A Couple of Good Reads

This is the time of year where financial writers like to recommend mutual funds for the coming year. Do you follow their recommendations?  If so, do yourself a favor and read The Best Mutual Funds to Buy Right Now! by Andrew Hallam.

Another good read is at MarketWatch by Robert Powell:  You may need less retirement income than you think.  The article illustrates to me that the whole subject of retirement planning is treated simplistically by researchers, and individuals should be aware of this.  Even going beyond the excellent points made in the study cited by Powell is the fact that individuals vary in the amount they spend during their retirement years.  Many spend heavily at first, doing the traveling or other expensive endeaors they have dreamed of, get it out of their system, and then settle in.  A decade then follows where spending may be somewhat less and even less than the 80% cited by Powell.  Closer to the end, or as Ed Slott is fond of saying "when the life insurance matures," medical costs ramp up.  The point is that spending in retirement is generally more complex than generally made out to be, and it is less cumbersome for researchers to just use simple percentage rate drawdowns.

Eye-Opening Article on Load Funds

Source: Movie Mezzanine

When we were kids, before the days of movie ratings, Freddie Gonzalez, Steve Lowe, and I walked to Wheaton Plaza to see Alfred Hitchcock's Psycho.  On the walk home, Steve and I had to explain the movie to Freddie who spent a good part of the show with his eyes closed and bent over trying to hide behind the seat in front of him.  He couldn't handle Norman Bates' strange handling of the death of his mother.  When Lila headed up the hill to find out what was going on in the Bates' house, Freddie was almost on the floor of the theater covering his eyes.

Freddie just couldn't uncover his eyes and take in the horror Hitchcock presented on the screen.  All of us had nightmares for weeks.

A different type of subtle horror takes place today in the world of investing with various class mutual funds.  A carryover from the days when the insurance salesman knocked on your door and sold mutual funds on a commission basis, today, load funds are still around.  Investors are still paying a 5% commission for funds when the same fund or a similar fund is available commission free.  The horror is when advisors charge investment management fees and put clients in load funds!

Someone has to go up the hill, turn the "old lady" in the chair around, and find out what is going on.

Steve Garmhausen, in "Are Sales Loads for Suckers" (Barrons, 1/19/2013), does this.  This article will save thousands of dollars for those investors willing to uncover their eyes and read and check out their own holdings.

A couple of quotes:

The more an investor learns about share classes, the more he may suspect that he's the proverbial sucker at the poker table, paying more than everyone else for the same funds. And the fact is, he may be on to something.

But the multiplicity of share classes can also create temptation for brokers to recommend shares based on what they stand to earn from the sale. So how do you ensure that you're in the most economical share class of a fund? 

(I've been accused of spoiling a movie line so I'm not going to give you the answer - please read the article).

To find out if a fund you hold does have a load, just put the ticker symbol in at www.morningstar.com. The first page will show you if there is a load.  The next step is to find out why you own a load fund.

For those for whom all of this is a bit much, I would recommend an hourly consultation with a fee-only advisor or even a knowledgeable family member or friend to go over what you hold.  The fee for the hour may very well pay for itself several times over.
 

Do You Know What's in That Fund?

Here is a really excellent piece--Hey, What Do You Think Of My Investment?--I recently came across that describes where an advisor was asked what he thought about a particular fund.  I empathized because I run into this all the time.  Asking an advisor what he thinks about a particular fund puts him or her in a difficult spot without knowing the overall goals and structure of an individual's investment program.  It's like asking about a team's draft choice if you don't know the structure of the overall team.

Still, he analyzed the fund's performance and structure.  Performance was a bit erratic - having performed well several years ago but under by quite a bit over the past 3 years.  But this is seen a lot:  advisors and individuals pick the best-performing funds but then the funds don't live up to their past performance.

What I found interesting about the piece, and what should give pause to those who invest in funds via their 401(k)s, 403 (b)s, and even brokerage accounts, is that the fund only had 15% of the Fund's assets invested in small cap growth stocks.  But it is a small cap growth stock fund!  The fund isn't investing in what its title claims it invests in.  In fact, the writer points out:

Let’s say you decided you wanted to dedicate 5% of your portfolio to small growth, so you put 5% of your portfolio into this fund.  In reality, you’ve only put 0.75% of your portfolio into small growth, not 5%.

