SOMETHING FOR THE WEEKEND
Vanguard.
I love Vanguard. I think we’d all be better off if everyone invested in Vanguard funds. And, in my opinion, Jack Bogle’s honorary knighthood and Presidential Medal of Freedom are long overdue.
But is the world’s biggest asset management company perfect? Even this die-hard fan would have to admit that it’s not.
I sometimes wish, for example, that Vanguard were more responsive to what the academic evidence tells us about investing. We’ve known, for instance, since the early 1990s, that there are certain risk factors that tend to deliver higher investment returns over the long term. But only recently has Vanguard started to offer funds designed to enable investors to capture those specific premiums.
The risk and rewards of evidence-based investing — Video 1/2
That risk and reward are related is one of the first things — if not, the first thing — that investors are supposed to learn. In general, markets reward investors for risk, and the more risk you take, the greater the reward you can expect over the long term.
But, being human, we often either forget, or choose to forget, this fundamental fact. It’s a tendency the investing industry loves to prey on with its seductive marketing and fancy-sounding, and frankly misleading, terms like risk parity, absolute return and downside protection. It knows that people choose to buy a product when they feel good about it, and who wouldn’t feel good about a fund that claims to offer greater reward with less risk?
Read the full article and watch the video
Remember who the fund industry is for — Bogle
Perhaps it’s his Scottish ancestry, but Jack Bogle seems to be a big fan of Adam Smith. He often quotes the moral philosopher and pioneer of economics, and he was at it again yesterday.
Speaking in Philadelphia at the launch of the Campaign for Investors, organised by the Institute of the Fiduciary Standard, Bogle read a passage from Smith’s most famous work, Wealth of Nations, written in 1776:
Consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to only so far as it may be necessary for promoting that of the consumer. The maxim is so perfectly self evident that it would be absurd to attempt to prove it. But in the mercantile system the interest of the consumer is almost constantly sacrificed to that of the producer; and it seems to consider production, and not consumption, as the ultimate end and object of all industry and commerce.
Those words neatly encapsulate Bogle’s principal objection to the asset management industry. As the producer, its ultimate object should be to serve investors; but the interest of the consumer has been almost constantly sacrificed to that of the industry.
Transparency will end “active vs passive”
“I’m not interested in active versus passive any more,” a London-based financial adviser told me the other day. “The argument has been won. What I’m interested in now is transparency.”
He’s right about active versus passive. Not that you’d have guessed it from reading the UK financial media, which for the most part continues to fly the flag for active management. The argument that, for the typical investor, active funds are still worth paying for has been completely demolished.
I also agree that transparency is now the burning issue. When investors are able to see, in black and white, how much it’s costing them to invest in actively managed funds, and how little value they’re receiving in return, most will no longer do so. They will choose instead to invest at much lower cost in funds that are guaranteed to deliver, near enough, the market return.
Of course, the industry knows this, which is why individual fund providers and trade bodies like the Investment Association are working so hard to keep the cost of investing opaque.
How to tell a fiduciary from a salesman
The most important thing to ascertain when choosing an adviser is whether or not he or she is a fiduciary. Will they put your interests first, at all times, even when it’s not in their own interests to do so?
But how do you tell a fiduciary from someone who’s not? The problem is, many advisers will claim to be fiduciaries when they’re not. If you’re in any doubt whatsoever, try asking them this question:
“If I told you there may be times when I disagree with your advice and will want to disregard it, would you still be happy to have me as a client?”
Articles for evidence-based advisers
We’ve had a good response to our announcement last week that I’m about to start providing selected advisory firms with articles about evidence-based investing. There will be two articles per month, each around 600-700 words long and aimed at end-investors. They will cover a range of subjects including the basic principles of evidence-based investing, the value of advice, the biases investors are prone to and the latest academic research. Though some of the articles will be topical, most will not be time-specific.
We now have the full details, including pricing. If you’re interested in subscribing, and you haven’t already done so, please contact my colleague Sam Willet at s.willet@regismedia.com, or on + 44 (0)121 285 2585.
Other TEBI posts you may have missed
Why are new listings so volatile?
On average we’re average. Get over it
Pssst! Want to know active managers’ secret sauce?
Look who’s bankrolling the Brexit campaign
Also worth reading
The paradox of active management (Jesse Livermore)
Investing: a random talk with Burton Malkiel (Nir Kaissar)
Mastering the game of imperfect forecasting (Bob Seawright)
Financial independence — adrift in the vastness (Monevator)
The hidden danger of being risk-averse (Heidi Grant Halvorson)
4 ways in which the investment industry tricks you (Ben Carlson)
If you’re such a great investor, where’s your alpha? (Barry Ritholtz)
Mistaking the train for the light at the end of the tunnel (Michael Batnick)
Pundits who provide the media with stock tips need regulating (Dan Solin)
No, active managers don’t add value in emerging markets (Larry Swedroe)
Consistently successful active fund managers are rarer than rare (Robert French)
Sometimes, yet more products are the last thing consumers need (Squared Away)
It may seem markets are more volatile than they were. But they aren’t (Index Fund Advisors)
Monday is a Bank Holiday in the UK, so I’m off now until Tuesday. Whatever you’re doing, enjoy it and keep safe.
Robin is a journalist and campaigner for positive change in global investing. He runs Regis Media, a niche provider of content marketing for financial advice firms with an evidence-based investment philosophy. He also works as a consultant to other disruptive firms in the investing sector.
