Anyone see Scott Burns column yesterday ?

[Cut-Throat]

The physician that did not want to go into the stock market, because it's overvalued or the bond market because interest rates are probably going to rise.

He just wanted to know where to put his money and get a safe 6 or 7 % - (He's not greedy)

He's in the educated portion of society. And people wonder why we get the government leaders that we do?

 

[unclemick]

Doctors are notoriously stupid when it comes to investing - paradoxically - because they are so highly educated. I'm loosely paraphasing Wm. Bernstein (neurosurgeon?) of Efficient Frontier - apparently the exception.

Also, I thought Mr. Burns response was less than adequate. Couch Potato anyone?

 

[unclemick]

Todays cbs Marketwatch - Paul Farrell says we are 'all' stupid and gives his ten reasons why.

 

[Cut-Throat]

unclemick,

Yup just read it.

And that is why you are right in investing in the Vanguard index funds. - I'm with you on this one.

Just admit you'll never beat the market, assemble a portfolio of asset classes and don't look back.

In this regard admitting your stupidity is the smart way to go.

 

[Ted]

There's a difference between "stupidity" and "ignorance."

People who are truly stupid seldom have the skills to make much money in the first place (except when they have the connections to get a job in certain construction trades unions) and tend to "blow" what they do make. Thus they never really have a need to know anything about investing.

Other people may be very intelligent about some things, but lack the time or the interest to learn about investing, and therefore are ignorant of it without being stupid. These people may make a lot of money and are the prime "prospects" of "financial professionals" otherwise known as salesmen.

I find it interesting that many people with large amounts of money are willing to sacrifice on the order of 1.5% or 2% or more of their wealth PER YEAR to have it "managed" by somebody that they can "trust." Often, the "trust" comes from dealing with a "prominent" national investment firm.

The "good news" is that such firms are usually legitimate and will not defraud their customers out of large amounts of money all at once. In the periodic instances when rogue employees do this, the "prominent" firm has the financial assets to make restitution to the client (under threat of legal action by regulatory authorities with its associated loss of reputation).

The "bad news" is that most "prominent" firms have a business strategy that is based on maximizing their profits through slick marketing. This includes not only advertising, but also having plush offices with slick-talking "financial professsionals" in pinstriped suits or the female equivalent. This strategy enables the firms to legally "milk" high fees from investors who are ignorant of investment principles. Chief among these principles is that of market efficiency -- that the "financial products" sold by "prominent" firms will probably produce the same risk adjusted returns BEFORE EXPENSES as any other publicly traded securities.

 

[wabmester]

While you guys were patting yourselves on the back for investing in Vanguard index funds and avoiding paid managers, I was reading this article written by a paid manager about the problems with Vanguard index funds.

http://www.tamasset.com/pdf/oct03ac2.pdf

Enjoy

 

[Ted]

eRe: Anyone see Scott Burns column yesterday ?  

Wabmester apparently did what I did and followed the link posted yesterday by WZD in the "Investment Strategies" section.

It's a very good link, and Jeff Troutner has a lot of insight into investment principles that are based on leading academic research. His chief point is that it is possible to improve upon index investing by using indexes that are more scientifically structured than the "standard" ones like the S & P 500, which develop certain biases.

He may be right, although it is debatable whether some of the historical data on asset returns that he uses to support his points are truly indicative of long term trends. At any rate, he basically agrees with the principle of "passive" asset management with periodic rebalancing. His "enhanced version" may further improve upon Vanguard's "standard" version. But investors who follow Vanguard's version will still do a whole lot better over time than most people who try for "active" management. Another thing to bear in mind is that the information on Troutner's web site is oriented primarily towards investors who are accumulating assets and can tolerate more risk.

It is worth noting that Vanguard's small cap index funds have not performed as well as a number of large actively managed small cap funds (such as Heartland Value and Fidelity Low Priced Stock). Vanguard recognized this problem and during the past year changed the indexes that it uses for these funds. I generally credit Vanguard with being straightforward in its advertising of its funds, but its data indicating that virtually all of its index funds outperform actively managed funds in the same category are biased by the fact that they base their comparisons on the entire universe of funds, which includes a lot of small ones that stay small because they underperform.

 

[haha]

Well, this is after all a sales document. One could compare returns after his fees, over 10 years or so. It is possible but not likely that he earns his keep, by providing an entree into Dimension funds. Bernstein also recommneds these funds.

But many of us just don't like financial professionals, like we may not like car salesmen, or whatever. I don't like it when some guy who would never give me the time of day walking down the street starts being all buddy-buddy when he finds out I have some money.

On the other hand, my Dad, after he put on a few years, loved to get "analyses" from nice looking female planners. He felt it was a type of softcore porn that he had earned through his years of hard work. He kept his money at home though.

Now there is a thread for this board. Money and sex. Sex and money. Joined at the hip.

