DOCUMENTARY FILM TRANSCRIPT
Index Funds: The 12-Step Recovery Program for Active Investors is a documentary film based on the book that is changing the way the world invests by replacing speculation with an education. Author, Mark Hebner, describes his foundational beginnings that ultimately led to the revelation of the ugly truth - that brokerage firms did not get rich by enhancing their client’s wealth, but rather (and ironically) by depleting it. This documentary provides comprehensive analysis of what works in investing and what doesn’t. Investors are bombarded with slick Wall Street sales pitches and fear tactics, all cleverly designed to get them to trade again, again and again. That’s how brokers get rich, not their clients. This film explains why investors should invest in a portfolio of index funds and relax. Many people have heard about index funds, but do not understand the overwhelming evidence as to why index funds are the superior investment option. This film will educate investors and help them understand how to make the market work for them, not their broker.
The 12-Steps Step 1: Active Investors
Step 7: Silent Partners
Step 2: Nobel Laureates
Step 8: Riskese
Step 3: Stock Pickers
Step 9: History
Step 4: Time Pickers
Step 10: Risk Capacity
Step 5: Manager Pickers
Step 11: Risk Exposure
Step 6: Style Drifters
Step 12: Invest & Relax
© 2016 Four Pines Publishing, Inc. All rights reserved. Distributed by Four Pines Publishing. Unauthorized copying, hiring, lending, public performance and broadcasting is prohibited. -2-
Mark Hebner, I am going to present you with the findings and explain how education can replace speculation. You are going to learn how to build your own financial security rather than someone else’s. You are going to learn how to invest and relax. One of the biggest reasons why investors fail to achieve their goals is that they aren’t, in fact, investors at all. They are speculators. Some people might call them gamblers. Of course, the industry puts a more positive gloss on what most investors do. The term it prefers to use is active investing. Robin Powell: Wall Street, home to the world’s two largest
Mark Hebner: Active investing has to do with an investment
stock exchanges, this iconic Manhattan address has come
strategy where an individual or a fund manager is trying to
to symbolize corporate America and in particular the global
beat a market. I say a market because there are many different
financial services industry.
markets in this world, international, U.S., even bond markets. They try to engage in different strategies such as picking stocks,
There is a famous scene in Martin Scorsese’s film The Wolf of
trying to time the market, trying to select managers who will
Wall Street in which senior broker Mark Hanna explains to new
do one of those things and beat the market. Lastly, trying to
recruit Jordan Belfort how stock broking works over a lunch of
choose an investment style that they think will have the best
martini and cocaine. The name of the game, Hanna says, is to
return at some near term future. In essence, it’s speculation
move the money from your client’s pocket into your pocket.
versus investing. And it’s actually a very bad idea because
“The number one rule of Wall Street: I don’t care if you are
we have mountains of evidence that says that none of those
Warren Buffet or if you’re Jimmy Buffett, nobody knows if a
things actually work.
stock is going to go up, down, sideways, or in circles, least of all stockbrokers. It’s all a fugayzi. It’s a fake. The clients,” Hanna
Robin Powell: The opposite of active investing is passive
goes on, “are addicted to trading and the challenge for the
investing. Passive investors don’t try to pick stocks, times,
broker is to keep coming up with brilliant ideas to keep them
managers, or styles. Instead, they buy and hold globally
trading again, again, and again. The client thinks he is getting
diversified portfolios of passively managed funds. A passive
rich, but in fact, it’s the broker who is taking home the cold,
fund or index fund can be defined as a mutual or exchange
traded fund with specific rules of construction that are adhered to regardless of market conditions.
Now, that description of how Wall Street works is, of course, designed to shock. It’s, after all, a Hollywood movie. But in
Equity index funds would include stocks of companies in
this film, we are going to discover how Hanna’s description is,
particular geographical locations, for example, the U.S.,
in fact, frighteningly close to reality. We are going to find out
Europe, or Far East Asia. Additional indexes within these
how from many people trading really is an addiction. How the
markets include segments such as small value or large growth
fund industry continues to mislead the majority of investors
stocks. Securities are purchased and held within a fund then
into thinking that if only they can find the right stock, the right
they meet that fund’s specific parameters and sold when they
sector, or the right fund manager, they can consistently beat
move outside those parameters. Think of an index fund then
as a rules-based investment vehicle.
Over the past 60 years or more, a vast amount of time, effort,
One of the advantages of passive investing when it’s done properly
and brainpower have been expended on studying how people
is that it takes human emotions out of the equation. Emotions can
should invest for the future. With the help of investment author
have a very detrimental impact on investment returns. -3-
Mark Hebner: Gambling generally has to do with a situation
equities have gone down, the emotional active investor often
where there is a 50/50 bet of an outcome that has to be close
thinks that is a signal they should be selling, but the disciplined,
to an equal wager or you wouldn’t get two sides to the gamble,
unemotional investor says I need to buy more of those equities
those offering the bet, and those taking the bet. The analogy
now to get back in balance. That is actually a much better
for the stock market is we have fair prices, which are achieved
strategy because you maintain your risk exposure.
by millions of traders in publicly traded markets around the world. Those fair prices actually set up a scenario where it’s
Robin Powell: Helping you control your emotions, keeping you
an equal 50/50 bet as to what’s going to happen in the very
invested during periods of market turbulence and rebalancing
short term. This creates an “action opportunity”, which is the
your portfolio are all key responsibilities of a financial advisor.
addictive component as described by Gambler’s Anonymous.
Yes, you could try to do it all yourself, but the chances are that if you do, you won’t reap the full benefits of a passive evidenced
Now, Barclay’s actually did a study on this. They determined
over a ten-year period, those who let their emotions drive their investment decisions cost them about 20 percent of the possible
So what are the benefits of emotion free investing from a
return they could have earned over that ten-year period.
performance point of view? Dalbar conducts an annual study called the quantitative analysis of investor behavior. Between
Robin Powell: Experts in behavioral finance have identified
1984 and 2013, it calculates that the average equity fund investor,
a number of behavioral biases to which active investors are
who periodically bought and sold, earned returns of 3.69 percent,
prone. One of the most common is overconfidence, expecting
while the buy and hold investment in the S&P 500 returned 11.11
better returns than you are likely to achieve. Another is
percent. An investor who owned a globally diversified index
hindsight bias thinking that past events were predictable, when
portfolio, would have seen returns of 12.33 percent.
in fact at the time they weren’t. Then there’s regret avoidance, vowing never to repeat the same decision if it once resulted in a big loss or missing out on a significant gain. Behavioral biases such as these cause an investor to think they have an element of control in areas where, actually, they have little or none. Passive investors choose to stay invested all of the time, regardless of the market conditions because they know that short-term volatility is unpredictable. To help them manage their risk, most of them rebalance their portfolios perhaps once or twice a year. Mark Hebner: Rebalancing is sort of the antithesis of what
If you are still a little skeptical about the wisdom of passive
the emotional investor would prefer to do. Most emotional
investing, than why not listen to what the most famous active
investors think there is a trend from the past that will continue
investor of all has to say on the subject? Yes, Warren Buffett is
in the future. So if you started off with a 50/50 portfolio and
a staunch advocate of index funds.
