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When a Chinese Wall Is Not Something to Toy With

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by Mark Hebner and IFA Contributors
Monday, December 22, 2014

In the wake of the dot-com bust of the early 2000s, you may recall how we were promised that going forward there would be a “Chinese wall” or a “firewall” between the research and investment banking departments of the Wall Street investment banks ...Read More

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  • Americans Continue to Get Failing Grades on Retirement Readiness

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    by Mark Hebner and IFA Contributors — Friday, December 19, 2014

    We have published many articles about the woeful state of financial literacy in America. Just when we thought it could not get any worse, along comes this story from the American College of Financial Services. A little over 1,000 people age 60-75 with at least $100,000 of ...Read More

  • Some Interesting New Data on 401(k) Plans

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    by Mark Hebner and IFA Contributors — Thursday, December 18, 2014

    BrightScope and the Investment Company Institute recently collaborated to produce this report on the current state of 401(k) plans based on BrightScope’s database of over 35,500 plans. As of 6/30/2014, of the $24.0 trillion of U.S. retirement plan assets, 401(k) plans ...Read More

  • A Golden Age for Active Investing? We Think Not!

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    by Mark Hebner and IFA Contributors — Wednesday, December 17, 2014

    Alexander Friedman of GAM Holding AG recently opined on CNBC.com that (to paraphrase Mark Twain) the recent reports of the demise of active managers are greatly exaggerated. Friedman acknowledges the mass migration from active to passive, noting that passive funds now account ...Read More

  • A Respectful Disagreement with St. Jack

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    by Mark Hebner and IFA Contributors — Tuesday, December 16, 2014

    Anyone who has spent a significant amount of time on our Website will know that we have nothing but the highest respect for Jack Bogle, the Father of Indexing for Retail Investors. Recently, however, we saw this Bloomberg article where Bogle said that he would not risk investing ...Read More

  • Mark Hebner and IFA Contributors

    What the Cap Rate from Real Estate Teaches Us about Investing

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    by Mark Hebner and IFA Contributors — Monday, December 15, 2014

    The capitalization rate (or cap rate) on a real estate investment property is defined as its yearly net income divided by its price. For example, suppose we have two apartment buildings, both of which have net rental income of $1 million. The first one (which we will call ...Read More

  • What Can We Read into the Increase in the VIX Index?

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    by Mark Hebner and IFA Contributors — Friday, December 12, 2014

    As noted in this CNBC article, The CBOE Volatility Index (VIX) which is widely interpreted to be an indicator of fear has risen by 40% (actually 57% based on the 12/10/2014 close) over the three trading days ending 12/10/2014. VIX measures the market’s expected short-term ...Read More

  • Living with Volatility, Again

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    by Jim Parker — Thursday, December 11, 2014

    Volatility is back. Just as many people were starting to think markets only ever move in one direction, the pendulum has swung the other way. Anxiety is a completely natural response to these events. Acting on those emotions, though, can end up doing us more harm than good. ...Read More

  • Two Nobel Laureates—Two Views of Smart Beta

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    by Mark Hebner and IFA Contributors — Thursday, December 11, 2014

    Smart beta appears to be all the rage in the investment world right now. According to this Financial Times article citing Morningstar data, there were 673 smart beta exchange-traded products representing just under $400 billion as of 6/30/2014. In one of our recent articles, we ...Read More

  • Even More Bad News for Active Managers

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    by Mark Hebner and IFA Contributors — Wednesday, December 10, 2014

    On the heels of this story that we just published regarding the difficult times faced by active managers of large cap funds comes this piece from Reuters which states, “Stock-picking fund managers are testing their investors’ patience with some of the worst ...Read More

  • Fallen Oil Prices: A Nice Tailwind for the Market

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    by Mark Hebner and IFA Contributors — Thursday, December 4, 2014

    One of the leading market-related stories of 2014 is the drop in oil prices. From the beginning of the year through the end of November, the price per barrel has dropped by about 33%, closing at just under $66. While this may be considered bad news for the energy ...Read More

