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Buy & hold vs. financial behavior: 'Frontline' asks the wrong questions

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The battle endures. No one much writes about this war much, except maybe me. A “Frontline” piece on PBS a few months ago partially argued that fiduciary standards for advisors and brokers were better than suitability standards. And the piece did a lot more, angering many. The show:

                Lambasted suitability;

                Vilified retirement plan results;

                Attacked financial advisors and retirement plans;

                Did not spend time on the most important things of all: the financial psychology of how investors behave and how some brokers and advisors behave;

                Spent a helluva lot of time on 401(k) plans; and

                Did not discuss the ethical pledges of ChFCs, CLUs and CFPs or the roles of employers and pension providers.

In other words, PBS’s “Frontline” gave a one-sided, Bogle-centric and extremely incomplete picture of the investing world. It was the worst kind of journalism: incomplete storytelling.

See also: My conversation with Frontline


Jack Bogle, the founder of Vanguard, built his firm on indexing. He has long held that indices are the very best way for everyone to invest. The fees are lower and the results are better, he says again and again. That’s true some of the time, but not all of the time.

For example, in three recent blogs, I proved, without a great deal of thought, that a simple Franklin Templeton portfolio using high-expense C-shares over the 12.25-year period ending March 31, would have creamed the S&P 500 index dramatically. (I also promised that I could have realized about the same result with Fidelity Advisor funds or American Funds.) In a subsequent blog, I demonstrated that one stock, Berkshire Hathaway B — with high expenses tacked on, just to make it tough — would have also decimated the S&P 500 index, despite the fact that the 12.25 years contained the worst decade in Berkshire history. In a third blog, I ran the S&P, via SPY, with zero expenses, and it was barely half as good.

Mr. Bogle may be right some of the time, but he’s not right all of the time, and, with the advent of electronic trading — computers awaking and springing into action, buying, selling or shorting, triggered by a gazillion software algorithms reacting to any and all news affecting the stock market — he may be right much less of the time than he was in the last century.

“Frontline” lionized Mr. Bogle and indexing.


Pensions, generally

The ubiquitous 401(k) plan was widely adopted because it was (1) a cheap date with very low expenses; and (2) shifted the risk-taking from the employer to the employee. There are other good reasons — for example, employers could not trust themselves to use a long-term conservative interest rate in defined-benefit assumptions. When employers hit a home run in defined-benefit interest, earning say 10 percent in a year, the employer would then lobby regulators to allow raising the rate assumption. This would require less in the way of deposits — robbing Peter and never even trying to pay Paul back — and the employers would instead use the funds for current non-retirement expenses. This ultimately created a woefully underfunded, unsupportable and unsustainable monster.

Big company pensions

It’s popular to think that it’s to everyone’s best interest to make a 401(k) plan work well for employees — after all, executives are employees too, right? To the contrary, most people in big-company executive suites make money in stock, salary, bonuses and options. Big companies want cheap 401(k)s, not good 401(k)s. Increasingly, CEOs act like royalty, using companies as fiefdoms — there is often little accountability to shareholders or to employees.

Small businesses — the heartbeat of America

Small-business owners — some small businesses are larger than you might think — often make most of their money when they sell their company down the road, at or near retirement age. Again, the 401(k) is often a relatively small piece of the pie, and again, the incentive is on cheap over good.

Advisors specializing in 401(k) plans

There are two kinds of advisors in this space. One handles maybe one or two plans because he or she handles investments for the owners. The other is an individual or firm who does nothing but 401(k) plans. In either event, the advisor compensation is lousy, and therefore, the portfolio work sinks in order to meet the level of pay.

I once handled a 401(k) plan for close to 12 years, and the participants had good results. (I charged 1 percent or so and more than 90 percent of employees used my portfolios.) At the end, though, portfolio expertise and results lost out to low costs.

Payroll accounting firms

This seems cost efficient, since such firms handle payroll reporting and the issuing of payroll checks or deposits for businesses; they have all the employee big data in house. In practice, costs are the winner and portfolios the loser.

Human resources

At most businesses, human resources drives retirement plans. Think about it for a minute: are the human resource folks you know likely to be good portfolio people? Or do you think they find the cheapest way that affords zero liability?

The right stuff

I argue that the right pension approach was the original defined-benefit concept. Clearly, however, it is not a good idea to have the funding requirements controlled by regulators very susceptible to the blandishments of political appointees — men and women essentially dependent on the need for reelection funding through lobbyists, i.e. the dark side of government.

There’s something bland and reassuring about retiring on 5 percent of your pay times the number of years of service to some maximum, plus Social Security. It was also nice to have an insured plan, whereby the dependent spouse got a fully funded benefit if the worker died pre-retirement.

There’s nothing wrong with the Pension Benefit Guaranty Corporation, designed to make retirements whole for employees when a company goes under, except that the federal insurance plan seems to be underfunded. Why? Because employers don’t contribute enough, probably at least partially for the reason outlined in the diatribe several paragraphs ago. Do employers confuse the good defined-benefit result in an occasional year as an excuse to fund less in following years, by adding higher interest assumptions? And do employers protect less by lobbying for or otherwise avoiding required contributions?

Back to the future401(k)s

Frontline” lambasted financial advisors and fund companies and lionized Jack Bogle. (I have nothing against Mr. Bogle and admire him for founding Vanguard and helping thousands of people with investments during his career — he is now retired, an emeritus; yet he’s still a prolific writer.) The show never addressed the No. 1 problem, which is investor psychological behavior — the herd approach to investing that always sends people scurrying for the exits when things are temporarily bad and gets them buying like crazy when things are temporarily good.

And this investing behavior applies as much to Vanguard as anywhere else. “Frontline” didn’t go deep — it went for the shallow performance, an easy-peasy way to look at serious problems and make the solutions seem simple when they are quite complicated. When you get down to it, few people or organizations know much about investing, especially the news readers and writers (a.k.a., anchors and reporters) who scream fire when anything bad happens in the world economy or, for that matter, in any country. The media makes the failure of a minor country with a Rhode Island-sized economy sound like the end of everything, a colossal pandemic.

What works

If you have the fortitude for it and some portfolio chops, buy-and-hold investing absolutely works. In the 12.25-year examples, I used $1 million deposits and high expenses and withdrew over $800,000 over the time span, winding up with more than $1.3 million at the end, except when I used the index. With the Bogle approach, my income and the ending results were halved. It’s a new world.

My suggestion? Use carefully designed buy-and-hold portfolios and communicate with customers so they stay the course. Or go tactical by using firms like The Sherman Sheet, Dynamic Portfolio Strategies and/or good SMAs like Weatherstone (Good Harbor) U.S. Tactical Core and/or its sector and country rotation programs. BTS has good programs too, as does WEDCO — its Power Dividend Index seems to be building a find track record.

If you know of other good ideas, don’t be bashful about writing to me, okay? Let me know.

Did I mention Berkshire Hathaway B? It’s like a good-but-cheap mutual fund, with more than70 companies owned outright and significant positions in others. Did I mention RBS TrendPilot? Its TBAR ticker tries to go to cash when gold is bad and the other way when the yellow stuff is good, and it does the same thing with mid-caps, through TRNM.

There are now flexible choices everywhere — consider Invesco Balanced-Risk Allocation and Virtus Premium Alpha Sector. Older funds like Ivy Asset Strategy and BlackRock Global Allocation have always been flexible. Here are some phone numbers. You may easily find the funds mentioned on your own.

Weatherstone   (800) 690-5918

BTS               (800) 343-3040, ext. 351

WEDCO       (401) 954-7220

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