MONEY Greece

How Investors Should React to the Greek Crisis

150701_INV_WhatGreeceMeans
Louisa Gouliamaki—AFP/Getty Images The Greek economic crisis isn't ending anytime soon.

Step one: Don't panic.

Even from afar, it’s hard for U.S. investors to ignore the Greek economic crisis, which continues to roil global markets.

After Greece saw its bailout funds expire Tuesday—and became the first developed country to fail to pay back a loan from the International Monetary Fund—Greek prime minister Alexis Tsipras sent a letter offering concessions to European creditors in hopes that a new agreement might help the country remain afloat.

The fate of the Greek economy depends in large part on whether its government can quickly make a deal with European leaders.

One point of tension: Leaders in Germany, Greece’s biggest creditor, are insisting that the country accept additional austerity measures like pension cuts before it can get more emergency funds. Though a compromise could be reached this week, the worst case scenario is that Greece would continue to miss debt payments and, eventually, be forced out of the euro currency. Doing so would allow Greece to pursue its own fiscal and monetary policies in pursuit of economic recovery.

But what would that mean for investors around the world? The short answer, assuming you have a fairly diversified portfolio of stocks and bonds, is that it probably wouldn’t have a dramatic long-term effect.

Here’s why: If you look at the kind of target-date mutual funds that are popular compenents of many American retirement accounts, like 401(k)s—the Vanguard Target Retirement 2035, for example—about a third of their holdings are in foreign stocks. And of those foreign stocks, only a small fraction tend to be Greek companies. The Vanguard Total International Stock (which the 2035 fund holds), for example, has only about 0.07% of assets in Greek companies. So not a lot of direct impact.

The indirect impact is also likely to be muted. More than 45% of the holdings in Vanguard Total International Stock are in European countries—and if Greece leaves the Eurozone, that could affect companies and markets throughout the Continent. But some analysts are arguing that the market has already reacted, and perhaps even over-reacted, to the possibility of a so-called Grexit. “You have to assume that a substantial amount of the correction is priced in,” Lawrence McDonald, head of U.S. macro strategy at Societe Generale, recently told MarketWatch.

That being said, a note of caution ought to be sounded about the dollar. If the Greek crisis isn’t resolved quickly, it could lead to a flight to safety away from the euro and toward the U.S. dollar. The dollar’s strength has already led to sluggish profit growth in the U.S. In the past few months, the euro has rebounded a bit. But the euro could weaken again if crisis persists in Greece, putting U.S. companies that sell their goods abroad in a tough spot.

Still, even if you believe things in Greece will get worse before they get better, history suggests you’d be unwise to pull much of your money from the market right now. Though we could be in for more bad news and some painful market gyrations in the near term, keeping your money invested and sticking to your long-term strategy will likely pay off in the end—no matter what happens in Greece. Plus, there’s potentially good news for bond investors: If fear of European instability drives investors to seek out safe assets like U.S. Treasuries, then many bond funds will do well.

MONEY Longevity

Will Living Too Long Ruin Your Retirement?

cupcake ruined by excessive amount of melting candles
D. Hurst—Alamy

Our life spans are getting longer, but we won’t all make it to 95.

“Longevity risk”—the possibility that people will live longer than expected, putting a strain on Social Security, Medicare, public and private pension funds, their own retirement savings, and the planet in general—has become a hot topic recently. Former hedge fund manager and Soros strategist Stanley Druckenmiller recently predicted that the aging population will precipitate a major economic crisis, while the Wall Street Journal took a more sanguine approach by devoting a whole section to “How to Add Life to Longer Lives.”

But before you start reciting “The first person to live to 150 has already been born”—a highly speculative prediction by Aubrey de Gray that Prudential decided to turn into a billboard—it’s worth taking a step back to see how longevity might impact your own retirement plan.

First off, according to the Society of Actuaries, which released new mortality tables late last year to help pension plans more accurately estimate their payouts, people are only going to live about two years more than had been previously thought. (For men who make it to 65, overall longevity rose from 84.6 in 2000 to 86.6 in 2014; for women age 65, longevity rose from 86.4 in 2000 to 88.8 in 2014.)

These figures are broad averages, so can be used as a starting point in trying to figure out your time horizon, but there are many other variables to consider, such as, are you single or married? Single people don’t live as long as married people. For that matter, is your retirement plan based on how long either member of a couple might live—or the more likely scenario of just one person being alive for a certain portion of retirement? As financial planner Michael Kitces has pointed out, planning for the former can lead to overly conservative projections.

