This may feel like math class, but here's another not-so-hypothetical hypothetical: Suppose a mutual fund manager is invested in a bank that is beginning to offer mortgages to poor people and overextended real estate speculators whom the manager believes will ultimately default on those loans years down the road. The bank decides to package those loans into collateralized mortgage backed securities that the fund manager also suspects years down the road will default. The bank also has a hedge fund division that leverages its bets on these CMO securities 20 to 1, which the manager suspects in the long-term will implode. But in the short-term the manager knows these activities will be immensely profitable, and in fact the bank will fall behind other banks doing exactly the same thing if it doesn't offer such loans. What do you see as the fiduciary responsibility of the fund manager in that situation? Bear in mind, that the manager gets to vote on electing boards who hire the CEOs making the decision to do this sort of lending. Also, bear in mind that the manager also gets to vote on the CEO's compensation package as to whether the CEO should get options that vest every quarter based on short-term profits or perhaps long-term restricted stock.

From the article:
"The U.S. is ranked ninth, with Mercer researchers faulting American 401(k) rules that allow savers to borrow from their accounts and take penalty-free distributions as soon as they reach age 59½."
There is this constant push to keep people working well into their 60's and into their 70's as well. Not all workers want to or can work that long. If the person has saved into their taxed deferred accounts throughout their work history, why not let them leave the work force early. That frees up jobs for the younger folks. I do agree with the idea regarding borrowing from retirement accounts. It should be a last resort.
As mentioned in another thread recently, travel is a great idea. Being able to do what you want and enjoy your senior years should not be lost. If you enjoy your work then that's fine. But for many, the senior years should be enjoyed with family and friends.

Sorry to be the contrarian. But outsized returns?? Not over the past 10 years. I rarely to never listen to money managers because it is easy to sound educated and articulate on a subject. Results impress and sway me more.

You are able to skip whatever does not interest you. Gundlach suggests caution concerning high yield bonds when he looks a couple of years into the future and thinks gold will be a good place to put some money during the coming 6 to 12 months.
valuewalk.com/2015/04/wall-street-week-video-on-demand-jeffrey-gundlach/

Here are some quick highlights from Thursday night’s conversation with Andrew Foster of Seafarer.
Seafarer’s objective: Andrew’s hope is to outperform his benchmark (the MSCI EM index) “slowly but steadily over time.” He describes the approach as a “relative return strategy” which pursues growth that’s more sustainable than what’s typical in developing markets while remaining value conscious.
Here’s the strategy: you need to start by understanding that the capital markets in many EM nations are somewhere between “poorly developed” and “cruddy.” Both academics and professional investors assume that a country’s capital markets will function smoothly: banks will make loans to credit-worthy borrowers, corporations and governments will be able to access the bond market to finance longer-term projects and stocks will trade regularly, transparently and at rational expense.
None of that may safely be assumed in the case of emerging markets; indeed, that’s what might distinguish an “emerging” market from a developed one. The question becomes: what are the characteristics of companies that might thrive in such conditions.
The answer seems to be (1) firms that can grow their top line steadily in the 7-15% per annum range and (2) those who can finance their growth internally. The focus on the top line means looking for firms that can increase revenues by 7-15% without obsessing about similar growth in the bottom line. It’s almost inevitable that EM firms will have “stumbles” that might diminish earnings for one to three years; while you can’t ignore them, you also can’t let them drive your investing decisions. “If the top line grows,” Andrew argues, “the bottom line will follow.” The focus on internal financing means that the firms will be capable of funding their operations and plans without needing recourse to the unreliable external sources of capital.
Seafarer tries to marry that focus on sustainable moderate growth “with some current income, which is a key tool to understanding quality and valuation of growth.” Dividends are a means to an end; they don’t do anything magical all by themselves. Dividends have three functions. They are:

An essential albeit crude valuation tool – many valuation metrics cannot be meaningfully applied across borders and between regions; there’s simply too much complexity in the way different markets operate. Dividends are a universally applicable measure.
A way of identifying firms that will bounce less in adverse market conditions – firms with stable yields that are just “somewhat higher than average” tend to be resilient. Firms with very high dividend yields are often sending out distress signals.
A key and under-appreciated signal for the liquidity and solvency of a company – EMs are constantly beset by liquidity and credit shocks and unreliable capital markets compound the challenge. Companies don’t survive those shocks as easily as people imagine. The effects of liquidity and credit crunches range from firms that completely miss their revenue and earnings forecasts to those that drown themselves in debt or simply shutter. Against such challenges dividends provide a clear and useful signal of liquidity and solvency.