let’s say your stocks went up, the active investor often thinks of that as a buying opportunity because something has gone
In his 2004 letter to shareholders in his firm, Berkshire
up. But the rebalancer or the unemotional and disciplined
Hathaway, Buffett said over the past 35 years, American
investor says that’s an opportunity to get their portfolio back
business has delivered terrific results. It should, therefore,
in balance, which means you actually sell some of that position
be easy for investors to earn juicy returns. All they had to do
that has gone up. The same is true on the opposite. If your
was piggyback corporate America in a diversified, low expense
way. An index fund they never touched would have done the
The notion of randomness was further developed in the 1970’s
job. Instead, many investors had experiences ranging from
by the economist and author Burton Malkiel. In his book,
mediocre to disastrous. In his 2014 letter to shareholders,
A Random Walk Down Wall Street, Malkiel famously wrote a
Buffett said he had directed the trustee of his sizable
blindfolded monkey throwing darts at a newspaper’s financial
inheritance to invest ten percent in short term government
pages could select a portfolio that would do just as well as one
bonds and the 90 percent balance in an equity index fund. Not
carefully selected by the experts.
only then does Warren Buffett recommend passive investing to ordinary investors, when he dies he wants his money to be
Both Samuelson and Malkiel had a significant influence on
invested passively as well.
Jack Bogle, the founder of the Vanguard Group, the firm that pioneered passive investing to individual investors. Mark Hebner: The Random Walk hypothesis is really crucial for investors to understand. It, in essence, says that the current price includes all of the information we currently know and actually the impact of that information on the future. So what that really says is now the change in price in the future has to do with new information that is random and unpredictable by definition. Nobody knows tomorrow’s news. The recognition of this randomness of returns sort of eliminates the ability for investors to try to pick stocks and try to time the market. That’s why it’s so important that they understand the Random Walk
In traditional 12-step programs, the second step is to
acknowledge the presence of a higher power. Investors have a higher power. It’s evidence. Rigorous, independent, peer
Robin Powell: The second key concept underpinning passive
reviewed, time-tested evidence about how markets work and
investing is the Efficient Market hypothesis. In a paper
how to invest. That evidence has been compiled over many
published in 1965, Professor Eugene Fama challenged the
decades by distinguished group of academics, many of them
assumption that the resources available to professional fund
Nobel Prize winners.
managers enabled them to outperform a randomly selected portfolio of securities with similar risk levels. His conclusion
Broadly speaking, their findings can be summarized in three
that was that there was no outperformance beyond what you
key concepts. The first concept investors need to grasp
would expect through random chance.
is the random walk. It dates back to 1900 when the French mathematician Louis Bachelier concluded that there is no
In another paper published five years later, Fama concluded
useful information contained in historical price movements of
that equity markets consistently incorporate all available
securities. Future price movements, said Bachelier, were no
information into prices, and the trends in capital markets
more predictable than the steps of a drunkard.
cannot be identified in advance. The only way an investor can expect to beat the market return is by taking risk greater than
But it wasn’t until the 1960’s that academics acknowledged the
the market. His work on market efficiency later earned Fama
significance of Bachelier’s contribution; foremost among them,
the Nobel Prize in Economics.
economist Paul Samuelson. His findings can be summarized as follows: market prices are the best estimates of value. Price
Mark Hebner: The Efficient Market hypothesis, is one of the
changes follow random patterns. And future news, and hence
most challenged ideas in finance and finally in 2013, the Nobel
stock prices, are unpredictable.
Prize was given for it, further evidence of its importance is the
continued increase in the interest in an index fund. The index
information is already incorporated in the price of each
fund is actually born out of the idea that markets are efficient.
security. Markets react to new information, which by its nature is unpredictable. Markets are prone to periods of volatility, but
Robin Powell: The third and final concept to consider is Modern
over the long term, they will reward investors for the risk they
Portfolio Theory. It was developed by another Nobel Laureate,
take. Finally, the most effective way to reduce risk is through
Professor Harry Markowitz. He showed that assets should be
diversification. The rational approach then is to invest for a
evaluated not only for their individual characteristics, but also
very long time in a highly diversified portfolio and to resist any
for their combined effect on a portfolio as a whole. Reducing
temptation to change course.
risk, Markowitz argued, was just as important as maximizing return, and that requires having a diversified portfolio. Modern Portfolio Theory has evolved over time. In 1992, for example, Eugene Fama and Kenneth French expanded on it with a paper on different risk factors that drive market returns. As much as 96 percent of historical returns, they found, could be explained by exposure to market, size, and value risk. The work of Fama and French inspired David Booth and Rex Sinquefield to found Dimensional Fund Advisors, a mutual fund company based in Austin, Texas, that’s helping to revolutionize the way we invest. We are now going to take a closer look at why it’s so hard Mark Hebner: The Fama and French Multifactor model was a
for professionals, as well as ordinary investors to beat the
sort of evolution in the idea of indexing. We started off with just
market by picking stocks. Think about it from a purely logical
a broad, general market based on the market capitalization
perspective. Is it realistic to presume that an individual investor
of companies, as sort of the starting point of indexing. Let’s
or stockbroker can know more than the combined knowledge
just buy the S&P 500, as an example. But as researchers
of millions of traders all over the world.
continued to look at different characteristics or dimensions of companies, they realized that small companies, for example,
Mark Hebner: An investor should think of the market as
had had higher returns than large companies. And value
this huge processing machine, collecting the information
companies had had higher returns than growth companies.
and knowledge and forecasts of some ten million traders on
So they started moving to the idea that you could construct
some 44 stock exchanges around the world, trading some ten
portfolios -- diversified portfolios --with those factors weighted
billion shares a day. So what this does is it embeds all of this
into those particular companies, in that particular index, and
information into the prices that a willing buyer and a willing
actually end up with portfolios that are of slight higher returns
seller are willing to trade at. Through this process, we end up
than the broad market capitalization weighted portfolio.
with the best estimate of the value of all of these securities, both stocks and bonds all over the world.