Your job also has an effect on how long you’re likely to live. As a new paper by the Center of Retirement Research points out, public sector workers live longer than private sector workers because the former, on average, tend to be more highly educated, which is another predictor of life span. At the same time, white collar workers, not surprisingly, live longer than blue-collar workers with physically demanding jobs. Rich white collar workers live longest of all, which suggests in some horrible Darwinian way that longevity risk may somehow take care of itself.

But the biggest factor of course is your family health history, and while that’s not something we can control, it’s certainly worth doing a bit of research to find out what kinds of diseases felled your relatives, as well as taking a hard look at your own exercise and eating habits. The issue of life span is really more a medical than a financial question, so you’d probably be better off addressing it with your doctor or a gerontologist than a financial advisor. With proper planning, you can turn longevity from something that’s currently being framed as a “risk” back into something to look forward to.

Konigsberg is the author of The Truth About Grief, a contributor to the anthology Money Changes Everything, and a director at Arden Asset Management. The views expressed are solely her own.

TIME India

Greenpeace Has Had Several of Its Indian Bank Accounts Frozen

INDIA-ENVIRONMENT-GREENPEACE-PROTEST
Punit Paranjpe—AFP/Getty Images Activists from the environmental group Greenpeace and local farmers from Madhya Pradesh state sit outside the headquarters of India's Essar Group during a protest in Mumbai on Jan. 22, 2014

It's accusing Delhi of trying to silence its opposition to the government's industrial projects

India froze seven bank accounts belonging to Greenpeace’s operations in the country on Thursday, escalating an ongoing conflict between Delhi and the environmental organization.

A government statement asserted that Greenpeace India was misusing funds and violating the country’s financial regulations, Reuters reported.

“We have evidence to prove that Greenpeace has been misreporting their funds and using their unaccounted foreign aid to stall crucial development projects,” an unnamed senior government official told Reuters.

The nongovernmental organization, which has accused the Indian government led by Prime Minister Narendra Modi of relaxing environmental rules to allow large industrial projects to move forward smoothly, dismissed the six-month suspension of its accounts as an attempt to silence dissent.

“We are being repeatedly targeted because we are protesting against government’s unlawful policies,” said Divya Raghunandan, Greenpeace India’s program director.

An earlier attempt by the Indian government to block the inflow of foreign funds to Greenpeace India was denied by a court order in January, soon after activist Priya Pillai was offloaded from a flight to the U.K., where he was to testify against India in front of the British Parliament.

MONEY index funds

The Smart Money is Finally Embracing the Right Way to Invest. You Should Too.

Investors turned their backs on traditional mutual funds in 2014 and began relying more heavily on indexing.

Since launching the Vanguard 500 fund in 1975, Vanguard founder Jack Bogle has been preaching the gospel of indexing — a plain-vanilla, low-cost strategy that calls for buying and holding all the stocks in a market and “settling” for average returns. He’s so fervent that his nickname in the industry is St. Jack.

Forty years laters, investors have finally found religion.

In 2014, the Vanguard Group attracted a record $216 billion of new money, largely on the strength of its index offerings and exchange-traded funds. These are funds that can be traded like individual stocks and that almost always track a market index.

Vanguard wasn’t alone. Blackrock, which runs the well-known iShares brand ETFs, attracted more than $100 billion of new money in 2014, a year in which investors both small and large embraced indexing, also known as “passive” investing.

By comparison, actively managed mutual funds — those that are run by traditional stock and bond pickers — saw net redemptions of nearly $13 billion last year, according to the fund tracker Morningstar.

There’s are several simple reasons for this:

1) Fund inflows generally follow recent performance.
And in 2014, the S&P 500 index of stocks outperformed roughly 80% of actively managed funds, noted Michael Rawson, an analyst with Morningstar.

He added: “When the market rallies strong, a lot of active managers tend to lag, maybe because they’re being more conservative, holding more quality stocks, or maybe holding a little bit of a cash — it is common for an active manager to hold some cash. So it’s difficult to keep up with the rising market.”

2) 2014 was a year when many heavy hitters espoused their preference for indexing.
In August, MONEY’s Ian Salisbury reported how the influential pension fund known as Calpers — the California Public Employees’ Retirement System — was openly considering reducing its use of actively managed strategies for its clients.

