According to Vanguard, for the 10 years leading up to 2007, the majority of actively-managed U.S. stock funds underperformed the index they were seeking to outperform. For instance, 84% of actively-managed U.S. large blend funds underperformed their index, and 68% of actively-managed U.S. small value funds underperformed, as well. The case is even worse for actively-managed bond funds. In that case, almost 95% of actively-managed bond funds underperformed their indexes for the 10 years leading up to 2007.
Archive for September 15th, 2011
I don’t write horror stories, but I did find this summary of Steven King’s advice on how to write useful.
I’ve followed the writings of Investment Advisor Dan Solin for several years. After reading a half-dozen of his articles, he might start to sound like a guy who only sings one song, but it seems to be a damned good song. Solin constantly rails at investment “experts” claim that they can actively manage your investments efficiently because they can “time the market”–they claim that they can figure out when and what to buy, such that you will make good returns on your investments.
The problem, as Solin once again indicates in his latest article, is these experts who advocate active-management of funds are shams and charlatans because high-fee actively managed investment funds almost never beat low-fee passively-managed index funds. In fact, almost all of these investment “experts” who set up think tanks, newsletters and websites end up out of business. Solin repeatedly tells us what the problem is and what to do about it: “Well-advised investors hold a globally diversified portfolio of low management fee stock and bond index funds in an asset allocation suitable for them.” Repeat as necessary. The evidence is clear that actively-managed plans consistently fail to beat the market as a whole (only 5% of actively managed funds will equal their benchmark index each year) and they cost a lot more money in management fees than index funds. Passive funds run by Vanguard charge only .41% per year on average. Actively managed funds typically charge 1% more than passive funds, and this difference can add up to huge numbers of dollars over the life of an investor.[caption id="attachment_19627" align="alignright" width="300" caption="Image by Vtupinamba at Dreamstime.com (with permission)"][/caption]
Give the damning evidence Solin has offered over the years, it amazes me that so many of us are forced into 401K accounts that charge much bigger fees to hire people who claim that they can “time the market.” That might be changing. Consider what happened to Kraft’s plan administrators after they included actively managed funds in their plans:
In their lawsuit, the plaintiffs asserted the retention of two actively managed funds in the defined contribution plan violated Kraft’s duty of prudence. They claimed the plan administrators in this plan should have followed the lead of the trustees in the defined benefit plan and dumped all actively managed funds.
In a stunning decision, Judge Ruben Castillo agreed to let this issue proceed to a jury trial. He held that, based on the conclusion of the Investment Committee for the defined benefit plan to drop all actively managed funds, a jury could conclude that the decision of the plan administrator and consultants to the defined contribution plan to retain two actively managed funds was a breach of fiduciary duty.
This decision should be a wake-up call to all trustees and plan administrators of retirement plans. Either they should pay attention to the data and replace actively managed funds with index funds, or risk the possibility of being liable for the shortfall.
At Common Dreams, Michael Klare advises us that easy (i.e., cheap oil) tends to run in concert with prosperity, but that Americans are stunningly obtuse about the fact that we’re running out of easy oil:
If American power is in decline, so is the relative status of oil in the global energy equation. In the 2000 edition of its International Energy Outlook, the Energy Information Administration (EIA) of the U.S. Department of Energy confidently foresaw ever-expanding oil production in Africa, Alaska, the Persian Gulf area, and the Gulf of Mexico, among other areas. It predicted, in fact, that world oil output would reach 97 million barrels per day in 2010 and a staggering 115 million barrels in 2020. EIA number-crunchers concluded as well that oil would long retain its position as the world’s leading source of energy. Its 38% share of the global energy supply, they said, would remain unchanged.
What a difference a decade makes. By 2010, a new understanding about the natural limits of oil production had sunk in at the EIA and its experts were predicting a disappointingly modest petroleum future. In that year, world oil output had reached just 82 million barrels per day, a stunning 15 million less than expected.
What’s the solution?
[T]he United States needs to move quickly to reduce its reliance on oil and increase the availability of other energy sources, especially renewable ones that pose no threat to the environment. This is not merely a matter of reducing our reliance on imported oil, as some have suggested. As long as oil remains our preeminent source of energy, we will be painfully vulnerable to the vicissitudes of the global oil market, wherever problems may arise. Only by embracing forms of energy immune to international disruption and capable of promoting investment at home can the foundations be laid for future economic progress. Of course, this is easy enough to write, but with Washington in the grip of near-total political paralysis, it appears that continuing American decline, possibly of a precipitous sort, could be in the cards.
For a lot more on this problem of peak oil, check out some of Brynn Jacobs’ writings at this website, including this article.