Robin Powell: Of course, it’s not essential to understand the finer details of the Random Walk, the Efficient Market hypothesis
Robin Powell: You should think of the market then as a
or Modern Portfolio theory to be a successful investor, but if you
collective brain or a giant supercomputer that works out the
are going to have a passive investment strategy and stick to it,
very latest best guesstimate of a security’s worth based on the
you need to understand why you are doing it.
combined wisdom of millions of people all around the world. Professor Terrance Odean studied 10,000 brokerage accounts and discovered that investors habitually over-estimated the
To summarize, markets are broadly efficient. All known
profit potential of their stock trades. In many cases, their profits
12 of them ended up with returns that outperformed the index
didn’t even cover their transaction costs. Odean also found
over the entire period. “Searching for excellent companies was
that many investors are prone to overtrade. In the five years to
like trying to catch light beams,” they concluded. “They were
1996, investors who traded most earned an annualized return
easy to imagine, but so hard to grasp.” In 2010, Meir Statman
of 11.4 percent, compared to the annualized market return of
and Deniz Anginer wrote a study on Fortune Magazine’s annual
list of America’s Most Admired Companies from 1983 to 2007. Using Fortune’s ratings, they constructed two portfolios, the
One of the reasons why investors are so attracted to the idea
Admired Portfolio containing the stocks with the highest
of picking stocks is that they see so many people who seem
ratings, and the Spurned Portfolio containing the stocks with
to be pretty good at it. Of course, the media loves a good
the lowest ratings. Over that period, the portfolio of spurned
story and is always coming up with examples of so-called star
stocks produced an annualized return of 16.12 percent, while
fund managers. But the reality is that fund performance is
the admired stocks produced a return of 13.81 percent.
essentially very random -- so random, in fact that it’s almost Mark Hebner: I think one of the more common myths is
impossible to distinguish skill from pure luck.
that good companies are actually good investments. I think if Olivier Scaillet and Russell Wermers analyzed the performance
investors were to think about what goes on in a trade, they
of 2,076 mutual fund managers between 1975 to 2006. They
might realize that may not be the case. So for example, let’s
found that 99.4 percent of those mangers displayed no
say there’s this wonderful company that the whole world
evidence of genuine stock picking skill, and that the 0.6 percent
admires. I don’t know, let’s call it Apple today. I want to buy
of managers who did outperform the index were statistically
those shares from somebody who is already holding those
indistinguishable from zero. In other words, just lucky.
Apple shares. Well, that individual is going to say, “Well, wait a minute. I don’t want to give up these great expected returns in the future unless you pay me for some of those today.” That’s why, in effect, there are no basically free lunches lying around. The seller demands a fair price given the greatness or the goodness of the company. And when you pay the fair price, you basically earn a return that is appropriate for the risk you have taken, and great companies don’t appear very risky to me. Those sort of great, good companies often fall in the classification of growth companies and the value companies are typically a distressed company. When we look at their difference in those returns over very long periods of time, they are roughly five percent per year.
Suppose you are lucky enough to pick a stock that outperforms the market. What then? The evidence shows there is no
Robin Powell: So do the same rules apply to fixed income or
guarantee that your chosen stock will continue to thrive or
bond investing? Can an active bond manager add value by
even survive in the future.
picking the right securities? Well, someone whose name has become synonymous with bond investing is Bill Gross, formally
In their 1998 book, Creative Destruction, Richard Foster and
of Pimco. His record is certainly very impressive, but it is also
Sarah Kaplan showed how the companies that made up the
worth noting what Gross himself has to say about it.
original S&P 500 performed after the creation of the index in 1957. Only 74 companies remained on the list in 1997 and just
acknowledged the part that luck had played in his success.
of risk. So, what percentage of times do market-timing gurus
“All of us, even the old guys like Buffett, Soros, Fuss, have
get it right? CXO Advisory Group tracks public forecasts of
cut our teeth during perhaps the most attractive epoch that
self-proclaimed market-timing gurus and rates how accurate
an investor could experience,” said Gross. In his December
they are. For the period from 2000 to 2012, the researchers
2013 letter, Gross addressed the issue of passive investing.
found that not one of the gurus was able to meet Sharpe’s
“Jack Bogle’s early business model at Vanguard promoting
requirement of 74 percent accuracy.
index funds was a mystery to me from my beginning years at Pimco,” he said. “Why would most investors be content with
Mark Hebner: In short, the reason that market timers do so
just average performance, I wondered. The answer is now
badly is that nobody can see the future. I mean this should be
obvious; an investor should want the highest performance for
obvious to investors. The future is an unknown. We don’t know
the least amount of risk, and for almost all measurable asset
what’s going to happen a month from now, a day from now
classes, index funds and many ETF’s have done a better job
even. This random, unpredictable news is what drives prices.
than almost all active managers.” Robin Powell: There are two big challenges for market timers. It’s easy to understand the allure of stock and bond picking,
Being in the market on the best days and out of it on the worst.
but while it’s made a fortune for Wall Street stockbrokers, it’s
The problem is, there are very few of either and both are very
proved far less financially rewarding for their clients. Stock
hard, if not impossible, to identify in advance.
picking is like looking for a needle in a haystack, an ill-fated pursuit that wastes time, energy, and money. A better solution
Professor Nejat Seyhun analyzed 7,802 trading days from 1963 to
is to trust the collective wisdom of the market, and to buy the
1993 and concluded that just 90 days generated 95 percent of all
that period’s market gains, an average of just three days per year. As we have learned, markets are essentially efficient. Prices incorporate all known information. Something that advocates of market timing often fail to grasp is just how quickly new information is devoured by market participants. In his book, Analysis for Financial Management, Robert C. Higgins writes, “The arrival of new information to a competitive market can be likened to the arrival of a lamb chop to a school of flesh eating piranhas. The instant it hits the water, there is turmoil as the piranhas devour the meat. Very soon, the meat is gone, leaving only the worthless bone behind. No amount of gnawing
So we’ve looked at stock picking. Now, let’s explore time
on the bone will yield any more meat and no further study of
picking, better known as market timing. Market timers claim
old information will yield any more valuable intelligence.”
the ability to predict the future movement of the stock market -- getting into the market before it goes up and getting out
Mark Hebner: If you turn on just about any financial news
before it goes down. However, numerous studies from
program at any point in the day, it won’t be long before you
industry and academic experts demonstrate that market
will hear a broadcaster talk about the future direction of the
timing is a bad idea. In his 1975 study, “Likely Gains from
market, such as the market is “going up” or the market is
Market Timing,” Nobel Laureate William Sharpe calculated
“going down.” The use of that phrase “going” actually is the
that a market timer must be accurate 74 percent of the time in
reason that investors want to trade. If you hear it is going up,
which to outperform a passive portfolio at a comparable level
why would you want to buy some of that? If something is going
down, you certainly want to sell it. So why do they do this? Well,
There is a very good reason that the SEC requires that, and
in essence, they are encouraging their viewers to call their
there basically has not been any evidence that a manager’s
stockbroker and place trades. Why is that? The advertisers for
past good results will replicate in the future.
these financial media programs benefit from trading. It’s their business model to make money when people trade. So when
Robin Powell: In a study of active fund performance between
investors can learn that these future trends don’t exist, all you
2002 and 2013, Morningstar found that an average of only
can say is that the market has “gone up” or the market has
7.8 percent of the top 100 fund managers repeated their
“gone down,” they will move a lot closer to this idea of being a
performance the following year. In 2008 and 2009, none of
them repeated their previous year’s top 100 performance.