This came on the heels of a provocative column written by a Morningstar insider questioning whether actively managed strategies had a future. “To cut to the chase,” wrote Morningstar’s John Rekenthaler, “apparently not much.”

And as MONEY’s Pat Regnier pointed out in a fascinating piece on Warren Buffett’s investing approach, the Oracle of Omaha noted in his most recent shareholder letter that his will “leaves instructions for his trustees to invest in an S&P 500 index fund.”

3) Plus, new research from Standard & Poor’s shows that even if active managers can beat the indexes, they can’t do that consistently over time.

The report, which was published in December, noted that “When it comes to the active versus passive debate, the true measurement of successful active management lies in the ability of a manager or a strategy to deliver above-average returns consistently over multiple periods. Demonstrating the ability to outperform repeatedly is the only proven way to differentiate a manager’s luck from skill.”

Yet according to Aye Soe, S&P’s senior director of global research and design, “relatively few funds can consistently stay at the top.”

Indeed, only 9.84% of U.S. stock funds managed to stay in the top quartile of performance over three consecutive years, according to S&P. This is presumably because over time, the higher fees and trading costs that actively managed funds trigger become too difficult for even the most seasoned managers to overcome.

Even worse, just 1.27% of domestic equity portfolios were able to stay in the top 25% of their peers for five straight years. For those funds that specialize in blue chip stocks, the numbers were even worse. Of the 257 large-cap funds that finished in the top quartile of their peers starting in September 2010, less than half of 1% remained in the top quartile for each of the subsequent 12-month periods through September 2014.

As Soe puts it, this “paints a negative picture regarding the lack of long-term persistence in mutual fund returns.”

MONEY funds

George Soros Bets $500 Million On Bill Gross

George Soros
Rex Features via AP Images Billionaire George Soros, 84, is giving Bill Gross $500 million to invest for him.

Hedge fund titan George Soros is wagering half a billion dollars that bond king Bill Gross will excel in his new role at Janus.

Things are looking rosy for star bond fund manager Bill Gross, whose September departure from PIMCO—the fund company he founded—was accompanied by reports of tensions between Gross and other executives at the firm.

Now that Gross has moved to Janus Capital, where he manages the $440 million Global Unconstrained Bond Fund, it seems he’s getting a fresh start—plus some.

Not only did Janus see more than a billion dollars of new investments flow in last month, following Gross’s arrival, but the company also announced Thursday that hedge fund titan George Soros would be investing $500 million with Gross.

Quantum Partners, a vehicle for Soros’s investment, will see its money managed in an account that’s run parallel to but separate from the Unconstrained Bond Fund. That’s so Soros will be protected from sudden inflows or outflows caused by other investors, S&P Capital IQ mutual-fund research director Todd Rosenbluth told the Wall Street Journal.

Gross tweeted: “I & my team will manage your new unconstrained strategic acct. 24h/day. An honor to be chosen & an honor to be earned as well.”

Watch this video to learn more about what bond fund managers do:

MONEY Ask the Expert

Knowing How Many — or Few — Funds to Own

Investing illustration
Robert A. Di Ieso, Jr.

Q: I have an $800,000 portfolio. How many mutual funds should I own? — Lynn

A: The optimal number of funds will vary depending on your time horizon, tolerance for risk, and exactly what kinds of funds you choose.

That said, if you’re looking to build and manage a diversified portfolio of exchange-traded funds (ETFs) or index mutual funds on your own, a good number is either six or 10, says Bill Valentine, president of Valentine Ventures, a Bend, Ore.-based wealth management firm. This is true, he says, whether you have $800,000 or a more modest portfolio.

Anything more than that many funds will “do nothing for diversification,” Valentine says, and will only add cost and complexity to your strategy.

Let’s start by discussing the whole notion of diversification. To get the best balance of risk and reward, you’ll want to invest in lots of securities across many different asset classes. Investing in ETFs or index mutual funds takes care of the first critical point of diversification since most such funds are composed of hundreds of different securities.

Even so, a single fund focused on a single asset class won’t provide you adequate diversification. Likewise, investing in six funds that all hold, say, large blue chip U.S. companies won’t improve returns, and may even detract from them.

“It’s important to blend asset classes than don’t act too similarly to each other, otherwise you’ll lose the benefit of diversification,” says Valentine.

If you’re young and have a long time horizon, you may not own bonds in your portfolio. Valentine says you’ll still want to spread your bets across six primary investment classes.

