Weekend Reads for Financial Advisors: Behavioral Finance, Retirement, and Bogle on Fees

Have you heard about the Baader-Meinhof Phenomenon? I hadn’t until I was looking for a term to explain that feeling where you come across a piece of information (or see something), and then it seems to crop up again. And again. That’s what I experienced this week with regard to mutual fund fees and active versus passive investing.

First I spotted a tweet by my colleague Steve Horan, CFA.

A Sharpe Assault on Mutual Fund Fees http://t.co/onQgsyZ7gI Bigger impact than you think! #CFA

— Stephen Horan, CFA (@Stephen_Horan) April 22, 2013

Then I watched a Frontline documentary about America’s broken retirement system in which John “Jack” Bogle had some choice words about fees. (Two of my favorite lines: “The magic of compound returns is overwhelmed by the tyranny of compounding cost”; and when you own long-term, low-cost index funds, “you are a creature of the market and not of the casino.”) And then I stumbled upon a British video clip about passive investing. (Links to all of these are included below).

And that was in between catching up on some of the bigger news stories of the past couple of weeks: A graduate student named Thomas Herndon helped successfully challenged the findings of Harvard University’s Carmen Reinhart and Kenneth Rogoff, who claimed that nations with a great deal of public debt inevitably face slow growth or economic contraction. (The brouhaha even provided fodder for the late-night comedy show The Colbert Report.) Dzhokhar Tsarnaev was arrested in connection with the Boston Marathon bombings. The AP’s twitter account was hacked, causing panic and sending the Dow plunging. And the dollar moved closer to the psychologically important level of Y100 against the yen. (And by the time you read this, may have breached that level.)

So, if you didn’t get around to all the reading you had intended to, here’s a quick roundup of some of the articles and video clips you may have missed:

Behavioral Finance

• Want to be a smarter investor? Then get in touch with your feelings, says Meir Statman in his recent article “Investor, Know Yourself.” (Wall Street Journal)
• Why does behavioral finance matter? Because it “gives us insight into two important aspects of investor behavior that can negatively affect returns,” according to Greg B. Davies of Barclays. Namely, reluctance (and its ally loss aversion) and the “behavior gap” (not to be confused with Carl Richards’s book with the same title). As Davies explains, “most credible research on individual (as opposed to institutional) investors finds this underperformance to be between 1% and 2% per year, on average (although this can be substantially higher). And the behavior gap is purely attributable to market-timing decisions.” (Barclays, PDF)
• For an expanded version of the article, see Barclays’s white paper “Overcoming the Cost of Being Human (or, the Pursuit of Anxiety-Adjusted Returns).” (Barclays, PDF)

Retirement Planning/Eldercare

• Frontline aired a first-rate documentary on America’s broken retirement system. It’s well worth carving out 53 minutes of your time to watch “The Retirement Gamble.” (Frontline)
• Also, the full transcript of the interview with Vanguard’s Bogle (most of which didn’t make it into the documentary) is available for (sobering) reading: “John Bogle: The ‘Train Wreck’ Awaiting American Retirement.” (Frontline)
• Richard H. Thaler points out that a Boston College economist, Alicia H. Munnell, and her colleagues have estimated that more than half of Americans are saving too little to support an adequate lifestyle if they plan to retire at 65. “To fix this, we need to do two things” he writes in “Shifting Our Retirement Savings Into Automatic.” “First, make payroll retirement savings plans available to everyone. Then, add empirically proven design features to them, making it easier for workers to make good choices. In other words, improve the plans’ choice architecture.” (New York Times)
• On the other hand, Meir Statman thinks it is time to switch from libertarian-paternalistic nudges to fully paternalistic shoves (i.e., mandatory private defined-contribution savings accounts). (Financial Analysts Journal)
• “How to Help Your Middle-Class Clients Retire” (Advisor Perspectives)
• “Subsidies vs. Nudges: Which Policies Increase Saving the Most?” (Center for Retirement Research at Boston College, PDF)
• Do you have aging parents or clients? The National Alliance on Mental Illness reports that more than 6.5 million Americans over age 65 suffer from depression. It’s never too late to get help, according to “How Therapy Can Help in the Golden Years.” (New York Times)

Markets/Investing

• In “A Sharpe Assault on Mutual Fund Fees,” Rick Ferri, CFA, discusses Nobel Laureate William Sharpe’s latest Financial Analysts Journal article “The Arithmetic of Investment Expenses.” (Forbes)
• Ferri is also one of the talking heads (along with Bogle and Charles Ellis) in a documentary about passive investing. Josh Brown discovered the clip last month and headlined his blog about it: “The Passive Investing Film Wall Street Doesn’t Want You to See.” (Reformed Broker)
• Is there a secret recipe to making money amid super-low rates? Perhaps it’s risk parity strategies. (Wall Street Journal)
• “Here Comes the Next Hot Emerging Market: The U.S.” (Wall Street Journal, subscription required)
• In this video presentation, titled “An Unstable Equilibrium,” John Hussman discusses current markets. (2013 Wine Country Conference via YouTube)
• As Josh Brown put it in a recent tweet:

Do NOT miss @eddyelfenbein's deep dive into the icy river that is Jeffrey Gundlach http://t.co/oCYclvKPVh

— Downtown Josh Brown (@ReformedBroker) April 22, 2013

• And here it is: “The Mind of Jeffrey Gundlach.” Incidentally, the post has become Eddy Elfenbein‘s most-read ever. (Crossing Wall Street)
• “The Core Elements of Investing” (Inside Investing)
• “Buy, Hold and Be Happy?” (Squared Away Blog)
• “The Golden Rule? Thoughts on Gold as an Investment” from Aswath Damodaran, a professor of finance at the Stern School of Business at NYU. (Musings on Markets)

Practice Management/Social Media

• Next time you’re hiring, consider asking the candidate: “If I were to speak to colleagues or supervisors who weren’t on your reference list, someone who you didn’t always get along with, what would they say about you?” In a recent Corner Office column, Nancy Aossey, president and chief executive of the nonprofit International Medical Corps, explains: “It forces people to think about themselves in a different way, through the lens of others and not their own.” (New York Times)
• “Eight Things Financial Advisors Shouldn’t Do on LinkedIn” (Financial Planning)

The Industry

• “UBS Seen Winning as Wealth Management Emulates Pimco” (Bloomberg)
• “The New Face of the Fiduciary” (Wealth Management)

And Now for Something Completely Different

• A real-time video of the moon rising over the Mount Victoria Lookout in Wellington, New Zealand. (Mark Gee via Vimeo)
• And, on the flip side: “NASA | SDO: Three Years of Sun in Three Minutes” (YouTube)

Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.

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