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sschullo

Why Indexing Should Be Part Of Your Portfolio.

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Hi,

 

The venerable Vanguard's S&P 500 index fund is the largest mutual fund in the country with $107 billion! That’s a lot of money which means that are a lot of folks who are doing the right thing. There is one guarantee with this fund is that it will never fall below the benchmark. It can't, its impossible because it is the benchmark. Managed funds on the other hand frequently fall below the benchmark over time. Managed funds will sometimes do absolutely great when they are , but this brings up another problem. One has to time it right to hold on to those gains. This is market timing and that has always been a loser’s game.

 

Click here to read an excellant interview of Mr. Souter, Vanguard's CFO explaining indexing again.

https://flagship4.vanguard.com/VGApp/hnw/Va...1252005_ALL.jsp[/url]

 

Steve

Edited by sschullo

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Hi Steve, Thanks for the article. I agree indexed funds are a great tool to develop wealth, not only the 500 index but also other low cost indexes such as reits, small caps, foreign, total market, etc that when used together can make a very low expensed diversifed portfolio. Also the vast majority of managed funds because of cost cannot compete with index funds over time as shown by Boogle, Swedroe, Bernstein, Ferri among others.

 

Practially indexed funds are fairly equal to their benchmarks; however, a very minor point, some might say that eventhough many well managed lower cost indexed funds equal or beat their benchmark in many years there is still a slight fund expense so that these index funds are not exacty equal to the benchmark.

 

Ira

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Hi,

JONATHAN CLEMENTS of the WSJ chimes in on index investing. Oh, that passive investing just won't go away and I can't image why. It can't just because of the low fees. Naw, can't be that simple. Of course it is my friends!

 

As Mr. Roth puts it, investing in actively managed funds is "like smoking two packs a day and expecting to live to 100. It could happen. But you certainly aren't helping your odds."

 

Read entire article: Click here.

 

Steve

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Hey Steve,

I have a great index fund in my Valic 457 account. It's similar to an S&P 500 index fund and it has a total expense ratio of 1.4%! What a joke. The state plan of Georgia, the Peach Reserves Plan, has the same fund for .05%. In other words, the Valic option is 27 times more expensive. Would you pay $27 for something that costs $1? Lipstick on a pig just doesn't do the trick. Index funds in fee-bloated annuities just don't do it for me.

 

Gerry

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Guest TR1982

Gerry,

Why did you buy it if you think it stinks? I've never understood this. People complaining about something they don't have to buy or own. If you think paying 27 times as much for something is a bad deal, THEN WHY DID YOU DO IT?

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TR,

Good question. I bought a 457 just buy service purchase credit with my state retirement plan. I park money there until I need to buy years. I put it in a fixed account. I also view this account as a worst case scenario if I were suddenly unemployed. I would be able to get to the money without the 10% penality if I were to separate service from my current employer. For that reason, I do not anticipate putting that much money there. I would consider putting more in a 457 account if I had cost-effective options.

 

I don't use my 457 for its investments; I use it for other purposes. Most of the funds have total expenses of 1.8% or higher. While this is not the worst case scenario in the industry, it is far from optimal. I receive ZERO added value from these expenses; the Georgia's state plan looks far superior to me. I would love to have access to it.

 

Yes, I do and moan a lot about this issue. I will continue to do so until better choices are made available.

 

Gerry

http://403boondoggle.blogspot.com/

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Just from the outside looking in - the reasons you listed for putting your money into the 457 don't make sense. Maybe you don't have a low fee alternative in either the 457 plan or the 403(b) plan. Surely the district must have a 403b plan - why not "park" the money there?

 

By parking your money in the fixed bucket you're compounding your problem. Your paying the extra fee to be in the annuity but your not investing it in anything that could possibly grow enough to offset some of those fees. You could put a conservative portfolio together within the VALIC program that would meet your investment needs net of fees if you really wanted to. Yeah the fees are high but if your goal is to return 7% and by investing wisely within the VALIC program you make a net return of 7% at the very least your achieving your objective.

 

The fact that VALIC is your choice for the 457 program should be a big warning to all of us. These new Regs that will go into effect 1.1.07 will create the same scenario that the 457 programs did when they first came out.

 

The district will go out for bid for their new 403(b) plan and companies like VALIC will come in and offer to take care of everything for the district to "make sure they are in compliance with the new regs"

 

We will have fewer choices and we could all be limited to one really bad choice.

 

Don't believe me? Then try this:

 

Look around at the leadership at your school - are they really looking to take on the extra fiduciary responsability? Do they have the talent to make sound investment choices that will impact the entire district?

