Surprising Investing Myths

These myths are communicated by the media and the financial institutions to keep money moving. After all the financial institutions cannot make money unless it is moving. These myths will keep you from reaching the true potential for your investment goals. There are three simple rules when investing for your long term goals…own equities….globally diversify…rebalance. These three rules will guide you and you must remain disciplined.

Investment Frontiers Symposia
Investment Frontiers Symposia (Photo credit: apec2011ceosummit)

Stellar Past Performance Is a Good Measure of Investment SkillEvery year, another fund manager is anointed as the “next investment guru” based on his recent past performance. It’s more likely he was just lucky rather than skillful. It can take a very long period of time (often 20 years or more) to determine whether the performance of a fund manager was luck instead of skill. Relatively few fund managers stick around that long.

If Only I Qualified for a Hedge Fund Investment

Be thankful you don’t. If you do, avoid the temptation. In his new book, The Hedge Fund Mirage: The Illusion of Big Money and Why It’s Too Good to Be True, Simon Lack concludes that hedge fund investors as a group would have been better off if they had simply invested in Treasury Bills. Lack bases his conclusion on publicly available data from Hedge Fund Research, Inc. Hedge funds are great investments for those who run successful ones, because of the excessive fees they charge: commonly 2 percent of assets and 20 percent of profits. This fee structure motivates them to take very high risks… with your money!

Investors are continually looking for the right answer to one question. Where is the best place to invest my money? There is no answer with regard to which asset class or fund manager. The real question should be what strategy will help me reach my goal.

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

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Look deeper in choosing target funds

Target date funds should be used with caution. Because of the wide variety of methods the plan sponsor must perform thorough due diligence to protect plan participants and themselves. Many are off target.

Target for Today
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The lack of a consistent approach among managers also makes it difficult for plan sponsors — or advisers working on their behalf — to evaluate target date providers, leaving many wondering how best to select a target date suite that meets the unique needs and characteristics of their participant base.For plans looking for an off-the-shelf target date product suited to their participants, the due-diligence process must go beyond traditional performance-based measures such as relative benchmark performance and peer group rankings to incorporate a thorough analysis of the differences in product design and features.

Target date funds can become a hiding place for new money managers and poorly performing funds. Additionally, each participant has different needs and tolerances regardless of age. Given the importance of the retirement plan, plan sponsors should investigate using professionally managed risk adjusted globally diversified portfolios for their plan.

Please comment or call to discuss your alternatives and what is best for your company.

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The Derivative Scare: Fear Mutual Funds

Mutual Fund Chart Caught In The Bark (Washingt...
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All that needs to be said on this subject is ‘Past performance is no indication of future results’.

This misinformation is compounded by the fact that mutual funds also use derivatives. In fact, a recent study presented the top 3 mutual funds in 401(k) plans, all of which use derivatives as underlying investment options. If derivatives should be avoided in retirement plans, buy an ETF of the benchmark index for each mutual fund listed below:

Top 3 Mutual Funds in 401(k) Plans

Source: BrightScope study of over 50,000 plans released 10/3/10

Fund name


Benchmark ETF

American Funds Growth Fund of America (AGTHX)


(VOO) – No Derivatives

Pimco Total Return (PTTAX)


(AGG) – No Derivatives

American Funds EuroPacific Growth Fund (AEPGX)


(VEA) – No Derivatives

There are many mutual funds touting great performance, but is this performance due to juicing the returns with derivative? The use of derivatives adds to performance significantly when the trader is right, however when they are wrong it can be catastrophic.

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Simple Investing for Troubled Times

In some recent papers, researchers argue that ...
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Actively managed funds are promoted because of the trading revenue they generate for the financial institutions. It does not matter whether the market is up or down the institutions make money on every trade. This strategy is not in your best interest.

Dump your actively managed fundsSeeking “alpha” is exciting. “Alpha” is the value a portfolio manager is supposed to add over its benchmark return. Since you can capture the return of a designated benchmark (net of transaction costs) by buying an index fund that tracks the index, purchasing actively managed funds makes no sense unless the portfolio manager is likely to deliver alpha. Here’s the rub, according to an exhaustive study, only 0.6 percent of managers produce alpha as a consequence of skill.

Don’t be fooled by pre-tax return data

Mutual funds report returns pre-tax. Most investors don’t understand the impact of taxes on their returns. The tax burden of individual investors varies depending on whether their accounts are tax deferred or after-tax accounts and the tax rate of their state of residence. Kritzman uses an example of a Massachusetts resident (admittedly a high tax state) who has a marginal tax rate of 35 percent. If this resident had a choice between an index fund with an expected return of 10 percent, a mutual fund with an expected return of 13.5 percent, and a hedge fund with an expected return of 19 percent, you would think selection of the hedge fund would be a no-brainer. You would be incorrect. At the end of a ten year period, after accounting for transaction costs, taxes, management and performance fees, the simulated return of the index fund was 8.27 percent, which beat the return of the mutual fund (7.82 percent) and the much hyped hedge fund (7.61 percent).

Here’s Kritzman’s conclusion: “It is very hard, if not impossible, to justify active management if your goal is to grow wealth. If, instead, you view active management as a source of entertainment, you may wish to consider less costly ways to amuse yourself.”

Study after study proves that active managers add no value to your portfolio. Investing for retirement is a long term process and a low cost, globally diversified portfolio, risk adjusted for you is the best option.

Please comment or call to discuss how this affects you.

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