Jack Bogle and passive investing, fighting 401(k) fees, and the looming retirement crisis

1. NPR shares a recent interview with Jack Bogle, “the George Washington of investing“:

“We live in this mythical world where we kind of believe the American way is if you try harder, you will do better — that if you pay a professional to do something, it will pay off,” Bogle says. “And these things are true — except in investing!”
 
That was Bogle’s insight: When you invest, you should own a mix of bonds and stocks. But paying investment managers to pick stocks just doesn’t work, he says. That’s because picking winners is very hard, and paying the guys in the suits is so expensive that it hobbles your ability to make money.

2. Also from NPR, a reminder to find out how much you’re paying for the mutual funds in your 401(k).

“Sixty percent of people don’t know they’re paying any fees at all in their 401(k) plan,” says Laurie Rowley, president of the nonprofit National Association of Retirement Plan Participants. NPR asked her and other experts to explain how people can get their retirement portfolios in good shape.
 
Rowley says people need to be aware that they are paying fees, and they need to find out how big those fees are. “Fees make a huge, dramatic impact on your total savings nest egg,” Rowley says.
 
A 2 percent annual fee might sound small, but it eats up half of your earnings over 35 years. Review your plan and pick just a few of the lowest cost funds, Rowley says.

In the same vein, we recently shared our data on mutual fund fees with CNBC.

3. On the rise of automated/robo financial advisors, Meb Faber writes that traditional advisors should not feel threatened but seize the opportunities they provide.

Many advisors have been wringing their hands over the fee compression – how can we compete in a world where asset allocation is a commodity?
 
The answer is – because asset allocation has always been a commodity.

Since almost every custodian and brokerage will have no cost robo technology for their advisors in the next year or two, advisors should spend as little time as possible on the asset allocation solution, and more and more on their value ads. But that is a beautiful thing! Clients would appreciate more attention, estate planning, insurance, tax management, microbrew tasting events etc etc. Not to mention it would free up advisors to spend more time on prospecting if they so choose.

4. The Economist summarizes sobering research on Americans saving for retirement. The brief version: not enough, and for many, not even close.

Unsurprisingly, the biggest problems face those with no private pension at all: 68% of these Americans are expected to fall short. Those lucky enough to be covered by defined-benefit plans—in which pensions are linked to a worker’s salary—have the least difficulty: only 20% are deemed at risk. Of those in defined-contribution (DC) plans—in which workers receive whatever pension pot they have accumulated by retirement—53% probably will not reach the replacement rate.
 
The problem is that many people simply do not save enough in a DC pension. The combined contributions of employers and employees average just 11.3% of salary. This will not generate the same level of pension as a typical defined-benefit plan. The CRR found that the average retirement assets of those aged 50-59 were just $110,000 in 2013, slightly lower than in 2010. This balance will improve over time, since DC plans are relatively new, but there is a long way to go. If pensioners take an (inflation-adjusted) 4% a year from their pot, they will need $250,000 just to generate an income of $10,000.

Dilbert, via Barry Ritholtz, has a relevant response.
 
 

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Volatility visualized, Barry Ritholtz challenges the All-Weather Portfolio, and how different countries spend their household budgets

Economist - volatility chart

1. The Economist charts the recent bout of volatility across global markets, and shares a takeaway for everyday investors:

The typical retail investor, making a monthly investment into his or her 401 (k), ought not to worry about a violent one-day move nor should a pension fund or an endowment. One would need to see a much more prolonged period of volatility to make investors reconsider the risk premium they expect.

2. With volatility on the mind, investors may be tempted by products such as the one championed by Tony Robbins and his “All-Weather Portfolio”. Barry Ritholtz warns that the All-Weather Portfolio suffers from recency bias, offers an “All-Century Portfolio”, and wagers $100,000 that his will outperform come 2035. He also reminds us:

Investors interested in this sort of asset allocation can access this portfolio numerous ways. You can do it yourself for free. It requires a bit of work and you need to do a rebalancing once or twice a year. But it’s cheap and easy and will do better than 90 percent of what Wall Street has for sale.
 
The most challenging part of this is you. Your emotions, your lack of discipline, your ability to stick to a tried-and-true methodology and not get distracted by something shinier.

For more in this vein, he shares Jason Zweig’s Rules for Investing.

3. How do different countries spend their money? The Economist shares a graphic. Who knew the United States spends nearly 21% of household budgets on Health Care, the highest in the world?

 
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Tyler Cowen on the Fed, everyday investors beating the pros, and what if Trump just invested in the S&P 500

1. Tyler Cowen on whether the Fed should tighten.

2. Barry Ritholtz writes that in the late August market correction mom and pop investors beat hedge funds and high-frequency traders.

3. Vox shares some fascinating maps from Google Trends based on worldwide stock index searches.

4. Michael Hiltzik at the LA Times talks about how Wall Street’s “can’t miss investment of the year” has been quite a miss.

