Harold Evensky CFP® , AIF®
FOREWARNED IS FOREARMED
From an interview at the end of 2018 with Greg Davis, Vanguard’s Chief Investment Officer:
“The bull market in stocks that began in many parts of the world in early 2009 is nearly a decade old. Should investors adjust their expectations?
“Based on our fair-valuation metrics, we expect globally diversified stock portfolios to deliver annualized returns in the 4.5%–6.5% range over the next ten years. That’s roughly half of their long-term historical average return. And it’s roughly a third of their annualized gains since the depths of the financial crisis a decade ago. So, yes, some investors probably are expecting too much from stocks.
“Below our headline expectations for global stock portfolios, which assume dollar-denominated investments, are somewhat higher forecasts for non-U.S. markets and somewhat lower forecasts for the U.S. market. We’re a little more optimistic about stocks outside the U.S. because their valuations are lower.”
And one more observation from an interview with WealthManagement.com:
WM: Do active managers have an edge in volatile markets?
GD: That’s always been the claim, but we haven’t seen the data really bear that out.
His observations are consistent with our expectations.
Vanguard: Our CIO talks expectations, interest rates, and blockchain
WealthManagement.com: Inside ETFs Q&A: Vanguard’s Gregory Davis
SEC’s latest on fiduciary: Advisers can customize individual client agreements
Disclosure and informed consent can limit services, allow third party pay
“When Securities and Exchange Commission chairman Jay Clayton asserted at a congressional hearing last week that investment advisers can ‘contract around’ their obligation to act in a client’s best interests, it caused some head scratching in the adviser community.
In response to being pressed by Sen. Elizabeth Warren, D-Mass., about the SEC’s investment advice reform proposal, Mr. Clayton said: ‘Advisers are allowed to contract around this standard; it’s not well known. This is something we want people to understand.’”
InvestmentNews: SEC’s latest on fiduciary: Advisers can customize individual client agreements
A head-scratcher indeed. All the more reason to be sure your financial advisor signs the OATH. See below in the “FOR SHAME” note for a copy.
What makes this proposal even more incredible are the results of a RAND study commissioned by the SEC Office of the Investor Advocate and published in its 2018 Report on Activities. These were some of their observations:
To understand investor understanding of the term “best interest,” we asked respondents “What do you think it means if a financial professional is required to act in your “best interest?” We offered respondents eight attributes to which they could respond yes, no, or I don’t know. Panel 3 of the infographic on the previous page summarizes three of the responses we want to highlight for the individuals that reported currently using a financial professional for investment advice. Current advice users overwhelmingly believed (86 percent) that a professional required to act in their best interest monitors their accounts on an ongoing basis. This is somewhat of a concern because the best interest standard, as proposed, will apply to broker-dealers who are not required to provide this service as part of their typical offerings. The next two questions relate to cost and conflicts of interest. Seventy-three percent of current advice users believed that a professional acting in their best interest “will help me to choose the lowest cost products, all else being equal.” Sixty-one percent indicated that the professional would “avoid taking higher compensation for selling me a product when a similar but less costly product is available.”
From Panel 3:
That is, most didn’t have a clue.
Asked if financial professionals acting in an investor’s “best interest” would be required to:
- Avoid taking higher compensation for selling one product when a similar but less costly one is available one is available …………………………………………61% said yes
- Help them choose the lowest cost products, all else being equal ……73% said yes
- Monitor their accounts on an ongoing basis …………………………….86% said yes
THESE ARE CURRENTLY NOT REQUIREMENTS FOR THOSE REGISTERED AS BROKERS
From my friend Peter
FROM MY LAST ISSUE
My friend the math professor says don’t try and use this PIN.
“You have an integral divided by a square root, where it appears the square root is not part of the integrand. I don’t see how this can provide a PIN; do you? Even if it were meant to be part of the integrand, there is still something wrong, because x^2-3x+2=(x-2)(x-1).”
Some thoughtful charts prepared by my associate Michael
I checked with my little brother (the Economics Professor at Syracuse) as he has the same porous memory as I do and we agreed we must be brilliant.
Open News: Neuroscientists Say Your Forgetfulness Is A Sign of Extraordinary Intelligence
“The U.S. Just Became a Net Oil Exporter for the First Time in 75 Years”
“‘We are becoming the dominant energy power in the world,’ said Michael Lynch, president of Strategic Energy & Economic Research. ‘But, because the change is gradual over time, I don’t think it’s going to cause a huge revolution, but you do have to think that OPEC is going to have to take that into account when they think about cutting.’
“The shale revolution has transformed oil wildcatters into billionaires and the U.S. into the world’s largest petroleum producer, surpassing Russia and Saudi Arabia. The power of OPEC has been diminished, undercutting one of the major geopolitical forces of the last half century.”
