Gyroscopic Investing

Dear Ms. Marcks,

I thought it was very brave of you to participate in the exceptional Frontline report, "The Retirement Gamble." It has long been my view that investors should limit their investments (in both their personal and retirement accounts) to a globally diversified portfolio of low management fee index funds (including ETFs and passively managed funds) in an asset allocation suitable for them.

In retirement accounts, it's very difficult to implement this sound, responsible, academically based strategy because most plans toss in a few token index funds but populate the balance of the investment choices with expensive actively managed funds (where the fund manager attempts to beat a designated benchmark).

It's not difficult to do the right thing for America's employees. A lot of firms, including those in the BAM ALLIANCE (with whom I am affiliated), offer 401(k) plans that consist solely of portfolios of low-cost, passively managed funds at various risk levels. Participants don't have to put together a risk-adjusted portfolio from many fund options (which few are able to do).

I understand you profess ignorance of the data indicating a majority of low-cost index funds outperform their active counterparts. In a blog post reviewing the Frontline report, Allan Roth reported your response as follows: "Yeah, I haven't seen any research that substantiates that. I mean, it -- I don't know whether it's true or not. I honestly have not seen any research that substantiates that."

I do want to thank you for that observation. I am often criticized for my view that brokers will say anything to capture assets. I was referring to retail brokers who are under pressure to meet their fee goals. I never imagined the president of a major securities firm would be captured for posterity uttering words that are either hopelessly ignorant or appallingly disingenuous. I am going to give you the benefit of the doubt and assume it's the former, but every fiber in my body tells me it's the latter.

Read the rest here...
http://www.huffingtonpost.com/dan-solin ... 73437.html

HT: Jack Bogle

Dan Solin is a frequent guest on the IFA podcast, which is very pro-indexing. 

[quote][/quote]It has long been my view that investors should limit their investments (in both their personal and retirement accounts) to a globally diversified portfolio of low management fee index funds (including ETFs and passively managed funds) in an asset allocation suitable for them.

This is the problem, people have NO idea what diversification and allocation selection even means.  Of course, we can try to tell them about the PP or they can look it up on their own, but it leaves so much room for confusion, and what is truly the appropriate amount of risk?

This is my problem with index-Nazis (I'm an index guy, mostly, btw)... they think the MAIN problem is doing actively managed funds.  I really don't think it is.  A lack of understanding diversification is the main problem.  Indexing is a way to lower fees since you don't know which picker to pick.

However, I think the anti-indexers put too much faith in technical analysis and past performance... or fundamentals that they think for some reason aren't priced into markets.

I'm pretty firmly in between, but I default to index because I find that the less moving pieces the better.  But that doesn't at all help me decide how to allocate my portfolio.

In fact, and I don't know if this is my first time realizing this, but to be a bit of a Devil's Advocate, HB's assertion that the fed won't let the treasury default is a little bit presumtuous, and maybe we should be "indexing" our bonds?  I mean we do have gold, which is essentially our back door out of the disaster that would be a U.S. default, but I wouldn't blame anyone for taking it to HB saying that this is far too big of an assumption to make with 50% of your money.

Eventually, hard decisions have to be made about allocation, and this involves "picking."  Indexing is only part of the solution.  I wouldn't be surprised if with the ease of investing on your own nowadays, and the prevalence of "index only" in the financial media, we have a bit of an epidemic where people's .07% expense ratio TSM ETF that they have 90% of their money in goes down in the next market collapse and people are baffled as to why they lost so much in "these safe, cheap Vanguard funds."  I know this isn't direcly what Bogle and his supporters are suggesting, but I think this is going to be the take-away by a LOT of people who only have so much time to read about this stuff.

And for the record, I have actually heard of people referring to their funds as "safe" before just because they're Vanguard or T. Rowe Price. 

