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The Retirement Gamble
April 28, 2013 4:51 PM   Subscribe

“Do you really want to invest in a system where you put up 100 percent of the capital, [you] take 100 percent of the risk, and you get 30 percent of the return?” Frontline correspondent Martin Smith speaks with authors, policy experts, and investment managers about the history and current reality of the 401(k).
posted by dephlogisticated (160 comments total) 76 users marked this as a favorite

 
What's most frustrating about the whole system is that even if you're someone like me who went to the trouble of reading up on investing through index funds, calculating how much you have to save for retirement, learning all the little tricks to reduce your tax liability, you still get screwed because you're stuck with a 401(k) that charges 1% in management fees on top of the fund expenses.

Imagine if we had to purchase cars like we invested for retirement, by having choices limited by the whims of our employers. Your neighbor down the road is permitted to buy a Camry at 0.5% above wholesale, while you must buy a Hummer at 7% above wholesale or have no car at all.
posted by indubitable at 5:04 PM on April 28, 2013 [9 favorites]


I saw this recently and highly recommend the entire segment. The takeaway was that index funds are cheaper and beat most active fund managers in the long term. Index funds are thus discouraged by those who want to sell their fund's products and who won't be upfront with this information, nor with their true relationship with your money.
posted by Brian B. at 5:06 PM on April 28, 2013 [2 favorites]


I was feeling pretty good about that state of my 401k. Trust reality and MeFi to ruin it for me. :(
posted by DU at 5:08 PM on April 28, 2013 [3 favorites]


My father, who has barely any formal education, but is whip smart, told a story to me right after the market crashed.

He said that when he was starting his business in the late 70s, his accountant told him that if he just invests X percentage of his monthly income in an IRA, he will be a millionaire by the time he retires. My dad said to him, "Bullshit. There is no way that the powers-that-be will let a poor schlub like me become a millionaire."

He was right, and will work until the day he dies.
posted by MisantropicPainforest at 5:09 PM on April 28, 2013 [22 favorites]


He said that when he was starting his business in the late 70s, his accountant told him that if he just invests X percentage of his monthly income in an IRA, he will be a millionaire by the time he retires. My dad said to him, "Bullshit. There is no way that the powers-that-be will let a poor schlub like me become a millionaire."

It would take a risibly small amount invested each month since the 1970s into an index fund to yield a million in today's dollars. Anyone who invested for the long term (i.e., didn't panic sell on the lows or try to play clever market-timing games) from the 1970s onwards would be hugely ahead of the game at this point, regardless of the Great Recession.

The market certainly has its risks and is certainly not a great alternative to Social Security, but it's silly to pretend it's some kind of cunningly rigged game that no minor player can ever come out ahead on. You had to be some kind of special genius of financial incompetence not to do well if you were investing throughout the great 90s boom years, and anyone who didn't panic sell in 2008 should now be not just back to where they were but ahead of the game.
posted by yoink at 5:26 PM on April 28, 2013 [35 favorites]


In Canada my mom, who is not sophisticated, was encouraged to invest in mutual funds back around 2000, and by the middle of the decade she had lost 25% of the value (perhaps more) of her capital. Had they invested in real estate locally she would have done fine, and even had a chance to do so - a house up the street from ours went on sale just before the boom started in 2003 or so, after which housing prices double in just five years (we never experienced a crash like the US). But her appetite for risk was too low.

However, fortune did smile on my parents in the end, as they were able to sell my grandmother's house in 2010 just a week before a housing correction. That house was one of the last houses to be sold in that part of town, and that legacy, combined with my mother's modest indexed pension from her union job, is helping ensure my parents have a comfortable retirement.

Working past retirement age may not be all that bad. My father was self-employed as a mechanical contractor, and work until age 68. He's very healthy, very sharp. While I'm sure he would have rather quit earlier, he has outlived other, more "successful" people in town, such as the founder of a large local grocery chain who was the same age as my father who cashed out at age 65 and then promptly died of a heart attack.

The lesson I take from my father is, don't get a desk job.
posted by KokuRyu at 5:26 PM on April 28, 2013 [2 favorites]


i don't put a penny of my own money in a 401k

the people who run my employer's program gave a little presentation a couple of years back where they told us how much our money would grow at 8% a year and kept harping on how that amount of money would really, really benefit our retirement - yes, they had a small print disclaimer on the powerpoint slides and the literature saying they weren't guaranteeing such a ROI or anything else, but they didn't verbally mention that

that seemed sleazy and dishonest to me as i know damned well it hasn't happened historically, especially in our current economic woes
posted by pyramid termite at 5:27 PM on April 28, 2013


Here is the main research article from Demos policy research group that that the documentary is based on: The Retirement Savings Drain: Hidden & Excessive Costs of 401(k)s (click download on the left) and an abc news article that summarizes the above findings.

Watching this documentary reminded me of this article I read a couple years ago about the advice Google gave its employees before its IPO, which was going to make a hundreds of millionaires. Basically, smart financial professionals who were brought in for lectures advised them to invest in low cost index funds. I went searching for that article and believe this is it.

It seems that the Bogleheads (click getting started in the top middle) style of investing is the way to go....
posted by Mr. Papagiorgio at 5:31 PM on April 28, 2013 [4 favorites]


Imagine if we had to purchase cars like we invested for retirement, by having choices limited by the whims of our employers.

While were at it, we should get the car insurance plan they offer as well. Lose your job? No car insurance for you.
posted by thelonius at 5:32 PM on April 28, 2013 [1 favorite]


Sounds like there are some really bad mutual funds out there. Mine consistently outperforms the Dow, S&P and NASDAQ.

I'd rather take 30% of some really good returns than take 100% of some shit returns. I personally can't pick stocks any better than an index fund. So if I have to pay a lot of people to manage my money so I can get a better return than that, god bless 'em.
posted by gjc at 5:34 PM on April 28, 2013


In other news: While Wronged Homeowners Got $300 Apiece in Foreclosure Settlement, Consultants Who Helped Protect Banks Got $2 Billion
posted by homunculus at 5:36 PM on April 28, 2013 [6 favorites]


I pick stocks for a mutual fund. But I'm one of the good ones! :)
posted by mullacc at 5:36 PM on April 28, 2013 [4 favorites]


He said that when he was starting his business in the late 70s, his accountant told him that if he just invests X percentage of his monthly income in an IRA, he will be a millionaire by the time he retires. My dad said to him, "Bullshit. There is no way that the powers-that-be will let a poor schlub like me become a millionaire."

Yet the math says otherwise. The reason poor schlubs remain poor schlubs when they have the means to invest is this type of thinking.
posted by gjc at 5:40 PM on April 28, 2013 [15 favorites]


Mine consistently outperforms the Dow, S&P and NASDAQ.

Over five years? Maybe. Over 30 years? Nope.
posted by incessant at 5:42 PM on April 28, 2013 [11 favorites]


My own decision was to invest in municipal bonds through a mutual fund. It shows a good, steady return and is insulated from many of the market forces that cause equities to fluctuate wildly. All of my dividends are tax exempt. My average annual return is in the mid to high single digits year after year. Best of all, I'm investing in stuff that matters: schools, water treatment plants, public transportation, storm drains, new roads, community colleges, power plants, etc.

Disclaimer: I am not an investment adviser nor do I play one on TV...
posted by jim in austin at 5:44 PM on April 28, 2013 [1 favorite]


In Canada my mom, who is not sophisticated, was encouraged to invest in mutual funds back around 2000, and by the middle of the decade she had lost 25% of the value (perhaps more) of her capital. Had they invested in real estate locally she would have done fine,

Yeah, but that's just a quirk of a particular recent historical situation. It's not hard to look back at similar stretches of time over the last century and do a comparison; typically people have done better in the stock market than they have in real estate; it's not like some evil moustache-twirling villain was warning her off a sure-thing so as to try to sucker her into losing her money.
posted by yoink at 5:48 PM on April 28, 2013


There are a multitude of issues with 401k's - beginning with the transition to defined contribution rather than defined benefit - which moves the risk of the timing of investment returns from being spread across a long time frame with a backup in the form of the cashflows from the corporate parent, and in many cases government insurance.

Then you have the issues inherent in self-directed retirement savings - people tend not to put enough money aside, and then we know that as a population we are really bad at selecting investments. They also tend to butcher asset allocation - being too heavy in stocks as they approach retirement age, or being over risk averse following periods of market underperfomance and too risk taking following periods of outperformance. I mean that 8% long term target for equities isn't actually crazy (give or take where you think long-term inflation is) - its just not 8% year in year out, it is 8% on average over 10-20 years.

And then the next kick in the balls is that people pick active managers (many of whom aren't active managers so much as 'I want to perform +/- x% of the index" - which is almost certainly a path to underperformance) who charge far above what they are able to deliver in terms of outperformance.

Them the final insult is the fees the admins charge for what is essentially a scale business where marginal costs approach 0.

Its all pretty shitty and embarrassing.
posted by JPD at 5:52 PM on April 28, 2013 [4 favorites]


Over five years? Maybe. Over 30 years? Nope.

I'm at about 12 years and it's still up. I'll let you know.

In Canada my mom, who is not sophisticated, was encouraged to invest in mutual funds back around 2000, and by the middle of the decade she had lost 25% of the value (perhaps more) of her capital. Had they invested in real estate locally she would have done fine,

A) Encouraged by whom? There is the old saying in the stock market, that when the janitor starts talking stocks and making money, it's time to get out because a bubble is occurring.

B) Until 2009 or so, anyway.
posted by gjc at 5:53 PM on April 28, 2013


I don't understand the depths to which shows like this really need to sink to get the actual point across....the "American dream" is one where rich people profit off of people who are less well off, and get to live a life of excess without giving the slightest thought to how his/her actions have affected those below them. The whole thing is a sham. It's a sham all the way down.

Somehow people think there's some secret dodge that will let them retire! At 60! As millionaires! What about any industry that is built around separating you from your money in thousands of crafty ways makes you want to trust that entire system?

Sometimes I feel like I've gotten so cynical I've actually spun around back to optimism again. Because they won. I don't expect to be taken care of. I literally expect nothing. The only thing that surprises me anymore is that people are still surprised.
posted by nevercalm at 5:53 PM on April 28, 2013 [13 favorites]


One particular thing that irks me about 401ks are the high costs of borrowing the money from them. While I understand the reasoning for preventing borrowing against a 401k, IT'S YOUR OWN MONEY. GRRRRR.
posted by drezdn at 5:54 PM on April 28, 2013


But what are you going to do? I'm the sole provider for a family of four which includes a special needs child. Until I was in my early 40s, every dime I made went to put a roof over our heads or food in our mouths. Only then was I able to start socking significant money away for the future, which I've been doing through the 401k programs my employer has offered, and to which they've contributed also.

I figure I'll be working til I'm 70, and I've only half-seriously joked with my wife for years that our retirement plan was going to be his and hers shopping carts.