  • Large Cap Active Managers on Track for Record Low Performance

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    by Mark Hebner and IFA Contributors — Wednesday, December 3, 2014

    As we were enjoying our Thanksgiving Day weekend, this Jason Zweig column in the Wall Street Journal caught our attention.  Zweig quotes Denys Glushkov, a senior researcher at Wharton Research Data Services at the University of Pennsylvania, as saying that only 9.3% of ...Read More

  • An Enormous Waste of Money

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    by Mark Hebner and IFA Contributors — Friday, November 28, 2014

    Just how much do investors spend every year on active management fees in pursuit of the ever-elusive alpha? How does $600 billion (or roughly the GDP of Switzerland) grab you? This unfathomably large number appears in a recent whitepaper from State Street’s Center for ...Read More

  • Ebola Stocks: Avoid them like the Plague!

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    by Mark Hebner and IFA Contributors — Wednesday, November 26, 2014

    So says the U.S. Securities and Exchange Commission (SEC) which recently suspended trading for ten business days in the stocks of four companies that claim to be developing products or services in response to the Ebola outbreak. Also, the SEC issued an Investor Alert warning ...Read More

  • Some Interesting Facts about the Ultra Wealthy

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    by Mark Hebner and IFA Contributors — Tuesday, November 25, 2014

    A few days ago, a client directed our attention to this CNBC article about ultra-high net worth (UHNW) people around the world. According to a report issued by UBS and Wealth-X, individuals worth $30 million more now number 211,275, making up .004% (1 in every 25,000) of the ...Read More

  • Vanguard Studies the Performance of College Endowments

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    by Mark Hebner and IFA Contributors — Monday, November 24, 2014

    Every Year, the National Association of College and University Business Officers (NACUBO) releases its study of the performance of college endowments. From the data in their press release, we created this chart showing that for the ten-year period ending 6/30/2013, endowments of ...Read More

  • Can You Rely on Mean Reversion to Outsmart the Market?

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    by Mark Hebner and IFA Contributors — Friday, November 21, 2014

    Mean reversion is the idea that following a period of above-average returns, there is more likely to be a period of below-average returns and vice versa. It can be applied not just to the overall stock market but to different segments of ...Read More

  • What Some Researchers Learned from Visits to Financial Advisers

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    by Mark Hebner and IFA Contributors — Thursday, November 20, 2014

    “The Market for Financial Advice: An Audit Study” is a working paper from the National Bureau of Economic Research. The three authors set up 284 contrived visits to Boston-area financial advisors in 2008. They sent trained, professional auditors to impersonate ...Read More

  • Currency Trading: How to Be Quickly Parted from Your Money

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    by Mark Hebner and IFA Contributors — Wednesday, November 19, 2014

    Regarding currency trading, you may have recently seen or heard a commercial such as this one which we found highly reminiscent of the brokerage commercials that aired during the 1990s portraying fictitious aggressive traders who had struck it rich through their on-line trading ...Read More

  • Smart Beta: Nothing New Under the Sun

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    by Mark Hebner and IFA Contributors — Tuesday, November 18, 2014

    In our daily perusal of investment-related articles, we came across this article1 from the Financial Times claiming that “smart beta is eating active managers’ lunch.” As we have previously noted, smart beta is just another term for exposure to the dimensions ...Read More

  • The Funded Ratio: An Actuarial Approach to Retirement Spending

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    by Mark Hebner and IFA Contributors — Monday, November 17, 2014

    In a recent Financial Professional Outlook, Russell Investments surveyed 234 financial advisors across 145 investment firms nationwide. According to their results, 60% of advisors said that more than half of their clients are near or in ...Read More

  • Understanding the Different Types of Retirement Plan Fiduciaries

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    by Mark Hebner and IFA Contributors — Friday, November 14, 2014

    The Employee Retirement Income Security Act (ERISA) defines the roles and responsibilities of various fiduciaries for defined contribution retirement plans. In this article, we will attempt to clarify what some people consider to be a confusing ...Read More

  • Popularity: An Elegant New Paradigm for Understanding Risk and Return

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    by Mark Hebner and IFA Contributors — Thursday, November 13, 2014

    The recently published 40th anniversary issue of the Journal of Portfolio Management features an article titled “Dimensions of Popularity” by Roger Ibbotson and Thomas Idzorek. Ibbotson is perhaps best known for his iconic Stocks, Bonds, Bills, and Inflation which he ...Read More

  • Q&A with IFA: Is Private Real Estate Superior to Publicly-Traded REITs?

