Professor Sharpe convincingly argues that in any period mathematically the performance of the average actively-managed fund must trail the performance of the average passively-managed fund by the average difference in fund management costs.

Fooling Some of the People All of the Time

Hedge funds and alternative investments have developed a kind of mythical reputation, so that many investors want to get into them. There are reasons to be skeptical: * Are hedge fund managers really that much smarter than all the other smart investment professionals out there? * Since risk adjusted returns are what count, is the risk properly reflected in the analysis? * The heavy performance cost structures create a significant additional performance hurdle to overcome, so how do they do it? * Can you tell beforehand which investments are superior and which are lemons? * Can you count on the performance numbers supplied for a particular investment and for benchmarks? Click the link above to download, from the Social Science Research Network, the research paper entitled: "Fooling Some of the People All of the Time: The Inefficient Performance and Persistence of Commodity Trading Advisors" by Geetesh Bhardwaj (SummerHaven Investment Management), Gary B. Gorton (Yale School of Management; National Bureau of Economic Research (NBER)) and K. Geert Rouwenhorst (Yale School of Management - International Center for Finance) There are several dozen flavors of hedge fund investment strategies out there, and it is difficult to get any objective performance data on most of them. However, commodities futures trading is one of those areas where this is possible. This research paper is a real eye-opener in that it is able to divine the actual net performance that commodities traders actually delivered to their investors. Bhardwaj, Gorton, and Rouwenhorst conclude that commodities futures investors put their investors ' money at huge risk, while their investors net under 2% over T-bill returns on average. Many loose their shirts -- well, they loose a lot of their money. Obviously, there are numerous other investments that historically have netted far more than 2% over T-Bill returns with dramatically less risk. The financial industry pitch for commodities is consistently related to lower asset class correlations when added to a portfolio, but what good is adding a highly volatile asset class to a portfolio, if incredibly excessive industry costs will siphon away the vast majority of asset returns? This is just more evidence of the pervasive financial industry disease of excessive and unjustified fees and costs, which bleed away large portions of the gross returns of investors -- leaving them with all the risk, but only some of the return. Of course, one could argue that commodities futures are a unique subset of hedge funds, and are not representative of the wider set of hedge funds. Yet, I am still left with the nagging suspicion that they are more likely to typify the larger hedge fund space. All hedge fund performance data comes from the same privately collected and funded sources, reporting is voluntary, hedge funds can influence whether or not their superior (inferior) performance record is added to (removed from) the data set, old data is not available so the data set cannot be adjusted for survivorship bias, and the data is subject to other important biases that are discussed in this research paper. (Note that this is not the first research paper to question the quality and reliability of hedge fund performance data.) If you do download and look at this paper, you do not have to read everything or immerse yourself in all of the data. The paper 's introduction and conclusion will tell enough of the story. The research details just drive home the point that the financial industry makes a lot of money off OPM (other people 's money).

FINRA Investor Alerts

The securities industry self-regulator in the US is FINRA. The FINRA website has a consumer protection section that includes a list of investor alerts. Whether or not you think you really know what you are doing when you invest, you should check the FINRA website for any consumer investor alerts that may apply to any investment that you are contemplating. Many investments that may not be in your best interests will involve high up-front and ongoing fees. These high fees may or may not be clear to you, depending upon the structure of an investment. It is wise to look at the FINRA investment alerts, before you sign anything. Check this web site before you make an investment, because in most situations, you will not be able to back out of that investment without some penalty, after you have signed and funded that investment. Forewarned is better than regretting a lighter wallet. About FINRA: This descriptive quote is from the FINRA website: "The Financial Industry Regulatory Authority, Inc. (FINRA) is the largest independent regulator of securities firms doing business with the public in the United States. Our core mission is to pursue investor protection and market integrity, and we carry it out by overseeing virtually every aspect of the brokerage industry. All told, FINRA oversees about 4,245 brokerage firms, about 162,230 branch offices and approximately 630,150 brokers."