What kills me is periodic efforts by the GOP to privatize social security. It doesn't take any financial sophistication to see that what they are really shooting for is a transaction fee windfall for their contributors as they try to wrest it from a single, giant, govt. managed pool into 10's of millions of little guys and the explosion in brokers fees such an arrangement would yeild.
posted by hwestiii at 5:55 PM on April 28, 2013 [12 favorites]


I have worked for employers who provided matching 401(k) contributions, employers who did not, and at least one employer who stopped doing it for a while and then started again.

I have always followed one consistent rule: I always contribute to my 401(k) when there is substantial employer match and never when there is not. The combination of fees and a poor selection of mystery-meat generic funds always shouted to me that it was a mug's game if there wasn't any free money being thrown in on top.
posted by George_Spiggott at 5:57 PM on April 28, 2013 [6 favorites]


One particular thing that irks me about 401ks are the high costs of borrowing the money from them. While I understand the reasoning for preventing borrowing against a 401k, IT'S YOUR OWN MONEY. GRRRRR.

It's not money until someone sells the stocks you own. So there are transaction fees involved. And I'm pretty sure your account gets to keep the interest you pay.
posted by gjc at 5:59 PM on April 28, 2013 [1 favorite]


The longer story is Wall Street's continued violation of the unspoken social contract, helped by a center-right-to-extremist-right government always eager to privatize services and eliminate regulations on those it doesn't provide. At some point, something has to give.
posted by Blazecock Pileon at 6:00 PM on April 28, 2013 [2 favorites]


He said that when he was starting his business in the late 70s, his accountant told him that if he just invests X percentage of his monthly income in an IRA, he will be a millionaire by the time he retires. My dad said to him, "Bullshit. There is no way that the powers-that-be will let a poor schlub like me become a millionaire."

Yet the math says otherwise. The reason poor schlubs remain poor schlubs when they have the means to invest is this type of thinking.


Isn't this
the old saying in the stock market, that when the janitor starts talking stocks and making money, it's time to get out because a bubble is occurring
basically the same thing as saying that the powers that be won't let a poor schlub become a millionaire?
posted by Ralston McTodd at 6:00 PM on April 28, 2013 [4 favorites]


what about a program that is on the books that denies you your retirement benefits the day you retire??
posted by robbyrobs at 6:01 PM on April 28, 2013


Can you explain what the social contract is that they violated?
posted by gjc at 6:01 PM on April 28, 2013 [1 favorite]


My own decision was to invest in municipal bonds through a mutual fund. It shows a good, steady return and is insulated from many of the market forces that cause equities to fluctuate wildly. All of my dividends are tax exempt. My average annual return is in the mid to high single digits year after year. Best of all, I'm investing in stuff that matters: schools, water treatment plants, public transportation, storm drains, new roads, community colleges, power plants, etc.

One of the most common errors people make is overstating the importance of volatility or lack there of. In general assuming you have ten years plus before retirement volatility is your friend as an investor. As long as you can never be forced to sell assets at a price you think is too low you shouldn't really care what path prices take.

Over five years? Maybe. Over 30 years? Nope.

Eh. There are managers that have outperformed over 30 years. There is the classic "Superinvestors of Graham and Doddsville". No one actually beats the indexes every single year, but the data would show you that actually really high volatility of annual returns relative to the market is something you should be looking for in an active manager. Pretty much the only ones who have outperformed over a 10 year+ time period share this characteristic. Actually I think there is a paper that analyzes the annual returns of a bunch of funds that beat the market over twenty years and I believe all them had at least one rolling three year time period in which they were amongst the very worst managers.
posted by JPD at 6:03 PM on April 28, 2013 [4 favorites]


I think the tax deferral makes 401k programs a much better deal than you think.
posted by borges at 6:03 PM on April 28, 2013 [4 favorites]


...And I'm pretty sure your account gets to keep the interest you pay.

But you lose your account if you change jobs. Then the balance of your loan is due, and if you don't pay it in full within 60 days, it's counted as an early withdrawal, so that means it's ordinary income for that tax year with an added penalty.

I am not your Financial Adviser, but my expensive experience has led me to believe that a 401(k) loan is a fairly risky gamble.
posted by infinitewindow at 6:03 PM on April 28, 2013 [2 favorites]


Of course the whole thing is rigged for the industry that provides it.
My only hope is that they will make so much money that they won't be overly bothered by the crumbs that fall to the floor for me.
To that end, I have contributed as much as I can (and then some) to whatever program is available to me.
It won't be enough, but it will be better than nothing. At least I hope it will.
posted by cccorlew at 6:04 PM on April 28, 2013 [3 favorites]


Poor 401(k) options are indeed a frustration, but the availability of IRAs as well as the fact 401(k) plans can be rolled over into IRAs and then invested with the custodian of your choice help mitigate this. Job-changing is frequent enough for many people that the benefits gained by plowing money into 401(k) plans and then rolling those funds over upon leaving employment will offset the hampered growth people may experience if their 401(k) plans have shitty fund choices or other fees.

It would be better, though, if every 401(k) plan had options as good as the TSP.
posted by MoonOrb at 6:04 PM on April 28, 2013 [4 favorites]


It's not money until someone sells the stocks you own. So there are transaction fees involved. And I'm pretty sure your account gets to keep the interest you pay.

Nah - its bullshit. I could take non-401k assets I have and pledge them as collateral for a secured loan at a rate far far lower than what I can borrow from my 401k at.
posted by JPD at 6:05 PM on April 28, 2013 [2 favorites]


BTW - if you think the fund management/money management complex in the US is bad. Whoo boy you should look at the fees in Europe are. They are like where the US was pre deregulation of commissions in the 70's - actually worse. I swear I saw an equity income fund that charged a 7% front end load, all of which went to the financial advisor. And I don't think you can even sue over churning.
posted by JPD at 6:10 PM on April 28, 2013 [2 favorites]


JPD: One of the most common errors people make is overstating the importance of volatility or lack there of. In general assuming you have ten years plus before retirement volatility is your friend as an investor. As long as you can never be forced to sell assets at a price you think is too low you shouldn't really care what path prices take.

I am retired so this good and informed advise does not seem to apply in my case...
posted by jim in austin at 6:11 PM on April 28, 2013


It's also worth noting that investment strategies using compound interest are intrinsically sensitive to market conditions during the period just prior to when a person cashes out. Since the rate of growth increases over time, the majority of the growth occurs towards the end of the investment period. So if your scheduled retirement just happens to be after a few years of poor market performance (like the recent recession), your returns end up being vastly lower than they otherwise would be.
posted by dephlogisticated at 6:11 PM on April 28, 2013 [2 favorites]


Isn't this

the old saying in the stock market, that when the janitor starts talking stocks and making money, it's time to get out because a bubble is occurring

basically the same thing as saying that the powers that be won't let a poor schlub become a millionaire?


Not really. The point is that when a market appears to be performing so well that any amateur can join the game and make a lot of money, you have a bubble going on. Just like house flipping in 2006. Buy a house, sell it in 6 months, make $40,000! How can I lose? When investing seems easy, something bad is about to happen.

It's not about the low pay of the janitor in the story, it's about the uptick in numbers of people newly entering the market because they see it as a quick money maker.
posted by gjc at 6:12 PM on April 28, 2013 [1 favorite]


The same way that it's worth asking why health insurance is tied to your job, it's worth asking why retirement funding is tied to your job. I have been in my career for about 9 years, and only for about 6 months of that time was I eligible for a 401(k) plan. I invest through a Roth IRA, but IRA limits aren't that high ($5,000/year, as opposed to $15,000/year for 401(k)s).

Terrible 401(k)s are, of course, terrible. Excessive fees are a huge problem. Many employers pick 401(k) providers based on who can show good returns for the past 5 years, or who has the slickest presentation, or who can do it cheapest for the company, rather than what the fees are for the employees. Fees are the one constant in investing-- your portfolio can go up 30% or down 30%, you're still going to pay the fees based on the total amount invested. The difference between a fee of .2% and 2% can be thousands of dollars a year.

I am hugely in favor of some kind of national program that would make a TSP-like retirement plan available to all. People shouldn't be held hostage to bad plans just because that's what their job offers, or not be able to have a 401(k) at all because their employer doesn't offer one. The US is increasingly moving towards a self-employed/contractor model; our structures for insurance/retirement need to keep up.
posted by matcha action at 6:16 PM on April 28, 2013 [6 favorites]


One of the most common errors people make is overstating the importance of volatility or lack there of. In general assuming you have ten years plus before retirement volatility is your friend as an investor.

I don't know how much I agree with the "volatility is your friend" part of this. Doesn't the math tell us that volatility is the enemy?

For example, let's assume an investment averages a 5% return over a ten year period. We'll start with $1000. In our first hypothetical, the investment returns 5% year in and year out, never more or never less. In the second hypothetical, the investment vacillates between losing 5% each year and returning 15%. Over a ten year period, that second investment will still return an average of 5%. But at the end of the ten years, the first investment will have made something like $1628.89, but the second will only have made $1556.35.

Hypothetical 2:

Year 1: $950
Year 2: $1092.5
Year 3: $1037.88
Year 4: $1193.56
Year 5: $1133.88
Year 6: $1303.96
Year 7: $1238.76
Year 8: $1424.58
Year 9: $1353.35
Year 10: $1556.35

So I'd argue that there is some risk related to volatility even for those investors who are on a long horizon.
posted by MoonOrb at 6:19 PM on April 28, 2013


that seemed sleazy and dishonest to me as i know damned well it hasn't happened historically, especially in our current economic woes

Actually, no, the stock market is doing awesome. I had a 401K at my pre-recession employer, and I managed to stay on there a bit into the downturn so that I was still picking up 401K shares after the Dow had gotten down into the 8000s. It pretty much doubled over the next 4 years.
posted by LionIndex at 6:22 PM on April 28, 2013


Actually, no, the stock market is doing awesome.

just like in the '20s - i just don't have any confidence the awesomeness is going to continue, especially when it's hard to find a reason for it
posted by pyramid termite at 6:28 PM on April 28, 2013 [1 favorite]


The comments about buying one kind of car or none are confusing me.

In Canada we have something called an RSP (retirement savings plan) which is basically a type of account. Your contributions (up to a yearly limit) reduce your taxes, and any interest/income you make in the account is not taxed until you withdraw after retirement.

Here, an employer-directed RSP is a benefit. The benefit might be that your employer matches your contributions or makes some base level of contributions for you. What your employer offers doesn't restrict you to one kind of retirement plan or none. And even if the mutual funds or whatever they're offering suck, they're putting free money in there for you.

