Here's a statement of the obvious: The opinions expressed here are those of the participants, not those of the Mutual Fund Observer. We cannot vouch for the accuracy or appropriateness of any of it, though we do encourage civility and good humor.
As an alternative view is this study introduced to me by MFO's @jstr (thank you):
"The popular 60/40 Stocks/Bond portfolio performs well over the past 24 years, but adding a simple moving average to this portfolio has increased returns, reduced the duration of draw downs, and substantially reduced portfolio draw down. Adding in an intermediate term bond fund as the cash fund accomplished even more, it increased annual returns more than 10% over the buy and hold portfolio, while having close to 1/3 of the daily draw down numbers. Avoiding draw down and still being involved in market upswings was the goal of this strategy, and it worked well in this instance. There were a few concerns, namely being involved in the cash filter fund for too much duration, not being diverse enough to capitalize on gains across different markets, and the potential of missing out on some of the market upsides. However, these concerns did not prevent us from accomplishing the goals of reducing draw down and risk along with increasing return in this particular example."
Mr. Wasik appears to be deriving his compensation based on word count.
His somewhat dubious case seems actually to be that trading is a bad idea. The investment pitfalls enumerated are not confined only to those in retirement. Investors at any age can make dumb decisions. Actually, a popped bubble can be even more injurious to a younger investor since the benefits from future compounding of principal takes a big hit when the principal invested is sharply reduced early on. The amount of damage incurred is proportional to the remaining years of investment.
I'm also suspicious of his repeated claims that a qualified financial advisor will provide salvation for these gullible retirees. What proof does he offer that advisors in general are not just as succeptible to market bubbles as individuals? So insistent is he on this point that at times I thought this was a paid advertisement for financial advisors.
The meaning of trading is open to many interpretations. Speculative purchases are by definition fraught with danger and ought to be limited in amount or avoided completely by most retail investors. However, modestly reducing exposure to risk assets during times of market euphoria and adding to investments after downturns is another type of trading - one which might well reduce risk to retirees' nest eggs. Since retirees have shorter time horizons, a missed opportunity in this case is likely to be less injurious than if it occurred at an earlier age.
I believe the author of this NY Times piece is spot on-target. Many investors need help in preserving and amplifying their retirement resources.
I’m perfectly happy to accept the fact that most retirees are smart and possess an ample supply of commonsense. They made it to retirement. It does not necessarily follow that smart folks are smart investors. In fact the empirical evidence speaks loudly against that assumption.
We all know that Mutual Fund managers struggle to beat their benchmark. Historically, an overwhelming percentage fail to satisfy that goal. Those percentages drop as the timeframe expands. The return shortfalls are even poorer for the individual investor. How so and by how much?
DALBAR research has a fairly exhaustive answer. For decades, DALBAR has been reporting the shortcomings of the private investor in mutual fund products. Each year the specific numbers vacillate a little, but the basic conclusion remains constant: Investors suck big time.
Here is a Link to a recent DALBAR report that was prepared for professional money advisors and was posted by a financial advisor (thanks Peter Bell, Bellmont Securities):
Please examine the data graphs and tables. That data documents the case. The DALBAR methodology has been criticized, but the trend-lines are obvious, and consistent over time. One conclusion is that investors who hold their positions do better than those who try to time the markets. Trading mutual funds does harm to end wealth.
Over different timeframes, DALBAR finds that investors only recover a fraction of the market rewards. That fraction lately has been about 50%. Earlier that fraction was even lower in the 30% range. I suppose all the current Internet exchanges and information centers (like MFO) are educating the private investor, and are contributing to his slight performance improvements. I hope that trend continues.
Given the huge disparity between market Indices and individual investor actual performance, a case can be made for consulting a financial planner. Given the headroom between market returns and the average individual’s investment returns, certainly not everyone, but many retirees could benefit from such services. That’s especially so if the selected advisor favors Index products for a major portion of the investment portfolio.
I suspect that not many MFOers require those services. In my case I did moderately well without those services and their accompanying costs. Mistakes happen and hiring an advisor does not immunize anyone against such mistakes. However, the odds just might shift a little towards a more successful retirement with a little help from a knowledgeable (and trustworthy) source.
MJG - If there's any statistical evidence here that the average investor investing with the help of the average advisor does much better over time than the average investor operating on his own does, I'd like to see it.
