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Why Indexing Should Be Part Of Your Portfolio.

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Hi AP,

I knew that LACOE had Vanguard. Congratulations. Right next door in LAUSD, anybody who suggests Vanguard is quite simply ignored by both the union and LAUSD. You also have adopted TIAA CREF for your 457 plan and so has the Los Angeles Community College district. But to suggest using TIAA cREF for the 457 plan, I was labeled as some kind of TIAA CREF rep, I kid you not! Most business is done behind closed doors, and then for some strange reason, the 457 plan was dropped. Nothing was ever said about the plan. The plan administrator knew that there were interested employees who wanted to help out, but we were ignored as usual.

In California, the 403b world is very secretive and exclusive. No body talks about this stuff publicly.

Steve

 

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TR,

You said that a monopoly is "a commodity controlled by one party." That’s great, now lets define according to Webster what does a "party" constitute. Interesting a "Party" is defined: "A person or group involved in an enterprise; a participant or an accessory." Bold is mine. All of the annuity and the loaded mutual fund companies are one party who monopolize the 403b market. This has been the case since 1958 for the insurance industry and the load mutual fund industry since 1974. Just about everybody in the world understands this and would agree with this assessment. It has been said by columnists, authors, investors and some re-educated 403b advisers (those sympathetic to the educators’ needs), people much smarter than I.

 

You refuse to see that perhaps, just perhaps, that the 85% of teachers who are sold some kind of high priced annuity product is a result of a monopoly arrangement or at best a conspiracy. Sure the list of no loads is nice but if nobody publicizes them, they don't exist, as far as the consumer or the individual teacher is concerned. Where do you think most of the $152 million from 32,500 LAUSD active employees park their tax deferred money? Duh!!!!!!!! Why the annuity and load mutual fund companies which constitute one party, the high price party and they are laughing all the way to the bank and having a real party.

 

BTW, you want to personalize this thing and your comments about what I want or don’t want are getting boring. And a lie. Once again, it is not what I want that’s important, but it’s an IDEA that we support. The idea of investing in low cost, no load, passive funds is a great idea.

 

It is another flat out, knee jerk, lie that the low cost companies don't care about the 403b market. TIAA CREF in their support for the revolutionary California bill AB 2506 means that they care a great deal about educators in K12 school districts. TC took a lot of heat with the oppositional monopoly who wanted nothing less than to keep the high priced status quo. You are wrong again about low fee companies. Fidelity Investments sent a rep to one of my workshops because they would like to present their funds to K12 educators. The usual route is blocked by union (who only have high priced firms as a “union approved” vendor) and district politics (who will never publicize these companies).

Steve

 

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"TIAA CREF in their support for the revolutionary California bill AB 2506 means that they care a great deal about educators in K12 school districts."

 

This is where you lost me. C'mon, TIAA-CREF supported AB2506 because it would've have been a huge boom for them. They couldn't compete with the comissioned sales reps so they backed legislation to get rid of their competition. Remember, they're a business.

 

The most frustrating part of all this is that the teachers don't understand about the process. They don't get that a planner that suggests charging them a flat rate for planning services along with a allocation of no load funds is less expensive than the guy that sells an annuity with no out of pocket expense. The rep that charges a fee and is open about what they'll do for that fee is looked at like the bad guy because his competitor will not charge a client but sell them a 10yr surrender charge product. That's the story that needs to be told.

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TR,

You’re yawning at these ideas:

 

1. Personal financial education and awareness/403b is a potentially powerful investment tool and a true benefit available to all educators.

2. Diversification across asset classes using passive/indices

3. Investing in low cost funds using Vanguard, TR Price, Fidelity, TIAA CREF

4. Rebalance

5. Teachers unions stepping up to the plate on the best interests of members by approving (union approved) just ONE low fee company, as a start (nowhere in the country is there a K12 teachers’ union who has a union approved company listed in number 3)

6. School districts must publicize all of their options and take more responsibility by educating employees similar to the 401k plan ERISA regulations.

7. Districts and unions must remind the 60% of educators not participating in 403b that the teachers' pension may not be enough to sustain their retirement lifestyles.