Do you think they are looking for a way to make their life easy? Do you really want these people to tell you what company to invest your money in? It didn't work out that good with the 457 and now 403b is next.

 

That's how, even though they had the ability to find a low cost provider for their 457 plan, you ended up with VALIC as your choice.

 

You can and moan until you get better choices - but it seems to me that, by not investing wisely in the program you do have, you are your own worst enemy. Better choices might not make a difference.

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Groundswell,

My wife and I max out our 403b accounts; the 457 plan is above and beyond our 403b allowances. We also fully fund our IRAs. I use the 457 like a money market account. I am in the 15% tax bracket, so for every $1,000 dollars I save $150. This seems like a good idea to me. Plus, I am getting a 3% return. Maybe I'm an idiot, but that looks like an 18% swing in my favor. Ultimately, my 457 money will be used to buy service purchase years.

 

As far as fiduciary responsiblity, that would not be a factor if the state plan were included. If it is good enough for the state, it should be good enough for the district. I don't understand that argument that every district needs a full service nanny to watch over the schools accounts. That sounds like foxes guarding the hen house to me. It's hard for me to understand how any true financial advisor could suggest , with a straight face, an index fund with an expense ratio of 1.4%.

 

I spoke with one rep who was advocating an annuity with an insurance charge over 1%, invested with funds of over 1%, with a portfolio advice feature of 1% a year. That equals 3% a year! That is both hilarious and extremely insulting.

 

As for my own investing, I'm doing fine. Most of my money is invested in low-cost Vanguard and Tiaa-Cref funds. I sleep very well at night. Sure, it bothers me to know that Valic has its fee-bloated hands on about $14,000 of my money, but I keep reminding myself what I am planning to do with that pool of money.

 

Gerry

 

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Guest TR1982

Gerry.

 

"That sounds like foxes guarding the hen house to me. It's hard for me to understand how any true financial advisor could suggest , with a straight face, an index fund with an expense ratio of 1.4%."

 

At what price can a "true" financial advisor recommend an index fund? (or, for that matter, any investment) 1.0%.....75%....50%.....25%....0.00%?

 

There are advisors who browse this site who have pricing models all over the map. Just because one is cheaper than another does not mean it is better. I send my kids to private schools and it costs a lot. I do it because I believe my kids are getting a better education.

 

Pricing is determined by market conditions. If you think you can find a better value somewhere else, then by all means, buy it.

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I agree that it's important to get value in our purchases, and I guess that each of us uses a different criteria to evaluate value in our purchases.

 

In investing, we at this board although there are some differences in our approaches to investing that we discuss regularly, we are generally fairly knowledgeable in what to do in our own individual investment programs, and I beleive that there are more similarities then differences in choices for ourselves. . We, as a group, make fairly good choices in our investment vehiles.

 

I think that the critical issue is the uniformed investor( whichin my opinion comprises the vast majority of 403b investors, who does not have the skill to know what value is in investing. The investor can pay 27 or 100 times as much as a comparable investment without knowing. Also, if using a sales agent, may or may not be getting any diversifcation help, etc without knowing the difference. These uninfomed investors are there to be victims fo the less scrupulous. Is there something to be done to educate the bulk of these investors?

 

Ira

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HR,

Rebuttal to your terse and knee jerk statements:

 

"That sounds like foxes guarding the hen house to me. It's hard for me to understand how any true financial advisor could suggest, with a straight face, an index fund with an expense ratio of 1.4%."

In the 403b world, it’s done all the time.

 

At what price can a "true" financial advisor recommend an index fund? (or, for that matter, any investment)

Two ways: 1. I know one advisor who gives this information pro bono.

2. A fee only adviser will also recommend an index fund.

 

Pricing is determined by market conditions.

In the 403b world, nothing is further from the truth. It’s another one of those answers that is never challenged. IMHO, high priced 403b products are high because they continue to be sold (do I dare say the word monopoly ), not because of demand mind you, but because of aggressive sales that says this is the only product available. Many of the pros have said on this site, over and over, that very few educators would have any 403b if it weren't for the sales force.

Years from now when investors will turn into mostly passive investing, the price of the high priced products will drop because of competition. But that is a long ways off.

 

If you think you can find a better value somewhere else, then by all means, buy it.

We do. WE DO TR, That’s why we have Vanguard and TIAA CREF.

 

TR, you have been around this site for some time now. By your statements, it looks like you have not learned a thing.

Steve

 

 

 

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Guest TR1982

Steve,

You didn't answer my question: At what price will a "true" financial advisor recommend any investment? You cannot hold yourself out to be an advisor and charge nothing. Do you want to be paid nothing for what you do? What consumer thinks that advice that is free is good? I guess that makes sense if you get your advice at cocktail parties or Money magazine.