It’s certainly true that perhaps 70% of the dispersion of returns over a 5-to-10 year period are driven by macro-economic factors (Putin invades-> the EU sanctions-> economies falter-> the price of oil drops-> interest rates fall) but that fact is not useful because such events are unforecastable and their macro-level impacts are incalculably complex (try “what effect will European reaction to Putin’s missile transfer offer have on shadow interest rates in China?”).
Andrew believes he can make sense of the ways in which micro-economic factors, which drive the other 30% of dispersion, might impact individual firms. He tries to insulate his portfolio, and his investors, from excess volatility by diversifying away some of the risk, imagining a “three years to not quite forever” time horizon for his holdings and moving across a firm’s capital structure in pursuit of the best risk-return balance.
While Seafarer is classified as an emerging markets equity fund, common stocks have comprised between 70-85% of the portfolio. “There’s way too much attention given to whether a security is a stock or bond; all are cash flows from an issuer. They’re not completely different animals, they’re cousins. We sometimes find instruments trading with odd valuations, try to exploit that.” As of January 2015, 80% of the fund is invested directly in common stock; the remainder is invested in ADRs, hard- and local-currency convertibles, government bonds and cash. The cash stake is at a historic low of 1%.
Thinking about the fund’s performance: Seafarer is in the top 3% of EM stock funds since launch, returning a bit over 10% annually. With characteristic honesty and modesty, Andrew cautions against assuming that the fund’s top-tier rankings will persist in the next part of the cycle:

We’re proud of performance over the last few years. We have really benefited from the fact that our strategy was well-positioned for anemic growth environments. Three or four years ago a lot of people were buying the story of vibrant growth in the emerging markets, and many were willing to overpay for it. As we know, that growth did not materialize. There are signs that the deceleration of growth is over even if it’s not clear when the acceleration of growth might begin. A major source of return for our fund over 10 years is beta. We’re here to harness beta and hope for a little alpha.

That said, he does believe that flaws in the construction of EM indexes makes it more likely that passive strategies will underperform:

I’m actually a fan of passive investing if costs are low, churn is low, and the benchmark is soundly constructed. The main EM benchmark is disconnected from the market. The MSCI EM index imposes filters for scalability and replicability in pursuit of an index that’s easily tradable by major investors. That leads it to being not a really good benchmark. The emerging markets have $14 trillion in market capitalization; the MSCI Core index captures only $3.8 trillion of that amount and the Total Market index captures just $4.2 trillion. In the US, the Total Stock Market indexes capture 80% of the market. The comparable EM index captures barely 25%.

Highlights from the questions:
While the fund is diversified, many people misunderstand the legal meaning of that term. Being diversified means that no more than 25% of the portfolio can be invested in securities that individually constitute more than 5% of the portfolio. Andrew could, in theory, invest 25% of the fund in a single stock or 15% in one and 10% in another. As a practical matter, a 4-5% position is “huge for us” though he has learned to let his winners run a little longer than he used to, so the occasional 6% position wouldn’t be surprising.
A focus on dividend payers does not imply a focus on large cap stocks. There are a lot of very stable dividend-payers in the mid- to small-cap range; Seafarer ranges about 15-20% small cap amd 35-50% midcap.
The fundamental reason to consider investing in emerging markets is because “they are really in dismal shape, sometimes the horrible things you read about them are true but there’s an incredibly powerful drive to give your kids a better life and to improve your life. People will move mountains to make things better. I followed the story of one family who were able to move from a farmhouse with a dirt floor to a comfortable, modern townhouse in one lifetime. It’s incredibly inspiring, but it’s also incredibly powerful.”
With special reference to holdings in eastern Europe, you need to avoid high-growth, high-expectation companies that are going to get shell-shocked by political turmoil and currency devaluation. It’s important to find companies that have already been hit and that have proved that they can survive the shock.
Bottom line: Andrew has a great track record built around winning by not losing. His funds have posted great relative returns in bad markets and very respectable absolute returns in frothy ones. It’s a pattern that I’ve found compelling.
Thanks to Timothy Gaar, David Hubbard, Sheldon Zafir and Heezsafe for raising questions with Andrew; regrets to Don Davis and Elie Tabet who were in the question queue when time ran out. I forwarded their contact information to Seafarer in hopes that their questions might yet be answered.
For folks unable to catch the call, there’s an available mp3 of the call. My observations, above, are based on notes that I took on the fly as the call proceeded, rather than on a careful replaying of the audio. They represent my interpretation plus my best attempt to reproduce Andrew’s words. I would, as always, be delighted to hear the reactions of some of the 40 other folks who participated as well.

