The sudden departure of legendary bond fund manager Bill Gross last week from Pimco highlights the difficulty with chasing managers and performance. We discovered long ago that the conventional approach to investing is deeply flawed and expensive. Why overpay a fund manager to predict markets when there is so little evidence that this works?
Years ago, we too thought that certain managers, at certain times and in certain circumstances could outperform the market. When we discovered Dimensional Funds in the mid 1990’s, that all changed. Dimensional, through their close collaboration with leading academics followed a different path. They believed that the actual evidence supported market based investing. That is, they believed trusting the collective wisdom of the markets was preferred over a single analyst or investment manager.
Conventional Fund Costs
Equally as problematic, particularly when viewed through the lens of time, are the high costs associated with the conventional method of investing. Vanguard Group founder John Bogle recently testified before the U.S. Senate Finance Committee specifically on fund costs. By his calculations, (a hypothetical 30 year old, saving 10% of his income in a 401-k plan until retirement at age 70), would have 65% more in his retirement plan utilizing low cost index type funds versus conventional funds. This alone would dramatically shrink the retirement income gap that currently is facing many investors moving towards retirement age.
Author and Nobel Prize winner Professor Daniel Kahneman wrote an essay in Thinking, by John Brockman, depicting the problem for many investors. “The confidence people have in their beliefs is not a measure of the quality of evidence but the coherence of the story the mind has managed to construct.” Some investors want to believe that somehow it is possible to select only the best stocks and be in the market only when it is rising. The evidence tells us this is nearly impossible but onward we go and bear the high costs attendant with that decision. Ready for a real conversation?