Index Mutual Funds & Spiders (SPY, DIA etc.)
- bob90245
- allancoleman
- Kirk
- bob90245
- Normxxx
- Kirk
- Jas_Jain
- SteveT
- bob90245
- SteveT
This archived discussion is "read only".
« Previous 1 2 3 4 5 Next »
» bob90245 - From the Archive
.http://www.kingcountyjournal.com/sited/s...
Coffeehouse Investor: Play for keeps if you want to be a winner
2000-07-16
by Bill Schultheis
Journal Columnist
It's time to get serious. Baseball's All Star game is over and the pennant races are heating up. Whether your team is on top or 10 games back, every game, every inning counts. This is what baseball is all about. It's time to play for keeps.
Anything can happen in baseball. Just ask the '51 Dodgers. The same is true with the stock market. How about your portfolio? Have you structured your portfolio to weather the unexpected, or does your portfolio consist of a jumbled compilation of stocks and mutual funds accumulated over the past 10 years amid this unprecedented bull market?
Now is the time to prepare for the unexpected. Now is the time to decide if you are going to participate in Wall Street's active attention to security selection, or if you are going to embrace the passive approach to investing, with a little common sense and modern portfolio theory thrown in for good measure.
If a subdued stock market climate does come to pass, this decision is likely to have a profound effect on your future financial well being. Although it means embracing a philosophy unpopular with the Wall Street crowd and maybe even your current financial advisor, this decision also means that you create a portfolio that isn't dependent on anyone's ability to predict the unknown. Rather, it means that you maximize your chances of achieving a financial goal regardless of the unknown.
Why is this important? Coffeehouse Investors realize investing isn't a game.
It is serious stuff. When it comes to choosing among 15,000 stocks and mutual funds for our portfolios, we won't get a second chance 10 or 20 years from now to make the right decisions that need to be made today.
We're investing for keeps.
To put this decision in perspective, let's start at the very beginning.
Over the long haul, your stock portfolio will produce one of three results:
A. Outperform the stock market average.
B. Equal (approximate) the stock market average.
C. Underperform the stock market average.
One of these three results will occur. You can't have it any other way. This is where the great debate and your big decision begins.
On one side of the great debate is Wall Street, which says, rather emphatically, "You should do everything you can to pursue option A in order to beat (outperform) the stock market average! And with 15,000 stocks and mutual funds to choose from we are ready and willing to help you with the enormous task of choosing the right ones." (What else are they going to say?)
On the other side of the great debate is academia (and a few Coffeehouse Investors) who reply, "Hey, hey, hey, Wall Street, not so fast there. We have analyzed your performance and looked at the data, and while your intentions might be honorable, it just ain't happening. To put it bluntly Wall Street, you are talking but you aren't delivering."
You've got to admit academia does have a point. Over the last 15 years, more than 80 percent of all domestic common stock mutual funds have underperformed the stock market average. This is what the great debate is all about.
Wall Street says, "Yes we can!"
Academia says, "So far, you haven't."
Wall Street says, "Yes we can, just look at the few lonely mutual funds that have beaten the stock market average!"
Academia says, "Get real, Wall Street. Identifying the ones that have done well in the past is a lot easier than identifying the ones that will do well in the future."
Wall Street says, "Gulp, uh, well, we still think we can!"
Academia says, "Forget it Wall Street, we have found a better way to invest. We are going to capture the entire return of each asset class and leave it at that (option B)."
The great debate continues. It will never stop. Never.
Most investors either knowingly or unknowingly pursue option A, (beating the stock market average) because that is what Wall Street tells them to pursue.
Unfortunately, there is one small problem with pursuing option A: What do you do when your mutual funds or individual stocks begin to underperform its respective benchmark?" Do you hang on to it, or do you switch it for something else? Eventually, every investor who pursues option A must deal with this dilemma, including large institutional accounts. They convene board meetings to decide whether to fire or rehire underperforming money managers in much the same way you convened your board meeting of one and decided whether to hold on to your dog of a mutual fund or sell it in favor of another one.
What do you do when your investments begin to underperform? Is it possible to remove yourself from this never-ending dilemma of active portfolio management and the unfortunate consequences of option C? Your efforts at maximizing future portfolio returns is dependent on your answer.
Bill Schultheis is author of The Coffeehouse Investor: How to Build Wealth, Ignore Wall Street and Get On With Your Life (Longstreet) and is an investment advisor with Pacific Asset Management. His column runs on Sundays. He is a Seattle resident. E-mail your comments to: Wjs5@aol.com.