Arithmetic of Investment Expenses

In his 2013 Financial Analysts Journal paper (March/April 2013 pp. 34-41), "The Arithmetic of Investment Expenses," William F. Sharpe, Stanford emeritus professor of finance and 1991 economic Nobel prize winner clearly demonstrated that a lump sum invested at very low fees (.06%/year) was likely to result in 38% greater wealth after thirty years compared to average mutual fund expenses (1.12%/year). If instead, the investment pattern was to contribute equal amounts each year over thirty years, the low fee investment strategy resulted in 20% greater terminal wealth.

Understanding Mutual Fund Classes

This January 13, 2003 NASD (and now updated on the FINRA site) investor alert describes Class A, B, and C mutual funds shares and lists some considerations in the choice of classes. (Note that The Skilled Investor believes that you should understand the full lifetime costs of paying any form of sales load. Investment sales loads can be an excessively costly way to pay for "advice.") On its "About" homepage, FINRA describes itself as: "The Financial Industry Regulatory Authority (FINRA) is the largest independent regulator for all securities firms doing business in the United States. FINRA 's mission is to protect America 's investors by making sure the securities industry operates fairly and honestly. All told, FINRA oversees about 4,380 brokerage firms, about 162,845 branch offices and approximately 629,640 registered securities representatives. FINRA has approximately 3,200 employees and operates from Washington, DC, and New York, NY, with 20 regional offices around the country."

Standard & Poor: Index Versus Active (SPIVA)

To find, click the link above and then search / look around on the Standard and Poors site for the main section on SPIVA. (Be patient. Their site search facility seems unable to find the main SPIVA section, but it is there.) "The Standard & Poor 's Index Versus Active (SPIVA) methodology is designed to provide an accurate and objective apples-to-apples comparison of funds’ performance versus their appropriate style indices, correcting for factors that have skewed results in previous index-versus-active analyses in the industry. SPIVA scorecards show both asset-weighted and equal-weighted averages, include survivorship bias correction to account for funds that may have merged or been liquidated during the period under study, and show style consistency for each style group across different time horizons." (quoted from the SPIVA Overview webpage)

The Asymmetric Value of Delaying Social Security Benefits

Extending the conclusions of this Meyer and Reichenstein study, Michael Kitces published a May 1, 2012 Advisor Perspectives commentary entitled "The Asymmetric Value of Delaying Social Security Benefits." Kitces’ commentary is also worth reading in its entirety. He summarized his observations this way: "In addition, delaying Social Security not only hedges longevity, it also hedges two other adverse scenarios that are otherwise harmful to the retiree: unexpectedly high inflation and unexpectedly low returns. ... the true value of delaying Social Security is a triple-benefit of hedging longevity, poor returns, and high inflation, because of the asymmetrical way that delayed higher benefits compound in the later years. It won 't necessarily win for every client, but as any good hedge would, it wins the most in the times the client will need it the most."

The Long-term Returns on the Original S&P 500 Firms

The Long-term Returns on the Original S&P 500 Firms" by Jeremy Siegel and Jeremy Schwartz (The Rodney L. White Center for Financial Research, The Wharton School, University of Pennsylvania, 2004, #29-04) This study shows that revisions of the S&P500 index over time have not enhanced the value of the index: 1) because new stocks tend to be added as relative valuations peak and 2) because of the market trading impact of index funds that must buy these newly added firms, while they jettison those that are removed from the index. In addition, this study is yet another proof that a passive, low cost, buy-and-hold strategy is superior over the long haul to all this frenetic active investing that individuals and investment funds do.

How the Social Security Claiming Decision Affects Portfolio Longevity

An April 2012 Journal of Financial Planning study entitled "How the Social Security Claiming Decision Affects Portfolio Longevity" by William Meyer and William Reichenstein is well worth reading. This study was intended to contribute to the literature on sustainable portfolio withdrawal rates in retirement by adding Social Security retirement payment timing and taxation to the discussion. Particularly, for those who have accumulated a smaller portfolio of investment assets by retirement, Meyer and Reichenstein reached several important conclusions. Regarding longevity of a retirement portfolio, they concluded that the decision to delay receipt of Social Security payments from age 62 to age 70 could lengthen the durability of a retirement portfolio by as much as ten years or more. This means that simply delaying receipt of Social Security payments -- with all other financial factors being equal -- could support an additional decade of expenditures. This addresses perhaps the number one worry of most retirees -- running out of money, if they were to live a very long time.