Is it not like that in the US? Or are you saying that you can't opt out of the retirement benefit, and you would rather have it as extra income that you can invest how you like?
posted by Pruitt-Igoe at 6:31 PM on April 28, 2013 [2 favorites]


I love it when they call me up and ask me if I want to make an appointment to speak to a Financial Adviser. A "Financial Adviser" who calls you, sees you for free, and works for a bank or investment firm is in fact a salesman, and his offerings are chosen for his benefit, not yours.
posted by George_Spiggott at 6:32 PM on April 28, 2013 [4 favorites]


I'm a teacher, so I can have TIAA-CREF. Thank heavens. TIAA-CREF and Social Security meant my mom's pre-existing condition exclusion when she joined her retirement community didn't clean out all her money (and all our money as well) when she needed long-term care and then skilled nursing.

Ameriprise, on the other hand, which we signed up with for my husband's 401(k), was an utter boondoggle. They still have some of our money because it's darn hard to get it out, even when I transferred his money to an account with TIAA-CREF.
posted by Peach at 6:36 PM on April 28, 2013 [1 favorite]


If someone is trying to sell you something really hard you can be pretty sure that a) you've missed the boat or b) the boat isn't going to sail...
posted by jim in austin at 6:38 PM on April 28, 2013 [2 favorites]


So I'd argue that there is some risk related to volatility even for those investors who are on a long horizon.

The argument is that the performance of the volatile asset should outperform the less volatile asset because of how the market perceives risk.

Yes the math can work against it on paper, in practice not so much.
posted by JPD at 6:43 PM on April 28, 2013


Actually I think there is a paper that analyzes the annual returns of a bunch of funds that beat the market over twenty years and I believe all them had at least one rolling three year time period in which they were amongst the very worst managers.

Do you have a link for this?
posted by triggerfinger at 6:44 PM on April 28, 2013


My employers must not suck as much as some, because I've always had a no-load S&P 500 index fund option (with minimum balance requirements in one case).
posted by BrotherCaine at 6:49 PM on April 28, 2013


My employer has a pretty small selection of funds, but they do have one index tracker with a low expense ratio for each major category (bonds, US stocks, international), so I'm pretty happy with that. I just put extra retirement money in an (essentially free) IRA where I can choose whatever investments I want.
posted by triggerfinger at 6:54 PM on April 28, 2013


Here, an employer-directed RSP is a benefit. The benefit might be that your employer matches your contributions or makes some base level of contributions for you. What your employer offers doesn't restrict you to one kind of retirement plan or none. And even if the mutual funds or whatever they're offering suck, they're putting free money in there for you.

What you describe is more-or-less exactly what in the US is called a "401(k) plan". So the issues described by the Frontline documentary also apply, broadly, to Canadian RSPs. The problem with such programs (well, one problem -- the problems are manifold) is that the combination of the facts that actively-managed funds will not typically outperform the market after fees and that such funds often make up the bulk of the offerings in these programs means that they can be extremely expensive vehicles, especially in a low-return or highly volatile environment (if your investment is returning 5%, has an expense ratio of 1%, and inflation's running at 2%, is the remaining 2% adequate growth to fund a retirement?)

And let's be clear: the employer match is not "free money". It's part of the employee's pay packet, but it's a part which is only paid if the employee agrees to give a chunk to the fund managers.
posted by multics at 6:56 PM on April 28, 2013 [1 favorite]


Do you have a link for this?

Ah it was from Brandes

Death, Taxes and Underperformance I over state what it says - 44/59 top decile performers over ten years had one year in the bottom decile, Half made an appearance in the bottom 1/3 on a rolling three basis.

They also have studies for Non-US managers. The actually have a pretty good library of investing info out there for free.
posted by JPD at 7:02 PM on April 28, 2013 [4 favorites]


But at the end of the ten years, the first investment will have made something like $1628.89, but the second will only have made $1556.35.

I think this is the difference between "losing 5%" being 95% or being 100%/105% (95.23%).
posted by smackfu at 7:14 PM on April 28, 2013


Urgh. This topic makes me so angry. I wish the government would just let me keep my retirement savings in an IRA, where I could pick a low-fee index fund and be done with it. But IRA's are limited to $5k a year, and in any case are not available at all if you make over $58k (which is not that much). So I have to keep my retirement savings with some shady investment firm that I have never heard of and I'm sure takes a significant chunk for itself. It's pure, blatant corruption, and everyone just goes along with it.
posted by miyabo at 7:14 PM on April 28, 2013 [1 favorite]


Is it not like that in the US? Or are you saying that you can't opt out of the retirement benefit, and you would rather have it as extra income that you can invest how you like?

In the US, an employer may or may not offer a 401(k) plan, and may or may not match your contribution up to some percentage or some total amount per annum, which latter is linked to your total compensation. You can opt out, but no, you don't have the option of using what would have been the company match for some other investment purpose -- you'd be leaving that money on the table.
posted by George_Spiggott at 7:15 PM on April 28, 2013


The market certainly has its risks and is certainly not a great alternative to Social Security, but it's silly to pretend it's some kind of cunningly rigged game that no minor player can ever come out ahead on. You had to be some kind of special genius of financial incompetence not to do well if you were investing throughout the great 90s boom years, and anyone who didn't panic sell in 2008 should now be not just back to where they were but ahead of the game.

I'm not really sure how ahead of the game you'd be. Based on this calculator, which assumes "that no commissions, fees or taxes are paid by our hypothetical investor from their investment," if I had invested $500 per month in the S&P 500 each and every month since I graduated from high school in the late(ish) 90s, my inflation-adjusted return on investment (reinvesting dividends) would currently be 1.68%. That doesn't seem...great.

As far as the stock market doing great "right now," literally every indicator I have seen forecasts bad times ahead, and if you look at the S&P 500 over its lifetime (click "all" on the graph), it really seems like it just went into rollercoaster mode starting in the mid-90s, and I don't really see any reason to believe it's going to level off into steady returns. It really seems like all of our received investing wisdom is based off of like 30 years of experience, and I don't think it's as rock solid as it's presented to be.
posted by Steely-eyed Missile Man at 7:20 PM on April 28, 2013 [1 favorite]


Eh. There are managers that have outperformed over 30 years.

See, this part always confuses me. For mutual funds, outperforming the market is like talking yourself out of a speeding ticket. Its this amazing thing that has been reported happening, but is by no means the norm.

But, isn't that what you're PAYING them to do?

If thats the case, why not just cut out the middle man and gamble on the actual stocks, if you want the risk, or just buy the index if you don't.
posted by cacofonie at 7:22 PM on April 28, 2013


Urgh. This topic makes me so angry. I wish the government would just let me keep my retirement savings in an IRA, where I could pick a low-fee index fund and be done with it. But IRA's are limited to $5k a year, and in any case are not available at all if you make over $58k (which is not that much). So I have to keep my retirement savings with some shady investment firm that I have never heard of and I'm sure takes a significant chunk for itself. It's pure, blatant corruption, and everyone just goes along with it.
This isn't quite accurate-- you can still contribute to a traditional IRA if your income is above $59,000, just some of your contributions may not be deductible (above $69,000, none of your contributions are deductible). This only applies if you contribute to your employer's plan. If you do not contribute to your employer's plan (if they don't have one, for instance) you can contribute, and your contributions are tax deductible, up to $178,000/year.

For a Roth IRA, your income needs to be below $112,000 to contribute-- none of your contributions are tax deductible, but you withdraw your money tax-free. (source)

The contribution limits are still a huge problem, though. I can't imagine why IRA limits are so low, except due to the power financial companies exert on congress. Lots of lousy 401(k) providers don't want you to have a choice where to invest most of your money.
posted by matcha action at 7:31 PM on April 28, 2013 [3 favorites]


it really seems like it just went into rollercoaster mode starting in the mid-90s, and I don't really see any reason to believe it's going to level off into steady returns. It really seems like all of our received investing wisdom is based off of like 30 years of experience, and I don't think it's as rock solid as it's presented to be.

Eh. The stock market has always been a rollercoaster, and most of the received investing wisdom is based off of something more like 90 years. The CRSP which is what most academic work is based off of begins in 1925.

See, this part always confuses me. For mutual funds, outperforming the market is like talking yourself out of a speeding ticket. Its this amazing thing that has been reported happening, but is by no means the norm.

But, isn't that what you're PAYING them to do?

If thats the case, why not just cut out the middle man and gamble on the actual stocks, if you want the risk, or just buy the index if you don't.


Of course, that's why the default should always be passive, but there are guys who have outperformed over decades, and they all seem to sort of do the same thing - but most people are not able to deal with what comes along with investing with those guys. Not to mention most of them are now closed to new investors.
posted by JPD at 7:31 PM on April 28, 2013


but most people are not able to deal with what comes along with investing with those guys. Not to mention most of them are now closed to new investors.

So basically: pay the speeding ticket or a take a bike.
posted by cacofonie at 7:35 PM on April 28, 2013


I was amused to see this reaction to the Frontline documentary. A senior retirement advisor complains that if we only saved (invested) 15% per year instead of the usual 3%, our returns would be so much bigger!

He compares it to how many minutes in the gym you are willing to endure to get those biceps you want. Is there any doubt these folks are out of touch?
posted by jabo at 7:35 PM on April 28, 2013 [1 favorite]


What you describe is more-or-less exactly what in the US is called a "401(k) plan". So the issues described by the Frontline documentary also apply, broadly, to Canadian RSPs.

Yep, Canadian registered saving plans are quite similar to the US 401(k) plan. Same entrenched mutual fund industry but with higher fees across the board in the expense ratio and in sale charges. On the upside, employer matching is common and unless you have a locked in RSP, you can transfer out to a self-directed RSP account. Plus there is a national pension plan that will act as a safety net, at least for the next few decades while it's still in surplus. But it's a similar problem of asking employees who are not investment savvy to manage their own defined contributions plans.

What's scary for me is hearing how American baby boomers are facing retirement funding problems. Isn't that one of the most richest and prosperous class of individuals in recent history, complete with defined benefit plans? If they're having problems after riding out the economic boom, what about the current jobless generation? Not just in American but across the world.
posted by tksh at 7:36 PM on April 28, 2013 [2 favorites]


So basically: pay the speeding ticket or a take a bike.

huh? no I'm not saying that at all. Find someone who buys cheap P/B stocks at a relatively low fee and only open up the statements to make sure he's doing what he said he's doing, and don't worry about anything.
posted by JPD at 7:37 PM on April 28, 2013 [1 favorite]


A senior retirement advisor complains that if we only saved (invested) 15% per year instead of the usual 3%, our returns would be so much bigger!

That's not what he said. I'm no fan of T. Rowe, but lets not misrepresent things. He basically said the number one thing you can control to make sure you have enough money at retirement is save more now. Not that saving more now allows you to earn bigger returns.
posted by JPD at 7:39 PM on April 28, 2013


I think, of all the 401k companies, Vanguard actually gets this. They are famous for focusing solely on cost, and are extremely boring as a result. They are serious to the extent that they pay less for employees, they are based in suburban Philly, rather than NY, and are generally always aiming for cost reductions.