8. Never mix insurance with investments, there are much better investment vehicles.

9. Start investing as soon as possible and invest consistently.

 

Many of us on this site would agree that when BOTH the salesman/woman and the client walk away from a deal, happy, that deal is more likely ethical, transparent, and, most important, meets the needs of BOTH sales person and client.

 

We also celebrate these ideas because they represent the future which makes investing very exciting.

 

Perhaps, if all of the above reforms materialize, what you fear the most will also materialize…

Your fears:

1. The Efficient Market Hypothesis is valuable, which leads to...

2. Most of the money in the form of fees, commissions and expenses now flowing to the unions and insurance company coffers and their agents' bank accounts will now go to the educators' retirement nest egg AND

3. Passive investments (not the managed funds) will beat the benchmarks over long periods of time (20 years or longer).

4. I'm right.

 

Best wishes and happy holidays to your and your family,

Steve

 

 

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Hi Groundswell,

 

You said: "This is where you lost me. C'mon, TIAA-CREF supported AB2506 because it would've have been a huge boom for them. They couldn't compete with the commissioned sales reps so they backed legislation to get rid of their competition. Remember, they're a business."

 

I don't agree at all that it would have been a boom for them because TC would have been part of the database just like all of the other vendors who signed up. Of course they are a business, but they also happened to be a not for profit business, similar to Vanguard. Who else would have stepped up to the plate to try a reform the completed outdated California insurance code 770.3, that favored the insurance industry. What they wanted to do was to lower the number of vendors in school districts, of course the opposition said what you said, TC wants to get rid of competition. The list of 150 vendors at my district, for example, is nuts. Anyway, I would be saying the same thing if Vanguard or TR Price did what TC did.

Look, educators have to choose a vendor for a 403b. There is no getting around that. If you don't like TC, it’s a free country. IMO, I believe that if TC were the only vendor available, educators would be much better off with their retirement plans than what we have today. I like TC for its passive, low fee structure and the colleges and universities have been using them without complaint for 80 years. Why is it that when they came into the K12 market, the positive perception and reputation changes to some kind of bully.

 

You said: "The most frustrating part of all this is that the teachers don't understand about the process. They don't get that a planner that suggests charging them a flat rate for planning services along with a allocation of no load funds is less expensive than the guy that sells an annuity with no out of pocket expense. The rep that charges a fee and is open about what they'll do for that fee is looked at like the bad guy because his competitor will not charge a client but sell them a 10yr surrender charge product. That's the story that needs to be told."

 

Numerous law suits against insurance carriers and their agents have been filed because of educators have not been told all of the fees and surrender charges. This story has been told by various media reports over the years. AFT article in 2000 Shark Attack! talked about the excessive fees and commissions. There have been many media publications, but teachers don't read this stuff, they are more likely listen to their unions. Until the local and state teachers' unions stop what they are doing now by endorsing only the high priced products and start telling members what you just said above, very few educators will understand the process.

 

Best wishes,

Steve

 

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Lets not let the facts get in the way of a great story.

 

Rankings on Ten Largest Mutual Funds for 10 Years ending 11-30-2005, at Maximum Sales Charge.

 

Dodge and Cox Stock 14.59%

American Funds Growth 12.34%

Fidelity Contra 11.95%

American Funds Capital Income Builder 10.49%

American Funds Investment Co. of America 10.19%

American Funds Washington Mutual 9.77%

Vanguard S&P 500 9.20%

American Funds Income Fund of America 9.16%

Fidelity Magellan 7.10%

Pimco Total Return 6.98%

 

The Vanguard S&P 500 may out perform a majority of mutual funds but when compared

against other large funds it slightly outperforms an income fund, a no-load disaster called Magellan and

a bond fund.

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403bAgent,

 

Your chart of performance is a non-starter and is completly meaningless. The S & P 500 is an index, but it does not represent a diversified portfolio, it represents a portfolio of mainly large and mainly growth stocks (though less growth than a few years ago). 10 years is not nearly enough time to make an accurate comparison of whether the mentioned funds would outperform, nor is their any evidence that people knew those funds would outperform in advance and would have chose them. Next, we would fully expect those chosen funds to outperform the S & P 500 as they are for the most part Value funds (even the growth fund has traditionally been more value than a traditional growth fund - like say Janus). Value funds are expected to outperform over long periods of time (though we would expect them to outperform over every time period or even every 10 or 20 year period) as they have more risk. If these funds didn't outperform the S & P 500 that would be a story as it would mean that they took more risk and recieved less return.

