The Curious Case of Benjamin Button
I’ll share a few thoughts of mine through Benjamin’s quotes. When I first heard the quotes, I didn’t immediately think about investing (to the delight of those close to me); it wasn’t until after the movie that I thought about the relationship between the movie and investing.
Take a look at a few of these quotes from the movie.
“You can be as mad as a mad dog at the way things went, you can curse the fates, but when it comes to the end, you have to let go.” I don’t think Benjamin was referring to the recent bear market, but, hey, we have to let it go. We can't go back and sell out in September of 2007 or buy in March 2009.
“Life can only be understood looking backward. It must be lived forward.” This quote reminded me of rearview mirror investing. So many investors -- including advisors and asset managers -- look at the past when trying to determine the future. I still believe in diversification and the long-term viability of the global economy, but we shouldn’t be fooled by past returns.
“We are defined by opportunities, even the ones we miss.” We can relate this quote to so many issues in life. Does anyone have an idea of what popped in my mind when it comes to investing? Leave a comment if you wish.
A Case for Active Management
The point is that when the current value of stocks (as measured by price to earnings ratio) is dramatically different from historical valuations, then portfolio managers that choose stocks (active management) will do better than those portfolio managers that simply track an index of stocks (passive management). So, does evidence of the above as written by The Boston Company mean that you should sell your index funds and buy actively managed mutual funds. Well, no.
Stick to the game plan you have put in place -- assuming you have a game plan. More on some suggested game plans in the near future. Until then, let us all know if you have a plan and if you are confident about your plan.
What's the Target Date for Target-Date Funds?
Morningstar mentions that Joseph Nagengast of Target Date Analytics believes "...the only acceptable goal of target-maturity solutions is to get the participant to the retirement date." He also believes "...the glide path should stop gliding at the point of retirement and retirees' equity should be invested entirely in fixed-income vehicles."
I'm curious how many readers believe that target-date funds should be at 100% fixed income at the target date? I don't think retirement is the finish line. At the very least, the choice should be given to the fund company as to the equity/fixed income allocation. After all, consumers should have more options available and not be limited by regulations.
More Partying Like 1999
After a poor first quarter of 2009, and “not as bad” economic news following a dreadful 2008, the market began rebounding in March and remained strong in April and May. According to Lipper, 98% of all equity and mixed-equity funds were in the green for the quarter ending June 30. The average equity mutual fund was up 19.77%, and 77 out of 78 equity classifications were on the plus side.
It’s a welcome relief from a painful 2008, but don’t forget about managing your portfolio risk through diversification -- probably a point that doesn’t need to be reiterated after such recent market turmoil.
Let’s take a look at some of the second quarter performance numbers*:
-
World Equity Funds +26.66%
- US Large Cap Funds +15.86%
- US Small Cap Funds +21.80%
- US Dollar against the euro -5.84%
- US Dollar against the pound -11.87%
- Oil +40.74%
Diversification Still Works
Simply put -- the cynics are wrong. We should all know by now that if you own U.S. equities and international equities, small cap and large cap, and growth and value, that they are not negatively correlated -- there is systematic risk. In other words, if you buy a US mutual fund and an international mutual fund, you shouldn’t expect that if the US market goes south then the international market will only go north. That’s not the point of diversification amongst various equity asset classes/styles.
A popular saying with respect to investing is: “All ships rise with a rising tide.” This was not spawned by the markets of 2008 when it was difficult to find shelter within any equity investment. We need to get back to reality. The point is that diversification is a long-term investment strategy. There is systematic risk of equity investing (ships, rising, tide). William Bernstein wrote a nice piece on the subject for CNN Money in April.
Death of Buy and Hold?
This questioning of time-tested strategies is understandable. After all, economically speaking, 2008 is a year to forget. But don’t forget it without learning a lesson. The lessons learned will be different for all of us. When it comes to investing, buy and hold in particular, Morningstar interviewed three investment pros who teach a lesson on buy and hold investing.
John Bogle makes a great point when he says, “…we don’t know what people mean when they say buy and hold.” Just like we will all learn a different lesson from the recent financial crisis, we probably all think of, and utilize, buy and hold strategies in a different manner. Regardless, it is worth watching the brief video interviews regarding the “Three Takes on the So-Called Death of Buy and Hold.”
Mutual Fund Scandal
In just one trading day the Janus Worldwide Fund made 5% when the market was down 2%? On another day, the Old Mutual Fund was up 9% when the market was down slightly? What gives?
