Learning about personal finance, tweaks to improve retirement, Apple, and China

1. Khan Academy and Visa have created a multi-part series on personal finance. Ever wondered what it means to buy company stock, or how an open-ended mutual fund works, or what bonds are? (Via Reddit Personal Finance.)

2. On retirement, The New York Times shares recent advice from some financial advisers on small tweaks that help investors save more and trim risk:

Your retirement portfolio may be bigger than you realize. At least it would be if all your resources — your salary and home and not just the 401(k) plan at work — were enlisted to accumulate enough wealth to satisfy your needs and wants in old age, some financial advisers say.
 
Factoring other assets and income streams into a financial plan can provide greater ease and flexibility in meeting goals, these advisers say. Such an approach may be especially useful now because the low income that many assets pay is causing savers to make their portfolios work harder than they should when sensible adjustments, like spending less and contributing more, would accomplish the same objective.

3. Apple announced a 30% year-over-year revenue increase… and its stock promptly dropped 4.5 percent. Marketplace has a piece that reminds us that the stock market is fueled by investor expectations. (Related, we shared recently an update of our AAPL optimism index.)

4. China’s stock market has been in the headlines. The Economist provides a quick primer:

Kind of looks like Half Dome

The great Charles Kindleberger described the pattern of how bubbles form and then burst in his book “Manias, Panics and Crashes”. His model, which was linked to the work of the economist Hyman Minsky, saw the process as having five stages: displacement, boom, over-trading, revulsion and tranquillity. China looks like it is following the model pretty closely, having reached stage four already.

Behind the numbers are regular Chinese investors riding the volatility, whom the New York Times chronicles:

China fell under the spell of the stock market over the last year, as millions of factory owners, university students, wheat growers and other investors jumped at a chance to strike it rich.
 

“When we eat breakfast, we think of the stock market. When we sleep, we see flashing red and green screens,” said Elizabeth Xu, 37, a customer service supervisor at an electronics company in Shanghai, who invested $2,500 last fall. “This is our new sport.”
 

But with the market stumbling in recent weeks, investors are now engaged in a national game where the risks are increasingly outweighing the rewards.

 
 
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The Greek crisis, startups staying private, and investor home bias

1. The Greek crisis is in the headlines. If you are just catching up, here is a terrific explainer from Vox.

How did we get here?

The roots of Greece’s crisis are simple. Before Greece joined the Eurozone, investors treated it as a middle-income country with poor governance — which is to say, a credit risk. After Greece joined the Eurozone, investors thought that Greece was no longer a credit risk — they figured, if push came to shove, other Eurozone members like Germany would bail Greece out. They were wrong.

What does it mean for Greeks?

Greece’s problems are often framed as a financial crisis, or a political crisis. But what they really are is a human crisis. Unemployment in Greece is over 25 percent now — higher than the United States during the Great Depression. And high unemployment is leading to political backlash.

2. What will happen with a Yes or No vote in the Sunday referendum? The Economist describes the scenarios.

3. What’s the next big tech IPO after Fitbit? One may have to wait. The New York Times shares how today’s startups stay private for longer:

For start-up entrepreneurs and their employees across Silicon Valley, an initial public offering is no longer a main goal. Instead, many founders talk about going public as a necessary evil to be postponed as long as possible because it comes with more problems than benefits.

4. The Times has a round-up of robo-advisors, focusing on services targeted at high net-worth investors.

5. We offer a column on investor home bias, and wish our readers a happy long weekend.

 
 
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Active funds underperformance, emotions in the way of investing, and short-sellers in the bull market

1. The Economist shares more new research, this time from S&P Dow Jones Indices, on the performance of actively managed mutual funds:

So let us take the 682 domestic US equity funds that were in the top quartile as of March 2013. How many were still in the top quartile a year later? If performance was random, one would expect a quarter to do so; the actual number was 21.3%. By the time one reached March 2015, randomness would suggest 6.25% of funds would remain in top quartile (a quarter of a quarter); the outcome was 5.28%. One might as well toss a coin or spin a bottle.

In recent months, the same blog has written up similar findings from Vanguard, Morning Star, and a related study on the consultants that help funds choose managers.

2. Dr Meir Statman writes in the Wall Street Journal on emotions getting in the way of smart investing:

Rational investors follow the maxim, “Cut your losses and let your profits run.” I, and fellow professors of finance, teach students to recognize the tax benefits of realizing losses and overcome the reluctance to realize them.
 
So why do so many investors do the opposite, sell winners too early and ride losers too long? The answer is largely in our desire for the emotional benefits of pride and avoidance of the emotional costs of regret.

3. The New York Times shines a spotlight on short sellers in the current bull market, and another on American seniors doing well in retirement.
 
4. Openfolio shares some regional maps showing industry-level home bias among their users. Here is a related piece from us. 
 
5. Barry Ritholtz reminds us not to mistake the meaning of stock splits.
 
 
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Active vs passive investing, Title IV of the JOBS Act, and how men and women invest differently

1. Jeff Sommer of the New York Times shares more research on active investing:

[Dalbar, a Boston Research firm] has been chronicling mutual fund investors’ efforts to beat financial markets for many years, and it has found that as a group, typical investors almost invariably lose.
 