Full disclosure,I don't work there, but know people who do, and have been impressed by how much they echo what is in the article.
posted by blahblahblah at 7:48 PM on April 28, 2013 [4 favorites]


If you want to learn about investing and you are smart you should take a look at moneychimp.com. It's the only site I've found that isn't full of idiotic advice or trying to sell you something.
posted by miyabo at 7:50 PM on April 28, 2013


Your contributions (up to a yearly limit) reduce your taxes, and any interest/income you make in the account is not taxed until you withdraw after retirement.

This is probably something best for AskMe, but as an idiot, I have trouble figuring out if an RRSP is ultimately worth it. Sure, my contributions reduce my taxes now, but aren't they actually only deferred until I claim them at retirement? And can I extrapolate just how much in taxes I will eventually pay? Is it possible that taxes will eat whatever income is made, or will the interest be where I'll make my money? Would I be better off dumping cash into a TFSA? And is bringing my information into a non-bank, non-work affiliated advisor worth it? And how can I tell a shit advisor from a good one? And will there ever be a rainbow?

Yes, this is something to take to AskMe.
posted by Alvy Ampersand at 7:51 PM on April 28, 2013


See, this part always confuses me. For mutual funds, outperforming the market is like talking yourself out of a speeding ticket. Its this amazing thing that has been reported happening, but is by no means the norm.

If the market were luck-based, this would be true, but it isn't. Every smart/winning decision someone makes in the stock market has someone else making a dumb/losing one. More or less. The idea of beating the market is just making the smarter decision >50% of the time. And again, there is real data out there that gives a dedicated investor all the information they need to do that.

It's also about strategy. Sometimes managers have their funds set up where they are more volitile than the market. They will lose 12% on a day the market loses 10%, but they will gain 15% on a day the market gains 10%. All things being equal, that should be a market beating strategy.
posted by gjc at 7:54 PM on April 28, 2013


Of course, that's why the default should always be passive, but there are guys who have outperformed over decades, and they all seem to sort of do the same thing - but most people are not able to deal with what comes along with investing with those guys. Not to mention most of them are now closed to new investors.

"Outperforming" needs to be carefully defined. It's one thing to show that a mutual fund's NAV outpaced the S&P500. It's another thing entirely to show that an investor in such a fund would have, after paying any transaction fees, expenses, loads and so on, would have realized a return above that of the index. That's not to say, of course, that there aren't a few funds that might beat their benchmark, net of fees, for very long periods of time. But, like they say in the commercials, "past performance is no guarantee of future returns". In the end, an investor in an index fund can be reasonably certain of realizing returns within epsilon of the index. An investor in even the best-performing actively-managed fund gets no such assurance.

That we have to discuss such esoterica in the context of retirement funding, though, really ignores the elephant in the room; shifting the burden of the fabulously complex problem of retirement income planning entirely onto individual employees in a largely unregulated market is a recipe for disaster.
posted by multics at 7:56 PM on April 28, 2013 [4 favorites]


There is a great deal of evidence that actively managed funds vastly outperform index funds, year after year.

For the manager, that is.

For the investor? Index funds are the only reasonable choice.
posted by miyabo at 7:58 PM on April 28, 2013 [2 favorites]


It is statistically impossible to tell luck from skill for a money manager on any reasonable time frame. That's why the right way to underwrite manager selection is to try to underwrite their investment process rather the last set of results that process produced.
posted by JPD at 7:58 PM on April 28, 2013


Yes, I'm not a schmuck I'm talking after fees.
posted by JPD at 7:59 PM on April 28, 2013


Why the surprise? Capitalism is about getting other people to part with their money. The system works.
posted by Twang at 7:59 PM on April 28, 2013


Sure, my contributions reduce my taxes now, but aren't they actually only deferred until I claim them at retirement?

The idea is that when you're retired then you can get the money back from the RRSP as your sole source (or main source) of income and pay very little in taxes. If you were to pay taxes on that money now, it would be a much larger portion because of the rest of your income.
posted by ODiV at 8:00 PM on April 28, 2013 [2 favorites]


He said that when he was starting his business in the late 70s, his accountant told him that if he just invests X percentage of his monthly income in an IRA, he will be a millionaire by the time he retires. My dad said to him, "Bullshit. There is no way that the powers-that-be will let a poor schlub like me become a millionaire."

I decided to fact-check this and see what I could come up with...

Using median income data from here and S&P 500 historical data from here...

First off, the historical prices of the S&P 500 index don't include dividends. I'm going to pull a number out of my ass and say that his stocks would have yielded 2% per year in dividends. So, in the spreadsheet I made, I added an additional 2% return every year.

If your father had started earning exactly the median income in 1975, and then, every January, invested 5% of it into the S&P 500 at the January closing price, reinvesting the dividends, he'd have contributed $33,008.65 to his IRA and today he'd have $178,036.20.

A millionaire? No. But $178k is a pretty good nest egg for having put less than two years' income into the fund.

Assuming he started in early 1976, he's also 37 years into this project. Since a typical work life is at least 40 years, he's got three more years for that nest egg to grow. His APR from 1976 - 2013 is 9.03% per year, so in three years, his $178k will grow another 30.6% to about $232k - assuming no further contributions.

Given the usual advice about taking 4% a year, that $232k would represent a lifetime income of around $9300 / year, or around $800 a month. Not really enough to live on, but certainly a nice supplement to Social Security.
posted by Hatashran at 8:00 PM on April 28, 2013 [2 favorites]


This is probably something best for AskMe, but as an idiot, I have trouble figuring out if an RRSP is ultimately worth it. Sure, my contributions reduce my taxes now, but aren't they actually only deferred until I claim them at retirement? And can I extrapolate just how much in taxes I will eventually pay? Is it possible that taxes will eat whatever income is made, or will the interest be where I'll make my money? Would I be better off dumping cash into a TFSA? And is bringing my information into a non-bank, non-work affiliated advisor worth it? And how can I tell a shit advisor from a good one? And will there ever be a rainbow?

Only Montgomery Burns knows if there will ever be a rainbow. But the conventional wisdom of tax deferral for retirement is that you'll have fewer expenses and less income when you are retired, so your marginal rate will be lower in the future.


Why the surprise? Capitalism is about getting other people to part with their money. The system works.

You forgot the other half- they part with their money in return for something they want. Ripping people off isn't capitalism, it is fraud. Capitalism, or the free market, is about people making mutually beneficial trades. Sometimes the benefit for one side is nebulous or short sighted, but the nice thing is that nobody is forced to engage in trade if they don't want to.
posted by gjc at 8:04 PM on April 28, 2013 [1 favorite]


Alvy Ampersand: that's honestly an entire AskMe thread by itself. My opinion is that if you have employer matching and you have access to low cost funds (<0.50%) or can transfer out to a self-directed RSP to purchase low cost funds, it's probably worth the hassle. Yes, RSPs are just a deferred tax shelter but if you expect to have less income after retirement than your top earning years, you will pay less overall taxes. I forgot what the withdrawal schedules are like but you're not required to withdraw the full amount upon retirement (and thus pay the entire tax). You can strategically withdraw or gift to fall under different marginal tax rates over your retirement years.

Though I've read some articles with the math showing that if you're a high income earner, maxing out your TFSA first puts you ahead. Google around.
posted by tksh at 8:07 PM on April 28, 2013 [2 favorites]



it really seems like it just went into rollercoaster mode starting in the mid-90s, and I don't really see any reason to believe it's going to level off into steady returns. It really seems like all of our received investing wisdom is based off of like 30 years of experience, and I don't think it's as rock solid as it's presented to be.


If you look at the trendline of the S&P 500, though, the roller coaster is almost all gains. When the S&P crashed, it just basically went down to where it should have been without the boom.
posted by gjc at 8:08 PM on April 28, 2013


Alvy Ampersand: I have trouble figuring out if an RRSP is ultimately worth it. Sure, my contributions reduce my taxes now, but aren't they actually only deferred until I claim them at retirement? And can I extrapolate just how much in taxes I will eventually pay? Is it possible that taxes will eat whatever income is made, or will the interest be where I'll make my money? Would I be better off dumping cash into a TFSA?

You're missing an important detail: In most cases your income will be less when you retire, so when you eventually repay the deferred tax, it will be at a lower rate. RRSPs work when you expect to make less money at the time of withdrawal. TFSAs work if you expect to make more money at the time of withdrawal or when you've maxed your RRSP. /cancon.


... or what tksh said.
posted by Popular Ethics at 8:10 PM on April 28, 2013 [1 favorite]


borges: "I think the tax deferral makes 401k programs a much better deal than you think."

Are you referring to not having to pay a fine for failing to hand your money to private interests on Wall Street?
posted by stet at 8:12 PM on April 28, 2013 [1 favorite]


I've always wondered why no one questioned the immediate benefit to the banks. They have your cash. Now. And you're afraid to withdraw it because of 'early withdrawal' penalties. Why does that not reek of scam to anyone but me? I mean sure you should have to pay the taxes immediately if you withdrawal... but... to me... the net benefit under the current system is to the banks.
posted by one4themoment at 8:21 PM on April 28, 2013 [1 favorite]


pyramid termite: i don't put a penny of my own money in a 401k

the people who run my employer's program gave a little presentation a couple of years back where they told us how much our money would grow at 8% a year and kept harping on how that amount of money would really, really benefit our retirement - yes, they had a small print disclaimer on the powerpoint slides and the literature saying they weren't guaranteeing such a ROI or anything else, but they didn't verbally mention that

that seemed sleazy and dishonest to me as i know damned well it hasn't happened historically, especially in our current economic woes

1. That "small print disclaimer" is specifically required by law. That they put it in "small print" (according to you; I always see it in full-sized print) means nothing insidious about them.

2. It's sleazy and dishonest to warn you that they cannot guarantee you magical returns?

3. It has happened historically. Absolutely. Try studying the history before you talk about it.

Honestly, there are a lot of dangerously underinformed people spouting opinions as facts in this thread.
posted by IAmBroom at 8:28 PM on April 28, 2013 [7 favorites]


one4themoment: "I've always wondered why no one questioned the immediate benefit to the banks. They have your cash. Now."

Not exactly. They have your assets under management, but it's not the same as depositor accounts. It's not the same as cash on their books.

I do agree that the current system benefits the financial managers more than the pension fund system does or did. The guarantee of benefits seems to be more important to people who are retired than the potential for bigger gains, which also brings with it the potential for losses.
posted by krinklyfig at 8:31 PM on April 28, 2013 [1 favorite]


I understand what you're saying (I think)... but are you also saying that they can't leverage those 'assets' into loans or other cash mechanisms? I'm admittedly financially illiterate but I can't help to think that there's another reason behind the extra penalty for early withdrawal other than "You were supposed to save this"
posted by one4themoment at 8:40 PM on April 28, 2013


>In Canada my mom, who is not sophisticated, was encouraged to invest in mutual funds back around 2000, and by the middle of the decade she had lost 25% of the value (perhaps more) of her capital. Had they invested in real estate locally she would have done fine,

Yeah, but that's just a quirk of a particular recent historical situation. It's not hard to look back at similar stretches of time over the last century and do a comparison; typically people have done better in the stock market than they have in real estate; it's not like some evil moustache-twirling villain was warning her off a sure-thing so as to try to sucker her into losing her money.


