The S&P500 has recently been hitting new all-time highs, which would seem to suggest that the economy is recovering and that the U.S. economy is back on track. The story does not look quite so rosy when you account for inflation, as Mark Hulbert has recently noted. The current level of the S&P500 is, in fact, still about 24% below its high in 2000 once inflation is considered. Economists and finance people would say that, measured in real terms, the S&P500 is 24% lower than it was at its 2000 peak. What this means is that the proceeds from the sale of a share of an S&P500 index fund purchases considerably less in real goods today than it did thirteen years ago. Continue reading
In a recent post, I presented a list of the ‘core asset classes’ that investors need in order to build portfolios that fully exploit available diversification opportunities. That article focused on portfolios designed for total return potential, the combined return from price appreciation and income generated by the assets in the portfolio. For investors focusing on building income-generating portfolios, the core asset classes are somewhat different. In this article, I present a proposed set of core asset classes for income-focused investors, along with examples of representative funds. Continue reading
Jeremy Grantham has produced yet another truly outstanding essay in GMO’s Quarterly Letter to Investors for April 2012. Never reluctant to take on controversy, he focuses on the ways in which mutual fund managers have strong incentives to behave in ways that are often not in the best interests of investors in their funds. In the academic world, these perverse incentives are referred to as “agency problems.”
A mutual fund manager makes decisions on behalf of his or her fund’s investors. In the parlance of economics, the manager acts as an agent working on behalf of the investors (the meaning here is similar to the use in the term real estate agent). Continue reading
Investors Have Lost Their Way
The aggregate performance numbers and evidence suggesting that most investors are holding inappropriate asset allocations foretell disaster for the investors who are relying on their 401(k) plans as the primary source of their retirement income.
There is little question that the average investor would benefit from some help in portfolio construction and maintenance. Continue reading
I just read a very important study by Vanguard called Mutual Fund Ratings and Future Performance. The title would seems to suggest that this study is going to look at whether mutual fund ratings such as Morningstar’s star ratings are a reasonable prediction of future performance. The study does tackle this issue, but it also addresses an issue that is, I believe, even more important and that most investors are totally unaware of:
empirical evidence has supported the notion that a low-cost index fund is difficult to beat consistently over time. Yet, despite both the theory and the evidence, most mutual fund performance ratings have given index funds an “average” rating.
Corporate 401(k) plan sponsors pick bad funds for their plans, according to a 2006 study. Then the participants in the plans compound the problem, again picking funds headed for a fall.
Why? Because though the Securities and Exchange Commission mandates that funds put in any piece of marketing the disclaimer that past performance is not indicative of future results, it seems no one believes them.
Commentary by Paul Keck.
You might assume from reading the title that I’m saying investors aren’t as smart as they think. Not exactly. What I am saying is the smartest individual investors know they aren’t that smart.
They know they aren’t smart enough to:
- consistently beat the market after costs
- time things
- pick the best funds consistently