OK. Listen up. It’s hot. It’s July. You’d rather be at the beach.
But you’re probably worried about your investments because some hyperactive managers with seven-figure salaries at Bear Stearns have made a mess--- perhaps for all of us --- by buying massive quantities of weird securities with borrowed money.
(If you have been at the beach, in police custody or otherwise removed from Newsland, here are the basics. Investment banking firm Bear Stearns has an asset management arm. Two hedge funds in this unit buy sub-prime mortgage securities. One is called High Grade Structured Credit Strategies Fund. The other is called High Grade Structured Credit Strategies Enhanced Leverage Fund. Investors commit money. The Bear Stearns funds invest it.
(For each dollar of investor equity, the funds borrow at least $10 more to buy additional securities. In that way, a few hundred million can become a multibillion-dollar problem. When the sub-prime debt market gets a sniffle, the hedge funds get pneumonia, maybe Ebola, as everyone discovers the market is virtually all sellers. Buyers of weird sub-prime mortgage securities, once eager, have walked away on very cold feet.
(This is not the first time something like this has happened. It has happened many times before because greed and hubris appear to have no memory.)
Your summer entertainment is to follow this story. Keep count of the zeros used to measure the lost money. Be glad none of it is yours, if the contagion doesn’t spread.
Your summer reading assignment is even easier. It is to read “The Smartest Investment Book You’ll Ever Read: The Simple, Stress-Free Way to Reach Your Investment Goals” (Perigee Books, $19.95). In 138 pages and 43 chapters, securities attorney Daniel R. Solin lays out the case for being a smart investor rather than the “hyperactive” one Wall Street wants you to be.
Do that, he says, and you’re likely to beat 95 percent of all professionally managed funds. That’s better than most studies indicate you can do. But the most recent report on actively managed funds versus index funds from Standard and Poor’s shows that 60 to 90 percent of all managed funds failed to beat their index over the 5 year period ending March 31 (see URL below).
This is no surprise: It is consistent with the findings of other researchers over the last 40 years.
How can you be smart rather than hyperactive?
You buy, and hold, a portfolio of low cost index funds. You earn market returns on a diversified portfolio.
Mr. Solin lays out compelling reasons in those 43 chapters. If you want more data, then you can read chapter 44. It adds another 14 pages providing you with links and references to all the studies that prove his point--- that hyperactive investing, as practiced by Wall Street, is for losers. You’ll get higher returns by investing in the index funds that most professional managers can’t beat. Your retirement nest egg will be bigger. And you’ll sleep better.
He also tells you exactly how to do it, whether you invest at Vanguard, Fidelity, or T. Rowe Price, using four different mixtures of only three funds--- the U.S. total equity market, the total international equity market, and the U.S. bond market. (You can, of course, do the same thing with exchange traded funds.)
This is the simple hands-on, how-to and why book many readers have been looking for.
I called Mr. Solin in Bonita Springs, Florida. I asked him what made it so difficult for people to get this simple (but smart!) idea. Why do even novice investors want to “tweak” their investments for “better” results?
“I see this all the time,” he said. “There is resistance to accepting the data, particularly among men. Men seem to feel they can somehow do better.
“People also like the excitement (of hyperactive investing.)
“But you also have to remember that people are inundated daily with information harmful to their financial health.”
The villain here isn’t just Wall Street and the Investment/Retirement Complex. It’s also the media. “The media equates lots of activity with progress,” Mr. Solin observed. The result is the never-ending prattle of financial television shows and the breathless, ever-changing hints at winning funds or stocks that appear on the changing covers of personal finance magazines.
My advice: Take this book to the beach. Check out his blog. Leave the Wall Street prattle behind.
On the web:
The Standard & Poor’s Report, First Quarter 2007
Daniel R. Solin’s website and blog
The book at Amazon
My columns on Couch Potato investing
My columns on Index and ETF investing