I didn't say it was a villain, but what I should have said is that she used an investment advisor from the local credit union (now the largest credit union in western Canada - not VanCity, btw), and her investment advisor, typical of most of the bloody smurfs that work at that credit union, was a moron. The fault was hers - she's risk-adverse, but also not terribly interested in learning about investment either.
posted by KokuRyu at 8:53 PM on April 28, 2013


The extra penalty for early withdrawal goes to the government, not to the bank. It's because you got a tax break for the earlier deposit, so they're recapturing that, plus an extra 10% for the inconvenience.
posted by Hatashran at 8:55 PM on April 28, 2013 [1 favorite]


I'm not really sure how ahead of the game you'd be. Based on this calculator, which assumes "that no commissions, fees or taxes are paid by our hypothetical investor from their investment," if I had invested $500 per month in the S&P 500 each and every month since I graduated from high school in the late(ish) 90s, my inflation-adjusted return on investment (reinvesting dividends) would currently be 1.68%. That doesn't seem...great.

A) compared to what? Where else were you going to put that money and earn a better inflation-adjusted rate of return?

B) my claim about being "ahead of the game" referred to the point from the beginning of the Great Recession to the present. Try using that calculator to run the experiment from the beginning of, say, 2007 to the present. You might be surprised by the result.
posted by yoink at 9:38 PM on April 28, 2013 [2 favorites]


* Sidebar - several people have averred above that the IRA contribution is $5000 annually. In actuality:

For 2013, the maximum you can contribute to all of your traditional and Roth IRAs is the smaller of:
$5,500 ($6,500 if you’re age 50 or older), or
your taxable compensation for the year.


from the IRS website
posted by jcworth at 10:58 PM on April 28, 2013 [1 favorite]


As a job hopper between universities, I now hold multiple pensions and defined contribution plans. I must say this piece basically omits the downsides of pensions. When Ms Robin Diamonte says that there was nothing wrong with the pension system, I'm wondering which history of pensions she's basing that on. The challenge of financing retirement is it takes several decades to prove whether any given system is truly working.

Private sector pensions, like employer paid health insurance, basically took off during the managed US economy of WW2. With wages frozen, employers turned to pensions as a means of recruiting scarce workers. For the first few decades it worked, but large companies didn't actually set aside much money for those future obligations -- there's simply no way for them to raise the kind of capital to retroactively fund that. By the time Europe and Japan rebuild a competitive manufacturing base though, employer paid pensions were beginning to demonstrate some weakness. If your company went bust, not only were you out a job, but your pension was jeopardized as well. A diversified portfolio, this was not.

It wasn't until 1974 that this situation was addressed. While the insurance fees instituted by ERISA's PBGC are apply some pressure for the shift -- up to 442 dollars per person every year in penalty interest (to say nothing of the actual pension obligations and administrative costs), I don't think it's the full story. Increased competition from overseas continues to play a role, but I suspect new domestic competitors would also be at a significant advantage.

There's nothing wrong with a pension system in theory, but I find it little to recommend underfunded employer managed pensions. You should be mostly indifferent between a raise or an increased pension. The only reason to choose the latter is because you know the money isn't there. Or far more cynically, it's a stealth transfer to older workers, in the form of retirement benefits, from younger workers, (even ones who haven't even joined the labor force yet!) who end up receiving reduced pay while working and discover their pension unable to meet the promise they took a pay cut for.

PBGC addressed some of the risk, but they're not looking to rosy either. Their continuing deficits suggest Congress is underpricing the insurance. This report suggests it's a fair price would be about double. And that's just the insurance on a pension plan shortfall, to say nothing of the expenses for cutting checks and managing investments.

401ks have a different set of problems, but pretending that pensions are free money from heaven got a lot of companies into serious trouble.
posted by pwnguin at 11:32 PM on April 28, 2013 [4 favorites]


I think, of all the 401k companies, Vanguard actually gets this. They are famous for focusing solely on cost, and are extremely boring as a result. They are serious to the extent that they pay less for employees, they are based in suburban Philly, rather than NY, and are generally always aiming for cost reductions.

Vanguard is awesome. The other big plus is that they're organized as a mutual (TIAA-CREF is also one), so the customers are the shareholders and there's no conflict of interest.
posted by cosmic.osmo at 11:58 PM on April 28, 2013 [1 favorite]


I understand what you're saying (I think)... but are you also saying that they can't leverage those 'assets' into loans or other cash mechanisms? I'm admittedly financially illiterate but I can't help to think that there's another reason behind the extra penalty for early withdrawal other than "You were supposed to save this"

No, they can't. The rules for investment banking and retail banking are completely different, they should scarcely be called by the same name. When you give money to your 401k, they invest it in things on your behalf. The money is gone; spent. You now own pieces of companies that, hopefully, will appreciate in value over the long term. The fund managers buy and sell these stocks for you, and take a cut of the profits for their trouble.

And yes, the 10% early withdrawal penalty is exactly that.
posted by gjc at 2:06 AM on April 29, 2013 [1 favorite]


High-load funds and accounts are indeed a problem, and the fact that these sorts of plans are linked to employment is silly. Heck, linking just about anything to employment is silly. Why on earth the feds haven't divorced health insurance from employment is beyond me, but there you go.

But just because there are shitty funds and expensive accounts out there doesn't mean that the system is rigged or that pensions are the only way to do things.

The thing about saving for retirement is that while capital growth is great, but investment is what's really going to do it for you. The reason the pensions have gone bust is the same reason most people don't have adequate retirement savings. If you plan to stop working on your mid-to-late sixties and spend the next twenty-odd years living off your savings, you'll likely need to put aside at least 15% of your gross income every year. Very few people do that, and certainly none of the pension plans did, which is why they went bust. Why such a high contribution requirement? Because after things like inflation and fund loads, regular annual returns much in excess of 3-5% are extraordinarily difficult to attain for normal investors. With rates that low, you'll need to put aside at least half of your nest egg out of your own money. Granted, half of what you end up with is returns on your investment, but if you're not putting aside a huge amount of money every year, you're not going to make it.

Which is why the whole concept of "retirement" is so odd. The idea that everyone, or even a significant percentage of people, are going to be able to afford to stop working for the last quarter or even third of their lives is just bizarre, historically and practically.
posted by valkyryn at 3:04 AM on April 29, 2013 [3 favorites]


We've got a nifty, illustrated piece on the math that should launch around 10:00 AM, EDT. Inshallah. I'll link to it when it launches.
posted by Mayor Curley at 3:34 AM on April 29, 2013 [2 favorites]


The idea that everyone, or even a significant percentage of people, are going to be able to afford to stop working for the last quarter or even third of their lives is just bizarre, historically and practically.

Well, you have to remember the historical circumstances that gave rise to the creation of Social Security and pensions and the like in the first place. These programs and systems developed not because we considered it some kind of big social problem that people weren't getting to enjoy their sunset years in a state of permanent leisure, or whatever: It's that we had massive levels of life threatening and debilitating poverty among our older populations that were keeping and/or dragging our younger populations down into poverty too (people may want to believe in the ideal of self-sufficiency and all that, but the reality is after age 60, even despite current medical advances, life is much more dangerous and health much more fragile and few who don't command significant stores of personal wealth to draw on can manage life at that age unassisted--health care is inherently more expensive for older people, so in an era of rapidly increasing health care costs, the last thing we need is the end of retirement as an institution or to push out the retirement age even further).

It's going to continually depress our entire economy if retirement suddenly vanishes. Not only will it push the burden for the care of the retirement-age population onto the successive generation, it'll increase the burden on the health care system generally as older workers become more likely to have acute health problems associated with working into older age.

By becoming over-dependent on the private financial sector with its short-term profit oriented outlook, we've made our entire society dangerously penny-wise and pound-foolish.

Which is why the whole concept of "retirement" is so odd. The idea that everyone, or even a significant percentage of people, are going to be able to afford to stop working for the last quarter or even third of their lives is just bizarre, historically and practically.

That's like saying it's odd that people don't expect to get polio anymore. Or arguing that, since for the vast majority of history, humans couldn't travel from one continent to another with better than 50-50 odds of survival, global trade is bizarre, historically and practically.

We humans have been steadily working on this project to improve the human condition for many years. At various times, we've made great strides that at other times in history seemed impossible or unlikely. History can be a useful teacher, but it isn't a prison.
posted by saulgoodman at 7:46 AM on April 29, 2013 [9 favorites]


Where else were you going to put that money and earn a better inflation-adjusted rate of return?

Is that the standard? I thought we were talking about being able to retire. I mean, if you earn the "best returns possible" but still end up in penury, then really who cares?
posted by Steely-eyed Missile Man at 8:24 AM on April 29, 2013


I've always had a no-load S&P 500 index fund option ...

Does anyone care where their invested money goes? And what do you do then?

I have a hard time investing in anything but money market funds ... which in reality probably isn't any morally better than throwing my money into oil, automobiles, junk food, or pay-day loans.

The problem I have with mutual funds is that if you care at all about where your money is being invested (i.e. not in companies you think are evil, of which I think a lot), you have to track the mutual funds constantly because holdings are always shifting ...

I certainly can't do it and keep a clear conscience. Someone help me out? Where can I invest my 401k that will get me more than 1% a year without investing in "evil stuff?" ... that does not seem to be an option for me.
posted by mrgrimm at 8:41 AM on April 29, 2013 [1 favorite]


Is that the standard? I thought we were talking about being able to retire. I mean, if you earn the "best returns possible" but still end up in penury, then really who cares?

Wait, what? How did you suddenly get to be condemned to "penury" because your savings are earning 2% above inflation on average over a roughly 40 year period?
posted by yoink at 8:41 AM on April 29, 2013 [3 favorites]


There is a whole class of socially responsible funds out there that have varying criteria for what is socially responsible.

Be aware though that taken too far you end up investing n things you feel good about investing in, and that is nearly always a big negative for your returns.

Like "No Guns, No Alcohol. No Defense" probably doesn't hurt you to much in trying to earn the market return.

"Only Green Energy and Organics" probably does.
posted by JPD at 8:43 AM on April 29, 2013


The extra penalty for early withdrawal goes to the government, not to the bank. It's because you got a tax break for the earlier deposit, so they're recapturing that, plus an extra 10% for the inconvenience.

It's not a tax break. You pay taxes on withdrawals either now, plus 10%, or later, when you're at some age defined as retirement.
posted by Blazecock Pileon at 8:46 AM on April 29, 2013


It's not a tax break. You pay taxes on withdrawals either now, plus 10%, or later, when you're at some age defined as retirement.

