Great new indexing tool just needs a better wrapper
By Paul B. Farrell, MarketWatch
ARROYO GRANDE, Calif. (MarketWatch) -- Titles and headlines sell stuff. In fact, my old marketing
professor told us that they are 88% of the reason why people read an advertisement or a column or pick
up a book. You gotta "GRAB!" your reader or customer. Make them stop in their tracks.
No grabber? No stop? No readers. No sale! Well, I just got a review copy of a new book by financial
adviser Mark T. Hebner, a colorful high-graphics beauty, loaded with fabulous charts, tables, data and
research. But the title is "Index Funds." I set it aside.
"Freakonomics!" Now that title's a show-stopper! The new "Bogleheads Guide to Investing!" Gotcha! A
must-read! But plain-vanilla "Index Funds?" Dull. Boring. A snoozer. So stick with me and read: For this
review I'm retitling Hebner's book "The Freakoindex Guide to Winning Portfolios!"
Folks, there's actually a big connection between the two: Freakonomic research says "experts" have an
"informational advantage" and use it against their clients. Which sure hints why index funds will never be
more popular than a mere 8% of the $8 trillion fund world, even though indexing consistently beats
actively managed funds. Index funds will always be the minority because the "experts" will invent jazzier
titles and headlines to sell nonindex funds that make more money for the "experts!"
So the media has a responsibility to get the indexing message out. And I believe Hebner's giving
American investors a great resource. Yet many will miss it because it lacks a jazzy "88%" title. And it's
pricey. But we've got a big surprise for you. After we review it we're going to show you how to get it for
free! So here's our summary of what we call "The Freakoindex Guide to Winning Portfolios:"
Step 1: Passive investors win
The game's fixed. Active investors try to pick the winners from among thousands of stocks and funds.
But prices are news-driven. And news is random and unpredictable. Worse yet, "experts" like Wall Street
brokers, portfolio managers and traders have an "informational advantage" that makes it impossible for
Main Street to beat them. They take advantage of naïve investors blindly throwing money at news tips.
Step 2: Nobel economists win
Hebner has the best survey I've seen of research by Nobel Prize-winning economists and other
academics. Unlike Wall Street plugging an IPO client or some brokers hustling commissions, they're
objective and unbiased. All this research proves conclusively that indexing and simple asset allocation
are the best way to win.
Step 3: Stock pickers lose
Wall Street brags about the stock-picking talents of active managers. Yet research says only 3% of them
beat their benchmark, and it's mostly luck. Stock-picking success is random. And today's winners are
rarely on top tomorrow.
Step 4: Market timers lose
Market timing is a fool's game. Over a 10-year period, 88% of your returns will come from a brief 40 up
days. Nobody can predict which 40 days. An academic study of 15,000 predictions by 237 timers
concluded: There's "no evidence that [market-timing] newsletters can time the market."
Step 5: Picking managers loses
Forget about picking next year's hot managers. You can't. The S&P 500 beat 97% of mutual fund
managers for a 10-year period ending October 2004. In two 30-year studies, the S&P 500 outperformed
97% and 94% of the managers. And only 12% of the top-100 managers repeated.
Step 6: Style drifters lose
Active managers love playing with your money, churning portfolios. They're gambling, it's fun. Their
average salary is more than $400,000 annually, even when they lose your money. One study proves that
40% of all funds drift from their stated objective. Reported holdings are months old, so you never really
know what's in any fund, or in your portfolio!
Step 7: Silent partners win
Before you make a dime invisible partners skim money off the top! They're silent because the SEC
doesn't require funds to disclose details about who's skimming: expenses, commissions, fees and taxes.
In one 15-year study of taxable accounts, actively managed funds returned 50% of the gross, while index
funds returned 85% to investors.
Step 8: Risk blindness
The sad truth is, most American investors don't know that what they're doing amounts to gambling. They
chase short-term returns, follow hot tips, never really understanding the impact that timing and risk-taking
have on their after-tax returns.
Step 9: History exposes
Managers come and go. Performance drifts unpredictably over the short term. Indexes are your only
reliable source going back 80 years. Raw indexes, not actively managed funds, are the best measure of
long-term portfolio risks.
Step 10: Risk capacity
What's your risk profile? Your risk "capacity" is a combination of five factors: Personal tolerance for risk
(anxiety level!), your investment IQ, net worth, income and savings rate, plus time to retirement or any
special withdrawal needs. This book has a ton of information on how to determine your risk profile!
Step 11: Risk exposure
Over 90% of a portfolio's returns are a function of asset allocation and not the specific funds, stocks and
bonds. Active management has a negative effect on returns, draining off a third or more. Over a 50-year
period, studies show that a diversified index portfolio will outperform the S&P 500.
Step 12: Invest and relax
Hebner says index and relax: The best way to maximize your returns is to avoid active trading, market
timing and actively managed funds. Create and build a portfolio of index funds that works for your unique
risk profile. Set it and forget it. Buy quality, rebalance periodically. And relax.
Now the best news of all: Hebner's hard copy is a museum piece, a work of art that ought to be on your
coffee table or framed on a wall. But if you think it's a bit pricey at $29.99, get it online free, right now!
See the virtual book.
You can return to this fabulous resource any time you need research, data (yes, Hebner's team does
update statistics regularily) and inspiration about investing, asset allocation and portfolio management.
So get it: "The Freakoindex Guide to Successful Portfolios" is perfect for America's 94 million Main Street
investors! Even if you only call it "Index Funds."
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