Significant variables may make this comparison impossible. The hardest to weed-out is that highly educated and wealthier investors are more likely to have advisors. In addition to their making more intelligent choices, brokerage costs are often lower, fund loads waived, or fees reduced for this class of investor.
Great question and insightful comments! Thank you for your contribution.
I don’t know how well the average financial advisor does in his construction of a client’s portfolio. I can’t reference a specific credible study in that arena. Perhaps some of the professionals that frequent this website can provide such a reference.
I merely suspect that the average advisor does better than the individual investor simply because that individual investor does so poorly himself. That’s what I meant when I talked about the excessive headroom between the market’s rewards and those actually captured by the average investor. That investor’s record is dismal; I’m sure it can be surpassed. That’s faint praise for the financial advisor industry.
Mark Hulbert has done yeoman work monitoring the performance of financial newsletters. He finds them rather poor market and stock forecasters. But a minority do excellent work and have done so for a long time. Of course, it was not immediately clear which of these newsletter options would be the winners ahead of time.
In general, the newsletters do better than the average ill-informed and impatient investor. In my pecking order of successful investing classes, I speculate that financial advisors position themselves closer to the mutual fund manager and newsletter cohorts than to the individual investor. That’s just my perceived ordering. Otherwise the financial advisor will not survive the competitive marketplace.
I suspect the chief contribution that an advisor can perform is to act as an anchor, and to encourage an investor to “stay the course”. Earlier, I referred to the “impatient” investor. Our record is that we abandon ship at the wrong times. The advisor can recommend against that losing propensity. For some, he fills the gap in the loneliness of the long distance investor.
The best advisors will provide the investor with the data and the confidence that promotes “staying the course”. I hope that he’ll also fill the portfolio with primarily low cost Index holdings.
MJG You may be surprised that I believe 99.5% of investors would be better served with a passive buy and hold in a Vanguard 500 Index fund or better yet a Vanguard 60%/40% fund. I have seen scant evidence an active strategy works in real time with real money. I see lots of academic strategy studies about using various technical indicators/ moving average crossovers and the like. But when it comes to real time actual money results at a real money brokerage firm that is a different story.
Wow! You really are taking an extreme position at one end of the spectrum. There is no doubt what you really think on this matter. And I have every confidence that you say what you mean and mean what you say. I sincerely believe that you are among the most trustworthy contributors on this site. Thank you for your post.
I’m not quite so hard-over. Typically, I like to start my guesstimates using the 80/20 rule. Applying that generic rule to investing, its application would suggest that 80% of active investors likely underperform market returns while the remaining 20% might do better. In this instance, I would stretch that to a 90/10 distribution. There is a small cohort of very smart investors; Unfortunately, I am not a member of that exclusive clan.
You and I are in good company by recognizing the shortcomings of the average investor, and the promising Index remedy.
Investment giants like Warren Buffet, Peter Lynch, and Bill Sharpe have all endorsed Index product strategies for most investors for decades now. Even Charles Schwab has admitted that “most of the mutual fund investments that I have are Index funds, approximately 75%”. They too joined the Jack Bogle and Charley Ellis bandwagon.
Thanks again for having the courage to honestly and unflinchingly state your assessment on this subject. I, and probably many other MFOers, appreciate your frankness and judgment here.
MJG I was quoting Dalbar back in the late 90s as well as numerous other sources ala MoniResearch, Timer Digest, Commodity Traders Consumer Reports, and Mark Hulbert to name just a few on the futility of beating the market averages. Also books such as A Fool and His Money, If They're So Smart, How Come You're Not Rich, and Rogues To Riches.
Obviously I don't practice what I preach. Had I done that I would have but a sliver of a nest egg. I have found the average investor doesn't have the temperament required to beat the averages - insane focus, obsessiveness to detail, competitiveness to the max, the ability to think outside of the box, and a 110% commitment. But I understand, because just about everyone is too busy working for a living to devote themselves day and night to the markets.
Edit: MJG thought I better beat you to the punch about why then don't more fund managers and hedge fund traders/money managers who live and die the markets 24 hours a day not beat the averages. They have to deal with the large numbers effect. Meaning, it is a lot easier to trade a small multi million dollar account than trade tens or hundreds of millions and more. My particular style of trading would not translate to tens or hundreds of millions. As it is, I have been banned by several fund companies and with a far larger account would probably be banned by them all. We small time traders in mutual funds can exploit things the big boys can't.