 

Your statement about the 403b world being a monopoly is right from the set of an Oliver Stone . There are hundreds of companies and dozens of products available in this market. Whether they are available in each situation has more to do with market forces than anything else. Your district, LAUSD, has over 130 different firms representing all kinds of products including firms such as Vanguard. Why do you continue to propagate the myth that there is a monopoly? Some of the people here have this impression that a school district with 200 employees is going to attract the attention of low cost investment providers. That is no more the case in the 403b world than it is in the 401k market. Similar size employers in the 401k market get the same products and pricing as 403b employers. I know because I have worked in both. That is not a conspiracy or a monopoly.

 

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HR,

No, you have not learned a thing... You still pop off your mouth when you don't know the details. I know about LAUSD, the union and the absolute one dimensional mentality that leads directly to a monopoly. I have worked here for 22 years. You are playing directly into the "it’s not a monopoly, but it looks like a monopoly, it feels like a monopoly, it is presented as a monopoly and, oh my gosh, only a small percentage of teachers have a low fee company, but this is not a monopoly."

 

You said:

"Your statement about the 403b world being a monopoly is right from the set of an Oliver Stone . There are hundreds of companies and dozens of products available in this market. Whether they are available in each situation has more to do with market forces than anything else. Your district, LAUSD, has over 130 different firms representing all kinds of products including firms such as Vanguard. Why do you continue to propagate the myth that there is a monopoly?" Your comment about Oliver Stone s brings up another word, the 403b world is a conspiracy.

Here are the facts:

 

Take a look at this link and then you might, just might realize what we, on the consumer’s side, are talking about...

It’s a monopoly and a conspircacy by the sheer numbers of high price companies and NOWHERE do you see Vanguard. Luckily we have Fidelity and TC, but since there is no publicity because of an outdated state insurance law which created this mess, only the high priced annuities and loaded mutual fund companies are presented to the 70,000 plus educators. This my friend is a monopoly. I constantly get comments from colleagues that say that they did not know TC or Fidelity was available.

 

Let me repeat: We do NOT have Vanguard available in LAUSD. You are lying because you don't know the facts so you make them up to keep the conspiracy alive and you cannot stand it what we try to say here on this site. For ten years we have tried and I will not waste my time explaining the entire history of what we did and the state law created by the insurance industry led by one company back in 1974 to make sure only high price companies are communicated to California educators in the form of the infamous hold harmless agreements that school districts hold to. We have said this before over and over.

 

You are constantly complaining that we do not answer your questions. We do, but you don't listen because it’s not what you want to hear. You have been here long enough to know what we are encouraging our educational colleagues to do and I am sick and tired of hearing your bellyaching. You always implying that we should not educate our colleagues, that fees don’t matter, the diversification and managing a 403b only a “pro” can do, that the higher you pay for advice, the better the advice and that managed mutual funds with loads and high fees are worth it because they beat the benchmarks over long periods of time. All of these statements that you make over and over again are absolutely false, misleading and frankly quite immature.

Steve

 

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Guest TR1982

Steve,

I went to Webster's dictionary to look up the definition of monopoly. This is what it said:

 

"a commodity controlled by one party"

 

Now, I looked at your link. There are 112 annuity options, 26 loaded mutual fund options, and 6 no load fund options. Please explain in plain English how this arrangement constitutes a "monopoly". There are 144 different firms represented here. 6 of them offer no load, low cost fund options. How many low cost options do you need before you have enough? 10, 100, 1000? I don't think there is anything that satisfies you except for EVERYONE to be limited to what YOU want.

 

I am all for low cost providers educating employees and selling them on the virtues of saving for retirement. But if they chose not to do that, should I stop? Am I prohibited from talking about it because they won't? The low cost providers don't care about the 403b market, never have, never will. Stop blaming other firms for the fact that low cost providers don't want to be in the 403b market. It's not their fault and they have not done anything wrong. It's just not what you want and that's fine. Don't buy it.

 

Have a happy holiday!

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Note to teachers whose districts use the LA County Office of Education for their 403b plans:

 

Vanguard is now available. I've just opened an account myself.

 

Below is a link that shows companies on the LACOE approved list. Scroll past the page marked "Annuities" (unless that is what you really want) and continue on to the "Custodial" page. Voila! You will see the usual list of suspects, but you will also see both Fidelity and Vanguard, as well.

 

http://www.lacoe.edu/includes/templates/do...cuments&id=3375

 

 

 

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