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Why Indexing Should Be Part Of Your Portfolio.

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HR,

Did it ever occur to you that instead of competing against TC, why didn’t you use some of their values, social responsive investing, indexing, low costs, low turn over, simplified portfolio and their general philosophy of looking out for the greater good. These values are a good "schtick" that all of us could use.

 

American Funds debate goes around again: There is one teaching strategy that I use with students all the time, repetition. Once again, regarding American Funds and indexes, John Bogle's nightmare is that AF turns into a no load. AF behaves more like an index fund rather than a managed fund. I would easily own AF if they would drop those loads. They, like Vanguard, have a steady long term outlook, little style drift, and little turn over, lowest cost of the managed funds. Everybody says they are managed well, but I wonder how much they are actually managed.

 

As a teacher, I have fond memories of AF. Their Los Angeles office was my elementary school's corporate sponsor and they gave our school ten of thousands of dollars over the years. They would send volunteers to come one afternoon a week for a year to tutor our students. One of their managers showed our inner city students some investment basics. He created a PP show that from a teacher's pedagogical POV was excellent. It is very difficult to teach adults about financial basics but to teach poor kids is much more difficult. I was impressed.

 

Steve

 

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403bagent,

 

Do a little homework on the dimensions of return and perhaps you will come to a better understanding of investment theory. Risk is not one-dimensional, it is not solely measured by standard deviation, if it was then Growth stocks should have higher returns - correct? Thus value stocks with lower standard deviations should be lower in risk because they've had lower standard deviations for most of history (during the depression value stocks fell more than growth stocks and can be expected to drop more during poor economic cylces), so the question is if they appear to have a lower "risk" why do they offer a higher return over most time periods? Is it a free lunch? No, it is not.

 

There are a number of factors that could explain why value stocks have outperformed growth stocks historically - behaviour, tracking-error, higher company risk, or a combination of all three. I think behaviour and higher company risk present the best arguements for the higher return of value stocks. If you are looking for a traditional measure of risk, you will be sorely disappointed, though perhaps enlightened.

 

Perhaps the best way to explain the inherent risk of value stocks that may not always show up in standard deviations is to look at a companies cost of capital (and the risk inherent in it). For example, if you were a loan officer at a bank and you had too make a loan to two companies, General Motors and Toyota. GM is having major financial problems and basically makes cars so that it can pay its current retirees, Toyota has a great balance sheet and no unions to deal. Which company would you make pay the higher interest rate, GM or Toyota? Toyota would obviously pay a lower interest rate because it has lower risk of default, while GM would pay a higher rate of interest. This cost of capital translates into the risk of the stocks. Would you pay the same price for a share of GM as Toyota? Of course not, that would be stupid, if you did you would recieve about the same rate of return with more risk (company risk). In order to be induced to purchase shares of GM they would have to be priced sufficiently below the price of Toyota in order for you to earn a return that corresponds with the risk. Do you go and check the standard deviation of both before making the purchase to figure out which one is more risky? That would be stupid as the standard deviation only tells you about the past and nothing about the company's present situation. There is inherently MORE RISK in GM shares than in Toyota, yet this may never show up in a standard deviation.

 

Does this fully explain the "hidden risk" in value stocks......perhaps, perhaps not, but it does give a logical, market based, risk vs return based answer to there being more risk in value stocks.

 

I see you did a great job of dodging the questions being asked of you, perhaps because you're not even sure of the questions you posed. What exactly are you trying to prove? What exactly IS your debate?

 

 

TR,

 

I don't consider you my "pal" and your little diaper comment really does nothing to actually answer the questions posed to you. You are confusing your viewpoint of TC based upon your being a broker and not upon reality. Are you really saying that had AB 2506 passed in its original form that TIAA would come to dominate the 403(b) based on it's contracts at that time? If that is what you think then you must be losing your mind. As much as I like TIAA-CREF in fixed income and real estate and a couple index funds I didn't like their lineup of funds at that time and believe that it would be nearly impossible for a proprietary entity to gain a monopolistic share of the market in k-12. They just couldn't have competed in my opinion. Perhaps you have a better opinion of them that they would wave a wand and cast a spell on all school districts and they would magically become the only vendor thereby kicking your high cost products out. I like that scenario in some ways, but it never could have happened. But then again, facts don't seem to matter to you.

 

As for the San Diego plan - I think the American Funds are a good company. They focus on keeping costs low, turnover low, and they won't get caught up in bubbles as they focus on fundamentals. I don't think the American funds will disappoint and would rather see someone in a diversified portfolio of American funds than solely in an S & P 500 fund. I am not in charge of the san diego plan, I have absolutely no control over it. Of course, the san diego plan does offer index funds and I have been working feverishly to get them to offer the BEST index funds available. I believe I will succeed in the new year in accomplishing that. You see, I don't look at the status quo and figure out how to profit by it (though I do look for profit opportunities), I look at the status quo and figure out how to make it better, I wish the same could be said for most of the people in this industry.

 

ScottyD

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Hi, I found several excellent posts in this thread by those posters who are doing a service for investors at this site by providing investor friendly honest information ; Steve, one of your posts, quoted below, really stands out to me, and I feel that it should be posted in the wise moves of this web site.

