Daniel Solin is a securities arbitration attorney and financial advisor. His latest book is easy to read and about much more than the title suggests. I have selected these "Investment Gems" to help make us better investors:
Thank you Dan Solin!"If we don't start doing a better job of managing the nation's retirement wealth, in another 10 or 15 years, we could be facing a social crisis that dwarves the Great Depression in terms of magnitude and duration." (Center for Fiduciary Studies)
The current retirement system benefits brokerage firms, brokers, pension consultants, insurance companies, insurance agents, the mutual fund industry, and employers. Employees get the short end of the stick. This must be changed."
"Employees are stuck with high-cost plans filled with underperforming investment choices that make it extremely difficult to reach their retirement goals."
"Smart investing is very simple: Focus on your asset allocation. Invest in a broadly diversified portfolio of low-cost index funds or ETFs. Avoid nearly all annuities and expensive, hyperactively managed funds."
"Your goal is to capture market returns. They are superior returns, based on all historical data. They are yours for the taking."
"One study looked at over 23,000 funds in the Morningstar data base over an 11-year period. It found that an average of only 14% of top-performing funds were able to repeat that performance in the following year."
"If you only remember one cardinal rule about investing, this is it: Lower costs directly relate to higher returns."
"The average actively managed fund has an expense ratio of 1.50%. The average index fund has an expense ratio of only 0.25%."
"Unfortunately, the daily media grist of hype and hysteria that promotes certain stocks and actively managed mutual funds influences many investors."
"During one 15 year period, 91% of institutional money managers who were overseeing more than 200 major corporate pension funds -- couldn't beat a portfolio that sank 60% of its assets into the S&P 500 Index and 40% into the Lehman Brothers Aggregate Bond Index."
"One study looked at 237 market-timing investment newsletters from 1980 to 1992. Almost all of the newsletters went out of business by the end of the study."
"Another study of mutual funds selected by Morningstar for its own 401(k) plan found that these funds significantly underperformed a broad U.S. market index for the period 1991-99."
"Add picking "hot" mutual funds to your list of bad investment practices. It's just as bad as stock picking or market timing."
"During the past 20 years, the S&P 500 stock index generated an annualized yearly return of 11.8%. -- But during the same period, Dalbar determined that mutual fund investors captured an average yearly return of a paltry 4.3%."
"Your portfolio should consist of a mix of different classes of stocks and bonds."
"Most people don't gather investments in any sort of systematic way. They collect their financial goodies based on emotions, tips, or conventional wisdom."
The data supporting the wisdom of investing in index funds and not trying to 'beat the markets' with hyperactively managed funds is so extensive and overwhelming that just listing it could fill up a book."
"You can get as simple or as complicated as you'd like. You can keep it very simple by owning just three mutual funds that invests in domestic stocks, foreign stocks, and bonds. That's precisely what I recommend in my model portfolios."
"When constructing a portfolio, nothing is more important than your asset allocation."
"Research shows that asset allocation accounts for 90% or more of the variability of your returns."
"Any pension fund manager who doesn't have the vast majority in passive investments is guilty of malfeasance, nonfeasance or some other kind of bad feasance!"
"Selling your winners and buying the losers (rebalancing) is a prudent way to keep your portfolio in good shape, but it's a very hard thing to have the discipline to do."
"If you don't want to do your own rebalancing, you can simply invest your retirement savings in one of the Vanguard Target Funds."
"Once you understand this history, you start to appreciate that the primary beneficiary of 401(k) plans is the employer."
"Highly compensated consultants are quietly paid to steer companies into picking expensive, underperforming funds for inclusion in 401(k) plans."
"Enron workers had close to 58% of their money sunk into that corporate scallywag when its stock dropped nearly 99%."
"A minimum savings rate of 15%, including your employer's match, is critical for a successful retirement."
"Most 401(K) plans are 'dumb plans.' They offer a bevy of high-expense-ratio, underperforming, hyperactively managed mutual funds and precious few low-expense-ratio index funds, ETFs, and passively managed funds."
"Select investment for your IRA to compensate for the weakest, or missing, links in your 401(k)."
"Step back and think of all your retirement holdings as sitting in one big pot."
