You Only Get to See the “Winners”.

Many of us hear our friends bragging about winning at the casino. But we never hear about the visits to the casino that result in losses. After you hear them brag about their winnings do you ask them to gamble for you, thinking they will repeat? Of course not, because you know it was only a matter of luck and in the long run the only ones to win are the casinos.  Investing for your financial future must/should not use the strategy of looking for the hot fund managers expecting them to repeat.

English: The Mutual Fund Store office, 37308 S...
English: The Mutual Fund Store office, 37308 Six Mile Road, Livonia, Michigan (Photo credit: Wikipedia)

Most mutual fund companies know many, if not most of their managers will produce below market returns and only a handful will beat the market through random luck.  So what do they do with the funds that fail?  They make them disappear by closing them or merging them with more successful funds.  The lucky funds that survive are paraded out in marketing campaigns to lure more investors into the trap.  Academics call this Survivor Bias.

The media makes us believe that there are some fund managers who can beat the market consistently. Unfortunately this is not the case for most.

There is also the case of advisers building portfolios concentrated in the ‘hot’ asset class.

Right now the U.S. Large cap equity market is outperforming the international and small market by a significant amount. Will this continue? Eventually this will not be the case. However I have no idea when this change will occur. No one does.

When these ‘hot’ asset classes eventually turn down Investors are bewildered. Because they believed they had found the great adviser that would always earn superior returns..

What ensues is what I call musical brokers. Investors drop the poor performer and seek out the ‘hot’ adviser. This is not investing but rather gambling and speculating.

Remember a globally diversified portfolio will at times under perform a concentrated portfolio. But over time the globally diversified portfolio will prevail and earn great returns.

Unless of course you or someone you know is able to predict the future.

Given that this is impossible to consistently do.

If you are investing for retirement, both leading to and in retirement. You need to know your expected risk (volatility) and expected return. With this information you can plan an income stream that meets your current needs. As well as grow to accommodate for the effects of inflation.

Far too many investors are looking to maximize return to spend more. This will lead to very disappointing results.

Stop worrying whether you are invested in the right things.

Rather your strategy should be backed by academic research.

By including components in your strategy which have earned the Nobel Prize in economics in your long term goals will be met.

To succeed long term in investing you must own equities….globally diversify….rebalance.

Real Control is More Important Than Perceived Control.

Brokerage firms create the illusion of “control” by encouraging investors to generate activity – frequent buying and selling. Remember the TV commercials with the talking baby who trades stocks?

This brokerage firm is giving the illusion that even a baby can follow simple rules to successful stock picking. The illusion is that you can pick your own stocks better than professional money managers.

It turns out neither can predictably or consistently pick the “right” stocks. Remember there are three signs that you are gambling and speculating with your investment dollars:

  • Stock picking.
  • Market timing.
  • Track record investing.

In a similar fashion, gamblers feel more in control of the outcome when they actively pull the arm of a slot machine. Activity is not control. Buying and selling often feels “good” and proactive.

In reality, most activity with regard to investing is counterproductive.

Many get frustrated with their adviser because they are not always making them money. Many of us expect our adviser to be moving our money from poorer performing stocks or funds to the best stocks or funds.

In talking with other advisers I have learned that some will review actively managed mutual funds. The criterion is to watch performance on a quarterly basis. If the fund manager under performs for 2 or 3 quarters they will replace the manager with the ‘current’ hot manager.

Essentially what they are doing is buying high and selling low. I wonder how their clients like this strategy.

Even worse these advisers will look at under performing asset classes and sell them and buy the ‘hot’ asset class. Another example of buying high and selling low. No wonder the financial services industry has a bad reputation.

An investor coach will build a globally diversified portfolio. Once built they will follow this prudent strategy. Most importantly will keep their clients and themselves from making an emotional change to their portfolio when the economy or whatever is going against them.  A prudent process and discipline to that process will guide you to a successful outcome in the long term.

Remember you will be retired for a long time. You need an investor coach/fiduciary adviser to keep you focused and centered.