Please spend 5 minutes and read the article.  I believe it will be eye-opening for most readers and could save a good chunk of a lot of nest eggs over the longer term.

Gen-Yers Uncomfortable With Market

Source: Richard Scarry

The September 12 - September 18, 2011 issue of Bloomberg Businessweek reports ("Armageddon" "We're Dealing With a Culture of Hypochondria" by Robert Farzad) that, according to an MFS Investment Mangement survey, 40 % of Gen-Yers (ages 18-30) agree with the statement, "I will never feel comfortable investing in the stock market."

The article goes on to say that this is "understandable"  because funds are underperforming today.  JPMorgan Chase found that 47% of 2,808 funds they track trailed their benchmark by more than 2.5% this year.

This underperformance is not news to the readers of this blog.  I, along with many other bloggers, constantly preach the folly of investing in actively managed funds and constantly report on their underperformance, after all fees and costs, over the long run.  Depending on the time period studied, 75% to 90% of actively managed funds underperform over the long run.  Furthermore, it is impossible to pick the superior performers.

Source: Bloomberg Businessweek 9/12 - 9/18, p, 47

Some specific year-to-date fund returns reported by Farzad are shown in the table.  Over the same period, through September 5 the S&P 500 was down 6%.

The American Funds fund is the largest fund in the country.  The Fairholme Fund is managed by Bruce Berkowitz, who was named "domestic stock fund manager of the decade" in January 2010 by Morningstar.  By contrast to these stalwart funds, the index is the equivalent of "the lowly worm" in the picture books by Richard Scarry my kids enjoyed as infants.

The full picture can be seen in the graphic:

Source: Bloomberg Businessweek 9/12 - 9/18, p, 47

 CLICK IMAGE TO ENLARGE  The negative view of markets by so many young people is disheartening on 2 counts.  First, one of the main tenets of attaining a decent retirement is to start investing early.  In the "haven't we seen this movie before" category, you can bet if the Dow rose 2,000 points over the next 12 months the very same Gen-Yers would be jumping in.

Secondly, in the view of many long time observers of the market, young people shouldn't even be considering high-priced active funds.  Minimize cost and index the market.  Hold on for the long term.  Embrace falling prices.  You are interested in where prices will be 30 years from now!

Long Term Market Outlook

Gen-Yers face the same hurdle as most investors:  they have a hard time seeing ahead.  Like many, they look in the rear view mirror.  Like many, they focus on the problems.  Suffice it to say that, over the past 30 years, there have just about always been very good reasons not to invest, including the S&L crisis, corporate governance problems, the East Asian crisis, the need to bail out the largest hedge fund in the country, the dot.com crash, 9/11, etc., etc.

But go back to 8/6/1991.  This was when Tim Berners-Lee created the first web site.  First cell phone?  In 1994, the first cell phone weighed 2 pounds and cost almost $4,000.  My first calculator was a Bowmar Brain that cost $110 and was equivalent to what you can get today for $12.  And so it goes with flat screen tvs, medical technologies, online courses in education, online banking, and on and on.  These are the things that make the world completely different from 30 years ago and are made by companies who prosper.

These were the changes we couldn't see.  These were the changes that drove stock prices sharply higher.

Are Mutual Funds a Scam?

Mark Hebner, CEO of Index Fund Advisors (IFA), gives his no-punches-pulled views on actively managed mutual funds to Henry Blodgett of Yahoo! Finance. He is of course "talking his book" since he heads up a $1.5 billion index fund management company. My perspective is this:  the evidence overwhelmingly shows that, after fees, it is very likely that you will under perform the market with an active fund over the long run. So, why risk your retirement assets in this endeavor?  Instead, if you buy into the long-term viability of the U.S. and global economy, then take advantage of the low-cost ways to participate.

The IFA website is worth a visit. Contains many useful resources.
Source:  Yahoo! Finance
Disclosure:  Information is presented for educational purposes and not intended as a recommendation.