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Guest TR1982

As for the comment about index funds made earlier - that you can't get diversified or that there performance hasn't been good compared to tactical or investment managers - I challenge you to back that up with facts. I use index funds almost exclusively and the returns have been great these last five years and I am able to build a diversified portfolio, in fact a diversified portfolio of index funds most likely beat most of the great majority of tactical asset allocation strategies over the past five years and has the best possibility to do so in the future. The real problem is that a diversified portfolio of index funds is difficult to find in the 403b world, many 403b's offer an S & P 500 fund - this is not a diversified portfolio. In the 403(b) world I will many times use active managers because they are the only way to get truly diversified.

 

This may sound shocking to some who know me, but I would rather have a diversified portfolio of active managers (caveat: low fees, low turnover) than a single S & P 500 index fund. Even though it is entirely possible the active managers will only meet the S & P 500 return, they will do so with less fluctuation if I can enough asset classes represented.......less fluctutation means a lot to people. I am a passive guy, but I also believe in the value of diversification......so whats available to people makes a big difference.

 

 

This is what I said:

 

"One of the interesting things often discussed here is the difference in fees in these programs. A lot of the regulars here point out that if you want to invest yourself you reduce your costs. No argument there. What I think is not discussed is that the indexing approach does not always result in better performance. While it does result in lower investment management costs, there is plenty of empirical data to suggest that indexing has severe limitations in building a diversified portfolio that results in better performance with less risk. "

 

I am confused. You suggest that my assertion is not correct and then you turn around and state that is exactly what you would do.

 

My comment was meant to call into question the blind allegiance that some in the investment community have to indexing. MPT is built on the assumption that asset class weighting is the determining factor in portfolio return. If you can't find index funds in all the necessary asset classes then you have a problem in being properly diversified. There is clear evidence that in lesser known asset classes that active mangers have consistently added value above the index. In addition, they have often done so with lower betas. That doesn't mean they all do it all the time.

 

The simple facts are that active managers exist who have proven they add alpha to their funds. The problem with indexing is that you can't invest in an index, you can only invest in an index fund. As an investor, I would want to do exactly what you suggest: build a diversified portfolio with active managers who have proven they can offer alpha.

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TR,

 

That is not what I said.

 

Index funds in nearly every category outperform the vast majority of active managers the vast majority of the time. They do so in small, large, value, international, emerging markets, and nearly any other asset class you can think of. The very few managers that outperform rarely continue to do so, there is little persistency - if there was then all we would have to do is pick a five star fund and be done with it. The problem is identifying a managers outperformance in advance, something that has been nearly impossible to do across all asset classes.

 

I use active managers only when there is no other choice - such as in many 403(b) plans. I would rather use a diversified portfolio of active managers than use one index fund measuring one asset class. Notice that I didn't say that active managers outpeform, only that fluctutation can be better controlled with a diversified portfolio. If given the choice between a diversified portfolio of index funds and a diversified portfolio of your best managers I would pick a diversified portfolio of index funds every time.

 

As for "blind allegiance," it doesn't take blind allegiance, just a little research. There is ample evidence that indexing provides the best potential for recieving the return of a specific asset class. Of course you are correct about active managers existing who have added alpha historically, the problem is that you have no idea whether it was do to luck or skill. You also have no way of identifying who these managers are in advance of their outperformance. If it was so easy to find quality managers then why don't the Russell funds lead all mutual funds in performance, or SEI, or Diversified? They spend all this money on active manager research to find the best and they end up underperforming............The job of an advisor is not to find the few managers who may or may not add alpha, it is to provide them a portfolio that gives them the best probability of meeting their goals - a diversified portfolio of index funds is that route.

 

ScottyD

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Guest TR1982

I love this debate - simply because it rages on forever and, regardless of your point of view, you can build a case either way.

 

If index funds in every class always outperform active managers all the time, then why aren't there index funds in every asset class? I've always found this amusing. Once you move outside of the S&P 500 arena, there really aren't many index funds. Part of the reason is that most markets outside of this area are not that efficient and it's hard to build index funds that will capture the supposed efficiencies of these markets.

 

I don't debate that you cannot know which managers will outperform their indexes before they do it. That does not, however, preclude the fact that you should not try. This is the problem I have with the indexing approach. It suggests that you cannot therefore you should not. I am not at all convinced that advisors should not try to give clients the best overall value they can in investing, whether it is through pure indexing, active management or some combination of the two. What I reject is that this debate is closed and that the "only" way is indexing. I have great respect for people like John Bogle, but he is not the final arbiter of these issues.

 

While indexing is a great approach, there are many investors out there who have achieved their goals without using indexing. I guess they don't count.