They include U.S. large cap stocks, U.S. small cap stocks, foreign developed-market stocks (shares of companies based in Europe and Japan), and foreign emerging-market stocks (shares of companies based in faster-growing economies such as like China and India).

And to diversify your equities, you’ll also want to consider owning a small amount in commodities and real estate investment trusts, or REITs.

Exactly how you slice the pie will depend on your specific time horizon and risk tolerance. Note: Valentine is not a proponent of owning bonds if you’re young, but most advisers recommend a small allocation to fixed income, even in a relatively aggressive portfolio.

Now, if you own bonds as part of your mix, you may want to add as many as four fixed-income funds to that mix.

Valentine recommends bond funds that give you exposure to: the broad U.S. fixed-income market (reflecting high-quality corporate and government debt), U.S. high yield bonds (which expose you to higher-yielding but lower-quality corporate debt), U.S. inflation-protected securities (to safeguard your holdings against rising consumer prices), and foreign bonds.

Again, the exact percentages will vary based on the specifics of your situation.

MONEY Portfolios

For $50 You Can Push For More Female CEOs — But Is It a Good Investment?

Indra Nooyi, chairman and chief executive officer of PepsiCo.
Bloomberg—Bloomberg via Getty Images Indra Nooyi, chairman and chief executive officer of PepsiCo.

Two new products let you invest in companies led by female executives. Whether this is a good idea depends on what you hope to achieve.

On Thursday, Barclays is launching a new index and exchange-traded note (WIL) that lets retail investors buy shares — at $50 a pop — of a basket of large U.S. companies led by women, including PepsiCoPEPSICO INC. PEP 1.26% , IBMINTERNATIONAL BUSINESS MACHINES CORP. IBM 1.13% , and XeroxXEROX CORP. XRX 0.38% . This should be exciting news for anyone disappointed by the lack of women in top corporate roles.

After all, female CEOs still make up less than 5% of Fortune 500 chiefs and less than 17% of board members — despite earning 44% of master’s degrees in business and management.

The new ETN is not the only tool of its kind: This past June, former Bank of America executive Sallie Krawcheck opened an index fund tracking global companies with female leadership — and online brokerage Motif Investing currently offers a custom portfolio of shares in women-led companies.

The big question is whether this type of socially-conscious investing is valuable — either to investors or to the goal of increasing female corporate leadership. Is it wise to let your conscience dictate how you manage your savings? And assuming you care about gender representation in the corporate world, is there any evidence that these investments will actually lead to more diversity?

Here’s what experts and research suggest:

Getting better-than-average returns shouldn’t be your motivation. Beyond the promise of effecting social change, the Barclays and Pax indexes are marketed with the suggestion that woman-led companies tend to do better than peers. It’s true that some evidence shows businesses can benefit from female leadership, with correlations between more women in top positions and higher returns on equity, lower volatility, and market-beating returns.

But correlation isn’t causation, and other research suggests that when businesses appoint female leadership, it may be a sign that crisis is brewing — the so-called “glass cliff.” Yet another study finds that limiting your investments to socially-responsible companies comes with costs.

Taken together, the pros and cons of conscience-based investing seem generally to cancel each other out. “Our research shows socially responsible investments do no better or worse than the broader stock market,” says Morningstar fund analyst Robert Goldsborough. “Over time the ups and downs tend to even out.”

As always, fees should be a consideration. Even if the underlying companies in a fund are good investments, high fees can eat away at your returns. Krawcheck’s Pax Ellevate Global Women’s fund charges 0.99% — far more than the 0.30% fee for the Vanguard Total World Stock Index (VTWSX). Investing only in U.S. companies, the new Barclays ETN is cheaper, with 0.45% in expenses, though the comparable Vanguard S&P 500 ETF (VOO) charges only 0.05% — a difference that can add up over time:

image-29

If supporting women is very important to you, you might consider investing in a broad, cheap index and using the money you saved on fees to invest directly in the best female-led companies — or you could simply donate to a non-profit supporting women’s causes.

If you still love this idea, that’s okay — just limit your exposure. There is an argument that supporting female leadership through investments could be more powerful than making a donation to a non-profit. The hope is that if enough investor cash flows to businesses led by women, “companies will take notice” and make more efforts to advance women in top positions, says Sue Meirs, Barclays COO for Equity and Funds Structured Markets Sales in the Americas. If investing in one of these indexes feels like the best way to support top-down gender diversity — and worth the cost — you could do worse than these industry-diversified offerings. “Investing as a social statement can be a fine thing,” says financial planner Sheryl Garrett, “though you don’t want to put all of your money toward a token investment.” Garrett suggests limiting your exposure to 10% of your overall portfolio.