Mikey

 

[unclemick]

I hate asset class investing - mainly because as a former engineer I always fall for it (Cause it's Sexy!!). In the 70's and 80,s it as 7 or 8 classes including RE and gold (Harry Brown?) and late 80's and early 90's I had as high as 30% international indexes(AAII meetings) and 7 funds across asset classes.

There is reason it's called hobby money. Even since 99 - Vanguard REIT index and small cap value index have slipped in. Periodically I have to look in the mirror and repeat to myself - balanced index funds at least ten times.

I still love to read that stuff.

.

 

[Cut-Throat]

Unclemick,

Yeah - I've got the engineer in me too! - Actually I'm with you on this one too. I go the balanced index fund also. I just mentioned asset class, just in case anyone felt the need to putz!

In 20 years of investing, what I learned is that the more I traded, whether individual stocks, mutual funds, the worse it got!

In spite of this I have averaged over a 14% return in those 20 years. But If I would have stuck it into a S&P 500 Index fund and went to sleep, I would be a couple percentage points better off I'm sure!

 

[wzd]

Re: Anyone see Scott Burns column yesterday ?  

Yes, I had read the TAM Asset Management article previously as well. I think several points mentioned above, by Ted and various responders, are quite appropriate:

It is written by a paid investor advisor firm; however they tout both DFA and Vanguard. I think that the article is somewhat tongue in cheek, about the 'problem' with index funds. While it does mention a problem, the author asserts he still favors of index funds and asset allocation over managed funds. In fact from their 'investments page':

There are several reason why we use index funds to implement our asset class strategies:

* "active" money managers consistently fail to beat unmanaged indexes

The article is more about the pitfalls that go with a fund that is tracking a 'transparent' index, vs. the advantage DFA has in creating their own asset class index. Go ahead and read the article. I think the points about composition of an index and about the ability of investors to trade off of changes in the index are quite valid. However he fails to mention the flipside - what are the disadvantages of a proprietary index? I'm sure we can think of some!

However DFA seems to be well respected as an indexing/asset allocation/passive investing set of funds. In spite of my adversion to 'trust me', they sound reasonable. Swedrowe also mentions them in his books, and I like his (and Bogle's) approach.

I don't use a CFP, or management company, but if I were to plan on using one, this is one I would investigate more carefully. For now, I like reading their newsletters - maybe I'm becoming a newletter junkie....I've sure been reading a lot lately. (not the infomercial ones though!)

wabmaster - way to get the thread going!

Wayne

 

[newellcr]

side thread - Paul Farrel

Unclemick,

I used to follow Paul Farrel's column, but I had difficulty finding his column reliably and stopped looking for it. Is his column at a known link each time or do you need to search for it?

Thanks,

Chris

 

[unclemick]

I go to cbs Marketwatch on tuesdays and thursdays - my webtv doesn't like hteir cookies so I can't register.

 

[Ted]

It is written by a paid investor advisor firm; however they tout both DFA and Vanguard.

 However he fails to mention the flipside - what are the disadvantages of a proprietary index?   I'm sure we can think of some!  

I don't think that TAM uses Vanguard (except possibly for a type of fund not offered by DFA). Rather, they are using Vanguard index funds as the "standard" to which to compare DFA Funds. And Vanguard's funds are certainly a tough standard to beat.

I see two down sides to the TAM/DFA approach.

First, it seems to be based mainly on the observation that small cap value stocks provide the highest long term return. Therefore, if you construct an index that is "pure" small cap value stocks, it will outperform others over time. The more assets that are allocated to this fund, the higher the return of the portfolio will be. The "catch" is that doing this will also increase the volatility of the portfolio. Although this approach is supported by evidence that the return to risk ratio is best for the smallest stocks, it nevertheless creates a higher level of risk that is typically more appropriate for high income working people than for retirees.

2. Secondly, DFA sells its funds only through investment advisors. Although these folks do seem to be a lot more familiar with the realities of markets than the typical marketing-oriented firm, they will naturally try to retain for themselves a large part of any "value added" by DFA. So I'm pretty confident that a reasonably knowledgeable investor dealing directly with Vanguard (and other low cost fund providers) could realize just as high a return -- especially on a risk-adjusted basis.

 

[John Galt]

I find Scott Burns' stuff just excellent. Discovered him
when I lived in Dallas starting in 1994. As regulars
on this site know, I can't stand Bob Brinker, and it's not just his personality or delivery. I try to listen when I'm
in the car but have to switch him off usually. I think
the worst thing is him trying to bluff his way through,
when he either doesn't know the answer or doesn't
understand the question.

John Galt

 

[wzd]

Re: Anyone see Scott Burns column yesterday ?  

I don't think that TAM uses Vanguard (except possibly for a type of fund not offered by DFA). Rather, they are using Vanguard index funds as the "standard" to which to compare DFA Funds. And Vanguard's funds are certainly a tough standard to beat.

They claim to. From their investments link on their home page:

We utilize the institutional index funds of Dimensional Fund Advisors (DFA) as well as index funds of The Vanguard Group and other fund families to implement our strategies. Funds are selected based on the indexes they track, performance relative to the index, and the expense ratios of the funds.