 

Indexing is a concept that is much larger than just one sector of the market (S & P 500), a truly diversified portfolio will represent many asset classes of the market, not just one.

 

Groundswell,

 

I wanted to respond to your assertion that TIAA-CREF wanted to "get rid of their competition" and that it would have been a big boom to them.

 

TIAA-CREF simply wanted a fair playing field where districts take responsibility for their plan and force all vendors to compete (as opposed to asking all vendors to show up with a retail product). They wanted districts to allow their employees to benefit from the economies of scale that could be utilized with a single vendor platform. In all likelikhood TIAA would not have won many districts as their product at the time was fairly inadequate. Thus even though I respect your opinion, I don't feel it is fully informed. A full look at the facts would show that TIAA was promoting competition and yes, they would have like to been one of the competitors, but it is doubtful they woud have won without a major re-vamp of their product.

 

ScottyD

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ScottyD,

 

I am comparing the 10 largest mutual funds. The Vanguard S&P 500 (the poster child for no-load passive investing) does not compare well. The quote "evidence that people knew those funds would outperform in advance and would have chose them" is not well thought out, the funds are the largest because millions are buying them. ??? " we would fully expext those funds to outperform the S&P 500 as they are for the most part Value funds.....as they have more risk." Show me one measure of risk that proves the value funds listed are more risky than the S&P 500. If 10 years is not long enough then go 20 and you will find very little changes.

 

P.S. your behind in the contest.

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OK 403bagent you reported some "facts." And here is my rebuttal:

 

1. For one thing nobody on this forum ever recommended Fidelity Magellan, yet you keep repeating here as though it represents the no load option. I have never owned Magellan and I don't know anybody who does. If my memory serves me correctly, I believe it used to have a 3% front end load.

 

2. Interesting, from your list, we have invested in Dodge and Cox stock and its a NO LOAD and its the best performer of your list. Thank YOU! Come on 403bagent, you can tell us… This is where you have your money, right? :-)

 

2. Since past performance is no guarantee of future performance or perhaps I am mistaken (times have changed, is past performance now a guarantee?), remember I am just a teacher and I make mistakes all the time. But what am I supposed to do with your list of loaded expensive companies than beat the S&P 500 index? Invest in them now and hope the next ten years provides the same return as the past ten years? Hardly. The guarantee on the passive side is that the fees will be low so that more money will go to my pocket and that passive funds will never under perform their respective indices. We are investing in the great US and world economy, not some managed fund that happens to do great in the short term. I've been there and done that, thank you.

 

3. As Scotty pointed out and I explicitly said that it takes 20+ years of due diligence with investing across asset classes and rebalancing which includes bonds and cash in order for this strategy to work.

 

Great ideas come from great stories and there are lots more to come.

Happy holidays,

Steve

 

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Guest TR1982

Scottyd,

 

"I wanted to respond to your assertion that TIAA-CREF wanted to "get rid of their competition" and that it would have been a big boom to them.

 

TIAA-CREF simply wanted a fair playing field where districts take responsibility for their plan and force all vendors to compete (as opposed to asking all vendors to show up with a retail product). They wanted districts to allow their employees to benefit from the economies of scale that could be utilized with a single vendor platform. In all likelikhood TIAA would not have won many districts as their product at the time was fairly inadequate. Thus even though I respect your opinion, I don't feel it is fully informed. A full look at the facts would show that TIAA was promoting competition and yes, they would have like to been one of the competitors, but it is doubtful they woud have won without a major re-vamp of their product."