@Maurice:
>> Since Ronald Reagan left office, there is not one American president who I believe would oppose such a tax.
A comical view in fact:
http://www.npr.org/2011/02/04/133489113/Reagan-Legacy-Clouds-Tax-Record
http://newsjunkiepost.com/2011/02/06/the-disastrous-legacy-of-ronald-reagan-in-charts/
HORSLEY: Reagan famously did cut taxes, sharply, in his first year in office. But as former Senator Alan Simpson, who co-chaired the fiscal commission, was quick to remind Norquist, that's only half the story.
Former Senator ALAN SIMPSON (Republican, Wyoming): Ronald Reagan raised taxes 11 times in his administration. I was here. I was here. I knew him. Better than anybody in this room. He was a dear friend and a total realist as to politics.
HORSLEY: Simpson's recollection is spot on, says historian Douglas Brinkley, the editor of Reagan's diaries.
Professor DOUGLAS BRINKLEY (Rice University): Ronald Reagan was never afraid to raise taxes. He knew that it was necessary at times. And so there's a false mythology out there about Reagan as this conservative president who came in and just cut taxes and trimmed federal spending in a dramatic way. It didn't happen that way. It's false.
HORSLEY: Reagan's budget director, David Stockman, explains the 1981 tax cut blew a much bigger hole in the federal budget than expected. So over the next few years, Reagan agreed to raise taxes again and again, ultimately undoing about half the savings of the '81 cut.
Mr. DAVID STOCKMAN (Former Director, Office Management and Budget): He wasn't very happy about it. He did it reluctantly. But at the end of the day, the math was overwhelming.
FLINTOFF: That's because Reagan was never able to match his 1981 tax cuts with a comparable cut in federal spending. A modest reduction in domestic spending was dwarfed by Reagan's big buildup in the Pentagon budget. And, Stockman says, Reagan never made a serious effort to challenge middle class entitlement programs, after an early proposal to curtail Social Security benefits was shot down.
Mr. STOCKMAN: The White House and President Reagan himself retreated within three days when it became clear the enormous political resistance that would occur if you were going to cut entitlements.
FLINTOFF: And without big spending cuts, Reagan faced a choice between raising taxes and an even bigger federal debt. He chose the tax hikes. ... But ever since Reagan, presidents who've tried to raise taxes are confronted with the myth of their tax-cutting predecessor.
What puzzles historian Brinkley is how Reagan, who also raised taxes, avoided paying a political price.
Prof. BRINKLEY: He seemed to get away with both. He seemed to really be kind of a centrist, big government deficit spender, but also be seen as a budget cutter. And it's because his persona was so great.
FLINTOFF: That persona is carefully cultivated by those, like Grover Norquist, who use Reagan's legacy as a weapon to fight off new taxes. Stockman says these myth-makers are distorting the real Reagan record.
Mr. STOCKMAN: I wouldn't call it merely airbrushing. I would call it outright revisionism if not fabrication of history.

This discussion is as of 4y ago.

For a very small fee of 0.1%, I would manage others' moneys by transitioning from AOA to AOR to AOM to AOK every 5-15 years or so. I wonder how that would compare.

I couldn't help but notice the title of the column: Fidelity vs. Vanguard, not actively managed vs. passively managed. So why did Merriman do the latter comparison? Fidelity has a series of target date funds that invest in index funds, and have exactly the same underlying ER as Vanguard; 0.16%.
(To John's point - sometimes Fidelity does not charge more for the same product; they generally match Vanguard in the index arena.)
There are still a couple of differences though, that Hank alluded to: the glide path of Fidelity funds (whether these index ones, or the ones Merriman chose to use as straw men) continue changing until 15 years past their target date (i.e. you still need growth past age 65). Vanguard's settle into a sleepy 30/70 (stock/bond) split just five years after retirement.
Then there is the breadth of assets employed. Even these "boring" Fidelity index target funds use TIPs and commodities. (The actively managed Fidelity target funds go further) And still they do this with the same ER. (To be fair, Vanguard adds international bonds, albeit hedged.)

