Opinion

John Wasik

Broker-sold funds still a hard sell

Jul 9, 2012 16:17 UTC

CHICAGO, July 9 (Reuters) – A recent New York Times story
quoting a former JP Morgan broker who said the company urged its
financial advisers to sell its own commissioned funds over
less-expensive outside products should not have surprised any
educated investors. It has been well-known in academic finance
circles for years that when you add up the fees that brokers
layer on, the value proposition often evaporates.

I have yet to find independent evidence that shows that
broker-sold products outperform noncommissioned index funds over
time on a regular basis. There are, of course, exceptions from
year to year. And of course, some brokers may provide a useful
service if the funds they recommend can equal or top market
returns and meet investors’ needs and goals. But generally the
opposite is true over the long haul.

A comprehensive study conducted by researchers Daniel
Bergstresser, John Chalmers and Peter Tufano, published in 2007,
examined broker- and direct-sold (when no broker was involved in
the transaction) funds from 1996 through 2004. The broker-sold
funds delivered lower risk-adjusted returns – even before
“distribution” costs were subtracted. The results were
consistent across different fund objectives, with the exception
of foreign-stock funds (see).

Investors pay far too much for these underperforming
broker-recommended funds – more than 4.5 percentage points over
direct-sold funds, the researchers found. They even offered a
less-charitable interpretation that brokers “put clients’
interests behind their own interests and the interests of the
fund companies that pay them.”

Building upon this research, one of the largest studies on
this topic ever conducted examined 524 mutual fund families for
the National Bureau of Economic Research, which was published in
2010 (see). The researchers
found that broker-sold funds not only needed to charge higher
fees to cover compensation, they invested less in portfolio
management and earned lower before-fee returns. Could it be that
brokers pitch these funds because they are paid more to sell
them than off-the-shelf, commission-free index funds?

Bill Bernstein’s ways to rewire your brain for investing

Jul 5, 2012 15:18 UTC

CHICAGO, July 5 (Reuters) – Bill Bernstein is both a
neurologist and a money manager, which gives him a unique
perspective on the human impulses that he says typically
short-circuit people’s portfolio decisions. Author of six books,
including “The Four Pillars of Investing,” he says we need to
rewire our brains to do the right things at the right times.

Long a rare voice of wisdom in an increasingly bi-polar
market environment, Bernstein says the trick to smart investing
is “learning how to behave. You have to fight your worst
instincts.”

Here are some behavioral guidelines he suggests:

1. Be careful with advisers.

It’s perfectly understandable if you don’t want to go it
alone in investing because there’s a lot to know and only a few
people are experts. If you choose an adviser, make sure that
they are a fiduciary; they must put your interests above that of
their firm. They also shouldn’t overcharge you, meaning annual
fees of less than 1 percent.

Five money lessons I’ve learned through 10 bear markets

Jul 2, 2012 16:50 UTC

CHICAGO (Reuters) – I turn 55 today. As a member of the baby boom generation who hopes he’s aging like a fine wine and not turning into vinegar, I abhor the idea of losing money again in a 2008-style meltdown.

If I’ve learned anything, it’s that I’m a lousy psychic, so I don’t try to guess what any market will be doing in the future. Having speculated in precious metals, tech stocks and bought and sold at the wrong moments, I’ve made plenty of mistakes and run off the cliff with the flock far too many times. Here are some lessons I learned along the way.

1. Being liquid is golden

Hewing to Ben Franklin’s advice, savings is my top priority. When we hit a family health crisis in 2009-2010, I was glad we had cash reserves and an investment club portfolio of established dividend-paying stocks that I could liquidate.

Is buy and hold dying a quick death?

Jun 29, 2012 15:05 UTC

CHICAGO, June 29 (Reuters) – Portfolio volatility is your
sworn enemy if you’re nearing retirement or market downturns
make you nauseous. But if you’re a buy-and-hold investor – and
believe that stock market risk diminishes over time – you still
need a new course of action.

With high-frequency robotic trading, exchange traded funds
and global news hitting markets at the speed of light, there’s
no reason to believe volatility is going away.

Recent research by Lubos Pastor of the University of Chicago
and Robert Stambaugh of the University of Pennsylvania confirms
this view. In a forthcoming piece in the Journal of Finance,
they examined 206 years of stocks returns and confronted the
conventional wisdom that stock risk declines over time.

Sure things in the age of uncertainty

Jun 25, 2012 18:47 UTC

CHICAGO, June 25 (Reuters) – If there was such a thing
as a global financial uncertainty index, it would be soaring to
a stratospheric level.

