I am sometimes described as “contrary.” Actually, the more commonly used terms are “opinionated,” “arbitrary” and “judgmental.” There may be varying degrees of truth to all of them. Today, however, rather than temper or minimize my “contrarian” views, I’ve decided to embrace them. Some of the statements I’m told fall into this category are:
1. Most financial news harms investors. Most financial news is a parade of “experts” peering into their respective crystal balls and giving predictions. They tell you when to get in or out of the markets, when to buy or sell stocks and which actively managed mutual funds to purchase.
Although Jim Cramer is the most notorious of these “financial psychics,” he is hardly alone. Almost every financial talk show on television follows this format. It’s also the primary thrust of the written media as well. I’m sure you have seen numerous stories about the “world’s 10 best stocks” or the next “hot” mutual fund.
I believe you’d be better off if you paid no attention to this financial “news.” It is anxiety-producing and generally unhelpful. You have no control over what is going on in the world and no ability to assess how those events might impact the market.
Think about it this way: If bad news meant the markets would tank, how do you explain that the Dow Jones Industrial Average closed on Sept. 29 at 17,041? The middle east has never been as unstable. Our relationship with Russia is deteriorating rapidly. We have all but declared war on ISIS. Yet, the market yawns and continues its upward trajectory.
Most financial news harms investors. You would be better served without it.
2. 401(k) plans are a giant rip-off. Don’t get me wrong. If your employer contributes to your 401(k) plan, you should consider participating by saving the minimum amount necessary to get the maximum matching contribution.
I still believe 401(k) plans are a national disgrace. They are filled with poor investment choices, consisting primarily of expensive, actively managed funds. Employees are expected to piece together a globally diversified portfolio from a confusing array of options.
The primary beneficiaries of these plans are employers who can avoid paying for a defined benefit plan, the mutual funds that earn high management fees while typically underperforming benchmark indexes and the brokers, advisors and insurance companies who “advise” these plans. Note that employees are not included on this list.
There is an exception. Plans that offer a limited number of portfolios of funds at different risk levels (ranging from conservative to aggressive) and use only low-management fee index funds, passively managed funds or exchange-traded funds, do offer meaningful benefits to participants. When this type of offering is combined with intensive participant education, the possibility of retiring with dignity comes closer to reality.
Only a tiny percentage of 401(k) plans are structured in this manner. That’s why the system needs a complete overhaul.
3. It should be far more difficult to sell actively managed funds. The track record of actively managed funds (where the fund manager is handsomely paid to outperform a benchmark index) is appalling. Here’s one example: Over the past five years, 87 percent of large-cap active fund managers underperformed their benchmark, according to recent S&P Indices Versus Active, or SPIVA, data.
Most investors buy actively managed funds. Many do so out of ignorance. Some succumb to massive advertising machines. If investors knew the statistics, most would choose to “just say no” and buy comparable index funds.
It should be much more difficult to sell these funds. There should be a mandatory disclosure of data comparing 1-year, 3-year, 5-year and 10-year returns of these funds with similar index funds. This disclosure should not be buried in a prospectus. It should be on a separate statement, requiring the signature of the buyer at the time of purchase. Here’s a sample disclosure:
Over any time period of one year or longer, it is likely you would be better off in a low-management fee index fund than this active fund. The longer the time period, the more likely it is that the index fund will outperform.
I don’t know how many investors would be dissuaded by this disclosure. Hopefully it would persuade many of them. But hope springs eternal. At least they can’t claim they were misinformed.
In addition, all advertising based on past performance should be banned. The standard disclosure, that past performance is no guarantee of future returns, is largely ignored. Advertising featuring Morningstar or other awarded ratings should also be prohibited. It’s misleading.
I also believe most people would be better off owning a home rather than renting, that mortgages should be paid off as soon as possible and that, other than in a genuine emergency, credit card debt should never be carried forward. I believe that under some circumstances, it can be wise to buy whole life instead of (or in addition to) term insurance. Those issues will have to wait, but in the meantime, investors should consider this advice, as contrarian as it is.
Dan Solin is the director of investor advocacy for the BAM ALLIANCE and a wealth advisor with Buckingham. He is a New York Times best-selling author of the Smartest series of books. His latest book is “The Smartest Sales Book You’ll Ever Read.”
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3 Contrarian Views About Investing originally appeared on usnews.com