-- posted by bob90245
-- posted by allancoleman
» Kirk - How to buy The Coffeehouse Investor:
.In response to message posted by bob90245:
The Coffeehouse Investor: How to Build Wealth Ignore Wall Street and Get on With Your Life by Bill Schultheis
Book Description
Baby Boomers are savings and investing at a rate of 33 percent of what they need to sustain their current lifestyles at retirement. The Coffeehouse Investor shows readers that by focusing more on their passions and creativity, and less on money and the hype and hysteria of Wall Street, they will actually build more wealth and improve the quality of their lives at the same time.
-- posted by Kirk
» bob90245 - Re: How to buy The Coffeehouse Investor:
In response to message posted by Kirk:I recently read this book. However, I'm a little reluctant to recommend it. For example, it doesn't even display the classic "Coffeehouse Portfolio". Nevertheless, it's geared to the casual reader whiling away the hours at a comfy coffeehouse. Schultheis' stories are entertaining, so that part I think the readers will enjoy.
Much of the meat of the book on investing can be read at either his website http://www.coffeehouseinvestor.com and/or on the 'slice and dice' thread.
However, I do think an accessible book in the manner written like The Coffeehouse Investor geared toward investor novices is sorely needed. Surprisingly, the article that I recently wrote is not "simple" enough for these type of readers. This was the feedback I received from my coworkers.
-- posted by bob90245
» Normxxx - Re: Re: How to buy The Coffeehouse Investor:
In response to message posted by bob90245:In the meantime, there is always Paul Merriman's Library
http://www.fundadvice.com/
and weekly radio show
http://www.soundinvesting.com/
Surprisingly, the article that I recently wrote is not "simple" enough for these type of readers. This was the feedback I received from my coworkers.
You have to understand that over 50% of investors think that all CDs are automatically FDIC insured against default, don't know that bond (prices) go down as interest rates rise, and have only the vaguest notion of the difference between stocks and bonds and their relative merits. And, they still think those nice brokers and financial consultants are there to help them.
-- posted by Normxxx
» Kirk - S&P details switch to 'full-float' index
.S&P details switch to 'full-float' index
By John Spence, CBS MarketWatch.com
Last Update: 6:39 PM ET Sept. 28, 2004
BOSTON (CBS.MW) -- Standard & Poor's on Tuesday detailed a plan to shift the composition of key index benchmarks over a phased, yearlong transition.
The changes will bring the S&P 500 (SPX: news, chart, profile), S&P MidCap 400 and S&P SmallCap 600 indices to a so-called full-float adjustment, where only shares available for open market trading will be counted.
Every company in a given index will be affected to some extent as fund managers and institutional investors readjust their holdings, the financial research firm said.
But S&P predicted that the effect from these moves would be minimal.
"Not only does the move to full float adjustment have a modest impact, but nearly 80 percent of the stocks are not affected," said David Blitzer, head of the Index Committee at S&P, in a written statement.
Estimated turnover for the S&P 500 due to float adjustment will be 3.3 percent, S&P said, while turnover for the S&P MidCap 400 and S&P SmallCap 600 is projected at 5.2 and 5.3 percent, respectively.
Annual turnover figures for the three indexes over the last three years were 3.2 percent for the S&P 500, 12.1 percent for the S&P MidCap 400, and 12.5 percent for the S&P SmallCap 600.
"Turnover for float adjustment is comparable to annual turnover in recent years," Blitzer added.
Float adjustment will not result in any selling for 79 percent of S&P 500 stocks, 70 percent of S&P MidCap 400 stocks and 64 percent of S&P SmallCap 600 stocks.
"Float" is the amount of company stock that is available for purchase on open markets, not including shares held by governments, insiders, and cross-held shares.
Most other stock-index providers have already switched to float weighting because it makes tracking benchmarks easier for index funds. S&P first reported its transition plan in March.
"The move to free float is Standard & Poor's response to the evolution of the market," Blitzer said.
Beginning Oct. 15, S&P will publish provisional half-float adjusted and full float-adjusted indexes for its U.S. stock benchmarks. A dozen S&P indexes will be affected.
On Mar. 18, 2005, S&P will shift to half float-adjusted indexes. The transition will be complete on Sept. 16, 2005.
The two-part transition spread out over several months will help index fund managers manage the change, said S&P.
"Gaming against the transition trade is extremely risky because the long transition period exposes any short position to fundamental risk," wrote S&P in a report.