MONEY ETFs

As BlackRock Goes to War With Vanguard, Mom-and-Pop ETF Investors Win

Even with $1 trillion in exchange-traded fund assets, BlackRock is being forced to slash costs on ETFs to compete with low-cost leader Vanguard.

Even as BlackRock is set to amass $1 trillion in exchange-traded fund assets in its iShares business, U.S. retail investors increasingly prefer to send their money to low-cost leader Vanguard.

With $998 billion in ETF money, BlackRock has more than the next contenders, Vanguard and State Street, combined.

But the company has struggled to compete with Vanguard, known for its investor-friendly low-cost investing, for mom and pop’s nest eggs. Retail investors now account for more than half of the $1.8 trillion in ETF assets under management in the U.S, according to consulting firm PwC.

So far this year, Vanguard has pulled in about $30.3 billion in net new ETF money in the U.S., or about 43% of the market, while iShares is second with $24.7 billion, or about 35%.

That reflects a trend that’s been going on for years: At the end of 2009, BlackRock had 47.7% of total U.S. ETF assets under management, compared with 11.7% for Vanguard. By the end of May, BlackRock’s market share was down to 38.9%, compared with 20.6% for Vanguard, according to Lipper.

“Our aspiration is to be number one in flows, and we can’t get there without being higher in the retail market place,” said Mark Wiedman, the BlackRock executive who heads the iShares business globally, speaking at the company’s annual meeting in New York in June. “We are starting to change our voice for that audience and I would say historically we frankly haven’t done that good a job.”

The market share loss comes in spite of BlackRock’s two-year effort to win retail investors.

BlackRock introduced a line of low-cost “buy and hold” investor-aimed ETFs in 2012, and since then has been cutting the fees on its ETFs, revamping its sales team, and pushing a new branding campaign. The firm has cut expenses on 12 funds since 2012, ranging from its S&P Total U.S. Stock Market ETF then to its high-dividend ETF in June 2014.

BlackRock says its flows have improved since it started its new retail effort.

One of the most significant price reductions was in its iShares High Dividend ETF. The cost to investors for that fund dropped to 0.12% of assets a year from 0.40%, a move that would cost BlackRock $11.2 million annually, based on the $4 billion in the fund. Last quarter, iShares ETFs generated some $765 million in base fees revenue.

“Every basis point that you cut a fee impacts revenues, but we don’t really look at that — we look at the profitability of our ETF business over the long term,” BlackRock executive Frank Porcelli, head of U.S. Wealth Advisory Business, said at Reuters’ Global Wealth Management Summit in June.

Asked about how fee cuts would affect BlackRock’s profits, he said it was “not relevant.”

With $4.4 trillion in total assets among its various product lines, BlackRock remains the world’s largest asset manager and is unlikely to be eclipsed by Vanguard anytime soon.

BlackRock has nearly tripled the size of the iShares business since it bought it from Barclays five years ago, largely by selling to big institutions, such as the Arizona State Retirement System, which plunked down $300 million to seed three iShares funds last year. It has also won institutional and retail investors abroad; BlackRock has a strong presence in Europe, Asia, Canada and Latin America. Total BlackRock ETF assets outside of the U.S. are about $280.5 billion, about 36 percent of the $700 billion total market.

Analysts say that iShares’ size and scale makes the effect of fee cuts in the near-term fairly minimal on the overall business, but that a prolonged price war could hurt the firm.

“It’s a tough spot to be in,” said Edward Jones analyst Jim Shanahan. “There is some growth potential there, but it is slow to materialize and it has to be powerful enough to offset the addition of a lot of these products with fees less than the current weighted average fee rate.”

Vanguard, which unlike BlackRock isn’t publicly traded, offers significantly cheaper funds. The average expense ratio of a Vanguard ETF is 0.14%, or $14 for every $10,000 invested, compared with the industry average of 0.58%. BlackRock’s average expense ratio is 0.32%.

“When talking about large, commoditized ETFs, low cost makes a big difference, and Vanguard is a little bit more competitive,” said Gabelli & Co analyst Macrae Sykes.