The Credit Spread Puzzle

Jeffery D. Amato and Eli M. Remolona, "The Credit Spread Puzzle," BIS Quarterly Review, December 2003, p 51-63 < http://www.bis.org/publ/qtrpdf/r_qt0312e.pdf > Introduction: "Spreads on corporate bonds tend to be many times wider than what would be implied by expected default losses alone. These spreads are the difference between yields on corporate debt subject to default risk and government bonds free of such risk. While credit spreads are often generally understood as the compensation for credit risk, it has been difficult to explain the precise relationship between spreads and such risk. In 1997–2003, for example, the average spread on BBB-rated corporate bonds with three to five years to maturity was about 170 basis points at annual rates. Yet, during the same period, the average yearly loss from default amounted to only 20 basis points. In this case, the spread was more than eight times the expected loss from default. The wide gap between spreads and expected default losses is what we call the credit spread puzzle.

The Social Security Claiming Guide

The Center for Retirement Studies at Boston College has some useful information for people regarding retirement benefit acceptance strategies. In particular, download their "The Social Security Claiming Guide" report.

Boston College CRR Financial Literacy Project

In 2009, the Social Security Administration established the Financial Literacy Research Consortium (FLRC) to do the following: * help foster retirement and other saving strategies at all stages of the life cycle, * help low and moderate income populations successfully plan and save for retirement and other life events, and * improve understanding of Social Security 's programs. The FLRC consists of three non-partisan, multidisciplinary research centers at Boston College, the RAND Corporation, and the University of Wisconsin. In part because the Boston College Center for Financial Literacy is held within the larger and already established Center for Retirement Research at Boston College, this one of these three FLRC centers has a particularly rich list of documents that are of practical use to individuals who are making decisions about Social Security for their families. This is a link to the BC Center for Financial Literacy. Once you are at this center 's website, also look around more broadly on the CRR website, because is offers a wealth of interesting and useful retirement information.

Social Security Financial Literacy Initiative

In 2009, the Social Security Administration established the Financial Literacy Research Consortium (FLRC), which is now part of the SSA 's Retirement Security Initiative. The objectives of the FLRC are to do the following: * help foster retirement and other saving strategies at all stages of the life cycle, * help low and moderate income populations successfully plan and save for retirement and other life events, and * improve understanding of Social Security 's programs.

Morningstar Instant X-Ray Tool

Morningstar Instant X-Ray Tool Whenever you invest in multiple mutual funds and ETFs, you may wonder how broadly and appropriately diversified your aggregate portfolio might be. Have your investment holdings and mutual funds that you have chosen increased the global diversification of your personal financial asset portfolio? Do they just duplicate what you already own? You can use the free Morningstar Instant X-Ray Tool to measure your portfolio diversification. This tool can help you to understand better the relative contribution that each of your investment holdings makes to your goal of holding a broadly diversified investment portfolio. On the Morningstar website, you can find their "Instant X-Ray" tool.

Federal Reserve System Consumer Information

US Department of Labor 401k Fees Rule

US Department of Labor Fact Sheet: Final Rule to Improve Transparency of Fees and Expenses to Workers in 401(k)-Type Retirement Plans Finding information about the costs of employer-sponsored defined contribution plans is difficult, because for years weak regulations have allowed the financial industry to obscure these costs and gouge millions of retirement plan participants. This has made it difficult for both employers and plan participants to understand the true costs of these retirement plans. Particularly at smaller companies where fewer people are paying attention, some of these retirement savings plans carry simply outrageous visible and hidden fees. With new US Department of Labor regulations requiring fee disclosures, we will soon have a much better understanding of these fees starting at the beginning of 2012. For information on these new regulations, follow this link to the US Department of Labor.