"Further, indexer trading will be spread out as managers use the provisional index to shift at a time of their own choice."
John Spence is a reporter for CBS MarketWatch in Boston.
-- posted by Kirk
» Jas_Jain - Perfect Example of Index Fraud: The Recent Additions to DOW
Perfect Example of Index Fraud: The Recent Additions to DOWTwo latest additions are: AIG and Viagara (PFE). How have they done since they were added? In one word: Horribly.
What were two prior additions? Two tech Scams -- INTC and MSFT. How have they done? Poorly.
Going beyond DOW, when was AOL added to S&P 500? You get the idea.
Jas
-- posted by Jas_Jain
» SteveT - Re: Perfect Example of Index Fraud: The Recent Additions to DOW
In response to Perfect Example of Index Fraud: The Recent Additions to DOW posted by Jas_Jain:Sounds like a great reason to use a total market index. VTI or VTSMX come to mind.
-- posted by SteveT
» bob90245 - Re: Perfect Example of Index Fraud: The Recent Additions to DOW
In response to Perfect Example of Index Fraud: The Recent Additions to DOW posted by Jas_Jain:Some of the index fund providers understand this flaw. You can read more at this link:
-- posted by bob90245
» SteveT - A Collection of Markets
Seems to me one could use this strategy without paying the advisor.
A Collection of Markets
By MARK VEVERKA
WHEN BARRON'S FIRST spoke with Robert Bingham, a principal in Bingham, Osborn & Scarborough, a San Francisco investment advisory, back in 1993, the firm was making a name for itself by investing clients' funds purely in mutual funds. Since then, the growth of mutual funds and the advent of exchange-traded funds have expanded the firm's playing field markedly, and its assets under management have surged to $1.4 billion from $150 million.
Bingham & Co. also have moved upmarket, raising the minimum investment acceptable to $2 million from $250,000. And Boston Private Financial Holdings (ticker: BPFH) recently bought 40% of the firm. But one thing hasn't changed: Bingham still aims to match or beat the returns in each of its markets, and usually succeeds. What funds and ETFs are peaking its interest right now? Read on.
Barron's: What's the idea behind your strategy?
Bingham: We use principally passive-investmentvehicles that are meant to represent markets, rather than active investment vehicles, such as managed mutual funds. We are very oriented toward modern portfolio theory, which essentially tells you public markets are very efficient. Trying to hire a manager who will beat the market is not a worthwhile endeavor. Over the past 20 years, about 80% of large-cap U.S. stock funds have underperformed against the Standard & Poor's 500. The tools in our kit are vehicles that most closely represent markets that we want represented in our portfolios. We use the mutual funds or exchange-traded funds that are the least expensive, with the least amount of turnover.
Has the environment for this sort of investing changed much since Barron's spoke with you in '93?
There is a huge difference. I think the world is coming around to our way of thinking. Back then, if you were looking at pure index funds, you were nearly limited to the Vanguard 500 (VFINX) and some passive funds. The advent of ETFs was a huge change. They really did not exist then. ETFs represent an exciting and innovative new wave of exceedingly inexpensive index funds. In addition to the stalwarts -- the S&P 500 index, or SPDR, and the Nasdaq 100, or QQQQ -- we are using the iShares MSCI EAFE Index Fund (EFA) for foreign large-caps and the iShares S&P 500 Index (IVV). I expect ETFs to proliferate, and we will expand our usage.
How do you go about picking funds and ETFs?
We select the markets we want to represent in our portfolios. We're looking for classes of securities with long-term positive performance and significant degrees of lack of correlation to each other. The work of Markowitz, Sharpe and Miller, who received Nobel Prizes in economics in 1990, demonstrated that combining such uncorrelated asset classes resulted in higher returns for the same risk, compared to nondiversified portfolios.
And after you've selected the markets?
We then look for funds to best represent those markets. We want a fund to closely track the market, to have the lowest possible internal expenses, and to have low turnover. You can always find a group of [actively managed] funds that have outperformed, but unfortunately that outperformance does not predict future outperformance. Low expense and low turnover are much more predictive of future results. We drive the average internal expense ratio of our portfolios down to about 0.35%, compared with the 1.4% average of all mutual funds. Our average annual turnover for stock funds is 10% to 15%, compared with the average stock mutual fund of about 100%. That converts to an additional savings in the realm of 0.75 of a percentage point. So careful cost management can save a portfolio upward of two percentage points.