They also claim to use an asset allocation model to reduce volitility. I tend to agree with your conclusions - do it yourself. I couldn't find their fee information anywhere on the pages, so I don't know how to adjust the claimed DFA returns downward to make a comparison. But regardless, I don't like paying someone to manage my portfolio, so I will do it myself.

However, I am researching advisors, etc. to put in my financial info folder for my wife, who does not want anything to do with managing her own portfolio. Then, if I die first, she will at least have an advisor/fund family I like to start with if she decides to use one.

Wayne

 

[Ted]

One of the benefits to participating in this forum is finding out about sources of financial information that are new to me. Like most people with a formal education in economics, I'm extremely skeptical about anybody's claims for having the "best" approach to investing. But I think that the TAM/Dimensional Fund Advisors approach is legitimate, and I would investigate it further (especially with regard to their fees) if I didn't prefer to manage my own investments.

DFA funds are listed with others in the daily tables of mutual fund performance. It turns out, however, that DFA sells its funds only through selected financial advisor firms, of which TAM is one. If I were going to go this route, I would first try to determine whether one of these firms had a local office so that I could deal with them in person.

Over 20 years of marriage, I have turned my wife into another "true believer" in low cost, diversified investing, and in the dangers that are inherent in any "golden investment opportunities" being pushed by "financial professionals." We keep our assets in our separate accounts, but coordinate them to achieve overall balance, and I'm certain that she could manage them just fine without me. Plus which, the two of us are a big hit at parties 8) :

 

[unclemick]

I come from a long line of financially challenged people - I have no ideas on how to protect them should I pass first.

 

[wzd]

Re: Anyone see Scott Burns column yesterday ?  

Unclemick - I share your problem.

The best I have though of is to write down the reasons for my portfolio, and to write down notes about my distrust of financial planners, and warnings about consultants at Fidelity, etc. I am looking over financial planners to see if I can find one that mirrors my investment philosophy, and that has the most reasonable of what I consider unreasonable fees, and add that to my recommendations.

Since she is not interested in listening in any detail now, that is the best I can think of. Anyone else with good solutions, speak up.

Wayne

 

[wzd]

Re: Anyone see Scott Burns column yesterday ?  

Ted -

Have you read Swedrowe's "What wall street doesn't want you to know"? It is one of the financial books I like among the many that our library has. He also happens to be a DFA proponent, and I looked into DFA funds a little bit after reading it only to find out what you mentioned above - they only sell thru CFP's, etc. Since I am not going thru a CFP, I wrote them off of my list; If I were working with a CFP I would certainly consider them.

Wayne

 

[Ted]

wzd,

I don't usually read entire books on finance because I feel that I understand the basic principles (as developed primarily by academics), and don't want to devote that much time to possibly picking up a few "fine points." Instead, I read short articles on the internet and in the financial news that seem (on the basis of their titles) to have something new to add.

My approach to investing is a lot like my approach to my career in civil engineering. The basic principles don't change, and as long as I can not identify how a proposed course of action would violate basic principles, it almost always works.

 

[wabmester]

My approach to investing is a lot like my approach to my career in civil engineering.  The basic principles don't change

Ted, I view most "basic principles" of investing a lot like the basic principles of weather prediction. I wish there were an underlying physics to this stuff, but for all of the historical statistical analysis done trying to find safe investing strategies, it really comes down to understanding human behavior and the interplay of a myriad of seemingly unrelated phenomena.

The markets have made many nobel laureates look like fools, so the only basic principle I subscribe to in this area is to always question your assumptions.

 

[LA_Newsboy]

it really comes down to understanding human behavior and the interplay of a myriad of seemingly unrelated phenomena.

While that approach might provide intellectual stimulation as you turn all this stuff over in your head, I think it makes "safe investing' far more complicated that it need be.

 

[wabmester]

While that approach might provide intellectual stimulation as you turn all this stuff over in your head, I think it makes "safe investing' far more complicated that it need be.

I don't know about more complicated, but it definitely makes me more defensive.  The stock market is a big mystery to me.  I'm willing to make a  pretty big bet on conventional market wisdom, but I also feel a need to hedge my bets with stuff I better understand.

For example, I have a bigger bet on real estate than most people.  I only invest in waterfront property because of supply/demand characteristics.  I'm aware that real estate as a market can crash, but I also take long-term comfort knowing that I'm holding real assets that will continue to hold intrinsic value in the face of almost any event.

I also decided to allocate assets to buying or building a small business because I like the control and upside potential.  Obviously not an approach everybody would want to take, but it works for me on many levels.

 

[John Galt]

Hello Wabmester! Your approach is a bit unorthodox, but it worked for me. I too owned a bunch of waterfront property (including my current house). Also, owned (sometimes alone - sometimes with partners)
several small businesses, starting about 20 years ago.
Although I might have pulled it off anyway, it is very difficult for me to see how I could have retired
without these components.

John Galt