Low cost is so attractive to people, that I'm afraid that might be all they concentrate on, especially with Dave Ramsey telling so many people to invest in Small Cap Stocks to get 12%, no gold, no bonds, and get a 15 year mortgage.  Diversification is a complex topic.  People will ignore it if given the chance.  We should be shouting about diversification first, and indexing second.

moda0306 wrote: In fact, and I don't know if this is my first time realizing this, but to be a bit of a Devil's Advocate, HB's assertion that the fed won't let the treasury default is a little bit presumtuous, and maybe we should be "indexing" our bonds?  I mean we do have gold, which is essentially our back door out of the disaster that would be a U.S. default, but I wouldn't blame anyone for taking it to HB saying that this is far too big of an assumption to make with 50% of your money.

I think HB's assertion that the Fed won't allow the Treasury to default is correct, since they can buy an unlimited amount of Treasury issuance. Anyway, what bond will be safe if the dollar collapses as a result of a Treasury default? Maybe Swiss governments, but then of course you have currency risk.

moda0306 wrote:

This is the problem, people have NO idea what diversification and allocation selection even means.  Of course, we can try to tell them about the PP or they can look it up on their own, but it leaves so much room for confusion, and what is truly the appropriate amount of risk?

Very true. I was listening to cubicle chatter the other day and an Indian immigrant who is now a citizen, and probably 50 years old, was asking a co-worker about what selections he should make for his 401k. The person he was asking wasn't very friendly, trying to tell him he needed to make his own decisions. He did finally offer up the advice to "check the performance" and "choose a stock fund that pays dividends (dividends seem to be the hot commodity lately - any one else notice this?).

I felt kind of sorry for the guy, especially since he's 50-years-old and only has about a 15 year investment horizon.

10 years ago at the same company he would have belonged to a pension plan with a clearly defined benefit after X many years of service. They did away with that and now we are all on our own.  I can handle it myself but this has to be overwhelming for a lot of people.

notsheigetz wrote: Very true. I was listening to cubicle chatter the other day and an Indian immigrant who is now a citizen, and probably 50 years old, was asking a co-worker about what selections he should make for his 401k. The person he was asking wasn't very friendly, trying to tell him he needed to make his own decisions.

What a shame. I love opportunities like that. We had a 19 year-old intern at work last summer who I got the opportunity to advise about investing, finally culminating in his opening a Roth IRA and implementing a permanent portfolio inside of it!

I feel like I made a real difference in his life; this kid knew nothing about finance beforehand, and by the time he left, he was pretty sophisticated.

Pointedstick wrote:

notsheigetz wrote: Very true. I was listening to cubicle chatter the other day and an Indian immigrant who is now a citizen, and probably 50 years old, was asking a co-worker about what selections he should make for his 401k. The person he was asking wasn't very friendly, trying to tell him he needed to make his own decisions.

What a shame. I love opportunities like that. We had a 19 year-old intern at work last summer, who I got the opportunity to advise about investing, finally culminating in his opening a Roth IRA and implementing a permanent portfolio inside of it!

I feel like I made a real difference in his life; this kid knew nothing about finance beforehand, and by the time he left. he was pretty sophisticated.

I second this comment. I end up having "Finance Lunches" at work now and then and have a question-and-answer session of anything financial they want to talk about. I normally maybe 2-3 people to ask questions which is fine for me. I certainly don't know everything about investing but I do know of different methods to invest, etc. It's a good feeling to help others that are more financially illiterate.

The sad thing is, all of this should be part of the standard curriculum in school!  How pathetic are we as a society that we graduate young adults and send them out into the world without knowing how to handle the basic necessities of life such as balancing a checkbook or investing for their future retirement? 

It kind of pisses you off if you think about it long enough, so I advise against doing that (unless of course you enjoy getting pissed off ).

rocketdog wrote:How pathetic are we as a society that we graduate young adults and send them out into the world without knowing how to handle the basic necessities of life such as balancing a checkbook or investing for their future retirement? 

What's a checkbook? 

Pointedstick wrote:

rocketdog wrote:How pathetic are we as a society that we graduate young adults and send them out into the world without knowing how to handle the basic necessities of life such as balancing a checkbook or investing for their future retirement? 

What's a checkbook? 

Whoa whoa whoa let's not get ahead of ourselves here. The first question is, what's a book?

