriate benchmark for the Morningstar category.

The performance of a fund against its appropriate index is a more accurate way to evaluate the performance of a mutual fund. Think of it this way. If the average 8th grader can run a 100 yard dash in 20 seconds and your child took 40 seconds, you might be concerned. However, if the only information you had was that your child was better than the average in his class (and the average in his class was 45 seconds), you might believe he was in great shape.

Using data from Morningstar (for example see here), Index Funds Advisors calculated the returns for the five-year period ending December 31, 2011 of the T. Rowe Price Retirement funds against their analyst assigned benchmark. This was the same period used by T. Rowe Price to measure performance against the Lipper average. We measured the performance of all 33 T. Rowe Price Retirement Funds. The results were surprising. None of them equaled (much less beat) their Morningstar analyst assigned benchmark. Underperformance ranged from 0.84 percent to 1.73 percent (annualized). Only twelve of these funds are available for direct purchase by individual investors.

The marketing machine of the major mutual fund families are continuously looking for ways to peddle their funds. Most of these methods are misleading to investors. Armies of lawyers for these funds make sure the wording of the marketing pieces will get their firm into court.

Please comment or call to discuss.

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The Greater Fool Theory and Investing

Stock pickers success has nothing to do with skill and all to do with luck. To succeed in reaching your long term financial goals own the market, globally diversify and rebalance. The final piece is to remain disciplined to your strategy. The formal phrase is the investment policy statement. You will not know if you succeed unless you have a goal and a strategy. Remember predicting the future is for fools.

Image via Wikipedia

You are Picking StocksPicking stocks refers to both the practice of buying individual stocks because you believe they are mispriced, or purchasing actively managed stock mutual funds, where the fund manager attempts to beat a designated benchmark. If you are engaging in either of these activities, you are a participant in the GFT.

Individual and institutional stock pickers assume they can find mispriced (typically underpriced) stocks, hold them and sell them at a profit. If anyone could do this, you would think it would be Bruce Berkowitz, the much lauded manager of the Fairholme Fund. With much fanfare, on Jan. 12, 2010, Morningstar issued a press release naming him the “Domestic-Stock Fund Manager of the Decade.” It noted this was a new award recognizing fund managers who have achieved superior risk-adjusted results over the past 10 years and have an established record of serving shareholders well.”

How did the “Domestic Fund Manager of the Decade” perform in 2011? According to data provided by Morningstar Direct, his fund suffered a staggering loss of 32.4 percent!

Greater fools thought that Berkowitz had the Midas touch that would continue indefinitely. They assumed there would always be buyers at a higher price for stocks picked by him. They were wrong.

If you purchase any actively managed mutual fund, you are engaging in the GFT. One study (reported here) showed the Vanguard Index fund beat 75 percent of designated mutual funds before taxes for the period 1982-1991. The same study found that its after tax return beat 65 out of 71 mutual funds. When you buy these actively managed funds, you are the greater fool.

Stock picking and over weight in gold are two big mistakes investors make. Many are driven by fear and media hype. The best strategy is a risk adjusted globally diversified portfolio. This takes out the guess work as well as the anxiety.

Please comment or call to discuss how this affects you.

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Morningstar’s Fund Manager of the Year: A Slippery Slope

A percent sign.
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There are really only three simple rules to sinvesting successfully..own equities….globally diversify….rebalance. Looking at past performance to determine the best performers and looking for them to repeat is a futile exercise.

Past Performance is no… (You know the rest)Will Danoff, who managed the Fidelity Contrafund, was Domestic Equity Manager of the Year in 2007. In that year, he beat his benchmark by almost eight percent. In 2009, he underperformed his benchmark by almost the same percentage.

Mason Hawkins, who managed Longleaf Partners, won the award in 2006, when he beat his benchmark by 6.17 percent. He underperformed his benchmark by 6.22 percent in 2007 and by 13 percent in 2008.

Every one of the fund managers of the year had subsequent years of some underperformance. Perhaps the worst example is Jim Callinan, the manager of the RS Small Cap Growth fund, who was the 1999 Domestic Equity Manager of the Year. No wonder. His fund beat its benchmark by an unbelievable 140 percent! Then Jim fell off the wagon. In six of the seven ensuing years, he underperformed his benchmark. In the only year he beat it (2004), it was by a measly 0.85 percent.

The Lack of Evidence of Skill

Of the sixteen funds studied, only one fund manager evidenced skill based on a statistical test (the t-test) which determines if the fund’s outperformance was really attributable to skill (with a 95 percent or higher probability) or if it could be explained by luck. Even if you can find a fund manager who passes the test for a finite period of time, it is not a slam dunk that his skill will persist in the future.

Helpful Data from Morningstar

While Morningstar’s “Fund Manager of the Year” awards are likely to mislead investors, other data it provides is worthy of serious consideration. It reported 2011 inflows of passively managed long-term funds of $76.4 billion in 2011. In sharp contrast, actively managed funds had net outflows of $9.4 billion. Clearly, investors are getting the message. Still, the overall market share of actively managed funds, as reported by Morningstar, is 85.2 percent compared to 14.8 percent.

Plan participants need to understand the value of the fund managers in your plan. In a vast majority of cases these actively managed funds add no value. There is evidence that asset allocation is the main determinant of portfolio success.

Please comment or call to discuss how this affects you and your organization.

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