“Investors recognize Vanguard as the low-cost leader — whether for index funds, for active funds, for bond funds, for money market funds, or for ETFs,” said Vanguard spokesman David Hoffman. “We like to say that we’ve been lowering the cost and complexity of investing for 38 years. We are also increasingly being recognized for our commitment to providing high-quality products that can play an enduring role in a portfolio.”

MONEY mutual funds

For Big Gains This Year, Fund Investors Go Small. Like Tiny

Stock pickers who manage funds with really small asset bases and make big bets on a tiny group of stocks are shooting the lights out. But for how much longer?

For U.S. mutual fund investors, this is shaping up to be a year when it pays to go small.

Not with small-company stock funds. No, tiny mutual funds with less than $100 million in assets under management are either leading or are among the top three or four best performers in every major U.S. stock category tracked by Morningstar for the year, through June 10.

How come? The outperformance of these tiny funds run by managers that few investors have ever heard of likely reflects the fact that, as passive investing in index and exchange-traded funds becomes increasingly popular, fund managers with small portfolios are swinging for the fences by taking concentrated bets on only a handful of stocks in order to stand out.

When all goes well, that can lead to strong outperformance even after a small fund’s higher-than-average fees; when it does not, those funds are likely to fall among the worst-performers.

At the same time, stock pickers tend to reap the biggest rewards in the later stages of a bull market, when rallies are less broad.

Each of the small funds leading their categories this year have 30 or fewer stocks in their portfolio. The $25 million Biondo Focus fund, for instance, has gained 9.8% for the year with its portfolio of 19 stocks, trailing only two other funds among the 1,743 in the Morningstar large-cap growth category. Its top holdings include a 14% stake in J.P. Morgan Chase JP MORGAN CHASE & CO. JPM 0.46% , 12% in Pacira Pharmaceuticals PACIRA PHARMACEUTI COM USD0.001 PCRX -1.02% , and 10.3% in Gilead Sciences GILEAD SCIENCES INC. GILD -0.5% .

By comparison, Fidelity’s $107.5 billion Contrafund, a mainstay of retirement accounts, holds no more than 4.5% in any one of its 298 holdings. The fund is up 3.4% for the year, putting it in the 57th percentile of the large growth category. Over the last three years, however, Contrafund has returned an average of 17.1% a year, while the Biondo fund has gained an average of 13.5% over the same time frame.

“When you are running a concentrated fund, you are taking greater risk opportunity for greater reward. If you pick the right stocks your winners are going to shine,” said Todd Rosenbluth, director of mutual fund research at S&P Capital IQ.

Picking only a handful of stocks tends to work better in the U.S. than in the emerging markets or Europe, Rosenbluth added, where a fund manager has to be right on not only a company, but on the performance of countries as well. Internationally, large funds by giants like Fidelity and T. Rowe Price Group Inc are leading the pack in categories ranging from emerging market stocks to European equities.

The managers of small funds, for their part, cite some advantages to their size. Brian Boyle, the lead portfolio manager of the $21 million Valley Forge Fund, whose 19.9% gain for the year leads all other large value funds, said he can be more nimble than the other 1,290 competitors in his category.

He has been able to build up nearly 10% of his portfolio in oil and gas company Birchcliff Energy BIR 0% even when just 5,000 shares of its stock change hands each day on average, he said, a position that a larger fund could not do without becoming a significant owner of the shares. Birchcliff shares are up 91% for the year.

“At some point there could be a constraint in terms of fund size, but we’re nowhere near it,” he said.

MONEY funds

3 Bad Reasons We Pay So Much For Mutual Funds

140616_INV_funds_1
Getty Images Why do investors let active managers reel in their assets?

The numbers say that cheap index funds are your best bet. So why are people still willing to pay fund managers so much?

Every time the market makes a big turn, this happens: A bunch of money managers previously hailed as brilliant get caught betting the wrong way. This time it’s hedge fund managers making “macro” bets. For example, the $13 billion fund run by Paul Tudor Jones is down 4.4%, according to the Wall Street Journal, while the general stock market is up 5.4% and bonds are up 3.4%.

Meanwhile, in the prosaic world of mutual funds available to you and me, the evidence is overwhelming that most managers can’t beat the market. Over the past five years, according to S&P Dow Jones Indices, about 73% of blue chip stock funds trailed the S&P 500 index. You can buy a passive S&P 500-tracking index fund for almost nothing—as little as 0.05% of asset per year—and get roughly all of the market’s return. Funds that instead use human being to pick stocks often charge 1% to 1.4%, for worse results.