To succeed in reaching our long term financial goals we must

  • Own equities and high quality short term fixed income.
  • Globally diversify.
  • Rebalance.

Remember sometimes rebalancing means buying poor performing asset classes and selling better performing asset classes.

In 2014 the S&P 500 was the best performing asset class by far. To succeed in investing you must be capable of selling the S&P 500 and buying the poorer performing asset classes. This of course is just an example. You must remain globally diversified.

Making changes to your portfolio based on short term volatility will result in disappointing long term performance. The difference may be a successful vs an unsuccessful retirement.

Why bad funds stay in your 401(k)

When you are dealing with actively managed mutual funds you will always have some bad funds in your portfolio. The thought that someone can predict which fund managers will beat the market seems attractive. The problem is the Wall Street bullies have convinced you that it can be done when in fact it cannot. The markets are random and unpredictable. You should invest accordingly, with the help of an investor coach.

Reach Skilled Volunteering
Reach Skilled Volunteering (Photo credit: Wikipedia)

Among funds whose trailing 3-year performance was in the lowest-ranking decile, “non-trustee” funds were almost three times as likely to be removed the following year (29.6%) as trustee funds (11.9%). Did the keeper funds reward their administrators’ faith by rebounding? Not in the short run: The researchers found that, on average, those trustee funds went on to underperform their benchmarks by 3.6% in the year after they survived the cut.What keeps slacker funds from getting expunged? As MarketWatch’s Ian Salisbury has reported, many trustee firms offer employers pre-packaged rosters of funds, an arrangement that can keep individual funds from getting closer scrutiny; the trustees also often cut employers a break on administrative costs if the employers let the trustees have more leeway in picking funds.

But there’s another factor in play: The bad funds don’t seem to bother employee-investors that much. Plan members, of course, could vote with their feet and leave these funds behind (ideally, in favor of index funds where underperformance would be less of an issue). But according to the NBER study, while 401(k) investors tend to chase good performance and pour money into hot funds, they’re less likely to pull their assets out of a poor performer—unless, of course, the trustees take it out of the plan. Evidently, inertia trumps disappointment.

Most employers do not realize that they are accountable for the funds in their 401(k) plan. These same employers, mistakenly believe the person selling them the plan are accountable for the funds in the plan. To find an adviser willing to accept responsibility for fund choices, you must have them agree, in writing to serve as the ERISA 3(38) investment manager.

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

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Hedge funds: Going nowhere fast

If investors are seeking higher returns with lower volatility they are wasting their time. The Wall Street bullies understand that investors are driven by fear and greed. They use this to convince investors to move their money. Your best strategy is to own equities, globally diversify and rebalance. This along with discipline will reduce your anxiety and improve results.

Hedge Fund Managers - Lynching Party Needed
Hedge Fund Managers – Lynching Party Needed (Photo credit: smallislander)

The S&P 500 has now outperformed its hedge-fund rival for ten straight years, with the exception of 2008 when both fell sharply. A simple-minded investment portfolio—60% of it in shares and the rest in sovereign bonds—has delivered returns of more than 90% over the past decade, compared with a meagre 17% after fees for hedge funds (see chart). As a group, the supposed sorcerers of the financial world have returned less than inflation. Gallingly, the profits passed on to their investors are almost certainly lower than the fees creamed off by the managers themselves.There are, of course, market-beating superstars, as you would expect in an industry with nearly 8,000 participants (and rising). The top decile of managers has served up returns of over 30% in the past year, according to Hedge Fund Research, a data provider. But a third have lost money, including some of the stars of yesteryear: John Paulson, celebrated as an investment wizard in 2007 for having foreseen America’s housing bubble, reportedly saw his flagship fund lose 17% in the first ten months of 2012, after a 51% fall in 2011.

The Wall Street bullies are continually looking for ways to attract new money. The record of hedge fund managers is similar to that of actively managed mutual funds. There are some lucky managers who outperform, Unfortunately past performance does not correlate with future results.