The Tax Foundation

Tax Data from the Tax Foundation -- The Tax Foundation provides "journalists, taxpayers and policymakers with basic data on taxes and spending," as part of its educational mission. Find tax U.S. federal, state, and local tax data, information, and analysis.

Morningstar Rating for Funds Factsheet

According to Morningstar 's Factsheet for Funds, "The Morningstar Rating (TM) is a quantitative assessment of a fund 's past performance--both return and risk--as measured from one to five stars." Within the Morninstar.com "Funds" section, look for and click on a link for the "Using the Star Rating" PDF document.

IRS -- Designated Roth Accounts in 401(k) or 403(b) Plans

Beginning in 2006, a 401(k) or 403(b) plan (but not a SARSEP or SIMPLE IRA plan) may permit an employee to irrevocably designate some or all of his or her elective contributions under the plan as designated Roth contributions. See this IRS web page for more information.

US Social Security Administration

Social Security Online: The Official Website of the U.S. Social Security Administration

Social Security Benefit Calculators

Choose a Benefit Calculator "Social Security Online: The Official Website of the U.S. Social Security Administration"

Social Security -- Actuarial Resources

Social Security Actuarial Resources "Social Security Online: The Official Website of the U.S. Social Security Administration

Morningstar

Morningstar.com investor information website Morningstar is a leading source of reasonably detailed information on many publicly traded investments -- particularly regarding investment funds such as mutual funds, exchange traded funds, annuities, separate accounts, etc. While Morningstar charges various subscription fees for certain services, the Morningstar.com website offers a significant amount of information that does not require a subscription fee. Because websites often change, it is not possible to list specific Internet links that will remain usable over time. Instead, if you wish to use Morningstar.com, simply go there and select first the category of investment that you are researching. Next, either choose one of the many screening tools that are offered or and use the website 's search facilities.

IRS -- Publications

Internal Revenue Service -- United States Department of the Treasury<

IRS -- FAQ on IRAs

Frequently Asked Questions about Individual Retirement Arrangements (IRAs) Internal Revenue Service -- United States Department of the Treasury

IRS Frequently Asked Questions

Frequently Asked Questions Internal Revenue Service -- United States Department of the Treasury

IRS 401k FAQ

Frequently Asked Questions on 401(k) pension plans Internal Revenue Service -- United States Department of the Treasury<

US Internal Revenue Service

Internal Revenue Service -- United States Department of the Treasury

Federation of Tax Administrators

The Federation of Tax Administrators provides analyses of U.S. state taxation. In addition, they provide links to state and federal tax agencies. According to the FTA website, the FTA "was organized in 1937 to improve the quality of state tax administration by providing services to state tax authorities and administrators." To find the FTA 's state tax information click on "State Comparisons" to the left, then "Tax Rates." In addition to state income tax information, you will find information on sales taxes, excise taxes, and other taxes at the state level.

Federal Reserve interest rates

Federal Reserve Statistical Series H1 -- Selected Interest Rates -- updated every business day excluding holidays

Federal Reserve database (FRED)

Research Division of the Federal Reserve Bank of St. Louis

Damodaran Online

Professor Aswath Damodaran, New York University Stern School Professor Damodaran 's excellent site provides numerous useful data sets and valuation tools.

Consumer Price Index

Bureau of Labor Statistics

The Tactical and Strategic Value of Commodity Futures

The Tactical and Strategic Value of Commodity Futures (Unabridged Version) by Claude B. Erb of the Trust Company of the West and by Campbell R. Harvey of Duke University (January 12, 2006). An briefer version of this paper was published in The Financial Analysts Journal in 2006. In this study, Erb and Harvey dissect the sources of commodity futures returns and analyze investment strategies that might make appropriate use of commodity futures. They conclude that commodity futures can play a role in tactical investment "price insurance" strategies conducted by very sophisticated traders and investors. Oddly, this is historical role that commodity futures have filled. A primary purpose of this paper was to analyze "the case for a long only commodity futures position in asset allocation." The key question is whether commodity futures tend to provide a "risk premium" for a long term passive buy-and-hold strategy, as equities have exhibited on average for so long. Is it appropriate to re-purpose commodity futures and make them a new asset class within the long-term portfolios of individual investors? Erb and Harvey conclude that: "A number of studies have argued that commodity futures are an appealing long-only investment class because they earn a risk premium similar to equities. Our paper argues that there are reasons to wonder what this is supposed to mean. Does the average commodity futures have ‘equity-like’ returns? Our research suggests that this has not been the case: the average returns of individual commodity futures contracts have been indistinguishable from zero.

