Mutual Fund Expenses

“After costs, the return on the average actively managed dollar will be less than the return on the average passively managed dollar for any time period.

  —William F. Sharpe, 1990 Nobel Laureate  William

 

 

William F. Sharpe, “The Arithmetic of Active Management,” Financial Analysts Journal 47, no. 1 (January/February 1991): 7-9. Mutual fund expense ratios as of August 21, 2012. Asset weighting based on net assets as of July 31, 2012. Data provided by Morningstar, Inc. Passive funds are those coded by Morningstar as Index Funds.

Registered Representative, Securities offered through Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Lion’s Share U.S. Financial Services and Cambridge are not affiliated. Indices mentioned cannot be directly invested in. Past performance is no guarantee.  When you access other linked websites, you assume total responsibility and risk of the websites you are linking to caveat emptor. All expressions of opinion are subject to change without notice in reaction to shifting market conditions. All materials presented are compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. Article are provided for informational purposes, and it is not to be construed as an offer, solicitation, recommendation or endorsement of any particular security, products, or services in Alabama, Florida, Georgia, and Tennessee. No offers may be made or accepted from any resident outside the specific state(s) referenced.

The Top Ten Money Excuses

 

jim parker

 

Human beings have an astounding facility for self-deception when it comes to our own money.

We tend to rationalize our own fears. So instead of just recognizing how we feel and reflecting on the thoughts that creates, we cut out the middle man and construct the façade of a logical-sounding argument over a vague feeling.

These arguments are often elaborate, short-term excuses that we use to justify behavior that runs counter to our own long-term interests.

Here are ten of these excuses:

1) “I just want to wait till things become clearer.”

It’s understandable to feel unnerved by volatile markets. But waiting for volatility to “clear” before investing often results in missing the return that can accompany the risk.

2) “I just can’t take the risk anymore.”

By focusing exclusively on the risk of losing money and paying a premium for safety, we can end up with insufficient funds for retirement. Avoiding risk can also mean missing an upside.

3) “I want to live today. Tomorrow can look after itself.”

Often used to justify a reckless purchase, it’s not either-or. You can live today and mind your savings. You just need to keep to your budget.

4) “I don’t care about capital gain. I just need the income.”

Income is fine. But making income your sole focus can lead you down a dangerous road. Just ask anyone who recently invested in collateralized debt obligations.

5) “I want to get some of those losses back.”

It’s human nature to be emotionally attached to past bets, even losing ones. But, as the song says, you have to know when to fold ’em.

6) “But this stock/fund/strategy has been good to me.”

We all have a tendency to hold on to winners too long. But without disciplined rebalancing, your portfolio can end up carrying much more risk than you bargained for.

7) “But the newspaper said…”

Investing by the headlines is like dressing based on yesterday’s weather report. The news might be accurate, but the market usually has reacted already and moved on to worrying about something else.

8) “The guy at the bar/my uncle/my boss told me…”

The world is full of experts, many who recycle stuff they’ve heard elsewhere. But even if their tips are right, this kind of advice rarely takes your circumstances into account.

9) “I just want certainty.”

Wanting confidence in your investments is fine. But certainty? You can spend a lot of money trying to insure yourself against every possible outcome. While it cannot guard against every risk or possible outcome, it’s cheaper to diversify your investments.

10) “I’m too busy to think about this.”

We often try to control things we can’t change—like market and media noise—and neglect areas where our actions can make a difference—like the costs of investments. That’s worth the effort.

Given how easy it is to pull the wool over our own eyes, it can pay to seek independent advice from someone who understands your needs and circumstances and who holds you to the promises you made to yourself in your most lucid moments.

Call it the “no more excuses” strategy.

Registered Representative, Securities offered through Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Lion’s Share U.S. Financial Services and Cambridge are not affiliated. Indices mentioned cannot be directly invested in. Past performance is no guarantee.  When you access other linked websites, you assume total responsibility and risk of the websites you are linking to caveat emptor. All expressions of opinion are subject to change without notice in reaction to shifting market conditions. All materials presented are compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. Article are provided for informational purposes, and it is not to be construed as an offer, solicitation, recommendation or endorsement of any particular security, products, or services in Alabama, Florida, Georgia, and Tennessee. No offers may be made or accepted from any resident outside the specific state(s) referenced.

Tired of Chasing Stocks?

Tired of chasing the latest trends and underperforming the market? Stop speculating. Instead, discover the solution leading the industry now for over 50 years with Dimensional Funds Advisors. Trying to predict which stocks to buy and sell can be frustrating, costly and more importantly, may reduce your returns.