5. If you’ve ever wondered how much Donald Trump would have made had he simply invested his inheritance in an S&P 500 index fund — and admit it, you have — Vox has the answer.

 
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A little reading material for a volatile market week

What a week:

1. CNBC shared SigFig data on how timing the market or panicking can cost investors:

Investors who try to time market highs and lows almost always hurt their performance over time. An analysis of investor behavior from SigFig, an investment planning and tracking firm, found that during the market correction in October 2014 roughly one in five investors reduced their exposure to equities, mutual funds and ETFs, with 0.6 percent selling 90 percent or more. That may have seemed smart at the time, but SigFig’s analysis found that the more people sold, the worse their investments performed.
 
“Those who appeared to panic the most—for example, those who trimmed their holdings by 90 percent or more—had the worst 12-month-trailing performance of all groups,” the researchers concluded. Their portfolios delivered a trailing 12-month return of -19.3 percent as of Aug. 21, compared with -3.7 percent for the people who did nothing during that October correction.

2. At SigFig, we believe that good investing means following a diversified strategy with discipline and long-term focus.

Along similar lines, Ron Lieber of the New York Times writes:

The impulse when the stock market falls hard for a few days in a row is to do something. Anything. Our life savings are often on the line, after all.
 
But that’s just the thing: Stocks are most useful for long-term goals. So unless those goals have changed in the last few days, it probably doesn’t make much sense to overhaul an investment strategy based on a blip of market activity.
 
So pour yourself a drink, or sit down with a pint of ice cream, and consider the following six things.

Here are his six things.

Lieber also profiles some pension fund managers and the folly of trying to beat the market, and a perhaps unusual method they use to stay on course:

On days like Thursday and Friday, when the stock market is declining, it’s hard to sit calmly and do nothing, especially when commentators are yelling on television. So when the two men are feeling itchy, they make for the hills, literally, running on trails near Reno for 10 or 15 miles at a time.
 
They can’t trade while they are in motion, but that’s probably a good thing. “We spend a lot of time up there talking each other out of stuff,” Mr. Lambert said. “In investing, the answer 90 percent of the time is to do nothing.”

3. Ben Casselman of fivethirtyeight.com tells us when to pay attention to the market and when not to:

We don’t write much about financial markets here at FiveThirtyEight. That’s intentional. Markets are important, but there’s already lots of good coverage out there. There’s also lots of really bad coverage — the deluge of minute-by-minute market data makes it incredibly tempting to see signals in what is really just noise. We don’t follow every up and down of the market because, unless you’re a trader, it just doesn’t matter.
 
But there are times when even non-traders should pay attention to the markets, either because they’re so bad they’re affecting the rest of the economy (think Lehman Brothers in 2008), or because they’re sending a signal about bad news around the corner. How do you know when to do that? You can’t, at least not perfectly. But by following a few simple guidelines, you can avoid getting caught up in the hype and stay focused on what really matters.

4. Published August 19th, James Osborne’s piece on “the worst question of them all” happened to be quite timely:

It’s summer, or at least it was recently until our oldest went back to preschool. Summer means family gatherings and kid’s birthday parties and BBQs and a pretty jammed social calendar for us. I try pretty hard to avoid the “professional” talk at social events, but I’m never 100% successful. Inevitably, somebody asks the question. I really hate the question. You know the question.
 
“So what do you think of the market right now?”
 
This is the part where I try really hard not to let out an exasperated sigh and shrug my shoulders. But first I’ll break down what drives me nuts.

5. And now, for something completely different.

 
 
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Lobbyists fight the fiduciary standard, Barry Ritholtz describes every FinTV interview, and we discuss setting investing goals

1. At SigFig we are squarely behind the Department of Labor’s effort to expand the fiduciary standard to all financial advisors. Investors should have no doubt that their advisor is putting their — the clients’ — best interests above his or her own. Not surprisingly, financial industry lobbyists are not going down without a fight:

The new [advertising] campaign is sponsored by Americans to Protect Family Security, a front for the life insurance and financial advisory industries. Its target is a proposed new Department of Labor regulation to simply require that the sellers of annuities, life insurance, IRAs, 401(k) investments and other such retirement products place their clients’ interest first… The whole point is that millions of customers can’t tell if they should trust their advisors, because the latter’s conflicts of interest are often well-hidden. When one hears the characters in the industry’s college-parents commercial worrying that they’ll get “no more help from Anne,” their trusted advisor, one feels the urge to knock some sense into their heads.
 
That great advice you’re getting from “Anne” may do more to line her pockets than your own–and you wouldn’t even know. If the Department of Labor regulations go through, then you’ll know.