In a post on his Pragmatic Capitalist blog, Cullen Roche wonders why people keep buying these funds that cost more and deliver less. His explanations sound right—you should read them—and boil down to people being poorly informed and too emotional about investing. Not everyone knows how hard it is to beat the market, and the ones who do are overconfident about their ability to do better.

But I’d like to propose a few more reasons people like active funds, which go beyond overoptimism. I’m not advocating for these active approaches. In each case, if this why you use active funds, I’ll suggest an alternative way of coming at the problem.

1) Using an active fund as a de facto financial adviser.

Many if not most fund managers these days are “closet indexers,” meaning they stick pretty close to a stock benchmark like the S&P 500, with just a few deviations they hope will goose performance enough to justify their fees. But there is a subset of managers with a broader mandate. They mix up U.S. stocks, foreign stocks, bonds and other assets. Some, like the popular T. Rowe Price and Fidelity “target-date” funds, shift among these assets according to a pre-set formula based on their investors planned age of retirement. Others move around based on their views about whether, say, U.S. stocks look expensive or cheap. But in either case, their investors may not really be coming to them for market-beating stock picks. They are using those funds to help find the right split among stocks and bonds.

In other words, these funds are stand-ins for the financial advisers who help people set up their portfolios. The advice isn’t personal, but really good personal advice is hard to get if you don’t already have a big portfolio.

The better alternative: Buy a target date fund that uses cheap index funds instead. Or an index-based “balanced fund” with about 60% in stocks and 40% in bonds. Even if that’s not quite the optimal mix, the advantage of low fees is often more important. Or you can build your own cheap three fund portfolio using the index funds on the Money 50 recommended list.

If what you really want is a fund manager who knows when to get you out of stocks before they drop, well, the truth is neither fund managers nor advisers are likely to time these turns consistently well. Investors who want to preserve capital in bear markets are better off just dialing back their stock exposure as a matter of policy.

2) Going active to get a tilt.

Not everyone wants exactly the level of risk the stock market delivers. Investors willing to live with more volatility to get a higher return might, for example, want to add more small companies to their portfolio. Likewise, there is some evidence that a bias toward value stocks can deliver better returns over the long run. For a long time, buying an active mutual fund was really the simplest way for most people to get a slightly different mix of risk and return characteristics than the market offered.

Those days are over. You can buy an index-based exchange-traded fund to capture almost any slice of the market or stylistic tilt. I’m skeptical of whether most of these funds are worth the bother, but many are cheaper and more reliable than pure active funds.

3) That enterprising feeling.

I’ve been a convinced indexer for so long that sometimes I forget how cynical the approach can sound to the uninitiated. You’re just tossing your money into the market and betting that on average it works out. Mutual fund managers, on the other hand, say they are scouring companies’ “fundamentals,”and “kicking the tires,” and “thinking of ourselves as owners of businesses.” (Never mind that for many fund managers holding a stock for a year is what counts as a long-run strategy.) At first blush, this doesn’t only sound like a smart way to make money… it sounds like the right thing to do. A way to be a good steward of wealth and to help build the American economy. I’m often struck by how people seem to admire Warren Buffett not only as a smart businessman with a rare stock picking ability, but as a kind of spirit guide. Not for nothing is his annual shareholder meeting called the Woodstock of Capitalism.

Roche has what I think is a deep insight that might make you think differently about this. The money you put into equities via your 401(k) or IRA isn’t really “investing,” just saving with more risk and an incrementally better expected return than bonds. That’s because you aren’t handing any funding to the company, but buying an old claim on it from someone else.

…the reality is that when you buy stocks or bonds on a secondary market you are allocating your savings into what was really someone else’s “investment” and it’s very likely that the easy money has already been made and these real “investors” are cashing out. Real investors build future production, make great products, provide superior services and only sell their majority interest in that production at a much later date (often on a stock exchange via an IPO).

Whether you buy an active fund or an index fund, you’ll be at a pretty distant remove from the companies you indirectly own. On average, you won’t have much chance of a big return, and some tire kicking here and there won’t add a lot of value. There’s nothing wrong with that. Most of us don’t have the time or the interest to be even part-time entrepreneurs. There’s no shame—and a lot of gain to be had—in keeping it cheap and simple and moving on.

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