Target Date funds vary too much from house to house to compare adequately. You best look under the hood - though I agree fees are an important consideration. Allocations among assets vary greatly, so that performance comparisons over time frames shorter than 10 years are near meaningless. The "glide-path" (usually prescribed by Prospectus) towards higher cash/bond allocations may vary. Additionally (at least in the case of Price), holdings are spread out among a number of underlying funds - so that you really need to become informed on how each of those underlying funds invests.
-
From the article: "Why are Fidelity expenses more than three times as high as Vanguard's ... First, Fidelity pays active fund managers to try to beat the market."
Not so fast .....
Let's overlook the fact that these are most likely team-managed (despite having a single "lead" manager).
Let's also overlook that you are buying into the research/analytical capabilities, often global, these companies possess. A manager is only as good as the research and analysis underlying him/her. That's especially important when you consider the wide breadth of investments held by these funds.
Let's also overlook that you are buying into a corporate "culture" whose assessment of risk and treatment of clients will vary. The first directly affects the returns available from these funds as well as the potential losses you may incur.
Returning to fees. Remember that the mix of assets held greatly impacts the fees a fund must charge to recover its costs. One invested heavily in plain-vanilla government bonds and equity indexes can charge substantially less than one with substantial allocations to high yield debt and international and EM stocks and bonds.
Aside from the above, it's a great article.

Still a lot of uninformed folks who are paying loads for the benefit of having an advisor run the investments for them, eh?
I know of three married couples who are using full service advisors. I have asked and they don't know much about their investments, but that they are paying a 1.5% fee, plus buying the the front loaded funds.
I have talked with these folks over the years and none of them had any interest in learning even the most basic functions of investing in funds. In both cases, available time was not a factor.
Another, oh well moment. At the least, they are providing an income for another, who in turn spends the income back into the economy.

Junkster said "... All the more reasons why some of us old timers need to start spending and enjoying what we have accumulated over the years. Life is short!".
AMEN.
-
Assuming the age of a great many here to be 65 or over, I'm a little puzzled there isn't greater discussion about withdrawing money and putting proceeds to good use. How often are we as investors faced with a crucial investment decision? Rarely I'd say. By contrast, we make decisions about spending nearly every day of the week. Yet, nary a mention.
I have some possible explanations. First, the average age of participants may be much lower than envisioned (I'd love to see whatever demographic data David has). If the average age is closer to 35 or 45, than it makes sense so much of the discussion revolves around buying/selling mutual funds, stocks, bonds or other investments. Another possibility is that many older folks who come here may fear they haven't saved enough to meet anticipated retirement needs - and are struggling to play catch-up at a late stage. The third (most likely) explanation is that it just isn't considered appropriate to mention spending on a forum devoted to investing.
I'd never argue that one should stop investing - not at any age. Even late in retirement folks should be seeking to outperform the measly returns cash and many bonds now offer. And since retirement may well last 30 years or longer, younger retirees still need to be acute to growing the nest-egg. Also, some older investors are focused primarily on growing their assets for the benefit of posterity.
Thanks Junkster and heezsafe for pointing this out in your recent posts. Just some rambling over coffee this morning.

The 15-year number does not mean much to me. Cycles occur, as when U.S. stocks under-performed international from 2001-2007, and the reverse happened in 2008-2014. Most of these funds have had multiple manager changes in 15 years. I would be much more interested in looking at true diversified international (not global, not EM) with current manager track records or records including their previous intl fund stints. When I do that, I get a very different picture and group of funds.