 

BTW, I attended a LAUSD union party meeting of teachers last week, and of course spoke with a few teachers about 403b's. None know about no load funds for investing. I was told by one of the individuals that the sales rep told her that the district pays any sales fees associated with his product, and another teacher told me that she had not heard from the sales rep after she was signed. WHY does that not surprise me?

Anyway, I gave this website address to a few lucky teachers, so they can seek advise to avoid the SCAMS they come across, and successfully invest for the long term.

 

"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,

TR has made the funniest remark so far in this conversation: To Scotty, "I was competing against them when you were in diapers, pal."

 

Well, I guess that settles it TR, the salesman, is right and those of us who use the 403b products are wrong.

 

TIAA-CREF has been a breath of fresh air for LAUSD and California. They are the best option I have for my 403b, and T-C helped get the law passed for the website www.403compare.com.

 

Another thing that amuses me in this conversation is all of this talk about past returns. Past returns don't tell me one thing about the future. Hey, if I had known that a funny little guy in Omaha was going to make so much money, I would have given him all of my money to invest. You smarts salesguys can't tell me what is the next great fund for the coming 30 years. Until you can predict the future, I'll stay with my diversified portfolio of low cost index funds. Best Wishes.

 

Joe

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Hi Joe,

Talk about funny remarks. TR, you have got some real competition here (not with TIAA CREF, but with your colleague, 403bagent for the funnest post.)

 

I was screaming with laughter when 403bagent posted his list of funds that beat the indices over the last ten years.

Number one on HIS list was none other than Dodge and Cox Stock. A NO LOAD with low expense ratios!

 

He still has not answered my question about putting his own money in that fund and of course, no one will answer THE question about what to do with that past performance information which has been dubbed around here for a long time as financial .

Oh well, he doesn't like to interact with us low life educators who just happen to know a little bit more than the average educators he probably sees in the school's cafeteria. Our questions are just too unprofessional!

 

Happy holidays

Steve

 

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Hi Ira,

Thanks for the comments. I would love to take credit for that list but I certainly can't. Other people much, much smarter than me came up with those life long financial bits of wisdom. The ten commandments posted by Dan, our tireless webmaster and author, on this site is one source and, of course, the venerable Vanguard Diehards' forum. It is always good to remind ourselves to who we are and what we trying to do to assist our colleagues to do the right thing. I am a mere conduit for great financial ideas. Nowhere else in the country is this honest and open 403b information available. It’s a lot of responsibility for us because nobody, nobody else is doing what we are trying to do here, as evidence by the comments you heard from teachers talking with agents.

 

The comment from one of the teachers who said that an agent told her that the commissions were paid by the district is just another disgusting and reprehensible comment. But unfortunately it is not surprising. Our colleagues are so uninformed because the 403b status quo system works that way. Nobody tells them the simplest information such as districts do not pay commissions, companies do not pay commissions, but the facts are that you the educator pays for all the fees. No other employer turns their head the other way and lets these TSA lounge lizards interact with employees with no accountability and oversight and lets them walk away laughing all the way to the bank, but it’s done all the time in school systems as you and I know.

 

Happy Holidays,

Steve

 

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Hi Steve,

I would guess 403bgent uses Dodge & Cox Stock for his clients. But, of course, we don't ever hear from TR or 403bagent exactly what they put their clients into. We only here about the great funds from the past. It would be enlighting to see exactly the funds that they really do use. Best Wishes.

 

Joe

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Dodge and Cox Stock (closed) charges .53 annual expenses and their International costs .77, very low charges for excellent performance. It took me a while to find these on my own several years ago, but they have been solid (as is the closed Balanced Fund). Thank you Scotty for the good discussion of risk..I think it gets a misunderstood rap too often..These low expense funds can't be expected to be promoted by the commission based brokers so we have to find them..and let's not reinforce diaper-mouth TR..

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Guest TR1982

Hi,

TR has made the funniest remark so far in this conversation: To Scotty, "I was competing against them when you were in diapers, pal."

 

Well, I guess that settles it TR, the salesman, is right and those of us who use the 403b products are wrong.

 

TIAA-CREF has been a breath of fresh air for LAUSD and California. They are the best option I have for my 403b, and T-C helped get the law passed for the website www.403compare.com.

 

Another thing that amuses me in this conversation is all of this talk about past returns. Past returns don't tell me one thing about the future. Hey, if I had known that a funny little guy in Omaha was going to make so much money, I would have given him all of my money to invest. You smarts salesguys can't tell me what is the next great fund for the coming 30 years. Until you can predict the future, I'll stay with my diversified portfolio of low cost index funds. Best Wishes.

 

Joe

 

 

Well, Joe, if TC is the best you got, then you deserve it. Mediocrity at it's best. I only wish my customers would judge my performance by that standard. Life would be a piece of cake.:)

 

 

Hi Steve,

I would guess 403bgent uses Dodge & Cox Stock for his clients. But, of course, we don't ever hear from TR or 403bagent exactly what they put their clients into. We only here about the great funds from the past. It would be enlighting to see exactly the funds that they really do use. Best Wishes.

