Investing voodoo

September 15, 2011 | By | 1 Reply More

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.

Image by Vtupinamba at (with permission)

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.

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.

What is Smolin’s advice for Plan Administrators or retirement plans?

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.



Category: Fraud, snake oil

About the Author ()

Erich Vieth is an attorney focusing on consumer law litigation and appellate practice. He is also a working musician and a writer, having founded Dangerous Intersection in 2006. Erich lives in the Shaw Neighborhood of St. Louis, Missouri, where he lives half-time with his two extraordinary daughters.

Comments (1)

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  1. Erich Vieth says:

    Here’s Dan Solin back to report on more investment advice voodoo:

    “Seeking “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.”

    Dan also offers some investment advice in this article, none of it based on active fund management.

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