401(k) Madness
- Created on Sunday, 24 August 2014 19:00
All across America, a familiar ritual is repeated at least quarterly. Sponsors of 401(k) plans meet with their brokers, insurance companies or other advisers. The purpose of the meeting is to decide which funds to keep as investment options and which ones to eliminate. Everyone has a familiar role. The plan adviser comes prepared with data demonstrating why certain fund managers aren't performing and need to be eliminated. The data are quite convincing. They show significant underperformance compared with the fund's benchmark index.
Choosing a replacement for underperforming funds is quite simple. The adviser explains the results of a "comprehensive analysis" of thousands of funds. This analysis winnows down the "winners." The plan sponsor and the adviser solemnly debate which fund should be selected. An agreement is reached. The sub-performing funds are bounced. New ones are selected.
Because this scenario occurs with such frequency, it's difficult to track which funds were once included in the plan and then eliminated. I have seen situations in which brokers have recommended funds for inclusion, subsequently excluded them and then later recommend they once again be included.
Read the rest of the article at The Huffington Post.
Small Value Funds Not Equal, Part II
- Created on Sunday, 17 August 2014 19:00
Smart investors begin their journey by developing an investment plan, or investment policy statement, that includes an asset allocation table. After the plan has been prepared, the next step is to select proper investment vehicles for providing the appropriate exposure to the desired asset classes.
A common error among investors who follow a “passive” investment strategy is to assume that all passive funds in the same asset class are basically identical. In other words, they mistakenly believe these passive funds are “commodities,” or substitutes for one another.
If passive investment products were commodities—in the economic sense, not the physical one—the only criteria needed to make a decision when choosing among them would be cost; in this case, the fund’s expense ratio. However, as we’ll demonstrate, two funds in the same asset class can actually look very different. The differences have implications not only in terms of risk and expected returns, but in terms of how their addition impacts the risks of an overall portfolio.
Read the rest of the article on ETF.com.
Americans Are Bad at Math, but It’s Not Too Late to Fix
- Created on Sunday, 17 August 2014 19:00
When I lived in Las Vegas, there were billboards everywhere advertising different casinos. One of the most common was the type that promised "98 percent payouts." I remember thinking how amazing that was. After all, 98 is a lot of percents! It seemed like a really good deal — until I thought about it for a minute.
It’s pretty simple, really. A 98 percent payout meant that, on average, for every dollar you gambled, you’d get back 98 cents. Now how attractive does that 98 percent look? No investor I know would be happy with that return on investment. Yet, based upon the number of people who visit casinos, they don’t seem too worried about it.
I suspect it's tied, in large part, to the problems Elizabeth Green outlined in painful detail in her much-discussed article in The New York Times Magazine, "Why Do Americans Stink at Math?" She wrote, "As a nation, we suffer from an ailment that John Allen Paulos, a Temple University math professor and an author, calls innumeracy — the mathematical equivalent of not being able to read. On national tests, nearly two-thirds of fourth graders and eighth graders are not proficient in math.” The results aren’t much better among adults. As Ms. Green noted, “A 2012 study comparing 16-to-65-year-olds in 20 countries found that Americans rank in the bottom five in numeracy.”
Read the rest of the article on The New York Times.