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

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A Warning About That Guy Who Is Beating the Market

We all want to beat our competitors. This includes beating the stock market and then bragging to our friends. What we are really doing is gambling and speculating with our investment dollars. One way to improve investing results is to stop this gambling, build a prudent portfolio, a globally diversified portfolio and rebalance. This improves results as well as reduces anxiety. Any time used to beat the market is time wasted.

Investment Conference
Investment Conference (Photo credit: Salmaan Taseer)

2) Skill versus luck If your conversations with “that guy” veer toward past performance, remember that you still need to determine if that mutual fund did well because of skill or luck. In other words, is the performance repeatable? And will it happen again once your money is in the fund?

Statistically, even if a fund beat the market average for 25 years we still can’t say with any degree of confidence it was because the manager was skillful versus lucky. Prof. Ken French at Dartmouth has already worked out these numbers. If you assume the fund beats the market by five percentage points per year, which is a huge number, and had volatility of 20 percent per year, you would still need 64 years of data before you could be confident the superior performance was because of something other than luck.

64 years!

The point is that finding skill in the world of mutual funds is almost impossible, and betting your retirement money on luck sounds like a bad idea to me.

3) Rear-view-mirror investing leads to accidents

Even though it seems logical, making investment decisions based on past performance doesn’t add up. In almost every other area — business, construction, medicine — past performance matters. But with investing, past performance tells us virtually nothing about future performance. At this point, it’s settled doctrine. The academics, regulatory agencies and most professionals agree: when it comes to investing, past performance has zero predictive value.

But for the sake of argument, let’s say there is some value in past performance. Most thoughtful people will not argue that it’s impossible for a mutual fund manager to outperform the market. The bigger question is this: How will you identify that manager in advance?

When you’re talking to “that guy,” be prepared to hear how much he thinks the past influences the future. Now you know better.

The Wall Street bullies want you to believe that they can predict the future. This is not investing it is gambling and speculating with your money. This is ok if that is your goal, however it is not a strategy to reach a long term goal.

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

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Why the Mutual Fund Industry Does Not Want To Reveal $10 Billion in Hidden Costs to Equity Fund Shareholders

Common Sense on Mutual Funds: New Imperatives ...
Common Sense on Mutual Funds: New Imperatives for the Intelligent Investor (Photo credit: Wikipedia)

The average actively managed equity mutual fund has a turnover rate of approximately 100%. This means that each year all the stocks are sold and new stocks are bought in the fund. Keep in mind that you bought these funds as a long term investment. The only real benefit to all this trading is the fees it gnerates for the brokers.


Now, a new research paper points out that investors in equity funds are incurring trading and market impact costs of up to $10 billion annually and considerably more if you include all mutual funds. This is due to the current unfair pricing of mutual fund shares.

In practice, new, liquidating shareholders in mutual funds are not paying their portion of trading commissions that are deducted when they build their current portfolios. But the way the fund industry is structured, long-term buy-and-hold investors assume these costs over time, thus transferring their wealth to new and liquidating shareholders, many of them who are short-term traders. As a result, wealth is transferred to new and liquidating shareholders, many of whom are short-term traders.

In practice, long-term holders, many of whom are saving for retirement, pay an unfair amount of the portfolio brokerage and market impact costs. Shareholders who trade frequently should pay for the churning and the additional costs they create.

The most equitable solution is for the fund’s accrued commissions to get added to the fund’s net asset value (NAV) per share for new purchasers and subtracted from net asset value per share for liquidating shareholders.

But while this would be a fair practice for all shareholders, it is complicated by the fact that fund management companies are compensated based on the assets under management (AUM) of their funds. Since there are many high-frequency short-term traders, many fund companies recognize that correcting this problem could reduce fund AUM’s, which, in turn, would reduce fund company revenues.

This study is a more compelling reason to avoid actively traded mutual funds. These costs hurt the performance of long term investors and remain hidden.

Please comment or call to discuss.

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Ten Things Mutual-Fund Companies Won’t Say

The Wall Street bullies want you to believe that they can predict the future. REALLY??? Obviously they cannot however investors continue to buy into the hype. Get quick rich achemes will not get you to your financial goals. Those who hire a coach and follow a prudent strategy will succeed long term.

