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Pension-Gate: Some Good News and Bad News

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by Mark Hebner and IFA Contributors
Thursday, August 14, 2014

The recent good news from the Wall Street Journal (summarized here) is that the California Public Employees’ Retirement System (CALPERS) is planning to drop the level of its hedge fund investments this year by 40% to $3 billion. This retreat comes in the aftermath of ...Read More

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  • Fidelity Agrees to Settle 401(k) Lawsuits

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    by Mark Hebner and IFA Contributors — Thursday, August 14, 2014

    A little less than a year ago, we published this article about Fidelity facing a class action lawsuit by its employees alleging that the firm put them into costly proprietary funds in the firm’s profit-sharing plan, even though cheaper options were available. One of the ...Read More

  • Invest Like a Hedge Fund? Thanks but No Thanks!

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    by Mark Hebner and IFA Contributors — Wednesday, August 6, 2014

    The Wall Street Journal recently featured an article, How Individual Investors Can Invest Like a Hedge Fund, that caught our attention. In light of recent poor performance which we have documented here and here, it is simply beyond us why anybody would want to emulate hedge ...Read More

  • State Pension Plans - A Deeper Look at Performance

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    by Mark Hebner and IFA Contributors — Wednesday, August 6, 2014

    Index Fund Advisors expended a large amount of time and effort in putting together the data that reveals the failure of active management for state pension systems. As of now, there is no central repository of information on state pension performance, so each state’s ...Read More

  • Quantifying the Value of Tax Loss Harvesting

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    by Tom Allen and Mark Hebner — Tuesday, August 5, 2014

    Tax loss harvesting is one service provided by most financial advisory firms and is one of the hardest to quantify in terms of value added. The professional opinion on this topic ranges from the “do it every chance you get” to the “never, ever.” At Index ...Read More

  • Weston Wellington on Dimensional's Philosophy

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    by Weston Wellington — Tuesday, August 5, 2014

    Weston Wellington, Vice President of Dimensional Fund Advisors, explains how he came to embrace Dimensional's scientific approach to investing. Weston explains how the ideas discussed at Dimensional had almost a "gravitational pull" on him... "sort of like a Black Hole ...Read More

  • The Active vs. Passive Debate Plays Out on MarketWatch

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    by Mark Hebner and IFA Contributors — Tuesday, August 5, 2014

    Those of us who are old enough to have watched 60 Minutes in the 1970s will undoubtedly remember the Point/Counterpoint segment which featured liberal and conservative spokesmen debating hot button issues of the day. Even more unforgettable was the Saturday Night Live parody ...Read More

  • FINRA Takes a Step in the Right Direction

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    by Mark Hebner and IFA Contributors — Monday, August 4, 2014

    A few months ago, we published an article about the problem of brokerage clients not being able to rely on information about their broker in FINRA’s BrokerCheck because of the ease with which brokers can expunge records of arbitration claims made against them. Today, we ...Read More

  • DFA Wins Another Survey of Financial Advisors

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    by Mark Hebner and IFA Contributors — Friday, August 1, 2014

    Market Strategies International just released its 2014 annual Advisor Brandscape report from its Cogent Reports Division™, and once again, Dimensional Fund Advisors (DFA) came out on top. The survey of 1,437 financial advisers was conducted online from February to April of ...Read More

  • Some Discouraging Results from Gallup

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    by Mark Hebner and IFA Contributors — Thursday, July 31, 2014

    A few months ago, Gallup, Inc. conducted a poll that asked 1,026 Americans to choose the best option for their long-term investments. Here is how they answered: Real Estate          ...Read More

  • Active vs. Passive — A Look at Pensions in the U.K.

