I enjoy answering your questions, but I thought it might be interesting to turn the tables and ask you some of my own.
Here are my top ten questions for investors in 2008:
10. The financial services sector was the second worst performing asset class in 2007.
If they can't manage their own money, why do you trust them to manage yours?
9. Two prominent Bear Stearns hedge funds, the Bear Stearns High-Grade Structured Credit Fund and the Bear Stearns High-Grade Structured Credit Enhanced Leveraged Fund, filed for bankruptcy in 2007, after losing $1.6 billion of investors money. The sophisticated managers of these funds failed to accurately predict the meltdown of the subprime bond market.
Is your "investment professional" smarter than these highly paid fund managers?
8. Some hedge funds were up by more than 60% in 2007, while others were down by over 50%.
How do you know which of the 8000 hedge funds out there will be winners in 2008?
7. The ten worst performing market investment letters were down by 15%-37% in 2007. These are "investment pros" who get paid to get it right. They obviously didn't.
Do you have confidence that your "investment professional" can pick winners in 2008?
6. Some stocks in the Russell 3000 were up by more than 300% in 2007 while others were down by over 90%. Some of the worst performing stocks were previously much heralded leaders in the real estate, consumer services, financial services and biotech industries.
How can you predict with confidence which of the stocks in the Russell 3000 will outperform others in 2008?
5. Bill Miller has been called "the greatest mutual fund manager of all time". He beat the S & P 500 for 15 consecutive years. However, in 2007, the flagship fund he managed was down 6.66% while the S & P 500 gained 5.50%. His fund was the worst performer among all large-cap growth funds tracked by Lipper Inc. He also underperformed the S & P 500 in 2006.
Is your "investment professional" a better stock picker than Bill Miller?
4. Can you rely on your "investment professional" to pick fund managers who will outperform Bill Miller?
3. Would you have been critical of your "investment professional" at the end of 2005 if he or she recommended that you invest in the fund managed by Bill Miller?
2. What is the standard deviation of your portfolio?
And the most important question of all:
1. Why do you use the services of an "investment professional"?
In this week's column, I discuss investing in tax deferred plans and respond to oft-repeated requests to predict what's going to happen in 2008.
Please add your questions as Comments to this blog and I will do my best to answer them.
Question From MandoLou:
Dan, I get and appreciate all your thoughts on asset allocation and low-cost index investing. But, I want to ask if you have thoughts on tax efficiency as well. In part, is it always best to totally max out on 401k/IRA/deferred accounts, or is there some point to tax-efficient investing in taxable accounts?
One of your peers, whom you've praised, Jason Zweig, has this (below) posted on his site. I'd be interested in your response. Thanks for your thoughts.
Jason Zweig writes: "Now, if your 401(k) is the only place you invest, there's nothing wrong with favoring stocks there. But if you also invest outside your company's plan, then it turns out that you will be much better off favoring bonds in your 401(k) and stocks in your other, taxable accounts.
Whether or not to max out in tax deferred accounts is a very complex question. I will be dealing with it in my forthcoming book, The Smartest 401(k) Book You'll Ever Read (Perigee Books 2008).
Most financial advisors believe that you should contribute the minimum necessary to these accounts necessary to qualify for the maximum corporate match.
The problems with 401(k) plans include high fees and poor investment options, usually with the predominant choices being high expense ratio, hyperactively managed funds.
Of course, you do not have these problems with IRAs. The Roth IRA is a particularly attractive option that should be considered by all investors who qualify for it.
I agree with the quote from Jason Zweig. It is more tax efficient to have bonds, which generate interest that would be taxed at higher ordinary income rates, in a tax deferred account. Stocks, which are tax deferred until sold, and then generate long term capital gains at lower rates (assuming they are held for more than a year and a day), should be placed in taxable accounts where possible.
Question From Unrepentantliberal:
Dan, looking ahead to the next year where, quite honestly, things look dicey for the US economy, how should a 50-ish investor with a decent 403-b account in mutual stock funds go about implementing your investing ideas in their portfolio?
Are their areas to avoided? Conversely, are there areas to be emphasized for increased return when rebalancing my portfolio? Currently I have too many stock funds and too few bond funds.
In my experience, "a decent 403(b) account" tends to be an oxymoron. I am glad yours is the exception.
I realize that most pundits agree that "things look dicey for the US economy", but consider the fact that the markets have already discounted for the news that is currently available. Future stock prices will be influenced by future news events. Since we don't know what that news will be, efforts to predict market prices are little more than financial astrology.
For the same reason, it is impossible to predict "areas to be avoided." If this could be done, presumably at the end of 2006 the "investment professionals" would have warned investors to stay away from the financial services and real estate sectors and to invest in emerging markets.
My advice to you will be familiar to regular readers of this column:
- Determine an appropriate asset allocation. If you have too many stocks and too few bonds, you clearly need to change your asset allocation;
- Use low cost index funds, if they are an option in your plan, to implement your new asset allocation, with a globally diversified portfolio.
I provide details in my archived blog, It's So Easy Your Broker Could Do It!, which you can access here.
I also provide more extensive back-up, analysis and commentary in my book, The Smartest Investment Book You'll Ever Read (Perigee Books 2006).
The views set forth in this blog are the opinions of the author alone and may not represent the views of any firm or entity with whom he is affiliated. The data, information, and content on this blog are for information, education, and non-commercial purposes only. Returns from index funds do not represent the performance of any investment advisory firm. The information on this blog does not involve the rendering of personalized investment advice and is limited to the dissemination of opinions on investing. No reader should construe these opinions as an offer of advisory services. Readers who require investment advice should retain the services of a competent investment professional. The information on this blog is not an offer to buy or sell, or a solicitation of any offer to buy or sell any securities or class of securities mentioned herein.