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    by Mark Hebner and IFA Contributors — Wednesday, November 12, 2014

    Question: I have heard that private real estate deals offer higher yields or better returns than publicly-traded real estate investment trusts (REITs). Is it worth my time to seek out private real estate investments for that portion of my portfolio? Answer: It is our opinion ...Read More

  • When a "Happiness Letter" Is Not Cause for Celebration

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    by Mark Hebner and IFA Contributors — Tuesday, November 11, 2014

    One of our favorite financial columnists, Jason Zweig of the Wall Street Journal, wrote this piece warning clients of brokerage firms to beware of “happiness letters”. Even though we thought we knew pretty much everything there is to know about brokerage firm ...Read More

  • Pimco Continues to Bleed Cash

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    by Mark Hebner and IFA Contributors — Monday, November 10, 2014

    Since the departure of Bill Gross from Pimco on September 26th, its flagship Total Return fund has suffered investor withdrawals of $51 billion, according to this excellent Wall Street Journal article by Kirsten Grind. For the month of October, $27.5 billion departed, and it ...Read More

  • A Great New Video: How to Win the Loser's Game [VIDEO]

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    by Mark Hebner — Friday, November 7, 2014

    Here is a full-length landmark documentary by SensibleInvesting.tv, How to Win the Loser’s Game.  It is well worth your time to watch every minute of it.  It is about 80 minutes long and contains interviews with some of the biggest names and brightest ...Read More

  • The 40th Anniversary of a Classic Investment Article

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    by Mark Hebner and IFA Contributors — Friday, November 7, 2014

    We have recently marked the 40th anniversary of Nobel Laureate (and father of random walk theory) Paul Samuelson’s Challenge to Judgment which originally appeared in the Journal of Portfolio Management. This was one of two articles from Samuelson that provided the ...Read More

  • The Darkest of Days for Active Management

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    by Mark Hebner and IFA Contributors — Thursday, November 6, 2014

    “Active management has never been in worse repute—this is the darkest of days.”                         --John Rekenthaler, Vice President of ...Read More

  • Christopher Dennistoun

    Livermore and Cutten—Rarer than Lions in Tennessee

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    by Christopher Dennistoun — Wednesday, November 5, 2014

    Edwin Lefevre’s, Reminiscences of a Stock Operator, is possibly the greatest book on the stock market ever written. But while every trader knows it by repute, most of us fail to appreciate its lessons. It was first published in The Saturday Evening Post appearing in 11 ...Read More

  • The Wisdom of a Stock Operator

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    by Mark Hebner and IFA Contributors — Sunday, November 2, 2014

    “Stock operator” is a term that is now obsolete. It essentially describes someone who makes a living by trading or speculating in individual stocks. Given the computerization of trading with the competition to obtain information whose age is measured in nanoseconds, ...Read More

  • Towers Watson Revisits the Gotrocks Family

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    by Mark Hebner and IFA Contributors — Friday, October 31, 2014

    In his 2005 shareholder letter, Warren Buffett envisioned a hypothetical family (the Gotrocks) who just happened to own all the companies in America. While each family member could have been content to simply collect their dividends, some of them hired “helpers” to ...Read More

  • Investors Continuing to Be Their Own Worst Enemy—Evidence from the Fed

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    by Mark Hebner and IFA Contributors — Thursday, October 30, 2014

    With the S&P 500 Index up about 170% from its low point in March of 2009, investors should have cause for rejoicing. Unfortunately, it now appears that many investors were there for the risk but did not stick around for the return, according to the Federal Reserve’s ...Read More

  • Enhancing Returns in Passively Managed Bond Funds

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    by Mark Hebner — Wednesday, October 29, 2014

    While the title of this article may seem like an oxymoron, it definitely does not refer to the activity of seeking out mispriced bonds, for the bond market is efficient, with prices incorporating investor expectations of future cash flows and the risk-adjusted discount rates ...Read More

  • Can Managers Pick Managers?