Bloomberg: The U.S. Just Became a Net Oil Exporter for the First Time in 75 Years
I KNOW YOU WANT TO KNOW
Top dog names for 2018 from NPR
#1 Bella Max
#2 Lucy Charlie
#3 Luna Cooper
#4 Daisy Buddy
#5 Lola Jack
NPR: Origins Of The Top Dog Names Of 2018: Pop Culture, Brunch, And Baby Names
MORE NOISE NOT NEWS
New York Times, Friday, December 7, 4:38 a.m.
“The arrest over the weekend of a top executive at Huawei, the Chinese telecommunications giant, has complicated President Trump’s trade talks with Beijing and drawn sharp protests from the Chinese government….
Side effects: The news contributed to whiplash for global markets on Thursday, but things seem more stable today.” [Emphasis mine]
thestreet, Friday, December 7
GOOD ADVICE FROM THE NEW YORK TIMES
“Today, you can invest in the Vanguard 500 Index Fund for as low as 4 basis points. But some legacy index funds—which track the exact same index—charge much, much higher fees than that, and investment gurus say they are simply unjustifiable.”
“The Rydex S&P 500 Index Fund—often considered the poster child of high-fee index funds—charges a net expense ratio of 2.33 percent. That includes a management fee of 75 basis points and 1 percent 12b-1 fee, a reward to the advisor for selling the fund. But there are more than a dozen similar, plain vanilla funds—also tracking the S&P—with net expense ratios over 1 percent. Federated Investors, State Farm and Invesco are just a few providers.”
Note: Data as of Oct. 31; these are widely held, market-cap-weighted, long only funds that track the S&P 500. It does not include funds that go short or use leverage.
It seems Barron’s reached the same conclusion in “Getting Fleeced on Fund Fees.”
“Investors might think index funds are a great way to capture market returns. Most index funds charge practically nothing: One of the largest, Vanguard Total Stock, charges just 0.04% a year; the average stock index fund’s expense ratio is down to 0.09%, less than a dime for every $100 invested. That has dropped from 0.27% in 2000, according to the Investment Company Institute, the fund industry’s lobbying group.
“Yet the industry’s method of calculating fees, on an asset-weighted basis, obscures a surprising fact: Hundreds of billions of dollars are sitting in share classes of index mutual funds that charge well above 1% in annual fees. Many of these funds do nothing more than track broad market benchmarks like the S&P 500. Yet their fees are on par with actively managed funds and, in some cases, even exceed them, topping 1.6% a year.”
“Another pool of high-fee funds sits in variable annuities, insurance contracts that hold stocks, bonds, or other financial assets in “sub-accounts.” Industry-wide, these sub-accounts hold more than $106 billion in index funds with expense ratios averaging 0.59%, according to data from Morningstar. That’s partly because these funds don’t have to compete against low-cost versions that investors may buy outside the insurance wrapper, says Todd Cipperman, founder of Cipperman Compliance Services, a financial consulting firm based in Wayne, Pa.”
“Barron’s found hundreds of funds held in variable annuities with sharply higher fees than what investors would pay for identical funds outside annuity wrappers. The Rydex Variable Nasdaq 100 fund is a popular choice, showing up in sub-accounts issued by carriers such as Nationwide, Principal, and Prudential, according to Morningstar. The fund has an expense ratio of 1.66%, well above the 0.2% for Invesco QQQ Trust (QQQ), an ETF with the identical portfolio. A spokesman for Nationwide said the firm ‘does not set nor establish the expense ratios of third-party funds.’ Principal declined to comment on the expense ratio of the Nasdaq fund. Prudential did not reply to requests for comment.”
WealthManagement.com: The Persistence of High-Fee Index Funds
Barron’s: Investors Might Be Paying Too Much for These Index Funds
Wonder why I keep pitching the Committee for the Fiduciary Standard’s Fiduciary Oath?
Seems like I included a bum link in my last NewsLetter; so I’m trying again:
FINANCIAL PLANNING – A GREAT PROFESSION
If you have a few minutes to kill, this is a link to an interview I did at the Financial Planning Annual Convention: CLICK HERE
10 GOLF COURSES YOU MUST VISIT BEFORE YOU DIE
For our golfer friends and clients
- Cabot Cliffs, Cape Breton, Canada
- Emirates Golf Club, Dubai
- Highland Course At Primland Resort, Meadows of Dan, Va.
- Cape Kidnappers Golf Course, Hawke’s Bay, New Zealand
Here’s an example of these courses:
- Leopard Creek Country Club, Mpumalanga, South Africa
- Yas Links, Abu Dhabi, United Arab Emirates
- Sandy Lane, St. James, Barbados
- Pebble Beach Golf Links, Pebble Beach, Calif.