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    by Mark Hebner and IFA Contributors — Wednesday, July 30, 2014

    In the past month, we have published two articles on the state of investment management in the U.K. In that regard, we found another video from our friends over at Sensible Investing that puts yet another nail into the coffin of active management. The video is ...Read More

  • Some Interesting Data from the 2014 Investment Company Fact Book

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    by Mark Hebner and IFA Contributors — Monday, July 28, 2014

    The Investment Company Institute is the national association of U.S. investment companies, including mutual funds, closed-end funds, exchange-traded funds (ETFs) and unit investment trusts (UITs). Members of ICI manage total assets of $17.1 trillion and serve more ...Read More

  • Does Past Performance Matter? The View from S&P Dow Jones Indices

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    by Mark Hebner and IFA Contributors — Monday, July 28, 2014

    S&P Dow Jones Indices recently released the latest version of its Persistence Scorecard. Any investor who chooses a fund manager based on performance relative to peers should thoroughly study this report. As with all the previous versions of the report, it showed a lower ...Read More

  • IFA's Performance Monitoring Report vs. the fi360 Fiduciary Score

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    by Mark Hebner and IFA Contributors — Wednesday, July 23, 2014

    For the purpose of the quarterly monitoring of the funds that IFA advises for use by both our individual and institutional clients (including 401(k) plan sponsors), IFA has chosen to use its own proprietary scoring system rather than the widely used fi360 Fiduciary Score. Below ...Read More

  • Risk Savvy—How to Make Good Decisions

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    by IFA Contributors — Tuesday, July 22, 2014

    A New Book by Gerd Gigerenzer Innumeracy is a word coined by cognitive scientist Douglas R. Hofstadter in the early 1980s to describe a lack of basic mathematical ability as it applies to everyday life. Later that decade, mathematician John Allen Paulos published a book of that ...Read More

  • Q&A with IFA: Market Timing with Moving Averages

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    by Mark Hebner and IFA Contributors — Friday, July 18, 2014

    Question: Some researchers argue that a market timing strategy based on buy/sell signals generated by a 50- or 200-day moving average offers a more appealing combination of risk and return than a buy-and-hold approach. What is your view? Note: The question above was originally ...Read More

  • Understanding Equity-Indexed Annuities

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    by Mark Hebner and IFA Contributors — Thursday, July 17, 2014

    Recently, a client asked us about potentially buying an equity-indexed annuity (EIA). Not to be confused with a variable annuity, an EIA is not held in a segregated account exclusively for the policyholder’s benefit. Instead, it is backed by the general reserves of the ...Read More

  • IFA's Use of Tax-Managed Funds

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    by Mark Hebner and IFA Contributors — Wednesday, July 16, 2014

    For investors with taxable accounts, IFA has long advised the use of tax-managed funds for the purpose of maximizing after-tax returns. Please note that this is not the same goal as minimizing taxes. The five tax-managed funds that IFA advises for our clients each cover a ...Read More

  • The IRS Addresses Longevity Risk in Retirement Plan Accounts

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    by Mark Hebner and IFA Contributors — Friday, July 11, 2014

    In our summary of risks facing retirees, we identified longevity (the potential to outlive one’s assets) as one that has increased through time with medical advances leading to ever-longer life-expectancies. One way of mitigating this risk is through the purchase of an ...Read More

  • Active vs. Passive in the U.K.—A Follow-up

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    by Mark Hebner and IFA Contributors — Thursday, July 10, 2014

    A few weeks ago, we published this article about the dismal performance of active managers in the U.K. We saw that only 1% of them were found to reliably beat a risk-adjusted benchmark, but even for that 1%, the managers extract the whole of this superior performance for ...Read More

  • Transfer on Death and Retirement Account Beneficiaries

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    by Mark Hebner and IFA Contributors — Wednesday, July 2, 2014

    As you are probably aware, if you have an IRA, 401(k), or other type of retirement account, you must have a designated beneficiary(s). Normally, you will have a primary beneficiary as well as a contingent beneficiary in the event that both you and your primary beneficiary perish ...Read More

  • With the Market at New Highs, How Should You Prepare for the Bear?