"30% of your stock assets should be in an international stock index fund and the balance should be in a broad domestic stock index fund that uses the Wilshire 5000 as its benchmark."
"To the extent possible, you should try to put bonds in tax-deferrred or tax-free account and put stocks in taxable accounts."
"Consider transferring company stock in your 401(k) into a taxable account and taking the tax hit instead of transferring the stock to an IRA."
"Just because the advisor sitting across from you was hired by your company doesn't mean you should trust him with your financial future."
"According to Forbes magazine, the mutual fund industry is the world's most profitable as it earns a consistent 30% pretax profit."
"In September 2007 the Harvard School of Business and the University of Oregon released a devastating study that made stockbrokers and advisors look like a bunch of bozos. Individual investors earned a yearly return of 10.54% for their stock funds during the period from 1996-2004. The brokers' clients? They mustered a yearly return of 8.04%."
"The financial field is rife with impostors. Almost anyone can call himself a "financial expert.' Beautificians face higher certification hurdles than financial advisors."
"Work exclusively with fee-only advisors: It eliminates a huge conflict of interest."
"Bill Bernstein (a Boglehead) is generally regarded as one of the most astute financial minds of our time."
"Any advisor who tells you she can 'beat the markets' is about to beat you out of your retirement nest egg."
"If you feel you need a financial advisor, make sure the advisor is an RIA (Registered Investment Advisor) who will focus on your asset allocation and the use of low-cost index funds for your portfolio."
"There is no doubt that employees would be immeasurably better off if their 401(k) plans adopted the basic features of the (government) Thrift Savings Plan."
If your 401(k) plan does not give you the option to invest in at least three broad-based low-cost index funds and a range of Target Retirment Funds, you have a subpar plan."
"If you invest in a Roth IRA, you don't have to worry as much about whether taxes will skyrocket because you won't owe taxes on this money when it's withdrawn."
"Investing in an IRA is a smart option for most investors."
"If you're just starting out, you might want to select an all-in-one Lifecycle or Target Retirement Fund that spreads your money across a wide swath of investments."
"If you name your spouse as the beneficiary of your IRA, they get to treat the inherited IRA just like it was their own--a major benefit."
"403(b) plans and annuities--They make 401(k) plans look good!"
"403(b) plans offer worse investment options than the high-expense-ratio, underperforming, hyperactive managed funds that populate most 401(k) plans."
"Annuities are particularly bad investments within a plan, where the tax deferral they offer is like wearing a raincoat indoors."
"School lounges around the country host a daily feeding frinzy, as annuity salesmen descend upon teachers like vultures, pitching their retirement products."
"Don't assume your union or administrator has your best interests at heart when it endorses 403(b) investment options."
"The costs of 403(b) annuities can range from 2 to 5 percent-putting these investments squarely in bloodsucking territory."
"There's a notable exception to high-cost annuity providers: TIAA-CREF. Think of it as the 'Vanguard' of annuity providers."
"Variable annuities rarely make sense for investors in 403(b) plans or outside of them.
"Equity indexed annuities (EIAs) are the new flavor of the month for annuity salesmen.--They're not suitable for anyone."
"Equity indexed annuities have as much chance of making investors rich as a handful of Monopoly money."
"If you can't afford to lose any cash, stick with money market and/or an FDIC-insured certificate of deposit."
"Explore available options for escaping your high-cost annuity."
"New regulations (January 1, 2009) should improve your 403(b) plan, but you need to remain vigilant."
"One kind of annuity might be an appealing option for those who want to create a steady and reliable income stream in retirement: An immediate annuity."
"An immediate annuity will essentially tranform all or part of your retirment savings into your own individual pension -- you don't have to worry about outliving your assets."
Vanguard offers a low-cost immediate annuity that does adjust for inflation, which may be worthy of consideration."
"An immediate annuity is a permanent decision-you can't revoke it. So it is important to keep a portion of your portfolio in liquid investments."
"There is no motivation for employers, 401(k) advisors, and the mutual fund industry to disturb the lucrative and cozy system that is working so well for them. It is up to you to make something positive happen. Lobby for a better 401(k) plan."
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