- El Camaleón Riviera Maya Golf Club, Playa del Carmen, Mexico
- The Blackstone Course at Mission Hills, Hainan, China
FA: 10 Golf Courses You Must Visit Before You Die
MERRILL LYNCH LOWERS MAX ADVISORY FEE TO 2%
Hot off the press from FinancialAdvisor IQ
“Wirehouse Merrill Lynch is dropping the top fees charged to its advisory platform clients for second time in two years…
“The maximum fees such clients will pay effective Jan. 1 will be 2%, according to FundFire. The current fee structure, effective since February 2017, sets the maximum at 2.2% for accounts with less than $5 million and 2% for those with more than $5 million, FundFire writes, citing Merrill Lynch’s March ADV.”
FinancialAdvisorIQ: Merrill Lynch Lowers Max Advisory Fee to 2%
MORE TOPs – THE NATION’S TOP 10 ‘PARTY SCHOOL’ COLLEGES
I’m sure parents of students of these schools are very pleased.
- University of Rhode Island, South Kingstown, R.I., Enrollment: 15,092,
- Colgate University, Hamilton, N.Y., Enrollment: 2,873
- University of Wisconsin-Madison, Madison, Wisc., Enrollment: 32,196
- University of California – Santa Barbara, Santa Barbara, Calif., Enrollment: 22,186
- Lehigh University, Bethlehem, Pa., Enrollment: 5,075
- Bucknell University, Lewisburg, Pa., Enrollment: 3,611
- Syracuse University, Syracuse, N.Y., Enrollment: 15,252
- Tulane University, New Orleans, Enrollment: 6,571
- West Virginia University, Morgantown, Va., Enrollment: 22,504
- University of Delaware, Newark, Del., Enrollment: 18,144
FA: The Nation’s Top 10 ‘Party School’ Colleges
SURE HOPE HE’S RIGHT
“Byron R. Wien, vice chairman in the Private Wealth Solutions group at Blackstone, issued his list of ‘Ten Surprises for 2019’ on Thursday, and it paints a rosier picture than some investors might expect, considering recent market volatility and economic signals.
“This is the 34th year Byron has released his list, which contains his views on economic, financial and political events for the coming year. Byron defines a ‘surprise’ as an event that the average investor would give a one-in-three chance of happening, but which he believes has a better than 50-50 chance of becoming a reality.”
Wien’s surprises for 2019, in his exact words, are as follows:
“Partly because of no further rate increases by the Federal Reserve and more attractive valuations as a result of the market decline at the end of 2018, the S&P 500 gains 15 percent for the year. Rallies and corrections occur but improved earnings enable equities to move higher in a reasonably benign interest-rate environment.”
FA: Byron Wien ‘Surprises’ With Rosy Predictions for 2019
NOT SO GOOD NEWS FOR ACTIVE MANAGERS
From S&P Dow Jones Indices:
ThinkTank: Does Past Performance Matter? The Persistence Scorecard
AND EVEN MORE BAD NEWS
From the recent S&P 500 SPIVA® Institutional Scorecard:
Similar to findings in previous scorecards, more mutual fund managers underperformed than their institutional counterparts for all equity categories on a net-of-fees basis. · For example, over the past 10 years in the large-cap equity space, 89.51% of mutual fund managers and 58.78% of institutional accounts underperformed the S&P 500® on a net-of-fees basis. … · Similarly, during the same period in the mid-cap space, 96.48% (85.37%) of mutual funds and 78.57% (62.98%) of institutional accounts underperformed the S&P MidCap 400® on a net (gross) basis. · Small-cap equity remains a challenging space for active managers. Over 80% of mutual funds underperformed the S&P SmallCap 600® (net- and gross-of-fees), while 81.61% (61.45%) of institutional accounts underperformed on a net (gross) basis in the past 10 years. The findings in the small-cap space help to dispel the myth that small-cap equity is an inefficient asset class that is best accessed via active management.
S&P Dow Jones Indicies: SPIVA® Institutional Scorecard: How Much Do Fees Affect the Active Versus Passive Debate?
QUIZ FOR MY VERY BRIGHT FRIENDS WHO ARE ALSO FORGETFUL
From my bright friend, Leon. There are nine questions.
These are not trick questions. They are straight questions with straight answers.
- Name the one sport in which neither the spectators nor the participants know the score or the leader until the contest ends.
- What famous North American landmark is constantly moving backward?
- Of all vegetables, only two can live to produce on their own for several growing seasons. All other vegetables must be replanted every year. What are the only two perennial vegetables?
- What fruit has its seeds on the outside?
- In many liquor stores, you can buy pear brandy, with a real pear inside the bottle. The pear is whole and ripe, and the bottle is genuine; it hasn’t been cut in any way. How did the pear get inside the bottle?
- Only three words in standard English begin with the letters “dw” and they are all common words. Name two of them.