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    by Mark Hebner and IFA Contributors — Wednesday, July 2, 2014

    As of today (July 2nd, 2014), the Dow and the S&P 500 Index are flirting with new highs of 17,000 and 2,000, respectively. Both have come a long way from their low points of March 9th, 2009 (6,547 for the Dow and 677 for the S&P 500). While all ...Read More

  • The Second Quarter of 2014 in Review

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    by Mark Hebner and IFA Contributors — Tuesday, July 1, 2014

    In the second quarter of 2014, market risk was rewarded around the world, particularly for emerging markets and real estate. Portfolios tilted towards small cap companies were not rewarded to the same extent as portfolios tilted towards large caps companies. On June 18th, the ...Read More

  • Q&A with IFA: Prediction in Valuations

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    by Mark Hebner and IFA Contributors — Monday, June 30, 2014

    Question: Do valuation measures such as price-to-earnings or price-to-dividend ratios help predict future returns? Are they telling us anything now? Note: The question above was originally addressed in DFA’s Fama/French Forumon December 11th, 2008, in the midst of the ...Read More

  • Q&A with IFA: Front Running and Fair Pricing

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    by Mark Hebner and IFA Contributors — Monday, June 23, 2014

    Question: What is the relation, if any, between the practice of "front running" trades and the efficient market hypothesis? Note: The question above was taken from DFA’s Fama/French Forum. Here is their response: “First, if front running is profitable, there must be ...Read More

  • Passive vs. Active—the View from Across the Pond

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    by Mark Hebner and IFA Contributors — Monday, June 23, 2014

    While perusing the Daily Telegraph, one of our Wealth Advisors came across this article that highlights the bloody awful results delivered by active managers in the U.K. Reporter Richard Evans cites Professor David Blake, one of the authors of this study  of 516 funds ...Read More

  • Mark Hebner and IFA Contributors

    Lord Abbett Funds: A Deeper Look at Their Performance

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    by Mark Hebner and IFA Contributors — Friday, June 20, 2014

    On a few occasions, we have been asked by prospective clients about Lord Abbett funds. Like American Funds, they have been around since the Great Depression and are fully dedicated to active management. As of 12/31/2013, they had $137 billion1 of assets under management spread ...Read More

  • Q&A with IFA: Do Low-Volatility Strategies Produce High Returns

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    by Mark Hebner and IFA Contributors — Friday, June 20, 2014

    Question: Certain researchers have reported1 that low-volatility stocks in the U.S. outperform high-volatility stocks and attribute this apparent anomaly to investor behavioral biases as well as limits to arbitrage. What do you make of their argument? Note: The question above ...Read More

  • Is There a Manager Risk Premium?

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    by IFA Contributors — Friday, June 20, 2014

    A risk premium is the return in excess of a reference rate that an investment is expected to provide. At Index Funds Advisors, Inc., we often speak of three different equity-related risk premiums. First, the market risk premium is the expected excess return of the total U.S. ...Read More

  • Tough Times for the Bond King

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    by Mark Hebner and IFA Contributors — Thursday, June 19, 2014

    While patience is a virtue, it appears to be one that is not possessed by many investors in actively managed funds. It is this difficult lesson that PIMCO’s Bill Gross aka “The Bond King” has had to learn lately. According to this article/video, the PIMCO Total ...Read More

  • FINRA Calls Out Merrill Lynch

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    by Mark Hebner and IFA Contributors — Thursday, June 19, 2014

    When reviewing retirement plans for our clients or for retirement plan sponsor clients, we often see the presence of mutual funds with front-end loads (Class A shares). However, we have always made the assumption that the load is waived for retirement plan accounts, but after ...Read More

  • The Never-Ending Pursuit of Manager Alpha – Updated

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    by Mark Hebner and IFA Contributors — Wednesday, June 18, 2014

    As we have pointed out on many occasions, both stock picking and hiring an active manager to pick stocks on your behalf are mug’s games. While some investors diligently study individual stocks and other investors handsomely pay active managers to deliver alpha (an ...Read More

  • Passive vs. Active: Yet another Milestone Is Reached

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    by Mark Hebner and IFA Contributors — Monday, June 16, 2014

    According to this Bloomberg article, Vanguard just passed up Fidelity to become the number one provider of 401(k) assets, thus continuing the long-term trend of migration from passive to active that we have documented in several articles such as this one. The current size of the ...Read More

