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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9/12

I didn't write anything for yesterday's commemoration.  Many others, most far better suited to memorializing the day, said a great deal.  My paltry mutterings would add little to what is, really, a personal day for most of us.  Like all the big anniversary events, the "where were you when" aspect makes it personal and maybe that's the most important part, I don't know. Instead it occurred to me to say something about the element of the disaster that puzzles most of us, even while most of us exhibit the very trait that disturbs us deeply in this context.  One of the most common questions asked at the time and still today is in the top 10 is: how could those men do that? Meaning, of course, how could they abandon what we consider personal conscience and common humanity to perpetrate horrible destruction at the cost of their own lives. The simple answer is also the most complex:  they were following a leader. I'm going to string together what may seem unrelated observations now to make a larger point and I will try to corral it all together by the end to bring it to that point. Firstly, with regards to the military, there are clear-cut lines of obligation set forth, the chief one being a soldier's oath to defend the constitution.  There is a code of conduct consistent with that and we have seen many instances where an officer has elected to disobey orders he or she deems illegal or immoral.  There is a tradition of assuming that not only does a soldier have a right to act upon conscience, but that there is an institutional duty to back that right up.  The purpose of making the oath one to the constitution (rather than to, say, the president or even to congress) first is to take the personal loyalty issue out of the equation. To underline this a bit more, a bit of history.  The German army prior to WWII was similarly obligated to the state.  German soldiers gave an oath to protect Germany and obey its laws.  Hitler changed that, making it an oath to him, personally, the Fuhrer.  (He left in place a rule explicitly obligating the German soldier to disobey illegal or immoral orders.) Unfortunately, human nature is not so geared that people find it particularly easy to dedicate themselves to an abstract without there also being a person representing it.  (We see this often in small ways, especially politically, when someone who has been advocating what is on its own a good idea suddenly comes under a cloud of suspicion.  Not only do people remove their support of that person but the idea is tainted as well.  People have difficulty separating out the idea from the person.  The reverse is less common, that a bad idea taints a popular leader.)  Dedicating yourself to supporting the constitution sounds simple in a civics class, but in real life people tend to follow people.  (Consider the case of Ollie North, whose dedication to Reagan trumped his legal responsibility to uphold the constitution and its legally binding requirement that he obey congress.) [More . . . ]

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The world through the lens of a college English teacher

At Orion Magazine, college English Instructor Erik Reece has written an excellent essay exploring the role of schools in modern society. The conversation is expansive (covering such things as John Gatto, Citizens United and the trashing of the environment), yet the bases of his essay are his personal interactions with thousands of English students. Here's the launching point for Reece's essay.   He asked his college freshmen English students to write an essay on the following topic: "Evaluate the education you received over the last four years."   Here is his summary of types of responses he received:

  • Many teachers show no passion for their subjects.
  • Many teachers don’t seem to know their subjects very well.
  • Teachers often have very low expectations for their students and very lax standards (late work is rarely penalized).
  • Many teachers are afraid to engage students in real critical thinking or actual dialogue; they simply rely on handouts and lectures.
  • Assignments don’t seem relevant to students’ “real” lives.
  • Many teachers only “teach to the test.”
  • The majority of the work is far too easy and leads to boredom.
  • Students express an overwhelming feeling that only their attendance and test scores are important to teachers and administrators.
Again, this is the starting point for a highly worthwhile piece of writing.   I invite you to take a look.

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The wrong type of math

In this three-minute talk, Mathemagician Art Benjamin urges that we change our emphasis when we teach our children math. I couldn't agree with him more. It saddens me to consider the immense amount of self-inflicted damage that Americans could have avoided, if only they were more savvy regarding probability and statistics. For example, very few Americans die of "terrorism," whereas the lives of millions of Americans are severely damaged or destroyed every year by crappy schools, lack of health care (including the failure to obtain colonoscopies), wars begun on the basis of lies, various risky behaviors and many other problems almost too many to mention, all of which leave the actual danger of "terrorism" in the dust. Yet Americans spend a massively lop-sided portion of their tax-dollars each year preventing "terrorism." Each of the serious causes of death we face would be much more preventable if only Americans had a better grasp of statistics and probability.    With better training in statistics and probabilities, Americans could better understand the risks that they faced and the probabilities of success of various proposed "solutions."   With better training, as Art Benjamin suggests, we would be better able to order our national priorities to better prevent the things that are most likely to harm us.

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