Deferring tax payments while you earn investment returns on the money is most decidedly a tax-break. The fact that you eventually pay taxes on the money you withdraw when you retire doesn't mean you aren't ahead of the game for having had the opportunity of deferring those tax payments.
posted by yoink at 8:51 AM on April 29, 2013 [1 favorite]


... but there are guys who have outperformed over decades

There are nearly 10,000 mutual funds. Which are the ones that have outperformed the market for decades? Out of 10,000 mutual funds, what are you odds of picking an outperforming fund for the next several decades?
posted by JackFlash at 8:57 AM on April 29, 2013 [2 favorites]


Wait, what? How did you suddenly get to be condemned to "penury" because your savings are earning 2% above inflation on average over a roughly 40 year period?

To bring this back to hard and fast figures, using the handy dandy calculator Steely-Eyed Missile Man linked above: someone who invested the inflation-adjusted equivalent of just $350 per month starting in 1970 (roughly the current monthly car payment on a new compact car) and reinvested all the interest would currently be sitting on $1,040,593.34 in capital. Now, sure, that's not "I'll buy a private island and use satellites to destroy the world economy" money, but it's not "penury" either--and there are a very sizable percentage of Americans who would have been capable of at least that amount of regular retirement savings.
posted by yoink at 9:06 AM on April 29, 2013


If anyone could link to reputable information about funds that have overperformed their benchmarks for decades, I'd be really interested in seeing it--thanks. Even a twenty year period, if anyone has that. I think Lipper or Legg-Mason or Magellan maybe did this for about 15 years or so? Anyway, I think it would be cool to check out the actual numbers on this.
posted by MoonOrb at 9:09 AM on April 29, 2013


Google is failing me but there was an article in the Wall Street Journal a couple years ago about a stock picking superstar who was ranked in the top 10 money managers for twenty consecutive years who had a huge percentage of his fund in Fannie Mae and Citibank and Bank of America in 2007 and wiped out all of his accumulated twenty years of returns in a few months.

One of these is the money manager middle class schlubs like me probably should use.
posted by bukvich at 9:15 AM on April 29, 2013 [1 favorite]


OK I found it. It's Bill Miller Legg Mason.
posted by bukvich at 9:19 AM on April 29, 2013


Right-Miller did it at Legg Mason for 15 years. He's a cautionary tale for the idea that active management is a better option than indexing. Indexers (I index) take it pretty much as an article of faith that there haven't been actively managed funds that have outpeformed their respective indices for periods greate than, say, several years. But I'd like to see actual data on it.
posted by MoonOrb at 9:33 AM on April 29, 2013 [1 favorite]


JPD: That's not what he said.

You're right, I misread "nest egg" as return. And the quote that galled me the most was not from the advisor but rather the WSJ writer who interviewed him:

“To be sure, Americans saving 15% per year will put more fees in the pockets of mutual funds firms. But it will also put more money in American nest eggs. And that, regardless of how much money Wall Street skims off our nest eggs, is a good thing, yes?”


That's a bit like saying the cure for world hunger is that people should eat more.
posted by jabo at 9:43 AM on April 29, 2013


Deferring tax payments while you earn investment returns on the money is most decidedly a tax-break.

It's not quite that black and white. More like a true deferment, than a break. You don't earn or collect on those returns until you hit a certain age. The government not only gets its x percent of what you initially put in, but x+y percent of what you put in and what you get in returns. In the meantime, it also collects taxes from the investment firms who control and make money from your deposits.

You can't collect any of those potential returns — assuming there isn't a crash or your funds will do better than break even with inflation — for a very long time. You get the bill, plus more at the end, and in the meantime you have very little control over your money, and a sizable penalty if you do try to take control.

And in that sense, retirement plans like these are the very definition of corporate welfare. Useful income, redirected into long-term financial instruments. It's quite a setup: risk is assumed entirely by the investor and control is relinquished almost entirely to Wall Street for 30-40 years.
posted by Blazecock Pileon at 9:44 AM on April 29, 2013 [3 favorites]


Of course, the reason for that lock-in is that people basically have to be forced to save for retirement against their own will.
posted by smackfu at 11:07 AM on April 29, 2013


If anyone could link to reputable information about funds that have overperformed their benchmarks for decades

"Superinvestors of Graham and Doddsville" - that is the classic study. Its old - '84 is when its from

Here is an update on a similar group from 2005 Summarized Here for those of you w/o access

Also I would suggest you read "Contrarian Investment, Extrapolation, and Risk" by Lakonishok, Shleifer and Vishy - which I only have via a dropbox link. It explores the value premia relative to the market - which is basically what the Graham and Dodd guys are doing.

Bill Miller is a bad example, and no you should not expect an active manager to outperform the market every single year on a 1 year basis - that's sort of the worst way to think about manager selection.
posted by JPD at 11:34 AM on April 29, 2013 [1 favorite]


Out of 10,000 mutual funds, what are you odds of picking an outperforming fund for the next several decades?

Yes of course, that's why passive low cost investing is best. But, but, but, you cannot ignore the fact that the value premia is real.
posted by JPD at 11:36 AM on April 29, 2013


JPD: "Death, Taxes and Underperformance I over state what it says - 44/59 top decile performers over ten years had one year in the bottom decile, Half made an appearance in the bottom 1/3 on a rolling three basis."

There are, of course, several problems with that particular study.

Survivor bias. The "10 years of performance data available" selection criteria excludes funds that are open in 1996 and closed before year ten. It happens quite a bit for a few reasons; a firm will start up a dozen funds, and after X years keep the winners and roll the loser's into the winners. Or if a fund's underperformance persists, investors will help the manager close the fund by withdrawing all their money. I have to assume, given how often this crops up, that Morningstar's historical data simply isn't available. Maybe their backups caught on fire?

Retrospective outlook. The study indicates some 25 percent* outperformed S&P after fees for ten years. But the retrospective reveals nothing about how to pick that manager. Even this study's data points out that an investor's expected returns investing with a random fund manager is lower than the S&P 500 returns. It's quite a leap to go from "some people do really well over ten years" to "30 percent of a great number is better than 100 percent of a lousy one" given that you have no credible criteria by which to determine in advance great returns from lousy ones.

Time sensitive. The study's chart of the top 5 funds suggests that outperformance owes to a singular market event, the dotcom explosion. And then they're all over the place, slowly reverting to the S&P. It would be enlightening to shift the dates around to see how robust their findings are. My hypothesis: not very.

*Survivorship bias will make that number smaller.
posted by pwnguin at 11:42 AM on April 29, 2013 [2 favorites]


Survivorship bias only matters if you think there is a top decile fund that closed. The point of it is that looking at any fund with less than ten years is useless. Survivorship bias would not skew the outcome.

Retrospective Output - yes. It does not tell you how to do manager selection - its not trying to tell you how to do manager selection. Its simply making the point that annual performance is not a good measure of what longer-term performance is going to be.


Time Sensitive- Study has been done over other time periods - same result. Look on the Brandes website.
posted by JPD at 11:45 AM on April 29, 2013


Bill Miller is a bad example, and no you should not expect an active manager to outperform the market every single year on a 1 year basis - that's sort of the worst way to think about manager selection.

I hear what you're saying, since I'm not looking so much for "every year" performance as I am looking at taking a 20 year or longer slice and asking the question of, "If I had put an equal amount into the index fund and the actively managed fund that is comparable to the index, are there any 20 year periods in which the actively managed fund would have brought me out ahead?"
posted by MoonOrb at 11:47 AM on April 29, 2013


Yes, and I provided you links to that.

I can also name you a bunch of funds off the top of my head that have numbers that look like that now.

But naming funds is a silly sort of activity. Instead I'd encourage you to read the L,S,V paper and well as the classic Fama-French work. Then if you look for managers who offer strategies whose processes are inspired by that work you will find that a much greater % of them outperform than would just be predicted by luck.
posted by JPD at 11:54 AM on April 29, 2013


Thanks! I'm not interested in finding the funds myself as I am in just evaluating the accuracy of the idea that "actively managed funds don't beat the index over the long term." This is sort of held up as truth in index fund circles, and I'm just curious what the data show.
posted by MoonOrb at 12:07 PM on April 29, 2013


Wait wait wait wait - lets be clear here
1) I absolute believe low cost passive investing is the best way for someone who has no interest in investing per se to invest. I might propose an index other than the SP500, but it is a correct statement to say that in aggregate active managers underperform over the long-term, and those that do in aggregate cannot statistically be shown to have skill over luck

2) That said the idea that it is impossible to outperform the market is incorrect - there is a heap of academic evidence that there are a few anomalies that beat the market - smaller market cap, low price to market, and pure price momentum (tho the last not by enough where the difference isn't eaten up by transaction fees given that strategy demands a high rate of turnover). There is an argument that those strategies outperform only because they also have higher annualized volatility and some people believe that annualized vol = risk - the L,S,V paper attemptts to address that.

My point is that if you just look at funds whose processes rely on some version of the P/B and Market Cap anomalies you will find that more funds outperform the SP50 than would be predicted by luck alone.

But - and I'm being totally serious here - you ( the group you, not you specifically) probably should not try to find them, and instead just buy the market portfolio to get equity risk and returns.

The Index fund crowd is correct, but its not as black and white as they would have you believe.
posted by JPD at 12:18 PM on April 29, 2013 [1 favorite]


Of course, the reason for that lock-in is that people basically have to be forced to save for retirement against their own will.

More or less. I doubt that Social Security will be available around the time I retire, though I am quite certain I will still be paying into it, if I still have a job. I suspect this is true for millions in my age bracket and younger.
posted by Blazecock Pileon at 12:18 PM on April 29, 2013 [1 favorite]


JPD-I think we agree, right?

I mean, I'm fascinated by all this stuff, and I invest almost exclusively in index funds, for what it's worth, but I'm not really making an argument here. I'm just really interested in evaluating the accuracy of the claim that's widely held in indexing circles about actively managed funds not able to outperform their benchmark indexes over significant periods of time.

And, right, I don't think it's impossible to outperform the market ("market" being the relevant benchmark, I guess) over time, I'm just curious about how frequently it has happened, historically. I would not be surprised to find that it's happened often enough that, in aggregrate, the success of those actively managed funds who outperformed cannot be attributed solely to luck.

But from the perspective of the relatively unsophisticated investor like me, how will I know which of the actively managed funds are likely to outperform in the future, especially if there are (and this is why I'm really curious about getting the data) so few of them? If there are a sufficient number of them to rule out luck, that may not mean that the odds of selecting one of them is really that strong, even if I'm a thoughtful and intelligent investor. So unless my investing situation is dire enough that it's necessary for me to take on excess risk, I'm happy just taking what the market gives me and capturing as much of the market's total return as possible.

For that reason I stick to index funds and allocate my investments among them to try to capture, as best as I can, the entire market. Which I'm totally fine with, and I don't expect my behavior to change even if it turns out there are many more historical examples of funds outperforming the market over, say, two decades or more than I have thought there may have been.
posted by MoonOrb at 12:34 PM on April 29, 2013


JPD: "Survivorship bias only matters if you think there is a top decile fund that closed. "

If there's enough, it might put the S&P 500 itself in the top decile.