  • The NACUBO Study

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    by Mark Hebner — Thursday, June 12, 2014

    You may think that college endowments, with all their access to academic knowledge and brainpower, would regularly hit home runs. You would be ...Read More

  • A Graphical View of the Mutual Fund Landscape

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    by Mark Hebner and IFA Contributors — Wednesday, June 11, 2014

    Since IFA began operations in 1999, we have published articles detailing how incredibly stacked the odds are against successfully picking a manager who will beat his benchmark (i.e., deliver alpha). See here and here for recent examples. However, as we like to say at IFA, a good ...Read More

  • Tough Times for Alternative Investment Strategies and Hedge Funds

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    by Mark Hebner and IFA Contributors — Tuesday, June 10, 2014

    At Index Fund Advisors, we are always distressed when we read articles such as this one that discusses a state pension plan increasing its exposure to alternative investments (i.e., investments beyond stocks, bonds, and real estate). A recent article in the Wall Street Journal ...Read More

  • Q&A with IFA: Dividends—Is Bigger Better?

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    by Mark Hebner and IFA Contributors — Friday, June 6, 2014

    Question: Does an equity strategy focusing on stocks with above-average dividend yield offer an appealing risk/reward tradeoff? Have dividend-paying stocks outperformed non-dividend payers in the U.S.? Note: The question above was taken from DFA’s Fama/French Forum. Here ...Read More

  • Q&A with IFA: Expected Returns and Socially Responsible Investing

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    by Mark Hebner and IFA Contributors — Wednesday, June 4, 2014

    Question: Are expected returns for "socially responsible" strategies lower compared to a conventional approach? Note: The question above was taken from DFA’s Fama/French Forum. Professors Fama and French gave this response: “Our paper, "Disagreements, Tastes, ...Read More

  • Q&A with IFA: Cap Weighting or GDP Weighting

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    by Mark Hebner and IFA Contributors — Wednesday, June 4, 2014

    Question: What is the merit, if any, in using a country weighting scheme based on Gross Domestic Product (GDP) rather than market capitalization? Note: The question above was taken from DFA’s Fama/French Forum. Professors Fama and French gave this brief response: ...Read More

  • Q&A with IFA: Seeking the Inefficient Asset Class

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    by Mark Hebner and IFA Contributors — Tuesday, June 3, 2014

    Question: We often hear the claim that some markets are less efficient than others—small company stocks, emerging markets, foreign exchange, and so on. Is there any evidence to support this assertion? Note: The question above was taken from DFA’s Fama/French Forum. ...Read More

  • Q&A with IFA: Are Monthly Stock Market Returns Normally Distributed?

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    by Mark Hebner and IFA Contributors — Monday, June 2, 2014

    Question: Are Monthly Stock Market Returns Normally Distributed? What is the best way to describe the distribution of stock market returns—a normal distribution, lognormal, or something else? What should investors do with this information? Note: The question above was ...Read More

  • Dimensional Bond Funds—Doing What They Are Supposed to Do

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    by Mark Hebner and IFA Contributors — Monday, May 19, 2014

    What is the proper role of fixed income in a diversified portfolio? As far as we at Index Fund Advisors are concerned, fixed income performs two vital functions. First, it dampens the volatility of the equity side of the portfolio which facilitates the adjustment of the overall ...Read More

  • Fairholme and Sequoia—No Great Performance Here

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    by Mark Hebner and IFA Contributors — Thursday, May 15, 2014

    Recently, we received a question from a client that we will paraphrase as follows: “While I know that the returns I have gotten from index funds have beaten the majority of active managers, would I not have been better off in funds like the Fairholme Fund (FAIRX) or the ...Read More

  • When Reality Confronts Investor Expectations

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    by Mark Hebner and IFA Contributors — Wednesday, May 14, 2014

    A recent survey of 1,050 American investors conducted by Natixis Global Asset Management found that they said they needed average annual returns of 9.8% above inflation to meet their financial needs such as providing income in retirement, housing expenses, and health care ...Read More

  • The American Enterprise Institute Honors Eugene Fama

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    by Mark Hebner and IFA Contributors — Monday, May 12, 2014

    The American Enterprise Institute for Public Policy Research (AEI) is a private not-for-profit think tank whose stated mission is "to defend the principles and improve the institutions of American freedom and democratic capitalism—limited government, private ...Read More

  • Do Active Investors Have a Gambling Problem?

