To avoid fiduciary breach claims due to costs, there are several things an investment committee can do to avoid being dragged into court by their participants. 1) Make certain your investment committee is proactive and members either have the expertise to perform or engage those that do. The reality is all fiduciaries have potential liability … Continue reading Staying out of trouble as a fiduciary
Category: 401(k)
The benefits of a US total market index fund
In addition to the low costs, the US total market index funds offer broad diversification. While asset allocation "experts" will say that you need a separate asset class sleeve for US Large, Mid, and Small Cap stocks in your asset allocation approach. The reality is Harry Markowitz, Nobel laureate for Modern Portfolio Theory, said unless … Continue reading The benefits of a US total market index fund
50/50
Assume for a moment that you must pick one of two investment portfolios. The first one is a buy and hold approach, 100% stocks. The second portfolio gets 50% of the upside and 50% of the downside. Which would you pick? For the 2nd approach, the initial investment of $1,000 declined to $764 in less … Continue reading 50/50
The Case for a 2 Asset Class Portfolio
Nobel winner, Harry Markowitz explicitly said in his paper, Portfolio Selection (attached), “It is necessary to avoid investing in securities with high covariances among themselves.” He also said to invest in an asset class one has to have “beliefs about the future performances of available securities.” Therefore the question becomes, how many asset classes are … Continue reading The Case for a 2 Asset Class Portfolio
Picking Active Managers II
In their paper, "Is Manager Selection Worth the Effort for Financial Advisors?," authors, John West, CFA, and Trevor Schuesler, CFA, conclude "manager selection fails to produce positive excess returns, on average" and "trend-chasing behavior leads to poor buy and sell decisions." They find "many advisors put their clients on the "hamster wheel" of manager selection, … Continue reading Picking Active Managers II
Picking Active Managers
To justify hiring active managers, the investor must believe 1. Some portfolio managers have the skill to deliver superior performance. 2. The investor has the talent to identify superior managers. In his paper, "Manager Selection," Scott D. Stewart from the CFA Institute found the with respect to evidence that managers can outperform their benchmarks: "evidence … Continue reading Picking Active Managers
Why index funds may be better for the 401(k)?
It’s not about the mountain of performance research against active funds. It comes down to one term that gets to the heart of 401k plans: reasonableness. Plan sponsors can easily be held liable if a group of participants develops a case in which it can show their investment fund offerings have fees that are not … Continue reading Why index funds may be better for the 401(k)?
Big Three Index Providers – Evaluation xlxs
This index fund overview and worksheet link will guide you for your 401k. Index funds are managed through 'full replication' and/or a 'sampling' strategy. Sampling is used with a large index such as the Barclays Aggregate bond index. Sampling may result in tracking error, the variance in return from the index. For replication, tracking error … Continue reading Big Three Index Providers – Evaluation xlxs
When Diversification Fails
If you believe in asset allocation, then this paper (attached) is for you. In their paper "When Diversification Fails," T Rowe portfolio managers, Sébastien Page, CFA, and Robert A. Panariello, CFA, conclude that "One of the most vexing problems in investment management is that diversification seems to disappear when investors need it the most." Their … Continue reading When Diversification Fails
Where The Black Swans Hide
Author and portfolio manager Meb Faber, of "Where the Black Swans Hide," states, "We continue to advocate that investors attempt to avoid declining markets where most of the volatility lies and conclude that market timing and risk management is indeed possible and beneficial to the investor." Faber's findings certainly make a strong case for avoiding … Continue reading Where The Black Swans Hide