Hi @Ted
This from my reply at your GMO link:
"Yup. One has to know what the intention and/or meaning of a particular investment is attempting to do.
Hell, healthcare will take a bang downward at some point in time, eh? One must pay attention to be an investor; deciding what they choose to do about/with risk and reward."
>>>The article mentions "Worrying"; but only in the title line.
As to currency swings. We all should understand that most standard active mutual funds do not apply a part of their operation to currency hedging.
But, also part of our world of investing is that other choices exist that do allow for flexibilty with investment choices.
From the GMO article link:
While many investors cite volatility reduction as a rationale for currency hedging, a white paper from GMO's Catherine LeGraw argues:
1) Volatility may be cut over the short-term, but not over longer horizons
>>>Correct
2) Volatility benefits have been reduced over time as companies become more global
>>>Correct
3) Even if volatility is lowered for international holdings, it isn't reduced for the whole portfolio as the hedging simply makes holdings more correlated with U.S. stocks
>>>Partially correct, IMHO
4) Hedging introduces leverage and hence tail risk (see the move in the Swiss franc).
>>>Correct. Investing involves risk, period.
>>>You directed this post towards me, and I am guessing this was based upon my notes to your GMO article post.
Worrying here regarding investments? Not at this time. Which includes our holding of HEDJ.
We sold our largest bond holding, LSBDX , beginning last October and unwound another large holding of PIMIX . LSBDX is at +.17% total return since mid-Oct, 2014 and -.21% YTD. PIMIX is about +3% YTD, and performing better than I expected. But, the monies from these sells have performed well with the purchases made with the monies.
We're about 65% equity between U.S. and Europe, at this time.
Europe, as we here know; has been going through stops and starts for investing for the past 5 years. The most recent QE program by the ECB may be of benefit; but I am not so sure of the overall long term value, at this time. The long time strength of the Euro finally started to decline (and stick) and we hope to ride this movement until the value of this is much less important.
Lastly, regarding the Euro currency. If, in conjunction the current QE policy of the ECB reducing interest rates and supporting bonds; that a positive recovery and strength for this areas exports will require the Euro to continue to devalue.
The holding periods for any of our investments is always subject to change dependent upon pricing and related market actions to any given sector.
The only sector of question at this time is U.S. real estate. Yes, this area has had a decent run for some time now; but I don't really find a reason for the recent weakness; other than profit taking.
Okay, time for more coffee; as I have to remove old carpeting/padding. YUCK !
Thanks for the question, or curiosity.
Take care,
Catch

Dear friends,
We have a conference call with Andrew Foster this Thursday evening, April 16, from 7:00 - 8:00 Eastern. Andrew manages SFGIX/SIGIX, which qualifies as a five-star fund under Morningstar's system and a Great Owl under our most risk-conscious one. Only 10 of 180 EM stock funds hold that distinction; of those, Seafarer has the distinction of being no-load, open to retail investors, and low cost (I think it has the lowest e.r. of the retail EM Owls).
The fund is up 13% YTD, 10% annually over the past three years, top 3% of its peer group. Andrew is one of the best communicators and best stewards around.
You'd be more than welcome to join us for hear from, and chat with, Andrew on Thursday. Failing that, I'd be delighted to share any questions you might have with Andrew and then I'll report back his responses in a "highlights" note here on the board.
As always, it's free and it's just a phone call so you can join in from pretty much anywhere.
Back to commenting on drafts of my students' papers,
David

FYI: Foreign stock mutual funds have outperformed U.S. stock funds the past 15 years. Stock funds invested abroad had built a huge lead by the end of 2007, as foreign markets, particularly emerging markets, surged while the U.S. economy struggled to recover from the bursting of the dot-com bubble.
Regards,
Ted
http://license.icopyright.net/user/viewFreeUse.act?fuid=MTkyMTgzMzc=
Enlarged Graphic:
http://news.investors.com/photopopup.aspx?path=webLV041415.png&docId=747683&xmpSource=&width=1000&height=1063&caption=&id=747601