Comments
"The popular 60/40 Stocks/Bond portfolio performs well over the past 24 years, but adding a simple moving average to this portfolio has increased returns, reduced the duration of draw downs, and substantially reduced portfolio draw down. Adding in an intermediate term bond fund as the cash fund accomplished even more, it increased annual returns more than 10% over the buy and hold portfolio, while having close to 1/3 of the daily draw down numbers. Avoiding draw down and still being involved in market upswings was the goal of this strategy, and it worked well in this instance. There were a few concerns, namely being involved in the cash filter fund for too much duration, not being diverse enough to capitalize on gains across different markets, and the potential of missing out on some of the market upsides. However, these concerns did not prevent us from accomplishing the goals of reducing draw down and risk along with increasing return in this particular example."
iema-blog.com/2016/02/6040-stockbonds-portfolio-with-market.html
As far as withdrawal are concerned, while in retirement virtually all scenarios point to the quote, "it pays to eat your bonds first, equities later."
His somewhat dubious case seems actually to be that trading is a bad idea. The investment pitfalls enumerated are not confined only to those in retirement. Investors at any age can make dumb decisions. Actually, a popped bubble can be even more injurious to a younger investor since the benefits from future compounding of principal takes a big hit when the principal invested is sharply reduced early on. The amount of damage incurred is proportional to the remaining years of investment.
I'm also suspicious of his repeated claims that a qualified financial advisor will provide salvation for these gullible retirees. What proof does he offer that advisors in general are not just as succeptible to market bubbles as individuals? So insistent is he on this point that at times I thought this was a paid advertisement for financial advisors.
The meaning of trading is open to many interpretations. Speculative purchases are by definition fraught with danger and ought to be limited in amount or avoided completely by most retail investors. However, modestly reducing exposure to risk assets during times of market euphoria and adding to investments after downturns is another type of trading - one which might well reduce risk to retirees' nest eggs. Since retirees have shorter time horizons, a missed opportunity in this case is likely to be less injurious than if it occurred at an earlier age.
http://seekingalpha.com/article/3869296-60-40-stock-bonds-portfolio-market-timing
Something similar, a rotation strategy using ETFs, was also posted there in Jan 2015:
http://seekingalpha.com/article/2817436-using-adaptive-asset-allocation-to-limit-market-risk-and-increase-return
I believe the author of this NY Times piece is spot on-target. Many investors need help in preserving and amplifying their retirement resources.
I’m perfectly happy to accept the fact that most retirees are smart and possess an ample supply of commonsense. They made it to retirement. It does not necessarily follow that smart folks are smart investors. In fact the empirical evidence speaks loudly against that assumption.
We all know that Mutual Fund managers struggle to beat their benchmark. Historically, an overwhelming percentage fail to satisfy that goal. Those percentages drop as the timeframe expands. The return shortfalls are even poorer for the individual investor. How so and by how much?
DALBAR research has a fairly exhaustive answer. For decades, DALBAR has been reporting the shortcomings of the private investor in mutual fund products. Each year the specific numbers vacillate a little, but the basic conclusion remains constant: Investors suck big time.
Here is a Link to a recent DALBAR report that was prepared for professional money advisors and was posted by a financial advisor (thanks Peter Bell, Bellmont Securities):
https://www.bellmontsecurities.com.au/wp-content/uploads/2015/04/2015-DALBAR-QAIB-study.pdf
Please examine the data graphs and tables. That data documents the case. The DALBAR methodology has been criticized, but the trend-lines are obvious, and consistent over time. One conclusion is that investors who hold their positions do better than those who try to time the markets. Trading mutual funds does harm to end wealth.
Over different timeframes, DALBAR finds that investors only recover a fraction of the market rewards. That fraction lately has been about 50%. Earlier that fraction was even lower in the 30% range. I suppose all the current Internet exchanges and information centers (like MFO) are educating the private investor, and are contributing to his slight performance improvements. I hope that trend continues.