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    by Mark Hebner and IFA Contributors — Tuesday, October 28, 2014

    Your mother may have taught you that cheaters never prosper, but what about copycats? When it comes to mutual fund managers, the answer is sometimes, but not for long, at least according to three researchers from the US and the UK who released this paper quantifying the ...Read More

  • More Troubled Waters for Hedge Funds

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    by Mark Hebner and IFA Contributors — Monday, October 27, 2014

    A few months ago, we published this article about the difficulties faced by hedge funds and alternative strategy mutual funds in delivering acceptable returns to their shareholders. Since that time, the situation appears to have worsened for hedge funds, according to this ...Read More

  • Memo to Pimco: Don't Mess with St. Jack!

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    by Mark Hebner and IFA Contributors — Friday, October 24, 2014

    Those of us who follow the financial media have been treated to a verbal slugfest featuring the Father of Retail Index Funds, Jack Bogle, going against Pimco Managing Director James Moore. It began with Mr. Bogle stating that Pimco investors who had chosen to withdraw their ...Read More

  • IRS Increases Allowed Retirement Plan Contributions for 2015

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    by Internal Revenue Service — Thursday, October 23, 2014

    The Internal Revenue Service today announced cost‑of‑living adjustments affecting dollar limitations for pension plans and other retirement-related items for tax year 2015. Many of the pension plan limitations will change for 2015 because the increase in the cost-of-living index ...Read More

  • Pension-Gate: The Repercussions of CalPERS' Hedge Fund Decision

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    by Mark Hebner and IFA Contributors — Thursday, October 23, 2014

    About a month ago, we published this article about the $300 billion California Public Employees’ Retirement System (CalPERS) deciding to terminate its $4 billion hedge fund program. Today, we were pleased to see this article in the Wall Street Journal indicating that other ...Read More

  • When a White Paper Should Be Ignored

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    by Mark Hebner and IFA Contributors — Wednesday, October 22, 2014

    In the investment industry, a claim that is backed up by a white paper takes on an aura of invincibility or unassailability. We at Index Fund Advisors find this to be an unfortunate state of affairs, for as we have previously noted, white papers are not necessarily ...Read More

  • How to Improve Your Economic Forecast

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    by Mark Hebner and IFA Contributors — Tuesday, October 21, 2014

    Knowing that we at Index Fund Advisors do not engage in economic forecasting, you can safely assume that the above title is meant to be facetious, just like this Wall Street Journal opinion piece titled “Government Forecasters Might as Well Use a Ouija Board” by ...Read More

  • The Google Effect?

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    by Jim Parker — Monday, October 20, 2014

    What can’t Google do? Free email, customized searches, maps, apps, browsers, video—the list goes on. Now researchers claim to have found a link between Google searches and future stock market movements.Researchers at Warwick Business School in the UK and Boston ...Read More

  • The Five Qualifications of a Risk Premium

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    by Mark Hebner and IFA Contributors — Monday, October 20, 2014

    How can we determine whether or not we have identified an exploitable risk premium—a source of higher expected returns that we can implement in our portfolios? To understand the concept of a risk premium, imagine that the only available investment is Treasury Bills, widely ...Read More

  • Year-End Fund Distributions & Portfolio Management

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    by Tom Allen and Mark Hebner — Friday, October 17, 2014

    At Index Fund Advisors, it is standard operating procedure for us to tailor how we manage client portfolios at year-end in anticipation of dividend and capital gains distributions from the mutual funds that we buy. Dimensional Fund Advisors (DFA) provides us with their estimates ...Read More

  • When Stock Speculation Was Rampant in San Francisco

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    by Mark Hebner and IFA Contributors — Tuesday, October 14, 2014

    About a decade after the California Gold Rush came a silver rush resulting from the discovery of the Comstock Lode in Nevada. What distinguished the latter from the former was that the bulk of the people who expected to get rich from it did not go out there with ...Read More