This graph shows three major stock indices sin...
This graph shows three major stock indices since 1975. Notice the meteoric rise of the stock market in the 1990s, followed by the collapse of the dot-com bubble in 2000 on the tech-heavy NASDAQ. (Photo credit: Wikipedia)

2″We can’t beat the market.”

For baseball players, batting .300 has always been a magical goal. For mutual-fund managers, it’s “beating the market.” That means when the Standard & Poor’s 500-stock index is up 10%, they are up 11%. If not for the drag put on returns by investment costs, blind luck alone would guarantee that roughly half of funds would beat the market in any given year.

But only about one in three mutual funds beats its target over the past five years, financial-data firm Morningstar reports. And many academics who’ve studied mutual-fund returns say shopping around for market-beating mutual funds is typically a waste of time.

3″When skill fails, we just double our odds.”

Imagine a school with more teachers than students, or a restaurant with more chefs de cuisine than place settings. That’s something akin to the situation in the mutual-fund world.

There are just under 5,000 stocks listed on major U.S. exchanges. By contrast, there are more than 8,500 mutual funds and exchange-traded funds, by Morningstar’s count.

Some say that large number of funds will inevitably lead to lower prices, but others offer a more skeptical take: A bigger roster of funds boosts the odds that at any given moment, one or two will be handily beating the market, says independent consultant Geoff Bobroff.

The Wall Street bullies want you to believe that they can pick the winners. There is overwhelming evidence that these are false prophets. The Wall Street bullies do not have your best interest in mind. Don’t empower Wall Street, hire  a coach and succeed.

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

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How To Fix Your Lousy 401(k) Retirement Plan: Pool It, Like a Pension Fund

I agree with the basic premise of this approach. However, I believe there is an alternative approach. to improving your plan and turing it into a pension fund ‘like’ plan without all the concerns of this approach. Most if not all investors are incapable of doing what needs to be done when it comes to successful investing.

President George W. Bush signs into law H.R. 4...
President George W. Bush signs into law H.R. 4, the Pension Protection Act of 2006, Thursday, Aug. 17, 2006. Joining him onstage in the Eisenhower Executive Office Building are, from left: Secretary of Labor Elaine Chao; Rep. Buck McKeon of California; Rep. John Boehner of Ohio; Senator Blanche Lincoln, D-Ark.; Senator Michael Enzi, R-Wyo., and Rep. Bill Thomas of California. (Photo credit: Wikipedia)

I’m not one who’ll argue that the average investment professional can beat the stock market indexes. But a seasoned professional can excel by reducing the fees that many mutual funds charge and making sensible choices on how to allocate your employees’ retirement dollars in a constantly changing economic climate.Let’s start with those fees. The Center for Retirement Research studied the costs that afflict a typical self-directed 401(k) plan. Administrating the plan normally costs 0.1 to 0.2 percent of assets—peanuts. The heftier charge is the 1.3-1.5 percent whack for managing the investments.

Half of that 1.3-1.5 percent cost is disclosed by the portfolio managers who operate your mutual funds. You know them as the funds’ “expense ratios,” which include the 12b-1 fees that pay for the marketing and selling of the funds as well as communications with shareholders. But the other half, the researchers explained, are trading costs—bid-ask spreads and commissions paid to market makers and dealers. Neither of these trading costs are disclosed. They’re excised from a mutual fund’s profits by the traders who fulfill the fund’s buy and sell orders.

In the hands of a good investment pro, the trading costs and management fees should be significantly less. For one thing, if all your employees’ retirement funds are pooled into a single large account, the manager will be able to use exchange-traded funds or directly invest in stocks, bonds and real estate investment trusts. These alternatives can have lower trading costs, avoiding the expenses mutual funds incur by having to be constantly ready to sell investments and provide a lot of liquidity to nervous, impatient retail investors.

There is an alternative to the pooled 401(k) plan which reduces the concerns stated in this article. The Pension Protection Act of 2006 allows plan sponsors to automatically enroll employees in an age appropriate portfolio. The employee has the option of signing a simple agreement and choose their own fund mix.

