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.

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Health care and death

Progressive sites are howling at the insensitivity of the Tea Party based on a hypothetical. This is how the conversation went down at a recent Republican debate:

Wolf Blitzer: A healthy 30 year old young man has a good job, makes a good living, but decides—you know what? I’m not going to spend $200 or $300 a month for health insurance because I’m healthy—I don’t need it. But something terrible happens … all of a sudden he needs it. Who’s going to pay for it if he goes into a coma. Ron Paul – He should do whatever he wants to do and assume responsibility for himself . . . My advise to him is to have a major medical policy . . . Blitzer: But he doesn’t have that and he needs intensive care for six months. Who pays? Ron Paul: That’s what freedom is about . . . taking your own risks. This whole idea that you have to compare and take care of everybody . . . Blitzer: Are you saying society should just let him die?" [A couple voices in the large crowd shout “Yes!”] Ron Paul: . . . The churches . . . [will help him]
Several things come to mind. The hypothetical was designed to make us not want to take care of this man. After all, if I am working overtime to scrape together huge payments for my family’s health insurance and the man in the hypothetical decides he won’t bother to pay even though he “makes a good living,” my gut feeling is he is trying to cheat the system, which makes me highly ambivalent about him, and much less sympathetic about his terrible situation. How much do I care about this man? I once told a friend of mine that I “cared” about a sad situation, and he said, “No you don’t. If you cared, you would do something to fix the problem and all you’re doing is complaining.” I think he was dead-on with that comment. If we care, we get involved. If we’re merely complaining, we don’t really care, no matter what we say. How do Americans often show they really care? By reaching into their pockets and giving money to the cause. With this in mind, allow me to offer a few of my own hypotheticals. [More . . .]

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What makes a poem a poem?

A few weeks ago, I found a treasure at a used bookstore: a copy of Tom Peters’s 1997 book “The Circle of Innovation” - with an extra treasure - the signature of the author). The book is filled with quotes to punctuate Peters’s themes. One in particular resonated with me:

Expose yourself to the best things humans have done and then try to bring those things into what you are doing. - Steve Jobs [pre-iPod, pre-iPhone, pre-iPad]
Brilliant. Jobs was talking about art, poetry, history. Peters tied the quote to the Mac (I have all three of the above gadgets, but I’ve sampled the Mac Kool-Aid and the lingering cyanide taste was too much for me) and the mixing of artists with engineers to create the Mac and its operating system. Despite that, it's still brilliant. It struck a chord because I’ve recently gotten a baptism by immersion in the art world. Now that we’ve stopped moving and have established a presence here in North Texas, my wife last year took her art from “interests” to “profession”. Since then it’s been a whirlwind of new and different – for her and me. In that short time, she’s explored a variety of media (requiring reconfiguration of the garage - uh, studio – several times) and done things she never dreamed of being able to do. Shameless plug here: check out her website and you’ll understand the multiple reconfigs I’ve had to facilitate (drill deep – there is a lot there and all produced in just the last year and a half.) Collateral to this evolution, this spring she was elected president of one of the art associations she joined and just two weeks ago became the publisher of a fine art engagement book. Now she’s attending exhibition openings and receptions to support the artists of the association, network with sponsors of the book, scout out art for the book, and simply enjoy the art. And unless I have something more pressing, I am also going to these openings. We went to two last Friday night and have another tomorrow night. ...more...

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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.

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