2. Barry Ritholtz shares a terrific articulation on what it means to be an “Alpha” or a “Beta investor. Don’t miss his cartoon of nearly every TV finance interview.:

So Alpha is asked where the Dow will be in a year, and he responds:
 
“Our view is that the economy in the U.S. continues to _______, and we foresee _______ problems overseas ______. China is _______, and that has ramifications for the Pacific Rim’s ______. Greece is ______ in Europe. The commodity complex is causing _____ for emerging markets. But many sectors of the U.S. economy remain _______, and some sectors overseas are still _______. The valuation issue continues to be _____, and that means _____ for investors. That has ramifications for corporate profits that will be ______. We think the economy is going to do ______, and you know that means inflation will be _____, which will force interest rates to ______. Under these conditions, the sectors most likely to benefit from this are ______, ______ and ______. The companies best positioned to take advantage of this are ____, ____ and ____. Based on all that, we especially recommend an overweight allocation to ____, ____ and ____. Thus, we believe the Dow will be at ______ next year.”
 
You can turn on FinTV any day of the week and hear some variation of that discussion.

3. We shared a piece on US News on setting goals and following through:

Setting goals and managing investment accounts pegged to each goal separately will likely protect you from your human self and the inclination to react emotionally — not necessarily appropriately — to market events. It might, for example, help you stay on course rather than panic and sell out if the market drops and your shorter-term savings are invested in the markets, says Aaron Gubin, head of research and wealth management at San Francisco investment management firm SigFig.

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Assets in ETFs exceed assets in hedge funds, Daniel Kahneman, and the value of good rules of thumb

1. Assets in Exchange Traded Funds now exceed assets in hedge funds. The Economist writes on the triumph of the humble ETF:

Economist_20150801_FNC199

Yet the steady return claimed by hedge funds can be replicated, or indeed beaten, with ETFs. S&P, an index provider, calculated the return over the past five years from a portfolio comprising 50% American bonds and 50% global equities. This portfolio easily outperformed the average return from hedge funds. S&P then deducted hedge-fund-style fees from the model portfolio; the result tracks hedge-fund returns very closely. It looks, in other words, as if hedge funds are a very expensive way of buying widely available assets. Last year CalPERS, California’s public-sector pension fund, announced it was selling off its investments in hedge funds, citing both complexity and costs.
 
ETFs have also faced criticism. Jack Bogle, the founder of Vanguard, an index-tracking firm, has argued that the ease of dealing in the funds may cause retail investors to trade too much, switching in and out of asset classes in a vain attempt to time the markets. A more widespread concern relates to liquidity. All ETFs allow investors to redeem their holdings instantly, but some of the assets they own, such as corporate bonds, trade infrequently. They thus face a potential problem if prices fall sharply and a lot of investors want to sell at once. That might force them to delay or limit redemptions (imposing “gates”, in the jargon). Some see this as the trigger for the next market crisis.

2. Daniel Kahneman, one of SigFig’s heroes, shares stories with the Guardian.

What’s fascinating is that Kahneman’s work explicitly swims against the current of human thought. Not even he believes that the various flaws that bedevil decision-making can be successfully corrected. The most damaging of these is overconfidence: the kind of optimism that leads governments to believe that wars are quickly winnable and capital projects will come in on budget despite statistics predicting exactly the opposite. It is the bias he says he would most like to eliminate if he had a magic wand. But it “is built so deeply into the structure of the mind that you couldn’t change it without changing many other things”.
 

 
In general, Kahneman is downbeat about the capacity of his brand of psychology to effect change in the world. I imagine he would simply argue he’s a realist about human nature. And, indeed, studies showing that “skilled” analysts are hopeless at predicting the price of shares have yet to translate into mass sackings or even reduced bonuses on Wall Street or in the City. The same goes for evidence that the influence of a high-quality CEO on the performance of a company is barely greater than chance.
 
But there are more modest ways his insights can help us avoid making mistakes. He advises, for example, that meetings start with participants writing down their ideas about the issue at hand before anyone speaks. That way, the halo effect – whereby the concerns raised first and most assertively dominate the discussion – can be mitigated, and a range of views considered. Then there is the concept of adversarial collaboration, an attempt to do away with pointless academic feuding. Though he doesn’t like to think in terms of leaving a legacy, it’s one thing he says he hopes to be remembered for. In the early 2000s Kahneman sought out a leading opponent of his view that so-called expert judgments were frequently flawed. Gary Klein’s research focused on the ability of professionals such as firefighters to make intuitive but highly skilled judgments in difficult circumstances. “We spent five or six years trying to figure out the boundary, where he’s right, where I am right. And that was a very satisfying experience. We wrote a paper entitled ‘A Failure to Disagree’”.

3. Also on overconfidence, Morgan Housel of the Motley Fool writes on the perils of over-precision and how, often, good rules of thumb are good enough.

One of biggest investing lessons I’ve learned is that the more precise you try to calculate, the further from reality you’re likely to end up. Precise calculations creates a spell of overconfidence, which makes you double down on whatever you want to believe no matter how wrong it is. Some examples are staggering: Wall Street’s top market strategists predict each January how much the S&P 500 will go up over the following year. Their collective track records are worse than if you just assumed stocks go up by their long-term history average every year.
 
In a messy world of emotions and misinformation, broad rules of thumb can be an excellent strategy.

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