If we were to peek into one your client's portfolios, what would we probably find?
Our typical portfolio, which is very diversified, will have equity holdings in large-cap U.S., large-cap value, small- cap, small-cap value, micro-cap, real estate, technology and then international large, international small, international-large value, international-small value. And that's just the equity side. The bond side is also extremely diversified, which is quite different than it was years ago.
Let's get to some names -- what are some of the funds you like right now?
We're concerned about continuing pressure on the dollar from large current-account and budget deficits, so we want significant assets in nondollar-denominated securities, usually around 20% of the portfolio. On the bond side, we use the Pimco Foreign Bond Unhedged (PFUAX) -- a good low-expense fund that will perform well if the dollar declines. On the foreign-stock side, we use funds that are unhedged against currency fluctuations: We like the Dimensional Fund Advisors Large Cap International (DFALX), DFA International Small Company (DFISX), DFA International Value (DFIVX) and DFA International Small Cap Value (DISVX). We use DFA funds for the domestic markets, too, in addition to their DFA U.S. Micro Cap (DFSCX). Research indicates benefits from diversifying by value and size in international markets as well as domestic.
Are you worried much about inflation?
We often have 5% of portfolios in commodities, which can now be represented by diversified funds. We specifically use the Oppenheimer Real Asset Class Y (QRAYX) and Pimco Commodity Real Return Strategy (PCRIX) together in portfolios. Oppenheimer is actively managed, but has historically tended to track the Goldman Sachs Commodity Index. Pimco is more technically an index fund following the Dow Jones AIG Commodity Index. Oppenheimer has higher concentrations in oil and energy, while Pimco is more diversified. Commodities are an asset allocator's dream since they are dramatically uncorrelated with both stocks and bonds, but they are also volatile. Needless to say, they have yielded superb results in the past year. We like our U.S. high-quality bond funds to be buffered by inflation-protected treasuries and adjustable-mortgage pools. Pimco and Vanguard have good funds in the former, and Evergreen in the latter.
How about U.S. equities?
To respond to a potentially more subdued and less volatile stock market than we have seen in the past 20 years, we supplement our S&P 500 positions with the Gateway Fund, which sells covered calls and buys deep-discount puts.
What has been your most successful market?
In the past five years, real-estate investment trusts. We use the Vanguard and DFA REIT funds. The run will probably not continue for the next five years. We have been taking profits by rebalancing all along, but they remain part of our portfolios.
When you put together portfolios, how do you size up clients' tolerance for risk?
Unlike a number of firms in our industry, we have no questionnaire that quantifies risk. We find it is much more subjective than that. We discuss with potential clients specific historical returns for different portfolio allocations, and at the same time the maximum negative results that have occurred with those allocations during down markets. That helps us get a sense of the clients' tolerance for downside risk.
You guys are financial planners in addition to an investment adviser. How do you prepare a plan for someone?
By taking into account current assets, future expected returns, inflation and income streams, we can calculate when a client can retire and how much he can expect to spend in retirement. The same methodology can help determine how much clients can give to charities and children.
Your firm recently received an investment by an outside firm. Is that a sign of where the financial-planning industry is headed?
Our industry was spawned in the '70s and '80s, and principals who are now in their 50s or 60s are seeking ways to realize the equity they have built up through the years. And if they are fee-based of a reasonable size, they have accumulated real value in the market- place. The question is: How do you sell your firm, or get out of the business?
You really need institutional help to cash out some of the equity, and so what you are seeing these days is a tremendous amount of interest from banks, such as Wells Fargo, Mellon, and Northern Trust and many oth
What's Boston Private's approach?
Many large banks have acquired wealth- management firms with mixed results. There is often a clash of culture and a major change of investment methodology. Boston Private is a smaller holding company which is acquiring groupings of banks and investment firms in high-net-worth regions of the country, such as San Francisco, Boston, Miami, Los Angeles and Seattle. They want these firms to retain their independent platforms.
What's next?
They have acquired 40% of our firm and can acquire up to 70% in stages over the next three years. This will allow two of the three founding partners to gradually retire, and the remaining founding partner and five additional partners to retain equity and continue to manage the firm without changing its culture or character.
Sounds like a plan. Thanks, Bob.
E-mail comments to editors@barrons.com
URL for this article:http://online.barrons.com/article/SB1129...
-- posted by SteveT
« Previous 1 2 3 4 5 Next »
Please follow the guidelines set forth in the Suite101 Posting Etiquette when adding to the discussion.