Robin Powell: People invest because they want a return. Buyers
Variations in fund manager performance are a function
pay a price that reflects the risk associated with capturing
principally of two things: first of all, luck, and secondly, the
that return. So a fair price equals a fair expected return. Now,
rotation of the style of their particular fund. When a manager’s
prices may subsequently go up or down depending on new
style is rewarded by the markets, that manger is often credited
information, but it’s best to assume at the time of a trade, that
with skill. But when market conditions change, very often, so,
the price is a fair one.
too, does the fund’s performance.
Time pickers like to think they can predict future market
Mark Hebner: Another problem in the analysis of the returns
movements, but they can’t. Why not? Because they can’t predict
of mutual fund managers from the past is this earn accounting
the next news story. There is no competitive edge that exists
of the funds that actually went out of business because they
other than illegal inside information. The best thing to do is to
had quite horrible returns. We call this a “survivorship bias”
invest for the long term in a low-cost portfolio of index funds.
of the data. Robin
performance tables. Citing data from the Center for Research in Security Prices, John Bogle calculated that it inflates the remaining funds average returns by 21 percent. A Morningstar study found that for the ten-year period to the end of March 2014, only 53 percent of actively managed funds across all categories survived. Even large institutions and pension plans chase performance, much to their detriment. Many of them hire outside consultants at great expense to choose funds for them. A study by Amit We have already seen how picking stocks and trying to time
Goyal and Sunil Wahal found that hiring and firing fund
the market is counterproductive, but what about finding a
managers was a waste of time and money. They analyzed
fund manager to do all that for you? Well, it sounds great in
the results of hiring 8,755 managers over a ten-year period
principle, but in practice, picking managers doesn’t work either.
from 1994. Managers who were hired had outperformed their benchmarks by an average of 2.91 percent over the three
Mark Hebner: Trying to pick the manager who will outperform
years before being hired. But, when costs were factored in,
their index in the future is a very difficult task. It goes against
those same managers underperformed their benchmarks by
the required statement on all mutual fund prospectuses which
0.47 percent over the following three years.
is past performance does not guarantee future performance.
To add insult to injury, the researchers also found that the
Robin Powell: Unlike actively managed funds, index funds
managers who were fired proceeded to outperform those who
are created according to specific criteria, allowing for accurate
tracking and prevention of style drift. By definition, they have to stay true to their stated style.
Remember as well, even if a fund does outperform consistently, that doesn’t necessarily mean the manager of
According to data from Standard and Poor’s Indices Versus
that fund is genuinely skilled. It can take a track record of many
Active Funds (SPIVA) scorecard, fewer than half of active
decades to be able to say with any degree of certainty that an
domestic equity funds remained style consistent over the five-
outperforming fund hasn’t simply been lucky.
year period ending in December 2013.
So next time you read about a star fund manager, be very
The bottom line is that if you invest in actively managed funds
cautious. Like unicorns, Big Foot, and the Loch Ness Monster,
then style drift is a very real danger. The way to avoid it, invest
the idea that you can rely on manager skill for consistent
in index funds instead.
outperformance belongs in the realm of fantasy.
Most people pay little attention to their cell phone bill. They When you buy a box of Corn Flakes, you expect it to contain
just look for the final figure at the bottom and write a check.
Corn Flakes. You know you are not buying granola or oatmeal.
But read it line by line, and you will see that it includes several
It’s safe to assume the name on the box is true to the box’s
fees that don’t go to your actual carrier. City telecom tax, state
contents. This is not the case with active fund managers who
telecom tax, and 911-service fee. They may seem small, but
engage in style drifting.
over time, they add up. Well, just as with your cell phone bill, your investment portfolio is also vulnerable to silent partners.
Mark Hebner: Style has to do with really the asset class that the investor tends to tilt their portfolio to. So for example, if
Mark Hebner: I like to remind investors that every time they
you were running a large value mutual fund, you have tilted
trade, they should think of a long line of individuals just sitting
your stock selection towards value stocks, and that’s a style.
there waiting for this trade to occur so they can all take a little
One of the problems with this is they often compare their
piece of this transaction. You have brokers who get some share
returns to a non-value index such as a large blended index like
of the trading commission. You have mutual fund companies
the S&P 500. Then they claim that they beat that benchmark,
who get a load or a commission every time someone purchases
when in fact, all they did is style drift into value stocks, which
their mutual fund. Then you have these trailing fees -- they are
we have a long history and documentation that they have had
called 12b-1 fees -- so those are little payments to the broker
higher returns. So did they actually beat their benchmark or
who recommended the fund. But, probably the biggest one
did they actually take different style risks with your money?
are the taxes incurred by active investors when they recognize
- 10 -
gains in their portfolio, especially if they are short-term gains. The short-term gain is treated as ordinary income and the long-term gain is treated as long-term capital gains. But, those taxes are really the largest silent partner. I like to call them a silent partner because so few investors dig into the details of all of these costs and expenses associated with their purchase of an investment or a security. Robin Powell: According to a 15-year study conducted by Vanguard founder John Bogle, investors kept 47 percent of the cumulative return of an average actively managed equity mutual fund, but 87 percent of the return of a typical index fund. Such contrasts in taxes reveal why passive investing
Citizens of Japan speak Japanese. Lawyers speak legalese.
makes for one very sad Uncle Sam.
insurance actuaries speak “Riskese.” Riskese is the essential Another problem is that the higher the turnover rate, in other
language of investing. It’s used to discuss topics of risk, return,
words, the more trading a fund does, the higher the investor’s
statistical significance, and time. Risk and returns go hand in
tax liability will be. An average actively managed mutual fund
hand. You can’t expect high returns without taking risk. People
has a far higher turnover rate than a typical index fund. There
are perfectly comfortable talking about the returns portion
is, however, an even bigger factor in underperformance by
of the investment process, but they become very squeamish
actively managed funds, fund fees.
when they realize they will lose money on their investments.