The numbers are devastating.
 
For the two decades through December, Dalbar found, the actual annualized return for the average stock mutual fund investor was only 5.19 percent, 4.66 percentage points lower than the 9.85 percent return for the Standard & Poor’s 500-stock index. Bond investors did even worse, trailing the benchmark Barclays Aggregate Bond index by 4.71 percentage points.
 
In isolation, these figures, which aren’t adjusted for inflation, may seem small. But they aren’t when they recur year after year. In fact, because of the effects of compounding — in which a positive return in one year adds to your stash and can grow further in subsequent years — those annualized numbers translate into life-changing disparities.

2. From The Economist, a reminder that Title IV of the JOBS Act of 2012 takes effect soon:

On June 19th Title IV of the JOBS (Jumpstart Our Business Startups) Act of 2012 goes into effect. It will change how small companies raise money. Those seeking $20m-50m will be able to offer their shares to the public while skipping some of the most costly regulatory requirements that normally involves, including being vetted by state officials, issuing quarterly reports and listing their shares on an exchange.
 
In the past, firms that did not meet those requirements could only raise money from investors with a net worth in excess of $1m or $200,000 in annual income. Ten thousand people who did pass that test have signed on to SeedInvest’s system. With the lifting of the rules on income, any adult American can now invest in small share offerings, according to Ryan Feit, SeedInvest’s chief executive.

 
3. The Chicago Tribune and Huffington Post quoted our past study comparing men and women investors.

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Hedge fund underperformance, how an investment adviser picks her adviser, and whether Millennials are smarter investors

1. The New York Times shares data on hedge fund performance and manager compensation.

The top 25 hedge fund managers reaped $11.62 billion in compensation in 2014, according to an annual ranking published on Tuesday by Institutional Investor’s Alpha magazine.
 
That collective payday came even as hedge funds, once high-octane money makers, returned on average low-single digits. In comparison, the benchmark Standard & Poor’s 500-stock index posted a gain of 13.68 percent last year when reinvested dividends were included.

For_Top_25_Hedge_Fund_Managers__a_Difficult_2014_Still_Paid_Well_-_NYTimes_com

2. Also in the Times, John Wasik shares a piece on the risks and rewards of self-managing portfolios.

There are good reasons for retirees to manage their own financial lives: Saving money on fees is one benefit, and more closely aligning investments with personal goals is another.
 
But there is dangerous ground along the way: Taxes, estate planning, rules around gifting to relatives, timing of withdrawals from retirement accounts and other issues can be immensely complex and are getting more so.

3. Our Chief Investment Officer Terry shares her approach to picking an investment adviser as an investment adviser.
 
4. On Yahoo, our CEO Mike relates some interesting facts in our data — namely, on some dimensions millennials may be smarter investors than their parents. In aggregate, younger investors are more likely to be passive, low-cost investors, owning lower-cost funds and less likely to overtrade on average.

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Diversification in retirement accounts, more data on active vs passive funds, and a special song from Buffett

This week in Friday Notes:

1. Berkshire Hathaway’s Annual Shareholder Meeting takes place this weekend in Omaha, Neb. What will Warren Buffett be talking about? We shared five questions we’d like to ask him, via Daily Finance:

Why Has Berkshire Hathaway Underperformed Lately?

Yes, over the last 50 years, Berkshire’s performance has been outstanding. But in four out of the last five years, it has underperformed the S&P 500 (^GSPC) by what has traditionally been Buffett’s preferred measure, book value per share growth. In his 2014 annual letter to shareholders, Buffett reported not only book value but also per-share market value change, a measure by which Berkshire has only underperformed in one of the last five years. Aaron Gubin, director of research at SigFig, says he would ask Buffett about the timing of this change; why begin reporting per-share market value today, when Berkshire has operated under fundamentally the same organizational structure for decades.

2. From Bloomberg, a reminder on the critical importance of diversification:

To get the income they need, investors need to protect themselves by spreading their assets among as many income-producing investments as possible. And they should beware of any investment that promises a big payout — it’s almost certainly too good to be true.

3. Do you have an active 401K? Are you filling it with company stock? Ron Lieber writes in the New York Times:

Don’t do this. If your employer matches your 401(k) contribution in company stock, set a calendar alert to remind yourself to sell it a few times each year and then reinvest it. If your employer restricts your ability to sell it right away and makes you keep it for a few years, complain loudly to human resources; most companies don’t do that anymore.

We shared our data on this topic in December.

4. The Economist shares some more data on active vs passive funds.

Nobody wants to buy the cheapest parachute. That is often presented as an argument for active fund management. If you buy index-trackers, you get guaranteed mediocrity. The smart money can find opportunities in the market, and for that it’s worth paying top dollar.
 

But the data don’t show that. Take a look at the table which shows the average annual return in various UK sectors over the 10 years to end-2014. Yes, it is from Vanguard, a passive manager. But if you think they have made the numbers up, I refer you back to Morningstar figures showing that active managers have only beaten the US market in 5 of the last 20 years.

5. And lastly, via Fortune, something a little different:

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