  • Supreme Court: Time Doesn't Heal All Wounds

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    by Mark Hebner and IFA Contributors — Monday, October 13, 2014

    We are quite pleased to learn about two recent court rulings on a topic that is very important to us, fiduciary protection in retirement plans. Both rulings rejected arguments that the plan sponsor defendants were protected from compensating plan participants for imprudent fund ...Read More

  • The Little Known Retirement Savings Vehicle – Cash Balance Plans

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    by Tom Allen and Mark Hebner — Friday, October 10, 2014

    Saving for retirement always seems like a monotonous topic of discussion – the party killer if you will. Terms like 401(k), Safe Harbor, salary deferrals, Roth contributions, do not draw the same amount of excitement as celebrity gossip, the upcoming weekend of football, ...Read More

  • A Summary of the 2005 SEC Study of Pension Consultants

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    by Mark Hebner and IFA Contributors — Friday, October 10, 2014

    In 2005, the Securities and Exchange Commissions (SEC) published a study of investment consultants who are hired by pension plans to pick managers for them. The SEC conducted focused examinations of twenty-four pension consultants, representing a cross-section of the pension ...Read More

  • Do Investment Consultants Add Value?

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    by Mark Hebner and IFA Contributors — Thursday, October 9, 2014

    Large institutional investors such as foundations, endowments, and pension plans spend billions of dollars on investment consultants on whom they rely to pick active managers. Recently, three researchers (two from Oxford University and one from the University of Connecticut) ...Read More

  • Yet Another Problem with Active Investing: Manager Turnover

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    by Mary Brunson and Mark Hebner — Thursday, October 9, 2014

    The surprise exit of Bill Gross from PIMCO likely has scores of investment committee members scratching their heads, wondering how to handle their fixed income mandates. Gross had fostered a stunning reputation for active bond management, racking up more than 26 years at the ...Read More

  • A Second Look at the Indian Mutual Fund Landscape

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    by Mark Hebner and IFA Contributors — Wednesday, October 8, 2014

    About eight months ago, one of our contacts in India (Jatin Visaria) sent us an analysis of fifty of the largest mutual funds domiciled in India that had at least fourteen years of returns data. We published this article discussing the results of that analysis. Recently, Jatin ...Read More

  • Is Diversification Still Your Buddy?

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    by Mark Hebner and IFA Contributors — Monday, October 6, 2014

    The title above refers to a famous quote from Nobel laureate Merton Miller, who was a teacher to the Father of Modern Finance, Eugene Fama. It also refers to the fact that for the first three quarters of 2013, most of the diversifiers we use with respect to the ...Read More

  • The Third Quarter of 2014 in Review

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    by Mark Hebner and IFA Contributors — Thursday, October 2, 2014

    In the third quarter of 2014, equities pulled back around the world, particularly for international developed markets. Portfolios tilted towards small cap and value companies performed worse than portfolios tilted towards large cap and growth companies. During the quarter, the ...Read More

  • The Value of Following IFA's Advice

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    by Mark Hebner — Wednesday, October 1, 2014

    What is the value of staying invested in a globally-diversified risk-appropriate portfolio regardless of what happens in the financial markets? Admittedly, this is very difficult to quantify because there is no clear alternative to test it against. This problem was noted by ...Read More

  • Q&A with IFA: How Well Have the Funds in My 401(k) Performed?

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    by Mark Hebner — Tuesday, September 30, 2014

      Question: I was recently informed by my company that the majority of the funds in our 401(k) plan have beaten their benchmarks as of 8/31/2014. I find myself somewhat skeptical. Can you please help me analyze the performance of these funds to determine if, going forward, ...Read More

  • Hedge Fund Shenanigans Uncovered by the SEC

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    by Mark Hebner and IFA Contributors — Tuesday, September 30, 2014

    While perusing the Wall Street Journal, we came across an article1 (“SEC Criticizes Hedge Funds”) that caught our attention. The Securities and Exchange Commission (SEC) recently completed examinations of 185 hedge fund firms and found deficiencies such as firms ...Read More