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TR -

 

Your ignorance about index investing is quite telling. There are index funds for virtually all asset classes worth investing in. The best index funds available are produced by Dimensional Fund Advisors. Vanguard also has index funds and ETF's are now becoming popular. DFA has index funds for every asset class and the performance is excellent. The research into indexing goes much further than just Bogle, the research is extensive and quite telling - active management just doesn't stack up.

 

ScottyD

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Scotty, I respect your opinion and it's obviously a well-informed one. But what bothers me about your posts (and about the posting of certain others on this board) is that they speak with such finality on the subject. The very existence of so many actively managed funds--to say nothing of the qualified and capable financial planners who recommend them--suggest that there is room for healthy disagreement on this subject, no?

 

For my part, if I find a fund that is managed by someone whose five-year track record beats his/her benchmark by a healthy margin, that would seem to be a good rationale for trusting this manager for future performance. Yes, "there is no guarantee"--believe me, I know the mantra well! But without "guaranteeing" anything, I'm very willing to take my chances with someone whose established record of performance justifies it.

 

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Guest Sierra
Sierra,

Hate to break it to you, you're wrong again!  There is no such thing as M&E on a fixed account.  Why don't you go out and sit for your Series 6 or 7 exam as well as the life and health exam in your state?  Then maybe you might be able to speak with some amount of authority on these subjects.

TR,

 

Fixed account holders just like sub-account holders pay a Mortality and Expenes fee. Having said that, it might be a little less in the case of the fixed account because there is no need in a fixed account to offer a guaranteed return of premium death benefit. But the fee is being charged because the insurer guarantees future annuity payout rates that were in effect at the time the contribution (premium) payment was made.

 

The Mortality and Expense fee for the fixed account is factored into the declared interest rate and as such is implicit rather than explicit as it is with the sub- accounts in a VA.

 

Peace and Hope,

Joel

TR: If not for the ME fee the insurer would not be guaranteeing future fixed income annuity rates on current premiums/accumulations. It is this insurance risk that makes this financial product/tool an "annuity" otherwise it would be a bank CD.

 

Rather than attempting to mock me why don't you do as I suggested and check this out with an actuary? I assure you I have already done so. He used the following example: Assume a declared interest rate of 5 percent and a $1000 premium payment. He assumed 1.00 percent or $10.00 for ME and specifically said that the $10.00 is deducted from the $1000 leaving the 5 percent interest rate to be applied to $990.00.

 

Please let us know what your actuary says.

 

Peace and Hope,

Joel L. Frank

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Guest TR1982

ScottyD,

Please forgive me for suggesting that there are not index funds in every asset class. What I meant to say is that there aren't many index funds beyond the the large cap classification.

 

Again, however, I reject your finality on this subject. I know that it often makes people feel good to demean others to prove their point but that won't work on me. I have access to research that clearly shows that active management in some asset classes has outperformed their respective indices and benchmarks. To imply otherwise is untruthful and a disservice to others on this board. You know as well as I do that we can easily point to mutual fund managers who have outperformed their benchmarks. That does not mean that all active management is superior to passive management.

 

I am well aware of the research that indicates that the majority of active managers in the large cap arena have not beaten the S&P 500 index over longer periods of time. I don't think, however, that means that passive investing is the only approach to achieving financial goals. I don't think the majority of financial advisors believe that as well. I respect the fact that you take that position and I wish you well in that approach. I just don't think that you are "right" and I am "wrong". I think that attitude does not serve the interests of clients in the long term since we don't know and understand all the factors that influence markets. If we did, we wouldn't be having this discussion and there would be only one mutual fund and everybody would be invested in that fund.

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Guest TR1982

Sierra,

I am not mocking you. I am simply suggesting that you read the prospectus of any fixed and variable annuity product. I did. That is a legal document which represents the product to the consumer. You ignore that and suggest that I talk to an actuary. I just don't think you should say that there is an M&E fee in a fixed annuity product when the prospectus doesn't say that. That is not truthful.

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Guest Sierra

Why do you insist on accusing me of being untruthful when I specifically quoted and example given to me by an actuary? DID YOU READ THE ACTUARY'S EXAMPLE? Please confine your response to the actuary's example and if you disagree please seek out an actuary of your own choosing and see what he/she says. For your convenience here is the actuary's example:

 

================================================

TR: If not for the ME fee the insurer would not be guaranteeing future fixed income annuity rates on current premiums/accumulations. It is this insurance risk that makes this financial product/tool an "annuity" otherwise it would be a bank CD.

 

Rather than attempting to mock me why don't you do as I suggested and check this out with an actuary? I assure you I have already done so. He used the following example: Assume a declared interest rate of 5 percent and a $1000 premium payment. He assumed 1.00 percent or $10.00 for ME and specifically said that the $10.00 is deducted from the $1000 leaving the 5 percent interest rate to be applied to $990.00.

 

Please let us know what your actuary says.