 

I can't believe I am hearing this. TC has been the single largest monopoly in the investment world over the last 70 years. They have never invited or encouraged competition, in fact, they've done everything they could to fight any kind of competition. I know because I've seen it in action. Until the late 1980s, TC had the only SEC exemption for being registered under the 1940 act. The only reason they lost the exemption was because numerous universities were sick of the stranglehold they had on the investment choices for employees. In the late 90s Congress finally revoked their tax exempt status which exempted them from all kinds of regulatory requirements. They fought that by pouring millions of dollars into the coffers of politicians and still lost. In my state, they were the ONLY choice for the optional retirement plan for higher ed employees for decades. When other firms tried to open the doors to competition, TC spent extensive political capital to keep them out. They finally lost that battle in the early 90s. In the K12 market, they don't want competition, they want to own the game, just like they did in higher ed. You call it greater efficiency, they call it locking the game up. They pay consultants to chose them as the sole provider. When they have to compete with others, they couldn't care less. In a large school district I work in, they paid Mercer to get them in the game. They get the same playing field as everyone else, the same opportunity at benefits fairs, advertising, etc. They don't show up, they don't advertise, they don't care. Unless the group hands them the deal lock, stock, and barrel, they aren't interested. In fact, they have been cancelling contracts with smaller groups over the last few years. This has been well publisized on this site. Why anyone here would defend TC is amazing to me. Their reputation in higher ed has been one of a large monopoly. slow to change, not looking out for the interests of their customers, etc.

 

Regards-

 

Steve,

 

You are very entertaining. I NEVER yawned at any of the ideas you listed off. In fact, those ideas never came up in the conversation. What I was dissing was your continual monopolistic conspiracy theories. Those ideas are silly, can't be proven, and don't make any difference. Why do you continually put words into other people's mouths?

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TR,

You better believe it. You were not here in California when the courage of TC came to the plate on teachers’ behalf and saw how California teachers have been getting screwed. I have never ever heard of a complaint of TC from higher education except through people who cannot compete with the low fees. Now I suppose you will arrange for some former higher ed. TC investor to come here and tell their story about how awful TC was.

 

Why don't you read this and then you will have something substantial to tell us about the future of TC.

But in the meantime, as long as Vanguard is not available with my employer LAUSD, I will continue to use TIAA CREF for my 403b and will not let some agent tell me that TC is a bad choice. Right now it still is a great choice.

 

Steve

 

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Groundswell,

 

It is your arguements that are poor.

 

Just because somebody buys something doesn't mean it is the best and just because something is sold doesn't mean it will outperform, that is just ludicrous. Perhaps the reason so many people bought them is BECAUSE of their early outperformance (surely that explains Magellan, why would it not explain the others). There is no evidence that these funds will outperform going forward, in fact the only fund to actually beat its benchmark is the Dodge and Cox Stock fund. The rest underperfomed a real Large Cap Value index.

 

Value stocks have outperformed by an average of 200 basis points long term because they have more risk. Do just a little research on the nature and types of risks and you will learn a little something about Value stocks and the relationship of risk vs return.

 

As for Dodge and Cox and 20 years...they have outperformed a Large Value index by about 200 basis points. We would fully expect some funds to outperform, just by randomness and it appears Dodge and Cox is one of them. Will they continue to outperform in the future? It seems likely, but no guarantee.

 

None of these arguements have any meaning anyway as your comparisons make absolutetly no sense. I am not even sure what we are arguing? Are we arguing that the vast majority of funds fail to beat their benchmark, or that there are a few funds that have beaten their benchmark and because of it have attracted capital? Is this an active vs passive debate? Or is this a debate about a properly balanced portfolio?

 

The fact is you just through up a bunch of numbers that have no real clear relationship to each other and no application to the discussion. What is your point? State it clearly with support.

 

ScottyD

 

As for TR.......YAWN.

 

You obviously hate TC and will argue against them regardless of the facts. You failed to respond to the fact that if school districts went through an RFP process their is little likelihood they would consistently choose TC without a major revamp of their program. Why do assume that all school districts would suddenly choose TC in an RFP just because TC wanted to see real competition in K-12? Your arguements don't support the the reality.

 

ScottyD

 

 

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Guest TR1982

Scottyd,

I don't hate TC (or anybody else) but I do know what their schtick is. I was competing against them when you were in diapers, pal. Besides, the record speaks for itself. All the information I related is in the public domain and you can easily find it on the internet if you want. BTW, if you are such a big believer in indexing, why are there so many American Funds in the San Diego school system case you work with? If you can't predict which active managers will outperform, why have them there? Kind of a mixed message there?

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