Report from Tau Beta Pi Convention "Managing Your Investments for Retirement"

[deserat]

Report from Tau Beta Pi Convention "Managing Your Investments for Retirement"

I was a voting delegate to the TBP convention and one of the seminars they had for the engineers (students and alumni) was called 'Managing Your Investments for Retirement.' Most of the presentation was a graphical and numerical thesis for why students should start saving and investing money early in their careers (we are engineers and understand numbers and graphs).

What was most interesting was one of the presenters was Harry Lange of the Magellan Fund fame (apparently he was fired due to poor performance of the fund - he left early to go to his Harvard B School reunion the next day). TBP gives out a lot of scholarships every year and apparently he and several other alumni were irritated that the endowment/trust was being managed by a bank using bonds. They made a pitch about 20 years ago or so and said the fund should be actively managed and in stocks. The amount of money in the trust fund has truly gotten quite large since then.

Back to the presentation - what interested me most were two things:

1) They advocated for using actively managed funds
2) They showed the typical AA for an actively managed portfolio for institutional investors:

US Equity: 20% Large Cap Growth, 20% Large Cap Value, 10% Small Cap Growth, 10% Small Cap Value

Intl Equity: 25% Developed Mkts, 15% Emerging Mkts

100% Equities - I asked about that and they said they were investing for perpetuity, so they would stay 100% in equities. They did say that with a shorter time frame and retirement, one would change their AA as they got older. However, their main audience was young 20-something engineering students.

I myself have done a FIRE presentation to the local student chapter here, but I didn't spend so much time on trying to convince them to save/invest and went into more practical actions for them to take as well as gave them several books and links to read for more info.

Question - what do you think of their AA?

Off topic - I found this article about Harry Lange:
https://www.forbes.com/sites/amyfel...money-man-at-hedonism-ii-resort/#2b70433c308d

I saw him and talked with him briefly...I did not know he was into nudity and he was wearing a suit at the time - I don't think TBP would have liked him au naturelle

 

[stepford]

Thanks for some nostalgia. I haven't thought about Tau Beta Pi since they gave me that funny little "bent" thing and taught me the secret handshake 40 years ago.

 

[GravitySucks]

Between 30 and 53 did have a little bond in my AA so I had about 95/5 but the equity portion was close to the suggested, though less International and more Value.
After the first ten years the passive funds had performed better than the managed funds so I moved most everything to the index fund choices.
It looks like a good allocation for someone with a 30 year time frame to me. And I'm not surprised an ex fund manager would recommend managed funds

 

[bingybear]

Thanks for some nostalgia. I haven't thought about Tau Beta Pi since they gave me that funny little "bent" thing and taught me the secret handshake 40 years ago.

I haven't thought much about it either. But don't recall the hand shake

 

[OldShooter]

AA is not far from the mix of companies in a whole world fund like VT; slightly more home country bias at 60/40 vs whole world at 50-55% US. Delivered results will be penalized by higher fund fees, trading costs, and market impact costs that stock pickers incur and these penalties come with no corresponding benefits.

We engineers love to think things through logically, sometimes even ignoring actual data because we think we are so smart. That is probably what is happening here. There is overwhelming statistical data and academic studies that say stock picking doesn't work. S&P SPIVA and "Manager Persistence" reports are really all you need to read. On the academic side, here are some short videos:

https://famafrench.dimensional.com/videos/is-this-a-good-time-for-active-investing.aspx

https://famafrench.dimensional.com/videos/identifying-superior-managers.aspx

And here is the seminal paper, only three pages: https://web.stanford.edu/~wfsharpe/art/active/active.htm

There is zero data to support a stock picking strategy.

 

[sengsational]

Efficient market theory suggests a small bond allocation increases the risk adjusted return. I'm surprised they don't follow the "efficient frontier", but maybe that theory is not universally accepted.



BTW, I signed up for life membership right out of college, so still get the periodical occasionally in the mail. So does my DD.

 

[OldShooter]

Efficient market theory suggests a small bond allocation increases the risk adjusted return. I'm surprised they don't follow the "efficient frontier", but maybe that theory is not universally accepted. ...

I think you are referring to modern portfolio theory (Markowitz) not the EMH.

The problem with MPT is that Markowitz defined "risk" as variation, specifically standard deviation. While that may be sound in some contexts, during the accumulation phase variation is pretty much irrelevant as the saver is not withdrawing money from the portfolio. So sequence of returns risk is not there. For someone in the accumulation phase, risk is really from lack of diversification (think Enron, Sears Holdings, GE, etc.) and from choosing a slow horse (bonds) rather than a fast one (equities). So the solution is highly diversified (aka passive) investing including a large fraction of non-US equities.

 

[Clone]

100% Equities - I asked about that and they said they were investing for perpetuity, so they would stay 100% in equities. They did say that with a shorter time frame and retirement, one would change their AA as they got older. However, their main audience was young 20-something engineering students.

I myself have done a FIRE presentation to the local student chapter here, but I didn't spend so much time on trying to convince them to save/invest and went into more practical actions for them to take as well as gave them several books and links to read for more info.

Question - what do you think of their AA?

I recommend that new engineering grads put 100% into a general stock fund or S&P type fund. Keep it really simple so that they have something they can remember on that second day of work when they need to choose how much to put into their 401k and what it should be invested in. As it grows in a couple years they can learn more about other allocations. What I do not want them to do is say- "I think I will just pay my bills and have fun for a few months before I worry about trying to save money."


My basic message- Make sure you get the 401K match. Put your money into simple general market funds. Manage your own money. Fund your HSA (if applicable). When you get raises, increase the percentage that you are putting into your 401k.

 

[38Chevy454]

I am also an engineer. I think being 100% equities is fine since the scholarship fund is for long term, or perpetuity as they claim. The only risk is if a serious long time downturn in stocks, they will need to draw the scholarship funds from the reduced value and may have longer recovery. I am assuming the withdrawal is on the order of 5% max each year I do think passive index funds will likely do better than active managed due to the increased fees. But kudos for them getting the fund to get away from 100% (also managed fee) bonds and into equities. In comparison over long term, even active managed equities should outperform 100% bonds by a a significant amount.



Concur that the best advice for new grads starting out is just ensure they save in an index type fund, max out the company match at minimum, hopefully saving approx 15% if they can swing it. Save 15% for 30+ years, while having a mostly equities allocation, and the new grad should be set for FIRE! Since engineers can do math, just show the magic of compounding and they will understand.

 

[W2R]

I haven't thought much about it either. But don't recall the hand shake

Me either. I was a member until I was out of engineering school for a couple of years, but didn't really feel like I got much out of it; so I dropped it at that point. No handshake! Maybe a secret handshake would have persuaded me to keep up my membership.