 

Peace and Hope,

Joel L. Frank

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Guest TR1982

Sierra,

I can come on here and "quote" anybody, actuary or not. What is the actuaries name, the name of his firm, and the product they sell. Otherwise, this is my brother's uncle's cousin told me. I work in the world of facts. Show it to me in the prospectus. If I was presenting this to you as a product to buy and took the approach you are taking, you would laugh me out of the room and then probably report me to the NASD.

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TR,

 

It is not demeaning to point out misleading information. If you have evidence that shows that managers outperform their benchmarks consistently then let's see it. The burden of proof is on active managers to prove their value - I never said that active managers don't ever outperform, simply that over time very few do and those few rarely persist and are near impossible to pick in advance. Show me your research to back up your assertion.

 

ScottyD

 

As for the M & E on fixed accounts. There is no explicit M & E fee on fixed accounts, just like there are no explicit fees (other than maybe a contract fee). Of course the insurance company incurs costs, one of them being what Joel points out; this cost is part of the spread, or the difference between what the company earns and pays out. Thus you could say M & E is included but only implicitly. There is no disclosed M & E on a fixed account. In reality you are both right.

 

ScottyD

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Guest TR1982

ScottyD,

Well, I guess demeaning depends on who is being demeaned. Frankly, I am not trying to convince you of my point of view. You are entitled to yours and I respect that. I just don't think there is any value in accusing people of being ignorant. There is plenty of research out there and I am not going to provide it to you to try convince you of something I know I can't convince you of. I agree with FT that there should be opportunity to express different points of view. Let's move on from this, I am getting bored with it.

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WSJ Interactive

The Statistics May Talk, But Investors Don't Listen

By JONATHAN CLEMENTS

 

The numbers don't lie. But investors, it seems, don't want to hear the truth.

 

According to the statistics, most stock-fund managers fail to beat the market, Wall Street strategists often flunk at forecasting and investment newsletters offer mediocre advice.

 

Yet investors keep buying actively managed funds, they keep listening to strategists and they keep subscribing to investment newsletters.

 

What's going on here? There are a handful of explanations for this apparently bizarre behavior:

 

WE THINK WE CAN PICK WINNERS.

 

According to fund researchers Lipper Analytical Services, 86% of diversified U.S. stock funds have lagged behind the Standard & Poor's 500-stock index over the past 10 years. That suggests investors would be much better off purchasing index funds, which simply seek to track the performance of the market averages.

 

Yet we persist in buying actively managed stock funds, because we like to believe that we can overcome the odds and select those 14% of funds that beat the market.

 

"People are overconfident and overly optimistic," says Terrance Odean, a finance professor at the University of California at Davis. "In many respects, this is useful. People who are optimistic tend to be happier, tend to work harder and tend to persevere. The downside is, in financial markets, there's a cost to this overconfidence. People spend too much time and money trying to beat the market."

 

You can read the full story at: http://pages.stern.nyu.edu/~adamodar/New_Home_Page/invmgmt/ch7/actinv.htm

Dan Otter

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Guest Sierra
Sierra,

Hate to break it to you, you're wrong again!  There is no such thing as M&E on a fixed account.  Why don't you go out and sit for your Series 6 or 7 exam as well as the life and health exam in your state?  Then maybe you might be able to speak with some amount of authority on these subjects.

TR,

 

Fixed account holders just like sub-account holders pay a Mortality and Expenes fee. Having said that, it might be a little less in the case of the fixed account because there is no need in a fixed account to offer a guaranteed return of premium death benefit. But the fee is being charged because the insurer guarantees future annuity payout rates that were in effect at the time the contribution (premium) payment was made.

 

The Mortality and Expense fee for the fixed account is factored into the declared interest rate and as such is implicit rather than explicit as it is with the sub- accounts in a VA.

 

Peace and Hope,

Joel

TR: As you can see, I specifically used the word "implicit" in my post of May 3, 2005. Now that Scott has also used "implicit" when describing its application to fixed account holders, are you still going to insist that fixed annuity holders do not pay an ME fee? Or, in the alternative, are you going to ask your actuary of choice and let us know what he/she says? Please get back to us with your decision.

 

 

 

Peace and Hope,

Joel

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Guest Sierra
Sierra,

I can come on here and "quote" anybody, actuary or not. What is the actuaries name, the name of his firm, and the product they sell. Otherwise, this is my brother's uncle's cousin told me. I work in the world of facts. Show it to me in the prospectus. If I was presenting this to you as a product to buy and took the approach you are taking, you would laugh me out of the room and then probably report me to the NASD.

The name of the firm is: CMS Pension Associates, 935 State Highway 34, Matawan, New Jersery. Tel: 732-290-0044. Fax: 732-583-8169. Please get back to us after you speak with them.

 

Peace and hope,

Joel

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