Investing voodoo

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]

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.

Continue ReadingInvesting voodoo

Minnesota AG: No releases for banks in the absence of thorough investigation

Lori Swanson, the Minnesota Attorney General has stepped up to tell the banks that they should not be released for their conduct over the past 10 years in the absence of a meaningful investigation. This account was published at Huffpo:

As government officials work to settle claims that the nation's biggest banks illegally foreclosed on American homeowners, Minnesota Attorney General Lori Swanson has joined a group of law enforcers pushing for a narrow deal that would leave banks exposed to potential legal action in the future. In a letter obtained by The Huffington Post, Swanson said any settlement with the group of banks over mortgage practices should exclude a release from claims over the creation of mortgage-linked securities. Swanson's support for a narrow settlement unites her with New York Attorney General Eric Schneiderman and attorneys general from three other states, who have said the banks' alleged wrongdoing hasn't been investigated thoroughly enough to merit a broader release from legal liability.

Continue ReadingMinnesota AG: No releases for banks in the absence of thorough investigation

Does LEED certification really mean a building is energy efficient?

The U.S. Green Building Council has gotten a lot of attention through promotion of its LEED standard.  I am personally aware of several organizations that have focused intense PR campaigns on claims that their buildings have been modified, usually at considerable expense, so that they are LEED-certified and thus more energy efficient.  Here's the claim as to the meaning of LEED certification on USGBC's website:

LEED, or Leadership in Energy and Environmental Design, is an internationally-recognized green building certification system. Developed by the U.S. Green Building Council (USGBC) in March 2000, LEED provides building owners and operators with a framework for identifying and implementing practical and measurable green building design, construction, operations and maintenance solutions.
Consequently, buildings that are LEED certified are understood by the general public as indicating that a building is especially energy-efficient. Today I read a disturbing article in Mother Jones (not yet available online): "Leeding us On."  The article focuses on allegations made by Henry Gifford, a New York City energy efficiency consultant, who calls LEED "a joke." Here's an excerpt: [More . . . ]

Continue ReadingDoes LEED certification really mean a building is energy efficient?

Insider Trading Writ Large

Imagine, if you will, a country in which banking regulations were stripped down so far that worthless paper again becomes a hot commodity. Now consider that this had (as it inevitably must) blown up and caused a crash in the lending market and equities market and thus the economy in general. Further note that a necessary result would be a rapid rise in the price of precious metals, notably gold. After a couple of years, that gold bubble would be ripe. People who had assets remaining when the junk bonds or sub-prime mortgages or whatever collapsed could have conservatively moved their money into gold, further depressing the equities market and inflating the price of gold. But, wait. Because of government investing, the market was recovering too fast! So fast that the wealthy were unable to swap their inflated gold for depressed stocks at the optimum time. What to do? Congress to the rescue! The wholly owned carriers of the banners of freedom and independence could be employed to create a palpably unnecessary crisis with a distinct deadline. Yes! This would quickly depress the markets and allow those holding too much bubble-gold to buy depressed stocks. Meanwhile, those elected to carry the load of screwing the middle class could also jump on the wagon and buy up stocks just before the deadline hits. Then the price of stocks returns to normal levels, and the gold bubble can be allowed to pop. I, for one, would like to see the trading histories of all those involved in the current crisis, and their friends and kin.

Continue ReadingInsider Trading Writ Large