About to say it’s all guess-work, anyway? Guess again. You don’t have to try to pick the best investments or identify which active or index manager will outperform the other. The reason is simple. Capital markets work. Investing is not a zero-sum game where one investor must lose so another can win. Over the long run, markets reward most investors for taking risk and providing capital. Any investor has the chance to capture the same capital market rates of return. Over the long run, markets reward most investors for taking risks and providing capital.

 Returns: Dimensional Funds (DFA) compared to Active Investors and the S&P 500

 Twenty years ending 2011

This chart compares the percentage of market return that has been captured by each of the three Fund categories: Active, Index and a hybrid model we’ll call Passive. The Passive Investor model is represented by funds managed by Dimensional Funds Advisors (DFA).

So, how has DFA maintained this track record? In 1958, the University of Chicago Economics department received $300,000 and a Univac computer to use in an attempt to determine true market returns. Many of today’s most prevalent investment methods and measurements stem from this research. Derived from this initial effort, Gene Fama and Ken French determined the 3 factors that drive stock performance (Fama French Three Factor Model). DFA was guided by Fama, French and several other well-respected and lauded economical academia. Their data analysis reshaped portfolios and greatly improved the industry’s understanding of these following items:

  • Equity market: Stocks have higher expected returns than fixed income.
  • Company size: The stocks of smaller companies have higher expected returns than the stocks of larger companies.
  • Company price: Lower-priced value stocks have higher expected returns than higher-priced growth stocks (measured by the ratio of company book value to market equity).

In essence, the multi-decade, highest capture of market returns shown here is based on portfolio engineering through clearly understanding risk dimensions of the entire market and weighting specific areas. Unlike increasingly popular index funds of today.

It’s never to late to make a great decision!

  1. Dalbar 2012 (January 1992 to December 2011)
  2. SP500 standard and poor’s (January 1992 to December 2011)
  3. Dimensional balanced all equity portfolio (January 1992 to December 2011)

Registered Representative, Securities offered through Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Lion’s Share U.S. Financial Services and Cambridge are not affiliated. Indices mentioned cannot be directly invested in. Past performance is no guarantee.  When you access other linked websites, you assume total responsibility and risk of the websites you are linking to caveat emptor. All expressions of opinion are subject to change without notice in reaction to shifting market conditions. All materials presented are compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. Article are provided for informational purposes, and it is not to be construed as an offer, solicitation, recommendation or endorsement of any particular security, products, or services in Alabama, Florida, Georgia, and Tennessee. No offers may be made or accepted from any resident outside the specific state(s) referenced.

Is Vanguard Signaling that Evidenced Based Investing is Better than Indexing?

Vanguard Web SiteThe Vanguard Group, Inc “Investment Giant” has built their investment success on two fundamental tenets: 1) Keep costs as low as possible; 2) Don’t try to beat the market, instead try to keep up with the market. Today, Vanguard’s investment approach would be called Index investing and would be based on tracking market benchmarks, such as the S&P500.

In an almost shocking announcement that is still rippling though Wall Street, it was announced this past week that Vanguard is now going to offer a set of fund investment choices based on the Center for Research in Security Prices (CRSP) at the University of Chicago Booth School of Business. (Readers may remember our recent post about the CRSP a few months ago.)

Wall StreetWhy is this such a shock to Wall Street? The announcement attempts to bury the most shocking item about Vanguard’s decision by leaving this tidbit to the very last paragraph:

“Vanguard provided development funding for connecting to CRSP Indexes; however, the methodologies for the CRSP Indexes were developed by CRSP, and the indexes are owned and operated independently by CRSP. Accordingly, the CRSP Indexes will be available for license as are all CRSP data products.”

In layman’s terms, what this says is Vanguard will now take a back seat to investment decisions and put professionals at CRSP in charge. Vanguard has merely paid for the creation of the systems and processes to create and license Funds that will follow the CRSP’s fifty years of fine-tuning their unique methodology.

In professional’s terms, this signals a huge change in one of the most successful investment giant’s approach. Are they going to move quickly and dramatically away from plain old Index investing? Obviously not. But, it is pretty clear that they are acknowledging the historically superiors benefits of a Passive Fund investment model based on the Fama French Three-Factor Model, which is the basis of DFA’s Funds.

Registered Representative, Securities offered through Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Lion’s Share U.S. Financial Services and Cambridge are not affiliated. Indices mentioned cannot be directly invested in. Past performance is no guarantee.  When you access other linked websites, you assume total responsibility and risk of the websites you are linking to caveat emptor. All expressions of opinion are subject to change without notice in reaction to shifting market conditions. All materials presented are compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. Article are provided for informational purposes, and it is not to be construed as an offer, solicitation, recommendation or endorsement of any particular security, products, or services in Alabama, Florida, Georgia, and Tennessee. No offers may be made or accepted from any resident outside the specific state(s) referenced.