- There are 14 punctuation marks in English grammar. Can you name at least half of them?
- Name the only vegetable or fruit that is never sold frozen, canned, processed, cooked, or in any other form except fresh.
- Name 6 or more things that you can wear on your feet beginning with the letter ‘S.’Answers to Quiz:
- The one sport in which neither the spectators nor the participants know the score or the leader until the contest ends: boxing.
- North American landmark constantly moving backward: Niagara Falls. The rim is worn down about two and a half feet each year because of the millions of gallons of water that rush over it every minute.
- Only two vegetables can live to produce on their own for several growing seasons: asparagus and rhubarb.
- The fruit with its seeds on the outside: strawberry.
- How did the pear get inside the brandy bottle? It grew inside the bottle. The bottles are placed over pear buds when they are small, and are wired in place on the tree. The bottle is left in place for the entire growing season. When the pears are ripe, they are snipped off at the stems.
- Three English words beginning with “dw”: dwarf, dwell, and dwindle.
- Fourteen punctuation marks in English grammar: period, comma, colon, semicolon, dash, hyphen, apostrophe, question mark, exclamation point, quotation mark, brackets, parenthesis, braces, and ellipses.
- The only vegetable or fruit never sold frozen, canned, processed, cooked, or in any other form but fresh: Lettuce.
- Six or more things you can wear on your feet beginning with “s”: shoes, socks, sandals, sneakers, slippers, skis, skates, snowshoes, stockings, stilts. Don’t send it back to me. I’ve already failed it once.
From JP Morgan’s most excellent Market Insights:
TELL ME IT’S NOT TRUE!
NPR: Woodstock Will Return This Summer, For Its 50th Anniversary
Ancient termite megapolis as large as Britian found in Brazil
CNN travel: Ancient termite megapolis as large as Britain found in Brazil
Many Americans Think Proof Of Bigfoot Is More Likely Than A Comfortable Retirement
“It’s no wonder one in three Americans believe they have a better chance of learning the mythical creature Chewbacca is real than retiring comfortably, given their current dearth of savings and retirement planning. Many simply aren’t saving anything and have no plan to start in 2019. Fewer than half (47%) of working Americans in their 40s and 50s with household incomes from $40,000 to $99,999 said retirement was one of their top three savings priorities for 2019, according to a new AARP-Ad Council survey. Just 21 percent said saving for retirement is their top priority for the new year.”
FA: Many Americans Think Proof Of Bigfoot Is More Likely Than A Comfortable Retirement
NOT SO UNIQUE
A little perspective from Barron’s (12/28/2018):
Barron’s: Sizing Up the Market’s Recent Volatility
Winners of the Epson International Pano Award contest from my friend Leon. Lots more at:
DailyMail.com: Lightning striking the Grand Canyon and a magical dive into an abyss: The stunning winners of the panoramic photography awards revealed.
Zoom the page up for more dramatic views:
A distraught senior citizen phoned her doctor’s office. “Is it true,” she wanted to know, “that the medication you prescribed has to be taken for the rest of my life?”
“Yes, I’m afraid so,” the doctor told her. There was a moment of silence before the senior lady replied, “I’m wondering, then, just how serious is my condition because this prescription is marked ‘NO REFILLS.’”
An older gentleman was on the operating table awaiting surgery and he insisted that his son, a renowned surgeon, perform the operation. As he was about to get the anesthesia, he asked to speak to his son.
“Yes, Dad, what is it?”
“Don’t be nervous, son; do your best, and just remember, if it doesn’t go well, if something happens to me, your mother is going to come and live with you and your wife….”
(I LOVE IT!)
The older we get, the fewer things seem worth waiting in line for.
When you are dissatisfied and would like to go back to youth, think of Algebra.
Now, if you feel this doesn’t apply to you, stick around awhile … it will!
SPEAKING OF OLDER
I graduated from high school in 1960. Here are some sobering facts from that year:
Movie ticket…………………………….51 cents
Best Picture……………………………”The Apartment”
Best Actor………………………………Burt Lancaster, “Elmer Gantry”
Best Actress……………………………Elizabeth Taylor, “Butterfield 8”
“It’s Now or Never,” Elvis Presley
“I’m Sorry,” Brenda Lee
“Running Bear,” Johnny Preston
“Teen Angel,” Mark Dinning
“The Twist,” Chubby Checker
“Alley Oop,” Hollywood Argyles
Those were the good old days!
LAST MINUTE ADDITION
Jack Bogle, founder of Vanguard and a beautiful person just passed away. Below is a wonderful tribute by Ron Lieber in the New York Times.
The New York Times: The Things John Bogle Taught Us: Humility, Ethics and Simplicity
Hope you enjoyed this issue, and I look forward to “seeing you” again.
Evensky & Katz / Foldes Financial Wealth Management