One of the best things any college could do would be to require all undergrads to take and pass a basic intro to personal finance course with The Bogleheads Guide to Investing as one of the required texts.

rocketdog wrote: The sad thing is, all of this should be part of the standard curriculum in school!  How pathetic are we as a society that we graduate young adults and send them out into the world without knowing how to handle the basic necessities of life such as balancing a checkbook or investing for their future retirement? 

It kind of pisses you off if you think about it long enough, so I advise against doing that (unless of course you enjoy getting pissed off ).

If it was part of the standard curriculum in school they would probably be giving out advice like make sure you invest in green companies like Solyndra.

notsheigetz wrote: If it was part of the standard curriculum in school they would probably be giving out advice like make sure you invest in green companies like Solyndra.

+1

Doesn't at least some of the responsibility for the instilling of common sense and practical life skills fall on parents?

Before I ever went out into the real world on my own, my father taught me by example the value of saving (he helped me open my first savings account and IRA when I was a teenager) and also the fact that splitting one's IRA investments between a stock index fund and a bond index fund is a decent default approach.

I think that choosing a compatible mate and maintaining that relationship for a lifetime is also a vital life skill, just as important as personal finance and investing. Should all schools have mandatory courses on that skill as well?

Tortoise wrote: Before I ever went out into the real world on my own, my father taught me by example the value of saving (he helped me open my first savings account and IRA when I was a teenager) and also the fact that splitting one's IRA investments between a stock index fund and a bond index fund is a decent default approach.

I got my first job busing tables when I was 16. It paid 85 cents/hour plus tips. Opened up a bank account and saved enough money from only that job to pay for tuition at the Ohio State University. Just goes to show you how times have changed. I don't know if teenagers can even find jobs nowadays and if they can I doubt that any of them pay enough to even come close to paying for tuition at a major University.

I wanted nothing to do with the IRA back then however, as those initials stood for "Irish Republican Army", a terrorist organization in Ireland.

Pointedstick wrote:

rocketdog wrote:How pathetic are we as a society that we graduate young adults and send them out into the world without knowing how to handle the basic necessities of life such as balancing a checkbook or investing for their future retirement? 

What's a checkbook? 

Come to think of it, what's a check?

rocketdog wrote:

Pointedstick wrote:

rocketdog wrote:How pathetic are we as a society that we graduate young adults and send them out into the world without knowing how to handle the basic necessities of life such as balancing a checkbook or investing for their future retirement? 

What's a checkbook? 

Come to think of it, what's a check?

I closed on a mortgage refinance this week.  As part of the process I could supply a voided check to sign up for payments to be deducted from my checking account automatically, and I would receive a 1% rebate on P&I every year.

Luckily I have 90 days to sign up online, because I could not find the checkbook.  I cannot remember the last time I wrote a paper check on that account.  I've run on average $2000 per month thru that account for at least 10 years and when someone wants a paper check I'm floored.

I'm sure if I do still have paper checks that they have the wrong bank name on them.  I opened that account when Washington Mutual (WaMu) first came to town, put up that building and offered incentives for new accounts...

There was a big push by the banks to stop issuing cheque books in the UK a couple of years ago because they were "archaic".

However there were a couple of truly outstanding outsourced IT failures in very large banks that meant huge swathes of people had to run off of cash withdrawn from their local branch for a week.

I haven't heard so much about cheques being archaic of late.   

AgAuMoney wrote:I closed on a mortgage refinance this week.  As part of the process I could supply a voided check to sign up for payments to be deducted from my checking account automatically, and I would receive a 1% rebate on P&I every year.

Luckily I have 90 days to sign up online, because I could not find the checkbook.  I cannot remember the last time I wrote a paper check on that account.  I've run on average $2000 per month thru that account for at least 10 years and when someone wants a paper check I'm floored.

I'm sure if I do still have paper checks that they have the wrong bank name on them.  I opened that account when Washington Mutual (WaMu) first came to town, put up that building and offered incentives for new accounts...

Ask the mortgage company if they will accept a bank letter instead of a voided check.  They should, for exactly the reasons you described.  At my company, you can sign up for payroll direct deposit with a bank letter instead of a voided check, because they know so few people write checks anymore and many don't even have paper checks available. 

I don't write very many checks, but I'm surprised that so many people don't use them at all.