Wise Money Decisions

Seekingalpha has a fascinating and short interview with Roger Ibbotson (”fascinating” and “short” seem to be highly correlated for me).

If you want to learn more about Ibbotson, read the intro to the article.

In case you don’t have time to read the whole interview, here are the highlights and money quotes:

• Because many hedge funds had (have?) a similar strategy, many hedge funds had to unlever at the same time in summer 2007, contributing to the meltdown “as they rushed to the same exits.” 
• “In both cases, the quant funds that were able to stick with their strategies were able to quickly recover. But those who targeted volatility got whiplashed. Those who kept their leverage intact did reasonably well. Unfortunately, many investors lumped quant funds into one big category, and have become wary of the whole group.”
• “Investors often select funds with the highest returns, without tracing where the returns came from. Most hedge fund returns are actually associated with beta, rather than alpha….. they do not really provide alpha and can be replicated for less than typical hedge fund fees.”
• “The drop exposed the fact that many hedge funds are really not absolute return vehicles, but actually contain a lot of beta.”
• And the most interesting quote in the interview:  “[H]edge fund alphas are still positive, although not as high or significant as before….  [T]he majority of the returns can be classified as beta, then fees, then net alpha, in that order. Despite the fact that alpha makes up the minority of the return, it is still noteworthy that the net alphas are positive. This is in contrast to the mutual fund industry where there is little evidence of aggregate positive alpha, even on a gross level. On a net level, aggregate mutual fund alpha is usually negative.”

The last quote is interesting for a few reasons.  First, it shows that hedge funds are not about “hedging,” as most of their returns is beta.   

Second, it contradicts another study I’ve seen that concluded the hedge fund industry has net negative alpha.  Unfortunately I didn’t save a link to the study.  If I come across it I’ll post it.

Third and most intersting, it’s more ammo that mutual funds in general are bad investments. There’s too much to say about this topic.  I’ll save it for a future post, or series of posts.

I just stumbled across this article at Fortune:

“Using your contacts without making them feel used” by Nadira A. Hira

It’s well worth a read, especially if you are “hitting up the network” looking for a job or for some other reason.

I wish my name rhymed.

Gene Epstein of Barron’s explains that older workers are more likely to stay in the work force longer, resulting in higher revenues for social security than current projections. 

He calculates that revenues will exceed expenses in the social security trust fund beginning in 2018, rather than the federal government’s current forecase of 2016.

It’s a pretty interesting idea, and seems to have some merit.  Older workers working longer is a long-term trend over the last few decades.   That trend should only be strengthened by older workers with 401(k)’s and other stock-based accounts that have lost significant value over the last 18 months.

Recommended reading from Jeremy Siegel.  Very interesting long-term data on stocks vs. bonds.

“Why the Credit Bureaus Can’t Get It Right” from smartmoney.com

A reader sent a link today with the note, “I’ve thought this for sooo long.” 

The link was to an article about Suze Orman by James Scurlock of ”The Big Money.”  

This article was long overdue. 

Editor’s Note:   If you’re Suze Orman’s mom and you don’t want to see your daughter get her comeuppance in a national financial publication, then don’t click through.

The mainstream press provides more bad financial advice than good, so it’s important to highlight the good advice when it appears.  

From Ron Lieber at the New York Times:

“It’s a question we’ve all asked in our darker moments of late: Why not just put all of our investments in cash, 100 percent, just for a little while, until things calm down?…

“By fleeing for the comfort of safe and insured, however, investors with a time horizon beyond a few years may be doing real damage to their long-term finances. If you’re tempted to make a big move to cash right now, you’re doing something called market timing. It’s an implied statement that you’ve figured out the right moment to get out of stocks - and will also know the right time to get back in.

“So let’s dispense with the first part straightaway. The right time to move out of stocks was a year or so ago, before various stock indexes the world over fell by one-third or more.

“If you missed that opportunity, you’re hardly alone.

“But if you sell now, you’ll be locking in your losses. And once you’re in cash, there isn’t much upside. In fact, with interest rates low, you’re likely to lose money in cash, because inflation will probably eat up the after-tax returns you earn from a savings or money-market account.”

I don’t have enough time to blog about all the interesting articles I come across.  So I throw them into a recommended reading list.

Here are some from this past week:

Will McCain’s plan for a tax credit for health insurance spell the end of the employer-based insurance system?  It’s too early to follow McCain’s and Obama’s every move so I haven’t paid attention to McCain’s plan.  In a nutshell it seems he’s proposing a tax credit for buying your own health insurance.  The idea is to level the playing field between those that look for and purchase their own insurance and those that obtain insurance through their employer. 

The article is focused on the mechanics and not on the politics (otherwise it wouldn’t show up on this blog), but it seems to be written with the assumption that keeping our employer-based insurance system is best.  Needless to say, that’s a large assumption.

Every day there’s a new article out on how to save gas.  They all have the same formula.  They tell you how much you spend on gas and how much you can save if you follow their tips.  The tips are always the same: light on the accelerator, cruise control, fill up tires, roll up the windows on the highway. 

The linked article includs a few less common tips though: turn off the ignition when traffic is at a standstill (I’m glad this hasn’t caught on cause it would drive me crazy waiting for everyone to start their car every time traffic moves 20 feet), and don’t make left turns.  Apparently three right turns can accomplish the same thing as one left turn.

This hard-hitting expose on how California government workers pull in 6-figures on overtime and bonus pay.  The poster child is the state prison nurse that made $310,000, mostly from overtime.  The top bonus went to the chief investment officer of California’s pension fund: $403,000 in incentive pay, brining his total take-home to $945,000.  A decent year.

Finally, North Dakota farmers are becoming millionaires.  The estimate is that one-third of the residents of Mountrail County, North Dakota will be millionaires in the next 5 years because of oil found under their land. 

The only problem for the sweet old couple in the picture accompanying the story, is it happened so late in life they may not be around to spend it all.