Dear friends,
For what interest it holds, the Gargoyle Hedged Value fund has quietly moved from RiverPark to TCW. The prospectus for the TCW fund refers to RiverPark as "the predecessor fund." Same team, strategy and expenses, $75 million AUM, substantially higher minimum initial investment.
While it's been popular to grouch about the RiverPark Alternatives funds (which has always muddled me since two of the three are distinctly above average), you might note that Hedged Value transitioned three years ago from being a hedge fund. The composite hedge-mutual record earns it a five-star rating at Morningstar. The fund will earn a three-year rating at the end of this month; it's made about 14% annually since the conversion, finished in the top third each year and, on an absolute returns basis, is in the top 6% of long/short funds over the past three years.
I've got a call out to the managers to see what's transpired. I'll share as soon as I can.
As ever,
David

would it be possible to make "return group" a searchable criteria, along with "age group" and "risk group"? lots of times i want to exclude any fund that is less than a 4 or a 5 in terms of returns for, say, one year and three, etc. would be very helpful, i think.
also, and i think i've mentioned this a few times before, but is there a way to age limit the drawdown numbers so that i can more easily compare apples to apples?
iow, let's say i'm looking at the list of funds in age groups 5 and 10. well, i get max DD numbers for time periods less than 5 years (no bear market), combined with those up to ten years (one doozy of a bear market), which makes comparing the funds by DD irrelevant.
i think it'd be better to be able to list, say, age groups 5 and 10 but have the option to limit the DD to the past 5 years for those funds in the 10-year age group. that'd make the comparisons apple to apple. i think.
am i making myself at all clear?

A couple of peanut gallery comments (older definition of PG): One might be equally suspicious of any prognostication lacking the adverb ("may"), considering the accuracy of such headlines. He probably could have skated with "why you might not..."
Secondly, The ordinary folks around whom I grew up aren't represented on MFO. On contemplation, I must admit that that is what they did ("make do"), from lack of other options. OTOH, my parents were quite surprised when they inherited stock from my mousy maiden aunt who served for years as a telephone operator for Ma Bell, until she was automated into a nursing home aide. Of course, they have no idea what to do with the stock.

Hi Guys,
I’m a huge Jason Zweig fan. I remember him from a few years ago at the Las Vegas MoneyShow. He was one of the few (maybe the only) presenter who scored his previous years recommendations against their subsequent performance, and rated his record below average. That candid honesty immediately won him a fan. His numerous WSJ columns reinforced my respect.
In this current column, Zweig uses DALBAR analysis across a wide time period to conclude that the average individual investor is not especially successful in his/her investing strategies. In fact, given their historically consistent shortfalls, a less generous assessment just might characterize them as being dumb.
But the DALBAR work is not the end voice on this matter. It has been criticized for shortcomings in its analyses method. According to the math wizards, the purported shortcomings accumulate to overstate the investor’s underperformance. The magnitude might be in error, but the trendline remains in negative territory.
As you know, I like to access original data sources. In keeping with that tradition, allow me to suggest a reliable academic source on this matter. I offer a recent survey paper from Brad Barber and Terrance Odean of “Trading is Hazardous to Your Wealth” fame. You may recall that after examining tens of thousands of West Coast trading records, this team concluded that women trade less frequently than men do, and, consequently, outperform them.
Here is a Link to their fine, global summary paper:
http://www.umass.edu/preferen/You Must Read This/Barber-Odean 2011.pdf
This paper was integrated as Chapter 22 in the “Handbook of the Economics of Finance” tome that was released in 2013. At times the paper is very readable; at other times it gets analytical and data dense. It is a worthwhile skim-read with easily understood explanations and with plausible investor rationales suggested.
The Conclusions Section is exceptionally brief and succinct. It is quoted in its entirety as follows:
“ The investors who inhabit the real world and those who populate academic
models are distant cousins. In theory, investors hold well diversified portfolios and trade infrequently so as to minimize taxes and other investment costs. In practice, investors behave differently. They trade frequently and have perverse stock selection ability, incurring unnecessary investment costs and return losses. They tend to sell their winners and hold their losers, generating unnecessary tax liabilities. Many hold poorly diversified portfolios, resulting in unnecessarily high levels of diversifiable risk, and many are unduly influenced by media and past experience. Individual investors who ignore the prescriptive advice to buy and hold low-fee, well-diversified portfolios, generally do so to their detriment.”
I hope you visit the source material. Enjoy.
Best Regards.

@Old_Joe Yes, SFGIX appears to be a good choice for general EM exposure. But, when I sold LZOEX three years ago, I was looking for a FM fund with good exposure to Africa so I bought WAFMX (which I learned about at MFO). That got supplemented with MEASX when it became available for more FM Asia exposure. MAPIX, ARTJX, WAFMX, and MEASX give me about 6% EM exposure out of 50% in stocks (20% foreign, 30% US).