Mark Hebner: One of the primary reasons that actively
Mark Hebner: The idea of the term riskese came to me as I was
managed mutual funds underperform index funds are the
sitting in lectures provided by academics who literally speak
fees. If you were to go to Morningstar today and take an
their own language. They rattle off terms like correlations,
average of all the mutual funds that there are, I would say
standard deviation, and T statistics that they just assume
conservatively, about 1.2 percent is the average expense ratio
their audience is aware of and they knew the definitions of.
of a mutual fund. Now, if we go look at index funds, we can
As I looked around the room, I noticed that there were a lot
see costs as low as 0.05 percent. But if you build a globally
of people who weren’t quite following these academics, and it
diversified portfolio with a little small and value tilt, you are
occurred to me they have their own language. We sometimes
coming in more around 0.30 or 0.35 percent, so that is one
call it academic speak, but for investors the important part of
third of the cost.
that language is this characterization of risk. This relationship between risk and return has to do with the uncertainty of
Robin Powell: Over time, the combined impact of fees and
the return and then the price that a willing buyer is willing
taxes really can eat into an active investor’s returns. No
to pay based on that uncertainty. So, let’s assume I have an
investment is free from silent partners, but by keeping that
investment that we would expect to earn ten percent a year
cost to a minimum, passive investors also keep a much higher
and you want to buy that from me. One of the first things you
proportion of their investments returns for themselves.
want to know is how certain is that ten percent. The more risk or uncertainty associated with that ten percent, the lower the
- 11 -
price that you would be willing to pay for that investment.
average, shaded yellow or green, accounts for 95.6 percent of outcomes. The area up to three standard deviations away from the main shaded yellow, green, and orange, accounts for 99.7 percent of all outcomes. The higher an investment’s standard deviation, the greater the chance that future returns will lie farther away from the average return.
Robin Powell: Every investment carries an expected return. The risk of investment is quantified by the degree to which the returns of the investment deviate from the average return during specific periods of time. Higher risk investments carry a wider range of short-term outcomes, but also carry higher expected returns, compensating investors for withstanding
Mark Hebner: What we have here is a probability machine.
short-term volatility. In contrast, investments that have had
The probability machine helps demonstrate randomness,
a narrow range of outcomes over long periods of time are
sometimes called chaos up top as the beads bounce around
expected to provide more consistent returns for the trade-off
like crazy, and the normal distribution of stock market returns.
of lower returns. For example, an all bond index portfolio has
The reason that we have this machine is to use this as a tool
provided a small, but consistent return while an all equity index
to explain stock market randomness. So, as you look in the
portfolio has provided a larger, but more erratic return. Higher
background here, you see these red bars. Those red bars
expected returns are the reward for investors’ willingness to
represent 600 monthly returns of a globally diversified portfolio
accept this volatility. In other words, risk is the source of returns
of index funds of stocks. Okay, this is an equity portfolio, right?
and should therefore be embraced in appropriate doses.
What you see is right down the middle is about one percent a month. Then the extreme tails are plus 15 percent in a month
Mark Hebner: The measure of the volatility of investment
and minus 15 percent a month. About two thirds of the time, it’s
returns that is most often used is standard deviation. It’s a
plus or minus 4.5 percent. That’s called the standard deviation.
standardized measure of how much returns deviate from the average return. If we were to look at the S&P 500 over the last 87 years, we would see that the average is about ten percent, but about two thirds of the time, we see a range of 20 on the plus side and 20 on the negative side. So, we like to say that the S&P has an average of ten and a standard deviation of 20. Robin Powell: The concept of standard deviation is illustrated in this bell-shaped curve. The curve represents a set of outcomes. In this case, let’s say the outcomes are the monthly returns of an investment. The yellow area covers one
Robin Powell: It’s also useful for investors to think in terms of
standard deviation on either side of the average and accounts
the different dimension of risk that drive investment returns.
for approximately 68 percent of investment outcomes in a
We owe our understanding of these risk dimensions principally
given period. The area within two standard deviations of the
to two academics, Eugene Fama and Kenneth French.
- 12 -
than you might think. Investors have reams of historical data Mark Hebner: The Multifactor model took the equity returns
at their disposal, yet they tend to base their decisions on very
of stocks and carved them up into slices, basically looking at the
recent data and assume that a fund that has performed well
size of the companies and a value growth metric. So by dividing
over say, the last three years, will continue to perform well in
up the market into these slices and looking at the returns
of these different slices, academics and, primarily Fama and French, uncovered that there had been higher returns among
Mark Hebner: The first problem investors have is collecting
the small companies and among value companies. Then when
a large enough sample size so that they can characterize the
you blended that, you even had a combination of these factors
risk and return of an investment. Now, how large a sample you
for even higher returns.
need is tied to how variable the data is. We have stock market returns with 20 percent standard deviations. That is very large
Robin Powell: Just as there are risk dimensions with stocks,
from a statistical point of view. So preferably, we like to see at
there are also different factors that drive bond returns. The
least 30 years, but my preference is even 50 years and most
term or maturity risk factor refers to the difference in returns
academics want to see the whole 87 years of data before they
between long-term government bonds and short-term
would start making generalizations or estimations about the
treasury bills. Longer-term bonds are riskier than short-term
expected returns, or even the volatility of stock market returns.
instruments and have historically yielded higher returns. There is also the default risk factor, which is associated with
Robin Powell: Let’s look at an example of how focusing on a
the credit quality of bonds. Instruments of lower credit quality
short time period can create a misleading impression. In the
are riskier than those of higher credit quality, again yielding
five-year period from 2009 to 2013, the S&P 500 index had an
higher expected returns.
annualized return of almost 18 percent. Based on that return, many investors would conclude that the S&P 500 was a shoot
Risk, you will have noticed, is a very complex subject. You don’t
the lights out investment. However, for the 20-year period
need to be an expert to be a successful investor. However,
ending 2013, the annualized return was 9.22 percent, more in
you do need to understand the basic principles. In a nutshell,
line with the 50-year period ending 2013.
returns are the rewards for the risk an investor takes. As well as exposing your portfolio to general market risk, it also makes
There are times when investing is like riding a roller coaster.
sense to utilize the different dimensions of risk to maximize
History is littered with examples of market crashes, the biggest
of which came in 1929. Now, this is the tickertape from the day of the stock market crash in November 1929. In those days, trading volumes were so low that you’d get about three or four listings every hour, but this represents the first 45 minutes of trading on that day. Later that day, a broker from Boston fished this ticker tape from out of the trash because he realized that this was a very significant day in history. He framed it and he put it on the wall of his broker’s in Boston, just to remind himself and his colleagues that crashes like this, really severe crashes, do happen. But despite such crashes, financial markets have almost always rewarded patient investors. The most complete
We think of the financial markets are very much part of the
historical database with stocks, bonds, and mutual funds can
modern world, but they have been around for much longer
be found at the Center of Research and Security Prices, or
- 13 -
CRSP, based at the Booth School of Business at the University
and returns associated with different asset classes. It helps them
of Chicago. It provides data from 1928 to the present day. This
to build an asset allocation appropriate to their risk profile. It also
graph shows the growth of a dollar in various indexes over the
equips them with the knowledge needed to withstand short-term
course of 86 years. During that period, there have been some
very major news events. While it’s true that those events did have big, short-term impacts on market prices, they proved to be largely inconsequential in the long term as the market marched ahead. Despite several setbacks, capitalism has not only persevered, but thrived. Mark Hebner: Depending on where you start a monthly return series, you can get very different results. If I look at results from January to December, I can see one kind of return, but if I shift that even one month, you can get a very different return. When you look at data on a monthly rolling basis, you are, in essence, capturing a simulated passive investor experience. Picture the market as a wild bull bucking up and down rearing, kicking, and twisting. Investors are like bull riders, and matching the right portfolio to an individual’s ability to handle risk is like finding the right bull for each investor to ride through the ups and downs of the market. Each investor has a unique risk capacity, which can be quantified in what’s called a risk capacity score. Higher scores signify a higher capacity for risk, a longer time horizon, and an ability to withstand market volatility. Investors with higher scores are generally recommended to hold portfolios with a larger allocation of Robin Powell: The information contained in monthly rolling
stocks. By contrast, lower scores signified a lower risk capacity
data is far more detailed than yearly data. For example, in a 50-
and a greater need for liquidity. Investors with lower scores
year period, there are 589 rolling 12-month periods, as opposed
are steered towards more conservative portfolios that hold a
to 50 consecutive non-overlapping 12-month periods. This
higher proportion of short-term bonds.