S&P 500 Index Mutual Funds: Diverse expenses and performance characteristics

Published in the March/April 2007 Journal of Indexes (pages 34-38), John A. Haslem, H. Kent Baker, and David M. Smith analyzed the investment expenses of S&P500 index mutual funds and found a very wide dispersion of management fees and total expense ratios. Without all their research details, which you can read yourself, Haslem, et. al. simply found that higher expenses just lowered investors ' net returns. They grouped S & P 500 index funds by expense groupings from low to high, i.e. standard deviations around the average expense ratio. They reported a list of twenty-five retail and institutional index mutual funds with lower costs.

Explaining the Rate Spread on Corporate Bonds

ABSTRACT: The purpose of this article is to explain the spread between rates on corporate and government bonds. We show that expected default accounts for a surprisingly small fraction of the premium in corporate rates over treasuries. While state taxes explain a substantial portion of the difference, the remaining portion of the spread is closely related to the factors that we commonly accept as explaining risk premiums for common stocks. Both our time series and cross-sectional tests support the existence of a risk premium on corporate bonds.

Equity Risk Premium: Expectations Great and Small

Richard A. Derrig and Elisha D. Orr "Equity Risk Premium: Expectations Great and Small" North American Actuarial Journal, Vol. 8, no. 1, [vp]. January 2004<

Investment Company Institute

The ICI provides a significant amount of information about the U.S. diversified investment fund industry. According to the ICI website: "The Investment Company Institute is the national association of U.S. investment companies, including mutual funds, closed-end funds, exchange-traded funds (ETFs), and unit investment trusts (UITs). ... Members of ICI manage total assets of $12.5 trillion and serve almost 90 million shareholders.

IndexUniverse.com

IndexUniverse.com (now etf.com) contains a wealth of information about index funds and ETFs. In particular, it provides a sophisticated index fund and ETF screening tool. For guidance from The Skilled Investor on how an individual investor might use this screener, see our article: Screening index mutual funds on-line with IndexUniverse.com

TIAA-CREF Institute

Performs investment related research to support its higher education clients. Many of the reports available on this site are also useful to individual investors.

Efficient Frontier

An Online Journal of Practical Asset Allocation, Edited by William J. Bernstein and Susan F. Sharin

U.S. Personal Savings Rates -- Bureau of Economic Analysis of the U.S. Department of Commerce

The Bureau of Economic Analysis of the U.S. Department of Commerce has tracked the national personal savings rate since 1952, as part of its "National Income and Product Accounts" and "Flow of Funds" reporting. From the 1950s through the 1980s the national national savings rates fluctuated around the 9% to 10% range. In the early 1980s, these rates began to decline.

Technology Review article -- "The Blow-up"

This Technology Review article discusses the role of 'quants ' or financial engineers in the 2007 summer meltdown in the subprime credit market. It is also instructive to individual investors on the capabilities of highly automated professional traders and investment fund money managers. Most individual investors just do not understand how "digitally deprived" they are. Investment portfolio self-assembly by individual investors versus investing in index mutual funds and index ETFs has become almost a ridiculously naive proposition. This article may help you to understand why. You do not have to be an MIT alumnus/a to register.

Professor William F. Sharpe

Dr. Sharpe is a Stanford University Professor Emeritus and co-recipient of the Nobel Prize in Economic Sciences (1990).

iMoneyNet

About iMoneyNet" webpage: "iMoneyNet is the leading provider of money market mutual fund information and analysis. Since 1975, we’ve been publishing Money Fund Report™ and building products to meet the needs of the domestic and offshore money fund industries.

Our Do-It-Yourself Personal Financial Planning websites