The euro zone crisis still festers, 15 major banks were
recently downgraded by Moody’s and the U.S. faces a boatload of
political risk through its year-end of fiscal cliff tax
increases.

Markets are being roiled by volatility, and so bonds have
become like caves – refuges from widespread fear.

Three likely winners in healthcare: John Wasik

Jun 22, 2012 13:37 UTC

CHICAGO (Reuters) – The one thing the Supreme Court will have no impact on as it decides the constitutionality of the Affordable Care Act is the immutable trend in U.S. healthcare: the growing cost of caring for an aging population.

A handful of industries will remain profitable despite the thorny politics of healthcare policy, and the best way to view this volatile situation through the lens of stocks is in the long term.

The annual growth rate in healthcare spending is expected to remain around 4 percent from now until 2014, then ratchet up to 6 percent, according to recent forecasts by the Centers for Medicare and Medicaid Services. In comparison, general consumer prices are rising just under 2 percent on an annualized basis.

Three likely winners in healthcare

Jun 22, 2012 13:34 UTC

CHICAGO, June 22 (Reuters) – The one thing the Supreme Court
will have no impact on as it decides the constitutionality of
the Affordable Care Act is the immutable trend in U.S.
healthcare: the growing cost of caring for an aging population.

A handful of industries will remain profitable despite the
thorny politics of healthcare policy, and the best way to view
this volatile situation through the lens of stocks is in the
long term.

The annual growth rate in healthcare spending is expected to
remain around 4 percent from now until 2014, then ratchet up to
6 percent, according to recent forecasts by the Centers for
Medicare and Medicaid Services. In comparison, general consumer
prices are rising just under 2 percent on an annualized basis.

Four currency strategies for euro/dollar angst

Jun 18, 2012 15:57 UTC

CHICAGO, June 18 (Reuters) – Developing a currency strategy
for your portfolio is like playing a chess game in which the
pieces are the futures of entire countries. Will Greece be able
to form a government and get its act together to keep the euro?
What about Spain and Italy? With the embattled euro and dollar
under a perennial cloud, does it make sense to have currency
strategy for your portfolio at all?

If you’re heavily invested in the securities of one
denomination, adopting a currency hedge may make some sense,
although the direction of currencies is notoriously difficult to
predict. All denominations are subject to political risk, the
economic health of the countries backing it, inflation and
interest rates. And currencies don’t pay a quarterly dividend
like a stock can or have a fixed coupon like a bond. Their
values are determined relative to other currencies and vary
depending upon a number of economic measures. It’s a complex and
volatile brew.

Then, there’s always a concern about currency debasement, or
the fear that countries are printing too much money, which in
turn stokes inflation. While that’s not an immediate concern in
the U.S. or Europe now, it could be if those economies heat up
again. And it could be that conventional wisdom about a
currency’s decline will be wrong long term.

Five contrarian reasons not to refinance

Jun 15, 2012 16:07 UTC

CHICAGO, June 15 (Reuters) – These days, lenders are
incredibly picky when it comes to customers. When I looked into
refinancing a few months ago, a mortgage broker asked for two
years of tax filings, and wanted my accountant to certify them.
Since the savings on a new loan would’ve been minor, I passed.

That’s not the advice you hear most, though, when it comes
to refinancing in today’s rate market. With 30-year loan rates
still under 4 percent, if you know you’re going to stay in your
home for a while – or need to cut payments on other properties
you own – don’t wait.

Unless the U.S. economy goes on life support again, it’s
hard to believe that rates will go any lower – in the June 14
Freddie Mac mortgage survey rates were 3.71 percent for 30-year
loans and 2.98 percent for 15-year notes. Until this week, those
averages showed a quiet six-week streak of record-low rates.

Drill for income with energy stocks

Jun 8, 2012 15:02 UTC

CHICAGO (Reuters) – Whenever the threat of an economic slowdown starts hulking around like a cranky bear, I look to essentials that are important to me as a long-term investor, like energy. Then I consider what investors need most while they watch share prices dip, and that is steady dividends.

Although I have severe reservations about energy companies’ role in global warming – they can be doing much more to promote clean/alternative energy – energy companies that pay healthy, consistent dividends still make sense. They will still make profits drilling for oil and natural gas far into the future, even in the face of falling oil prices.

Good examples of old, healthy dividend payers are Exxon-Mobil and Chevron, two of the largest energy producers on the planet. Even as oil prices gyrate, the total long-term global demand for oil and gas is increasing. And if you’re willing to hold onto these stocks, you can be rewarded over decades.

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