Andrew Hallam

Millionaire Expat


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rel="nofollow" href="#ulink_230d83d4-c4cd-5eeb-b4bb-7b41bea2441a">19 However, these US fund managers could have saved a lot of effort if they bought Vanguard's Balanced Institutional Shares Index (60 percent stocks, 40 percent bonds). It beat 77 percent of American college endowment funds over the previous 10 years.

      When faced with evidence that conflicts with our beliefs, each of us should be able to change our mind. Several years ago, I thought financial advisors who built portfolios of actively managed funds fell under two categories: they were either naïve or evil (especially those selling offshore pensions to unwary expats). While some evil ones exist, most are just undertrained salespeople trying to make a buck from commissions and trailer fees. Their bias hurts investors, but it can hurt the advisors too. The most respected accreditation for financial advisors is a CFP (Certified Financial Planner or Chartered Financial Planner). Most financial advisors without this qualification are glorified salespeople with questionable training. But even the CFP training (which takes a fraction of the time to complete compared to a nurse, teacher, social worker or plumber's training) leaves most financial advisors woefully unqualified to build portfolios based on economic science.

Schematic illustration of Financial Advisors Can't Predict the Future.

      Illustration by Chad Crowe: Printed with permission.

      Finance researchers Juhani T. Linnainmaa, Brian T. Melzer, and Alessandro Previtero gained access to portfolio performances for 4,688 Canadian financial advisors and about 500,000 the advisors' clients between 1999 and 2013. It was no surprise to see that most of the advisors bought actively managed funds for their clients. But they bought similar funds for their personal portfolios.

      When comparing their performances to an equal‐risk adjusted portfolio of index funds or ETFs, the advisors underperformed by about 3 percent per year. Sure, the advisors paid fees that were higher than those charged by index funds or ETFs. But the advisors also chased past performance. They bought funds that were “doing well.” But they didn't read the SPIVA Persistence Scorecard. They didn't learn that funds that perform well during one time period usually lag the next.

      That's why the advisors' personal money, and their clients' money, underperformed by 3 percent per year. Compounded over the 15‐year study, they unperformed similarly allocated portfolios of index funds by about 55 percent.

      1 Index funds (or ETFs) beat most actively managed funds over time.

      2 While some actively managed funds beat their counterpart index funds, you'll never know which will win ahead of time.

      3 Nobody can predict what stocks or what economic sectors will perform well in the future. Most active mutual fund managers, hedge fund managers and college endowment fund managers try. But as a result, they lose to similar, risk‐adjusted portfolios of index funds.

      4 Most people buy funds with hot track records or they follow a guru with a “winning record.” Don't do that. Funds that win during one time period typically underperform the next, whether they're actively managed mutual funds, hedge funds or college endowment funds.

      5 If you mention index funds to most financial advisors, most of them will try to fight you. Hold your ground. And remember that most financial advisors are not bad people. They are just undertrained and dealing with a conflict of interest.

      1 1. Fred Schwed, Where Are the Customers' Yachts? Or, A Good Hard Look at Wall Street (New York: John Wiley & Sons, 1995), 1.

      2 2. Global Investor Experience Study, Morningstar. Accessed August 11, 2021, https://www.morningstar.com/lp/global-fund-investor-experience

      3 3. “Actively Cheated,” The Economist, July 13, 2002. Accessed May 5, 2014.www.economist.com/node/1224513

      4 4. “SPIVA US Scorecard,” Accessed August 11, 2021,https://www.spglobal.com/spdji/en/documents/spiva/spiva-us-year-end-2020.pdf

      5 5. “SPIVA Canada Scorecard,” Accessed August 11, 2021, https://www.spglobal.com/spdji/en/documents/spiva/spiva-canada-scorecard-year-end-2020.pdf

      6 6. Burton G. Malkiel, A Random Walk Down Wall Street: The Time‐Tested Strategy for Successful Investing, 11th ed. (New York: W.W. Norton, 2012), 399.

      7 7. Warren E. Buffett, “Chairman's Letter—1996.” Accessed August 11, 2021. www.berkshirehathaway.com/letters/1996.html

      8 8. “Berkshire Hathaway Inc., 2006 Annual Report.” Accessed August 11, 2021, https://www.berkshirehathaway.com/letters/2006ltr.pdf

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