table charts the comparative performance of different equity indexes from 1928 through 2013. It shows that over 1,021 one-
Risk capacity can be regarded as a measurement of an
year monthly rolling periods, a simulated passive investor in a
investor’s ability to earn stock market returns. Calculating risk
large growth index beat a simulated passive investor in a large
capacity is the first step to deciding which portfolio will deliver
value index 44 percent of the time, causing investors to think it
optimal returns for each investor.
might be a toss-up between large growth and large value. But, in 793 20- year monthly rolling periods, the large value index
Mark Hebner: Where many of these surveys focus on just
beat the large growth index 88 percent of the time. Over short
your feelings about a loss, that’s why they call it the risk
periods, volatility and price swings confuse investors as to
tolerance survey, I see that as really just one dimension of my
which index is a better long-term investment, but the picture
becomes clearer when longer periods are considered. Robin Powell: The five specific dimensions of risk capacity are So, studying market history helps investors to understand the risks
these: time horizon and liquidity needs, attitude toward risk, net
- 14 -
worth, income and savings rate, and investment knowledge. It’s
can blend these various asset classes together, really indexes
hard to overestimate the importance of calculating an accurate
from all over the world in a way that you maximize the return
risk capacity score. You, as the investor need to take an active
given a certain level of risk.
role in helping your advisor to work it out. Get it right, and you Robin Powell: Investors should think of their portfolios as
are far more likely to enjoy a successful investment experience.
an investment in global capitalism with a total market cap of $41 trillion, annual profits of $2.4 trillion, more than 12,000 CEO’s worldwide, and more than 72,000,000 employees selling products in 192 countries, it simply isn’t reasonable to believe that Capitalism, Inc., would go out of business. And, if it did, your money would be worthless.
Once your capacity for risk has been evaluated, the next step is for your advisor to construct a suitable investment portfolio. There is one man more than any other who has contributed to our understanding of portfolio construction, Professor Harry Markowitz. As a Ph.D. candidate in the 1950’s, Markowitz
Mark Hebner: Portfolios should include a broad diversified
believed that investment professionals erred by focusing too
exposure to equities within each geographic area of the world.
much on the returns of individual stocks with no consideration
That’s also good to have some exposure to real estate. It’s a
of the concept of risk exposure. Markowitz set out to prove that
little bit unique of an asset class. It has a low correlation of their
you could generate bigger investment returns by optimizing
returns with equities, meaning if equity markets are up, you
the trade-off between risk and return.
might see real estate down. When equity markets are down, you could see real estate up. Then lastly, you should have a
In his Nobel Prize winning paper, “Portfolio Selection”
broad diversified exposure to fixed income. The fixed income
Markowitz established the importance of diversification. He
should include some governments and some corporates and
asserted the best portfolios include non-correlated stocks that
some maturities that pretty much stop at five-year maturities.
act and move independently from each other. Today, trillions
If you go much longer than five-year maturities, investors
of dollars worldwide are invested according to his principles of
subject their portfolio to greater risks, but not much greater
risk and return.
Mark Hebner: The risk exposure that an investor has in their
Robin Powell: Once investors identify the asset allocation that
portfolio can really be best characterized, first and foremost,
matches their risk capacity, they have a choice to make as to
by their allocation between stocks and bonds. But beyond that,
how best to implement that asset allocation. A small number
we want to build exposures to risk factors that we know have
of fund providers over asset class indexes, the most prominent
correlation to returns over the very long term. So, we would
of which are Vanguard and Dimensional Fund Advisors.
start with a global equity portfolio, but then tilt that portfolio to value and small companies around the world -- in emerging
Mark Hebner: The differences between Vanguard and DFA
markets and international markets and U.S. markets. So, you
first have to do with a definition of their indexes. So if we were
- 15 -
to see the rules that they use to construct small and value, for
Our journey of discovery is almost at an end. We have just one
example, you would see they actually use different criteria to
more issue to explore, one more lesson to learn, a lesson that
define what is small and define what is value. Finally, when
might well make the difference between your achieving your
they go to implement or actually purchase the stocks to
investment goals and not.
complete the portfolio, they also have different rules as to how they implement the actual portfolio. So when you combine all of these factors, you end up with very different returns for investments that have the same name and even different fee levels. Vanguard has actually a lower fee and Dimensional is a little higher fee, but the Vanguard actually had a lower return among many of the asset classes that we show.
So we have learned how to invest, not to speculate as most people do, but truly invest. How to calculate your capacity for risk and then to build a portfolio that maximizes the returns you can expect for the level of risk you decide to take. Armed with that information, you could probably manage on your Robin Powell: This chart plots the risk and reward for 20 index
own without a financial advisor, but there are some very
portfolios and for various indexes over the 50-year period
compelling reasons why you shouldnâ€™t try to.
from 1965. In a nutshell, it shows the benefits of efficient portfolio design. The number of each portfolio represents the
Mark Hebner: We actually went back and looked at over 650
proportion of stocks. So portfolio 70 for example, contains 70
clients who invested with us over a seven- year time period
percent stocks. Note how the S&P 500 index had similar risk
from before the 2008 crash up until 2014. We were quite
characteristics to portfolio 90, but delivered a lower return. The
surprised to see when we divided those clients into a couple
chart clearly shows the value of diversifying beyond the large
of buckets, those who basically followed our advice and those
cap companies in the U.S., as reflected in the S&P 500 index.
who didnâ€™t follow our advice but actually stayed here at the
Portfolios 60 to 90 all delivered higher annualized returns with
firm. So we could actually track how well they did. What we
the same or less risk than the S&P 500.
discovered is that those clients who basically stuck with the program, the passive investing program, they actually earned the full return of the original index portfolio they were advised to invest in. But then the group who decided to kind of go on their own, sort of the rogue client, if you will, and were concerned about the market so they went to cash. Then they decided when was the right time to come in. They basically decided they wanted to take over their portfolio. We put them in another bucket. What we found is that they only earned 70 percent of the return of the original portfolio they had elected to be in. So that was a 30 percent cost to them by not sticking with the advice of an advisor.