Given the huge disparity between market Indices and individual investor actual performance, a case can be made for consulting a financial planner. Given the headroom between market returns and the average individual’s investment returns, certainly not everyone, but many retirees could benefit from such services. That’s especially so if the selected advisor favors Index products for a major portion of the investment portfolio.
I suspect that not many MFOers require those services. In my case I did moderately well without those services and their accompanying costs. Mistakes happen and hiring an advisor does not immunize anyone against such mistakes. However, the odds just might shift a little towards a more successful retirement with a little help from a knowledgeable (and trustworthy) source.
Best Wishes.
Significant variables may make this comparison impossible. The hardest to weed-out is that highly educated and wealthier investors are more likely to have advisors. In addition to their making more intelligent choices, brokerage costs are often lower, fund loads waived, or fees reduced for this class of investor.
Great question and insightful comments! Thank you for your contribution.
I don’t know how well the average financial advisor does in his construction of a client’s portfolio. I can’t reference a specific credible study in that arena. Perhaps some of the professionals that frequent this website can provide such a reference.
I merely suspect that the average advisor does better than the individual investor simply because that individual investor does so poorly himself. That’s what I meant when I talked about the excessive headroom between the market’s rewards and those actually captured by the average investor. That investor’s record is dismal; I’m sure it can be surpassed. That’s faint praise for the financial advisor industry.
Mark Hulbert has done yeoman work monitoring the performance of financial newsletters. He finds them rather poor market and stock forecasters. But a minority do excellent work and have done so for a long time. Of course, it was not immediately clear which of these newsletter options would be the winners ahead of time.
In general, the newsletters do better than the average ill-informed and impatient investor. In my pecking order of successful investing classes, I speculate that financial advisors position themselves closer to the mutual fund manager and newsletter cohorts than to the individual investor. That’s just my perceived ordering. Otherwise the financial advisor will not survive the competitive marketplace.
I suspect the chief contribution that an advisor can perform is to act as an anchor, and to encourage an investor to “stay the course”. Earlier, I referred to the “impatient” investor. Our record is that we abandon ship at the wrong times. The advisor can recommend against that losing propensity. For some, he fills the gap in the loneliness of the long distance investor.
The best advisors will provide the investor with the data and the confidence that promotes “staying the course”. I hope that he’ll also fill the portfolio with primarily low cost Index holdings.
Best Wishes.
I am more than surprised; I am astounded.
Wow! You really are taking an extreme position at one end of the spectrum. There is no doubt what you really think on this matter. And I have every confidence that you say what you mean and mean what you say. I sincerely believe that you are among the most trustworthy contributors on this site. Thank you for your post.
I’m not quite so hard-over. Typically, I like to start my guesstimates using the 80/20 rule. Applying that generic rule to investing, its application would suggest that 80% of active investors likely underperform market returns while the remaining 20% might do better. In this instance, I would stretch that to a 90/10 distribution. There is a small cohort of very smart investors; Unfortunately, I am not a member of that exclusive clan.
You and I are in good company by recognizing the shortcomings of the average investor, and the promising Index remedy.
Investment giants like Warren Buffet, Peter Lynch, and Bill Sharpe have all endorsed Index product strategies for most investors for decades now. Even Charles Schwab has admitted that “most of the mutual fund investments that I have are Index funds, approximately 75%”. They too joined the Jack Bogle and Charley Ellis bandwagon.
Thanks again for having the courage to honestly and unflinchingly state your assessment on this subject. I, and probably many other MFOers, appreciate your frankness and judgment here.
Best Wishes.
Obviously I don't practice what I preach. Had I done that I would have but a sliver of a nest egg. I have found the average investor doesn't have the temperament required to beat the averages - insane focus, obsessiveness to detail, competitiveness to the max, the ability to think outside of the box, and a 110% commitment. But I understand, because just about everyone is too busy working for a living to devote themselves day and night to the markets.
Edit: MJG thought I better beat you to the punch about why then don't more fund managers and hedge fund traders/money managers who live and die the markets 24 hours a day not beat the averages. They have to deal with the large numbers effect. Meaning, it is a lot easier to trade a small multi million dollar account than trade tens or hundreds of millions and more. My particular style of trading would not translate to tens or hundreds of millions. As it is, I have been banned by several fund companies and with a far larger account would probably be banned by them all. We small time traders in mutual funds can exploit things the big boys can't.