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    by Mark Hebner and IFA Contributors — Wednesday, May 7, 2014

    Index Fund Advisors’ 12-Step Program for Active Investors suggests that active investing is a disease akin to alcoholism, drug addiction, or gambling addiction. While we certainly do not say that all active investors suffer from an addiction that requires treatment, we ...Read More

  • IFA's Scientific Approach to Investing

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    by Mark Hebner and IFA Contributors — Tuesday, May 6, 2014

    Since its inception, Index Fund Advisors has always strived to take a scientific or academic approach to investing. We follow the evidence (i.e., long-term returns data) to wherever it leads us and we live by the Latin motto of the Royal Society, “Nullius in ...Read More

  • Manager Picking is a Mug's Game

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    by Mark Hebner and IFA Contributors — Friday, May 2, 2014

    The search for investment managers who will deliver alpha is an activity that accounts for billions of dollars that is spent by foundations, endowments, pension plans, and other institutional investors. To determine if these dollars are well-spent, it is fair to ask how ...Read More

  • Risk Aversion vs. Ambiguity Aversion and 401(k) Plans

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    by Mark Hebner and IFA Contributors — Thursday, May 1, 2014

    In a news briefing regarding Saddam Hussein’s weapons of mass destruction before the invasion of Iraq, former Defense Secretary Donald Rumsfeld famously stated: “Reports that say there’s—that something hasn’t happened are always interesting to me, ...Read More

  • Small-Cap Face-Off: Russell 2000 vs. S&P 600

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    by Mark Hebner and IFA Contributors — Thursday, May 1, 2014

    Investors who decide to index the small-cap portion of their portfolios face a bewildering array of choices from index mutual funds and exchange-traded funds (ETFs) that track indexes from providers such as Russell, S&P Dow Jones, MSCI, and Morningstar. At Index Fund ...Read More

  • Capturing the Momentum Factor—Simple but Not Easy

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    by Mark Hebner and IFA Contributors — Tuesday, April 22, 2014

    Last year, we wrote this article about momentum, which as the name suggests, is the tendency of securities that have outperformed (or underperformed) the market over a three- to twelve-month period to continue to outperform (or underperform) the market. In other words, momentum ...Read More

  • When a Negative Is Actually a Positive

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    by Mark Hebner and IFA Contributors — Monday, April 21, 2014

    Last week, BlackRock Inc, the world’s largest money manager released its quarterly earnings report for the first quarter of 2014. Normally, we don’t pay much attention to these things, but something caught our eye in this Reuters story that we thought was worth ...Read More

  • Pension-Gate Continues: Some Good Advice for the Hawkeye State

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    by Mark Hebner and IFA Contributors — Thursday, April 17, 2014

    At Index Fund Advisors, we are always gratified to read articles such as this one which give a good airing of the arguments in favor of indexing pension funds for public employees. One fund that would clearly benefit is the $27 billion Iowa Public Employees’ Retirement ...Read More

  • Connecting the Dots

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    by Jim Parker, Dimensional Fund Advisors — Thursday, April 17, 2014

    Human beings love stories. But this innate tendency can lead us to imagine connections between events where none really exist. For financial journalists, this is a virtual job requirement. For investors, it can be a disaster. “The Australian dollar rose today after Westpac ...Read More

  • The Problem of High 401(k) Costs

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    by Mark Hebner — Monday, April 14, 2014

    In December of 2012, Demos, a liberal think tank, published The Retirement Savings Drain—The Hidden and Excessive Costs of 401(k)s. It caused quite a stir and provided much of the source material for the PBS Frontline Documentary, The Retirement Gamble. Recently, another ...Read More