Do you remember the mutual fund trading and timing fiasco that was ended in 2003? I remember it too well. Brokers (a team at my former employer was written up frequently in the WSJ and other papers after they were busted) were trading mutual funds after hours.
It doesn't matter how the brokers and their hedge fund clients profited from the trades. It's sufficient to say that we (brokers that is -- and I was a broker, I mean financial advisor, at the time) thought they were on top of their games. We thought they were making money for their clients, building a loyal client base and, in turn, making a great living.
Then, one day, about 10 guys in white shirts and red ties walked in the brokers' office with hand held tape recorders. Their office was directly across the hall from mine. I had a perfect view as the brokers' files were pilfered and incriminating information was gathered.
Fast forwarding six years, settlements for the misdeeds of unscrupulous brokers, hedge fund managers and, in some cases, mutual fund companies, are being paid. Old Mutual Fund and Janus Advisor Worldwide, as I mentioned above, received large sums.
Morningstar has posted a piece on the mutual fund scandal and points out the mutual funds that recently received a windfall from the settlement.Money Markets: Would Floating Prices Sink the Industry?
The SEC has revealed their much anticipated plan. Fortunately, they aren’t calling for money market funds to float their share prices -- for the moment. Money market mutual funds have been popular due to their perceived safety of principal. But many believed the SEC would allow the price of the funds to float, which industry observers say would have led to less than stable cash reserves and, possibly, a sinking money market industry.
A recent article in the Washington Post discusses the pros and cons of the SEC’s proposal. What do you think?
The Joys of Trading All Day Long
Mr. Bogle reminded the audience that the original tagline of the first ETF (State Street’s SPDR) was: “Trading the Market All Day Long in Real Time.” Sounds like fun, right? Trading in this fashion should be an endeavor saved for the soothsayers among us.
Mr. Bogle pointed out that the turnover of the SPDR ETF was 10,105% in 2009. Investors took the tagline to heart. That’s an amazing number and compared to 33% turnover in mutual funds in 2009. Mr. Bogle went on to point out (with his tongue firmly in his cheek) that the ETF model has been a great business model. It’s been a great business model for brokers and speculators. But how has the ETF model been for individual investors?
According to Mr. Bogle’s studies, over the past five years the SPDR has performed -1.9% per year (a result of the market, not of the ETF model). But the average investor in the SPDR lost 8.2% per year. He goes on to say, “So you tell me if all that trading was good for the investors or not good for the investors.”
My point for blogging about the study is not to disparage ETFs. Well, maybe a little bit of criticism, I admit. My point is, and I made a similar point in a recent article, that if individual investors are buying ETFs rather than index mutual funds for the fact that ETFs can be traded throughout the day, then they should think again -- or buy an ETF for another reason.
Who Wants More Disclosures?
I received an email from Mike Kruger, Online Outreach Specialist for the House Committee on Education and Labor. The email was in response to my recent blog post regarding the mandatory inclusion of index funds in all 401(k) retirement plans.
Mike wrote: "I know you are aware this markup is coming and I wanted to make sure you had all the information that you and the folks at About.com Guide to Mutual Funds would need. 2 bills regarding 401(k)s and retirement advice will be marked up in our subcommittee. These bills could save individuals tens of thousands (if not more) over their lifetime by increasing transparency and removing conflicted investment advice. Let me know if there is anything else I can do for you."
The subcommittee voted today (you can vote in my poll). The bill now goes to the Education and Labor Committee. The bill is important to investors looking for full disclosure and transparency. It could be a game changer in the 401(k) market (for providers of index funds and for providers of advice).
Specifically, the bill includes (directly from the committee's website):
- Ensure that workers receive basic investment information, including information on risk, return, complete fees, and investment objectives before signing-up for a plan;
- Require that all fees -- in one number -- that are charged against a worker’s account to be included in the account holder’s quarterly statement;
- Require service firms to tell employers the fees workers are charged on all investment options into four categories: administrative fees, investment management fees, transaction fees, and other fees;
- Require 401(k) plans to offer at least one low-cost index fund to plan participants in order to receive protection against liability for participants’ investment losses;
- Require service providers to disclose financial relationships so companies that sponsor 401(k) plans can make sure there are no conflicts of interest; and
- Give the U.S. Department of Labor the authority to enforce new disclosure rules and fine service providers who violate them.
Mutual fund investors should applaud many aspects of the bill. Who doesn't want to know what they are paying for?