But I see now the argument you're putting together is subtle. I'll be putting the L,S,V paper in my pile of to-read papers. Certainly, we should be a bit suspect of Bogle's advice to use an investment strategy when he's the CEO of a firm dedicated to it.

Of course, there's another question entirely: if it's as simple as price:book ratios, what are these other managers doing that causes them to underperform the relatively simple SP500 benchmark?
posted by pwnguin at 12:47 PM on April 29, 2013 [1 favorite]


Of course, there's another question entirely: if it's as simple as price:book ratios, what are these other managers doing that causes them to underperform the relatively simple SP500 benchmark?

I could talk about this for hours. It is a really hard style to run as a business. Returns tend to be negatively correlated with inflows into equities, and you will often have times where your returns are horrific. On top of that, to do it well means a small cap strategy, and that naturally has a size limit - which makes it unattractive to certain large fund complexes.

And to actually manage a portfolio like that requires a skill set and a temperment pretty strongly opposed to what is required to be a strong salesman and market - which at the end of the day is a lot of what drives the industry.

there is a guy who was 2700 points behind his benchmark on a three year basis the day the nasdaq peaked. He got it all back plus a few thousand bps in the tech wreck. You have to have a lot of confidence believing in what you do to not change things when you are down 27% versus your bench mark. And you have to hope your clients understand what you are up to.

Also as human beings we aren't really wired to invest like this. That's why it works.
posted by JPD at 12:55 PM on April 29, 2013


JPD: But naming funds is a silly sort of activity. Instead I'd encourage you to read the L,S,V paper and well as the classic Fama-French work.

Well, so far you have been unable to name one single mutual fund, open to investors, that has "outperformed for decades."

For example, from your links one of the outperformers is the Clipper Fund. Go ahead and plot it against the S&P 500 for the last 25 years and you will see they have significantly underperformed the S&P (100% return vs 400% return).

You appear to have a misreading of Fama and French. They did not say that active value managers can beat the market. In fact they said the opposite. Value and size are two factors in investment returns and you can capture those factors through index funds. No active manager is necessary. There is no evidence that active management beats indexing. If you want a value or small tilt you can simply buy those indexes. That doesn't require an active manager and just because a manager tilts to value or small, it is no indication of skill. Anyone can do it with an index fund.
posted by JackFlash at 1:09 PM on April 29, 2013 [1 favorite]


How Retirement Fees Cost You
posted by Mayor Curley at 1:33 PM on April 29, 2013 [3 favorites]


For example, from your links one of the outperformers is the Clipper Fund. Go ahead and plot it against the S&P 500 for the last 25 years and you will see they have significantly underperformed the S&P (100% return vs 400% return).

Clipper changed managers in the mid-80s, then twice in the oughts. Its hardly the same fund. Sequoia sucks now to0 - Cunniff retired 30 years ago, Ruane died 8 years.

The people running funds change - they sell out, they retire, they die.

Please read what I said - clearly having a value tilt is what matters.

I understand quite well what F-F says. I don't think I was using it to claim active managers outperform. I did say managers who take advantage of the size and value premia have a much greater likelihood of outperforming the market.

But -I tend to think the passive crowd really understands the value in taking good kinds of factor risk Indeed just the other day Bogle popped up debating Jeremy Siegel and his factor index funds.



I'm not sure why open matters?

I'll give you three funds:
Longeleaf Partners Fund
Brandes Global
Tweedy Browne
posted by JPD at 1:48 PM on April 29, 2013


Dammit " The passive crowd doesn't understand the value of taking good kinds of factor risk."


Yes on average, passive investing is the way to go. Almost no one is equipped to underwrite active managers investment processes. But, you are more likely to find active managers who outperform by focusing on managers with a strong P/B and small cap bias.

I will agree you are probably better off just buying value and size factor risk.

I never said "active managers outperform" - that is obviously manifestly untrue.
posted by JPD at 1:55 PM on April 29, 2013


JPD: I'm curious why you might propose an index other than the S&P 500 to capture the market portfolio. Can you expand on this? Is this an asset allocation thing?
posted by tksh at 3:11 PM on April 29, 2013


I don't know what JPD's answer would be, but if you want to capture "the market," you need to do more than invest in only 500 companies. There's more to the market than 500 companies--the S&P 500 is by and large a domestic, large cap fund. If you want to include the market's return from small and mid caps, many international companies, and bonds, you can't just stick with the S&P 500. That's why you invest in some combination of index funds to do your best to capture the market's return.
posted by MoonOrb at 3:15 PM on April 29, 2013


I understand that the total universe of risky assets extends beyond US large cap but most of what I've read about CAPM have used the S&P 500 as a practical proxy. If we're talking about ultra-simplified, DIY low cost investing for dummies approach, wouldn't asset allocations be a bit overkill to try to capture the market?
posted by tksh at 3:34 PM on April 29, 2013


I'm not sure it matters, but generally the Russell 2000 is a broader proxy, I would be inclined to own something that tracked the Russell Value if I don't want to buy an index specifically constructed to capture the Value and Small Cap Factors.

MSCI World is the the most common global index. MSCI EAFE is what most us institutions benchmark their non-US non-EM exposures agains.

Not sure what you mean by asset allocations. To my mind asset allocations is the mix of bonds/equities/others - and I pretty much think that should be driven by age more than anything else. As bad as people are at picking stocks they are probably worse at picking asset classes.
posted by JPD at 4:06 PM on April 29, 2013


Asset allocations are pretty simple and not overkill at all. You could capture the market pretty effectively using about three funds if you wanted to take a path of pretty low resistance: about 1/3 each into Vanguard Total Bond Market Fund, Total Stock Market Fund, and Total International Stock Fund.

Maybe CAPM discussion focuses around the S&P 500 because there's a lot of historical data for it? I think there's a pretty strong argument that it doesn't represent "the market," unless you exclude from the market both bonds and many overseas companies.

There's a sufficient lack of correlation among the performance of domestic equities, international equities, and bonds that investing in three funds (and rebalancing) instead of one, would be worth the minimal additional effort even for the DIY low cost investing for dummies candidate.

(Of course, people could do way, way, way, way worse than just putting their investments into an S&P 500 index and leaving them there).
posted by MoonOrb at 4:08 PM on April 29, 2013


Passive investing is completely unethical. It is a total abandonment of responsibility and lets corrupt CEOs and their crony boards loot the public.

Active managers need their feet held to the fire. But at least there's the possibility that an active manager can serve as a responsible steward of capital.

The only way capitalism can work the way it's supposed to is if investors take corporate governance seriously. A passive benchmark doesn't take into account the real time, effort and expense of properly monitoring and influencing the behavior of corporate managers and directors.

If you're willing to give away your shareholder vote in order to save on expenses, you are enabling the worst corporate behavior.
posted by mullacc at 4:16 PM on April 29, 2013


That reminds me of the quote attributed to Upton Sinclair about how it is difficult to get a man to understand something if his salary depends on him not understanding it.
posted by MoonOrb at 4:21 PM on April 29, 2013 [2 favorites]


JPD: Yeah, I was thinking asset allocation as in recommending an index that tracked more of the broader equities market like the BMI or the combined 1500. Not so much about mixed asset classes.

MoonOrb: I have a very different view of bonds during this cycle than you apparently :)
posted by tksh at 4:31 PM on April 29, 2013


tksh--fair enough--my investment style isn't based on cycles, or any other attempts at timing the market. It's just based on holding (to the extent I can) the whole market, and I consider bonds as part of the whole market.
posted by MoonOrb at 4:43 PM on April 29, 2013


Oh, I thought of a new analogy:

Judging active investment managers solely by their performance relative to the benchmark is like judging teachers base solely on their students' standardized test scores. Both approaches have perverse effects on the systems they try to fix.
posted by mullacc at 5:10 PM on April 29, 2013 [1 favorite]



BTW - if this topic in general interests you I heartily recommend "Capital Ideas" by Peter Bernstein. Its basically a history of the professionalization of the money management industry and the development of passive investing.
posted by JPD at 5:51 PM on April 29, 2013 [2 favorites]


If you're willing to give away your shareholder vote in order to save on expenses, you are enabling the worst corporate behavior.

At the minimal size of my current investment portfolio there is zero chance that I'll make any money having all of it actively managed (the fees will be more than the profit on average).

However, I'm curious about whether there is a way to let most of my retirement money ride in an index fund, and somehow create a sort of ethical hedge fund that counters the worst players in the index with short sales or options? I know there are a few indexes that try to do something like an ethical index fund, but if I've got a beef with a particular company on the list, how best would I counter my index investment?
posted by BrotherCaine at 6:05 PM on April 29, 2013


mullacc: "If you're willing to give away your shareholder vote in order to save on expenses, you are enabling the worst corporate behavior."

So... mutual funds are out?
posted by pwnguin at 6:31 PM on April 29, 2013 [1 favorite]


The only way capitalism can work the way it's supposed to is if investors take corporate governance seriously.

Corporate governance is one of my favorite topics and one that most people find too boring to discuss, so I'm always happy when I see a mention of it.

The US has a long, long way to go on this, though there are some notable institutional investors that use shareholder activism to get things done. And we did have the "shareholder spring" last year so I still hold out hope. Things like Occupy Wall Street are good for raising public awareness about what's going on but shareholder activism is what really gets things done.
posted by triggerfinger at 7:33 PM on April 29, 2013 [1 favorite]


I'll give you three funds:
Longleaf Partners Fund
Brandes Global
Tweedy Browne


Over the last 25 years, all of those funds underperformed the Vanguard Small Cap Value Index Fund. All of that active management just goes into fees for the managers -- a very inefficient way of capturing value and size premiums. No evidence of outperformance or skill at all.
posted by JackFlash at 9:40 PM on April 29, 2013 [1 favorite]


They aren't small cap funds. The brandes fund isn't even a US fund
posted by JPD at 5:14 AM on April 30, 2013


Examples of funds that have outperformed their benchmark over the long term are the Pimco Total Return fund in the US and Invesco Perpetual High Income Fund in the UK. Both have had a few years of underperformance but have beat the benchmark long term.
posted by triggerfinger at 6:44 AM on April 30, 2013


Passive investing is completely unethical.... Active managers need their feet held to the fire. But at least there's the possibility that an active manager can serve as a responsible steward of capital.

If it's more probable that they will act as an irresponsible steward, then the scenario is reversed. There are no doubt opposing interests holding their feet to other fires.
posted by Brian B. at 7:04 AM on April 30, 2013 [2 favorites]


Over the last 25 years, all of those funds underperformed the Vanguard Small Cap Value Index Fund.

Unless you have some data I can't find on the Vanguard website, the fund you are talking about started in May 1998.

Anyway, I compared the Vanguard index fund to a group of small cap mutual funds that I follow that have at least 14 year history. Of those 18, 16 of them outperformed that index.

Here they are, the % is the difference between the funds total return and the total return of VISVX over the last 14 years.