- 16 -
Robin Powell: In short, you need to find a financial advisor who is unconflicted, who doesn’t receive commission for recommending certain products. You want someone who will recommend the course of action for one reason and one reason only: it’s in your best interest. Remember, you are also looking for an RIA with an evidence-based investment philosophy who specializes in passive investments. He or she should be able to help you invest according to your risk capacity, properly allocate assets across a blend of globally diversified passively managed index funds, maintain a portfolio with appropriate Robin Powell: Look for example, at the financial crisis of
risk exposure, avoid the impulse to react to market volatility,
2008. Confidence was high the previous October when the
and minimize investment costs and taxes.
Dow Jones Industrial Average reached its peak of 14,164. The Dow then steadily declined for more than a year and then dropped sharply by 22 percent in just eight trading days in October 2008. The market continued its decline over the next five months and bottomed out at 6,547 in March 2009. Many investors pulled out of the market altogether, but the Dow then shot back up, hitting the 17,000 mark in July 2014. Those who threw in the towel caused irrevocable damage to their long-term returns. The legendary investor Benjamin Graham once said, “The investor’s chief problem, even his worst enemy is likely to be
We have looked at the importance of asset allocation and
himself.” Indeed, some investors get in the way of their own
matching your portfolio with your capacity for risk from the
success. You may want to see the fees you pay to a passive
outset. It’s also essential that you maintain the appropriate
advisor as an insurance premium, insuring against your mistakes
asset allocation throughout your investing life. This is achieved
and lack of knowledge. So how do you find a suitable advisor?
through rebalancing, which is something else your advisor can do for you.
Mark Hebner: Through my experience in talking to many investors over the 16 years that I have been doing this, one of
Mark Hebner: Because investors are compensated for the
the most misunderstood concepts is this idea of a fiduciary.
risk they take, they need to make sure that they hold that risk
A fiduciary is somebody who has an obligation and a duty
constant over time. One of the primary strategies in doing
to do what is in the best interest of the other party, even if it
that is a rebalancing of the portfolio. This is a difficult move
goes against their interest. What is so surprising to so many
for investors. It’s actually counterintuitive to what you might
investors is that a broker working at a brokerage firm actually
emotionally want to do. If the markets have gone up ten percent,
has an exclusion from being a fiduciary to their clients. I
your intuition might say, “Gosh, it’s going to continue to go up. I
always like to tell people follow the money. So if you follow
don’t want to sell now. I want to wait until it’s going down.” But
the money for the broker or an advisor who isn’t a fiduciary,
nobody knows what these directions are in the future. So to be
you will see that they get their compensation, their payment
disciplined about this, you want to set boundaries, and when
for the products they sell or for the activity that they generate
you reach those boundaries, you automatically adjust your
from the client. But someone who has a pure fiduciary duty is
portfolio and maintain the risk exposure that’s appropriate to
paid directly by the client, which aligns their interests with the
your risk capacity.
interest of the client. - 17 -
Robin Powell: Your advisor will also need to devise whatâ€™s
upward trajectory despite numerous events that at the time
called a glide path strategy for you, reducing the level of risk
seemed catastrophic. We have learned how important it is to
you take the closer you come to retirement by increasing
evaluate your capacity for risk and to build your investment
the proportion of bonds in your portfolio and reducing the
portfolio accordingly. Finally, we have seen how having a
number of stocks.
trusted passive advisor can help you feel relaxed about your investments.
Mark Hebner: Another very important role for advisors is to monitor the tax loss harvesting opportunities for investors in
Mark Hebner: I wanted the investor to be able to invest
taxable accounts. So what is that? I like to call it the silver lining
and relax and to have a peaceful and profitable investment
in the cloudy bad market, the scary market that is kind of like
experience so that in their retirement years, they can actually
dark clouds in the sky. The silver lining around those clouds is
enjoy themselves and not be nervous or fearful that someday
the opportunity to actually harvest those losses, which basically
they are going to run out of money or have to rely on the
give you credits against capital gains tax that you may have to
government or family to support them.
pay in the future as you recognize capitals gains. So the way we do that is we monitor investments for losses of ten percent and $10,000.00. Once we reach that trigger, we alert the client that it would be time to harvest that loss, which is basically sell the index that is down, buy another index that is in a different asset class for 31 days, then 31 days later, you reverse that back to the original potion. Itâ€™s a complicated strategy, but it can be very beneficial to clients in taxable accounts.
Robin Powell: That brings us to the end of the 12-Step Recovery Program for Active Investors. We have come a long way. We have seen the detrimental impact our own emotions can wreak on our investments. We have taken a brief walk through the milestones of financial science and learned to respect the collective wisdom of the markets. We have observed the futility of chasing performance. We have seen the self-defeating nature of trying to predict future market movements and the huge part played by random chance in fund returns. We have learned how risk and return go hand in hand. Weâ€™ve seen how markets have continued their long-term
- 18 -
BASED ON THE BOOK INDEX FUNDS: THE
12-STEP RECOVERY PROGRAM FOR ACTIVE INVESTORS ART BY LALA RAGIMOV CINEMATOGRAPHY BY JIM ANDERSON & TIM MEYERS EDITED BY JONATHAN NICHOLAS WRITTEN BY ROBIN POWELL EXECUTIVE PRODUCED BY MARK HEBNER PRODUCED BY SAM LEWIS & SAM WILLET & ROBIN POWELL DIRECTED BY ROBIN POWELL
Â© 2016 Four Pines Publishing, Inc. All rights reserved. Distributed by Four Pines Publishing. Unauthorized copying, hiring, lending, public performance and broadcasting is prohibited. - 19 -
Disclosure for Backtested Performance Information 1. Index Fund Advisors, Inc. (IFA) is an SEC registered Investment Adviser. Information pertaining to IFA’s advisory operations, services, and fees is set forth in IFAs’ current Form ADV Part 2 (Brochure), a copy of which is available upon request and at www.adviserinfo.sec.gov. Mark T. Hebner is the President and Founder of Index Fund Advisors. Inc., ifa.com. The performance information presented in certain charts or tables represent backtested performance based on combined simulated index data and live (or actual) mutual fund results from January 1, 1928 to the period ending date shown, using the strategy of buy and hold and on the first of each year annually rebalancing the globally diversified portfolios of index funds. Backtested performance is hypothetical (it does not reflect trading in actual accounts) and is provided for informational purposes only to indicate historical performance had the index portfolios been available over the relevant time period. IFA refers to this hypothetical data as a Simulated Passive Investor Experience (SPIE). IFA did not offer the index portfolios until November 1999. Prior to 1999, IFA did not manage client assets. The IFA indexing investment strategy is based on principles generally known as Modern Portfolio Theory and the Fama and French Three Factor Model for Equities and Two Factor Model for Fixed Income. Index portfolios are designed to provide substantial global diversification in order to reduce investment concentration and the resulting potential increased risk caused by the volatility of individual companies, indexes, or asset classes. 