Friday, November 8, 2013

Rule 7 Peek Inside a Pilferer's Playbook

Your portfolio or the broker's pocket?

This is the second part of this week's reading.

Andrew begins by presenting some of the typical responses you will hear if you talk to most broker's about index funds.  Understand that brokers don't like this talk because it is a short step away from them making less money and even not needing their services!

The response I like is where the broker will ask you why you are willing to accept average returns or average performance by using index funds that achieve market returns.  The answer is simple:  the market returns handily beat the performance of most brokers after taking into account all fees and costs.  The average return is actually far superior!

Although we understand this now, the fact is that this is counter intuitive.  Seeing a well-appointed office and poring over a bunch of fancy research reports with fast talkers naturally leads the brain to assume that the advisors you are meeting with can beat the markets.  After reading this chapter you'll understand  that this assumption has dearly cost many on their road to a successful retirement!

You'll be surprised to learn in this chapter that much of the pension fund money in the U.S. is managed with index funds.  These are assets managed by the so-called "best and brightest" - graduates of the top finance schools in the country.  If anyone could beat the market, it would be this group!

Embedded in this chapter are references to really good books to read and authors to know as you continue your journey to learn investing:
  • Dan Solin, a securities litigation attorney, wrote The Smartest Investment Book You'll Ever Read.  Here is a talk he gave to Google employees you'll want to watch:
  • William Bernstein - The Four Pillars of Investing.
  • Bill Schultheis - The New Coffeehouse Investor.  Schultheis emphasizes the efficiency of using well-diversified, low-cost index funds.  He argues that you may want to enjoy your retirement and life in general by avoiding spending an inordinate amount of time picking stocks and timing the market.
  • Burton Malkiel - A Random Walk Down Wall Street.  This is the bible of the genre.  It details the evidence in favor of the so-called efficient market hypothesis - the hypothesis that says that using publicly available information to beat the market is futile. 
At the end of the chapter is a quote worth reflecting upon by Jack Meyer, former head of Harvard University's Endowment Fund:
"The investment business is a giant scam. It deletes billions of dollars every year in transaction costs and fees...Most people think they can find fund managers who can outperform, but most people are wrong. You should hold index funds. No doubt about it. "

Strong words from one who has been around the block!

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