 

Joe

 

 

Ok, Joe, let's see. You think paying for advice is stupid. You think past performance is worthless. You would never use an advisor.

Now you want me to tell you what I have my clients invest in? Now that's hysterical.

 

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TR,

 

I wonder, what benchmark(s), and time horizons, if any that you measure the fund choices for your clients against, and how often you advise them of their successes or failures.

 

I also wonder, are the funds that you choose for yourself, the same as for your clients? Do you personally prefer funds that you pay a load on, or one where you pay no load?

 

Ira

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Guest TR1982

TR,

 

I wonder, what benchmark(s), and time horizons, if any that you measure the fund choices for your clients against, and how often you advise them of their successes or failures.

 

I also wonder, are the funds that you choose for yourself, the same as for your clients? Do you personally prefer funds that you pay a load on, or one where you pay no load?

 

Ira

 

 

Ira,

I use 3 and 5 year time periods to evaluate fund performance in general. The benchmarks I use are weighted for the average of the Lipper fund performance of each asset class. I don't evaluate performance against benchmarks in any serious way for less than 12 month periods. Obviously, I always want to beat the benchmark, but it's impossible every quarter. Clients know every quarter how they are performing against the benchmark if they want to . The end game for me is not the benchmark, however. It's the accomplishment of the clients goal or objective. That's why using unmanaged market indexes can be problematic. The client may and probably will have a goal that is not just to outperform a market index. In fact, few clients have that as an objective.

I use the same investments for myself that I use for my clients. I eat my own cooking. In general, the money I manage is on an advisory basis using no load or load waived funds on an open fee based platform. If the client doesn't have enough money to invest in a fee based account, I will use a load based fund (such as American funds, Oppenheimer, or Franklin Templeton) or a C share class fund if the client wants to pay for it that way. I give them the choice. Occasionally, I will use a no load fund for the client if the circumstances warrant it. In those cases, the client gets it for free.

 

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Hi

TR, it is very simple: Dodge and Cox is put forth as a great fund with great history. However, I doubt you put your clients into that fund. You don't have to worry about me wanting to get advice from you. I only use Vanguard for my investments. I currently use TIAA-CREF for my new 403b funds, but 99% is at Vanguard. I certainly have paid for advice. John Bogle, Larry Swedroe, Bill Bernstein, Rick Ferri, Frank Armstrong, Bill Schlutheis, Jane Bryant Quinn, and Dan Otter are the ones that I have paid for advice. That was money well spent! Best Wishes.

 

Joe

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Guest Joel

 

TR,

 

I wonder, what benchmark(s), and time horizons, if any that you measure the fund choices for your clients against, and how often you advise them of their successes or failures.

 

I also wonder, are the funds that you choose for yourself, the same as for your clients? Do you personally prefer funds that you pay a load on, or one where you pay no load?

 

Ira

 

 

Ira,

I use 3 and 5 year time periods to evaluate fund performance in general. The benchmarks I use are weighted for the average of the Lipper fund performance of each asset class. I don't evaluate performance against benchmarks in any serious way for less than 12 month periods. Obviously, I always want to beat the benchmark, but it's impossible every quarter. Clients know every quarter how they are performing against the benchmark if they want to . The end game for me is not the benchmark, however. It's the accomplishment of the clients goal or objective. That's why using unmanaged market indexes can be problematic. The client may and probably will have a goal that is not just to outperform a market index. In fact, few clients have that as an objective.

I use the same investments for myself that I use for my clients. I eat my own cooking. In general, the money I manage is on an advisory basis using no load or load waived funds on an open fee based platform. If the client doesn't have enough money to invest in a fee based account, I will use a load based fund (such as American funds, Oppenheimer, or Franklin Templeton) or a C share class fund if the client wants to pay for it that way. I give them the choice. Occasionally, I will use a no load fund for the client if the circumstances warrant it. In those cases, the client gets it for free.

 

"In those cases, the client gets it for free" Are you saying that when you use no-load funds the client receives your advisory service for nothing? Please clarify.

 

 

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Guest TR1982

Hi

TR, it is very simple: Dodge and Cox is put forth as a great fund with great history. However, I doubt you put your clients into that fund. You don't have to worry about me wanting to get advice from you. I only use Vanguard for my investments. I currently use TIAA-CREF for my new 403b funds, but 99% is at Vanguard. I certainly have paid for advice. John Bogle, Larry Swedroe, Bill Bernstein, Rick Ferri, Frank Armstrong, Bill Schlutheis, Jane Bryant Quinn, and Dan Otter are the ones that I have paid for advice. That was money well spent! Best Wishes.

 

Joe

 

 

How do you know what I put my clients into? That's what's so funny about guys like you!! You assume, assume, assume! You think from a few posts here that you know me and what I do for my clients. Most of these comments couldn't be further from the truth! It must make you feel good that you can ASSUME that everyone is wrong and therefore YOU are RIGHT!

BTW, if you want to spend $12.95 for investment advice, that's fine with me. Remember, in life you get what you pay for.

Best wishes for a wonderful Christmas holiday and a happy New Year.

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