Please comment or call to discuss how this affects you and your company 401(k) plan.

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Flawed 401(k) Plan Structures to Blame for Systemic Failure

The 401(k) plan has been sold backwards since the beginning in the early 1980s. Since it is the sole source of retirement for most Americans is should be sold more like a pension plan. Most Americans do not know how nor do they wish to pick their own fund mix. There also is the matter of making emotional decisions with their plan assets. Their choices should be limited to approving the risk level.

Employee of the Month Reserved Parking Sign
Employee of the Month Reserved Parking Sign (Photo credits:

“Captured” plans: Over 90% of 401(k) plans involve the employer effectively “outsourcing” the entire administration and management of the plan. Financial vendors shape the investment program, including the mutual fund investment options to be offered, and divvy-up between themselves the compensation to be derived from the plan’s assets—all this with only superficial or illusory input from sponsors. Sponsors are permitted to choose Coke or Pepsi—i.e., any carbonated beverage (actively managed mutual fund) loaded with caffeine and sugar (fees permitting kick-back payments to gatekeepers).There is a sucker in the room and it’s, for sure, the participants and often the employer as well.

Understandably, the overwhelming majority of 401(k) plan sponsors do not have sophisticated investment personnel charged with responsibility for overseeing the retirement plan and cannot afford to. (Recall that over 90% of plans are tiny—under $5 million.) Owners or human resource types dedicating, at best, a few hours a week to thwarting Wall Street sharks intent upon devouring plan assets, don’t stand a chance.

In my investigative experience, it is mind-blowing just how much money can be skimmed by Wall Street from even a single large plan—tens of millions—seemingly unbeknownst to employers.

While investment firms deliberately seek to capture or control plans so they can maximize the profits they derive from 401(k)s, the industry has successfully fought efforts to hold vendors responsible, as fiduciaries, for the plans they bilk. Given industry marketing pitches, it should come as no surprise that employers regularly lose sight of the fact that under ERISA, the sponsor remains responsible as the named fiduciary to the plan even when the sponsor delegates or outsources management of the plan.

The Wall Street bullies have used the 401(k) plan as a cash cow. The undisclosed fees generated by these plans has been staggering at the expense of the plan participants(employees).

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

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The Big Lie Is a Cruel Hoax

The Wall Street bullies have lead us to believe that there is someone out there who can predict the future. This belief is the main cause for poor performance by investors. Your financial future is at stake. Granted some will get lucky but the vast majority will suffer.

M42 at dusk
M42 at dusk (Photo credit: Highways Agency)

The perpetuation of the myth that you can pick outperforming actively managed funds through “research” is a cruel hoax. It makes ordinary investors feel inadequate when their efforts fail. Most don’t realize that extraordinary resources by researchers with advanced degrees in finance have been devoted to finding the magic bullet that would “beat the markets.” None have succeeded.The fruitless search for predictive factors of outperforming funds is harmful to your financial health. In a recent blog on Forbes, Richard Ferri calculated the probability of selecting a winning actively managed fund for different categories of stocks and bonds ranged from a low of 22 percent to a high of 32 percent.

Most investors hold a portfolio of mutual funds, and not just a single fund. Ferri reached some startling conclusions about the probability of a portfolio of all actively managed funds beating a comparable portfolio of all index funds. This statistic stood out: An actively managed portfolio consisting of five funds held for 20 years had only a 2 percent chance of beating a comparable portfolio of index funds. Ferri concludes that “[T]he evidence in favor of all index funds, all of the time, is irrefutable, overwhelming and important to all investors.”

Don’t be misled by statements indicating there is some way you can identify actively managed funds that will outperform their benchmarks prospectively. As one commentator noted, relying on past performance and hoping it will persist is “like driving forward while looking through the rear view mirror.”

Trying to pick active managers that ‘beat’ the market is gambling and speculating with your money. Don’t do it.

Please comment or call to discuss how to improve your portfolio.

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