2. A review of the IFA Index Data Sources (www.ifaindexes.com), IFA Indexes Time Series Construction (www.ifa.com/disclosures/ charts) and several of the Dimensional Indexes (www.ifa.com/disclosures/charts/#dfafunds) is an integral part of this disclosure and should be read in conjunction with this explanation of backtested performance information presented. IFA defines index funds as mutual funds that follow a set of rules of ownership that are held constant regardless of market conditions. An important characteristic of an index fund is that its rules of ownership are not based on a forecast of short-term events. Therefore, an investment strategy that is limited to the buying and rebalancing of a portfolio of index funds is often referred to as passive investing, as opposed to active investing. Simulated index data is based on the performance of indexes and live mutual funds as described in the IFA Indexes Data Sources page. The index mutual funds used in IFA’s Index Portfolios are IFA’s best estimate of a mutual fund that will come closest to the index data provided in the simulated indexes. Simulated index data is used for the period prior to the inception of the relevant live mutual fund data and an equivalent mutual fund expense ratio is deducted from simulated index data. Live (or actual) mutual fund performance is used after the inception date of each mutual fund. The IFA Indexes Times Series Construction goes back to January 1928 and consistently reflects a tilt towards small cap and value equities over time, with an increasing diversification to international markets, emerging markets and real estate investment trusts as data became available. As of January 1928, there are 4 equity indexes and 2 bond indexes; in January 1970 there are a total of 8 indexes, and there are 15 indexes in March 1998 to present. Backtested performance is calculated by using a computer program and monthly returns data set that start with the first day of the given time period and evaluates the returns of simulated indexes and Dimensional Fund Advisors mutual funds. 3. Backtested performance does not represent actual performance and should not be interpreted as an indication of such performance. Actual performance for client accounts may be materially lower than that of the index portfolios. Backtested performance results have certain inherent limitations. Such results do not represent the impact that material economic and market factors might have on an investment adviser’s decision-making process if the adviser were actually managing client money. Backtested performance also differs from actual performance because it is achieved through the retroactive application of model portfolios (in this case, IFA’s Index Portfolios) designed with the benefit of hindsight. As a result, the models theoretically may be changed from time to time and the effect on performance results could be either favorable or unfavorable. 4. History of Changes to the IFA Indexes: 1991-2000: IFA Index Portfolios 10, 30, 50, 70 and 90 were originally suggested by Dimensional Fund Advisors, merely as an example of globally diversified investments using their custom index mutual funds, back in 1991 with moderate modifications in 1996 to reflect the availability of index funds that tracked the emerging markets asset class. Index Portfolios between each of the above listed portfolios were created by IFA in 2000 by interpolating between the above portfolios. Portfolios 5, 95 and 100 were created by Index Fund Advisors in 2000, as a lower and higher extension of the DFA 1991 risk and return line. As of March 1, 2010, 100 IFA Index Portfolios are available to IFA clients, with IFA Index Portfolios between the shown allocations being interpolations of the 20 allocations shown.
- 20 -
5. Backtested performance results assume the reinvestment of dividends and capital gains and annual rebalancing at the beginning of each year. The performance of the IFA Index Portfolios reflects and is net of the effect of IFAâ€™s annual investment management fee of 0.9%, billed monthly, unless stated otherwise. Depending on the amount of assets under management, the investment management fee may be less. Unless indicated otherwise, data shown for each individual IFA Index is shown without a deduction of the IFA advisory fee. Performance results also do not reflect transaction fees and other expenses, which reduce returns. 6. For all data periods, annualized standard deviation is presented as an approximation by multiplying the monthly standard deviation number by the square root of 12. Please note that the number computed from annual data may differ materially from this estimate. We have chosen this methodology because Morningstar uses the same method. In those charts and tables where the standard deviation of daily returns is shown, it is estimated as the standard deviation of monthly returns divided by the square root of 22. 7. The tax-managed index funds are not used in calculating the backtested performance of the index portfolios, unless specified in the table or chart. 8. Performance results for clients that invested in accordance with the IFA Index Portfolios will vary from the backtested performance due to market conditions and other factors, including investments cash flows, mutual fund allocations, frequency and precision of rebalancing, tax-management strategies, cash balances, lower than 0.9% advisory fees, varying custodian fees, and/or the timing of fee deductions. As the result of these and potentially other variances, actual performance for client accounts may differ materially from (and may be lower than) that of the index portfolios. Clients should consult their account statements for information about how their actual performance compares to that of the index portfolios. 9. As with any investment strategy, there is potential for profit as well as the possibility of loss. IFA does not guarantee any minimum level of investment performance or the success of any index portfolio or investment strategy. All investments involve risk and investment recommendations will not always be profitable. 10. Past performance does not guarantee future results. 11. DISCLAIMER: THERE ARE NO WARRANTIES, EXPRESSED OR IMPLIED, AS TO ACCURACY, COMPLETENESS, OR RESULTS OBTAINED FROM ANY INFORMATION PROVIDED HEREIN OR ON THE MATERIAL PROVIDED. This film does not constitute a complete description of our investment services and is for informational purposes only. It is in no way a solicitation or an offer to sell securities or investment advisory services. Any statements regarding market or other financial information is obtained from sources which we and our suppliers believe to be reliable, but we do not warrant or guarantee the timeliness or accuracy of this information. Neither our information providers nor we shall be liable for any errors or inaccuracies, regardless of cause, or the lack of timeliness of, or for any delay or interruption in the transmission thereof to the user. All investments involve risk, including foreign currency exchange rates, political risks, market risk, different methods of accounting and financial reporting, and foreign taxes. Your use of these materials, including www.ifa.com website is your acknowledgement that you have read and understood the full disclaimer as stated above. IFA licenses the use of data, in part, from Morningstar Direct, a third-party provider of stock market data. Where data is cited from Morningstar Direct, the following disclosures apply: ÂŠ2015 Morningstar, Inc. All rights reserved. The information provided by Morningstar Direct and contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. For additional information, disclosures, updates, references and sources see www.ifabt.com and pages 278-308 of the book Index Funds: The 12-Step Recovery Program for Active Investors by Mark T. Hebner, Copyright 2015
- 21 -
Companion Transcript Booklet to the documentary film Index Funds: The 12-Step Recovery Program for Active Investors. Slick Wall Street sal...
Published on Jul 22, 2016
Companion Transcript Booklet to the documentary film Index Funds: The 12-Step Recovery Program for Active Investors. Slick Wall Street sal...