VISVX had total return of 249.5% in that time frame.

HRTVX 18.3%
SKSEX 6.6%
DEVLX (9.0%)
TSVUX 52.1%
BERWX 10.1%
JSIVX 43.5%
FRMCX 127.9%
RYPNX 166.4%
SPSCX (20.9%)
ARTVX 64.7%
ACRNX 74.2%
KSCVX 22.9%
PCVAX 77.3%
PRSVX 114.4%
ACRNX 74.2%
KSCVX 22.9%
PCVAX 77.3%
PRSVX 114.4%

Note that VISVX actual outperformed the Russell 2000 Value index by 10.5% over 14 years, so all the outperformers above also outperformed their benchmark.

And, yes, this data is all about selection bias. The bias is that I picked funds whose investment process I respect.
posted by mullacc at 8:23 AM on April 30, 2013


And to take the funds that JPD specifically mentioned and compare them to their actual benchmark:

Longleaf Partners relative to the Russell 1000 Value over the stated time period:
10Y: -23.6%
20Y: +57.8%
25Y: +239.9%

Tweedy Browne is a tough one because it doesn't fit very well into any box. It has emphasized international stocks much more heavily than most US-focused funds.

Against the Russell 1000 Value:
10Y: -20.6%
15Y: -6.2%

Against the MSCI World:
10Y: -6.4%
15Y: +43.9%

Brandes International. JPD actually said Global, but their global mutual funds are relatively new. This international fund is the oldest.

Against the MSCI EAFE:
10Y: +32.8%
15Y: +104.0%

The Sequioa Fund, despite manager deaths that JPD mentioned, has been really awesome:

Against the Russell 1000 Value:
10Y: +2.2%
15Y: +59.5%
20Y: +362.1%
25Y: +421.7%
posted by mullacc at 8:38 AM on April 30, 2013


If it's more probable that they will act as an irresponsible steward, then the scenario is reversed. There are no doubt opposing interests holding their feet to other fires.

Fair enough. And the investment management industry (which I think is distinct from what most people call "Wall Street") has had its share of problems. But ultimately managers are paid by their clients based on the amount of assets managed. If clients want to chase short-term performance and ignore corporate governance, that's what most managers do too. If clients were more interested in responsible stewardship, that's what managers would do. And some very successful managers seek out those kind of clients, but that's not the industry norm.
posted by mullacc at 8:44 AM on April 30, 2013


Also: I messed up in one of my posts above and listed three funds twice (ACRNX, PRSVX, KSCVX). So the list actually had 14 funds of which 12 outperformed. I was combining separate lists I keep and forgot about the dupes.
posted by mullacc at 8:48 AM on April 30, 2013


mullacc: Passive investing is completely unethical. It is a total abandonment of responsibility and lets corrupt CEOs and their crony boards loot the public.
Bwahahahahaha!

Oh, wait... you're serious?

By your logic, bank savings accounts and checking accounts and money market accounts are all equally unethical. So is accepting employment in any company that is not employee-owned.

IOW, your bar for unethical actions is so low that probably 95% of us violate it. I'd say that puts it on the same moral level as "SPEED LIMIT 55" signs (except that if you don't speed, you may end up without money to live on - which has got to figure in somewhere on the "highly-moral-but-unrealistic" judgment scale).
posted by IAmBroom at 10:42 AM on April 30, 2013


BrotherCaine: If you're willing to give away your shareholder vote in order to save on expenses, you are enabling the worst corporate behavior.

At the minimal size of my current investment portfolio there is zero chance that I'll make any money having all of it actively managed (the fees will be more than the profit on average).

However, I'm curious about whether there is a way to let most of my retirement money ride in an index fund, and somehow create a sort of ethical hedge fund that counters the worst players in the index with short sales or options? I know there are a few indexes that try to do something like an ethical index fund, but if I've got a beef with a particular company on the list, how best would I counter my index investment?
Short the undesired company. It's slightly more expensive than simply removing that company from the index fund, but also much easier than creating your own "new-and-improved ethical index fund".
posted by IAmBroom at 10:45 AM on April 30, 2013 [1 favorite]


If you're willing to give away your shareholder vote in order to save on expenses, you are enabling the worst corporate behavior.

Does anyone care where their invested money goes? And what do you do then?

So how do you avoid investing your 401k in corporations that "misbehave"?

Bueller?
posted by mrgrimm at 11:17 AM on April 30, 2013


IAmBroom: HAHAHAHAHHA SEE I CAN TYPE LAUGHING IN ORDER TO DELEGITIMIZE YOU TOO.

Anyway, I was obviously being hyperbolic. But your analogy to checking accounts and money market accounts doesn't work. Those funds aren't passively managed. If you don't like how your bank makes loan decisions, you can go to another bank. Also, I'd argue that equity holders have a much higher level of responsibility than lenders. Just like you have more responsibility for what goes in your house than your mortgage lender does.
posted by mullacc at 11:56 AM on April 30, 2013


So how do you avoid investing your 401k in corporations that "misbehave"?

How do you stop Congress from mismanaging the country? Oh, you vote for someone you think will do a better job! Do the same with money managers. Or hire a financial advisor who picks managers according to your standards.

Or just buy an index fund and let everything go to hell while you complain on Metafilter and save 60bps.
posted by mullacc at 11:58 AM on April 30, 2013


Individual shareholders don't have any power, and money managers don't really have much power either. Normally we don't consider people to be moral monsters for not exercising their nonexistent power.

But hey, that was a creative marketing angle!
posted by leopard at 1:42 PM on April 30, 2013 [1 favorite]


If you save the 401(k) maximum every year for 30 years, a difference of 60 bps between two investments is $591,000. I'm sure you're a great guy mullacc but I don't really want to give you that much money.
posted by miyabo at 1:50 PM on April 30, 2013


money managers don't really have much power either.

That is a ridiculous statement.

If you save the 401(k) maximum every year for 30 years, a difference of 60 bps between two investments is $591,000.

A) What is your math? The 2013 max is $17,500, right? If I assume 8% long-run equity market appreciation, I calculate a $251,567 difference in ending balance based on total contributions of $832,570 (I assume the max increases 3% per year) and ending balance of $2.67M vs $2.42M.

B) Not to nitpick, but something like 40% of the difference is lost opportunity cost rather than actual fees paid to the manager. That doesn't matter from an investment perspective, but it matters if you are thinking about what money the manager actual collects.

C) This takes it as a given that the active manager will underperform. That's a decent assumption if you are picking managers out of a hat. But just a little homework and discipline to ride out underperforming years will improve your odds.

D) This also assumes the index is a viable investment option and doesn't factor in the economic costs of squandered capital. For example, if corporate managers continue to have free reign to mismanage their companies, that value destruction is not reflected in this analysis. Or think about it another way--what if index managers actually had to due diligence all the companies in an index and actually engage in corporate governance beyond just paying ISS for their proxy voting service? It would increase costs dramatically and destroy the cost advantage that index funds currently enjoy.
posted by mullacc at 2:41 PM on April 30, 2013


So what know kind of impact have you had on company managements, mullacc? If you think Apple is sitting on too much cash, what exactly do you do, and how exactly do they respond? What if two of your investors disagree about Apple's cash position, how do you keep both of them happy?

Listen, half of active investors are going to beat the market, and the other half are going to get beat. That's just a mathematical fact, no matter how many fees you charge. Passive investors are just being smart if they don't have any special ability to pick winning managers.
posted by leopard at 3:08 PM on April 30, 2013


mullacc, I have to say that I'm also having some trouble following your argument. I'd suggest that you're overstating your case: completely unethical; total abandonment of responsibility, etc.

I guess you'd be compelled to agree, then, that because there's only a "chance" that investing actively might somehow influence corporate behavior that those who invest actively are still unethical and still abandoning responsibility, right? Just not "competely," and "totally," so I suppose the ethical superiority of active investment vs. passive investment is measured by whatever difference there is between this "total" abandonment of responsibility and whatever amount of responsibility this "chance" of influencing corporate behavior amounts to. Is that a fair assessment of your argument?

I'd say that one flaw is that the implication is that corporate behavior can only be influenced by shareholders. We can put aside the practical matter of how likely or unlikely it is that a single, small investor can exert this influence. I hope we can agree that there are other ways--ways that might have even a greater impact on a corporation's management than owning shares--like (for example) supporting appropriate environmental regulation, human rights legislation, and so on and so forth.

Anyway, I'd argue that starting from the premise that it is "completely" unethical to invest passively is just silly. I think if you had framed your argument as "if you invest passively you miss out on the unlikely but theoretical possibility that you, as an individual investor, can influence corporate actions," I think I would agree with that. I'd also say that I'm willing to miss out on that, and I'd think it would be strange for anyone to describe this decision as completely unethical or a total abandonment of social responsibility.
posted by MoonOrb at 3:37 PM on April 30, 2013


So what know kind of impact have you had on company managements, mullacc?

How does a senator keep his constituents happy if two of them happen to disagree on a particular vote?

Listen, half of active investors are going to beat the market, and the other half are going to get beat. That's just a mathematical fact, no matter how many fees you charge.

This is not a mathematical fact when a big chunk of the market is passively managed.

Passive investors are just being smart if they don't have any special ability to pick winning managers.

Not that special of ability. Most of the investors mentioned in that essay are dead now but the real basic value investing philosophy that unite them is carried on by the current generation. The philosophy is simple but it is hard to implement because it's uncomfortable for investors (both managers and their clients) to have the courage of their convictions. Which should be viewed as an opportunity not a discouragement.
posted by mullacc at 3:45 PM on April 30, 2013


I'd suggest that you're overstating your case: completely unethical; total abandonment of responsibility, etc.

Yes, I admit I was straight-up trolling. While I do very strongly believe that passive investing is undermining corporate governance, I do not blame individuals for distrusting mutual fund managers. I've made comments to that effect on Metafilter before and no one engaged me on it, so this time I was a dick about it. I was also trying to be kinda tongue-in-cheek because I know I am horribly conflicted on this topic given my source of income.

One bone to pick with a couple things you said....

We can put aside the practical matter of how likely or unlikely it is that a single, small investor can exert this influence.

and

if you invest passively you miss out on the unlikely but theoretical possibility that you, as an individual investor, can influence corporate actions...

I don't think individual investors have much influence. That's why I think active managers are required. And it's also why I've made analogies to politics. I think individuals need to pick investment managers like they pick which politicians to vote for.
posted by mullacc at 3:59 PM on April 30, 2013 [1 favorite]


Yes, I admit I was straight-up trolling.

Well, sweet. It would be cool if you had the courtesy to avoid that in the future.
posted by MoonOrb at 4:12 PM on April 30, 2013 [1 favorite]


The analogy to politics was terrible anyway. Most voters are passive voters (they'll vote for whoever their party puts up for office -- which is actually a fairly sensible thing for them to do).
posted by leopard at 6:30 PM on April 30, 2013


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