The Power of Passive Investing E-Book

Richard A. Ferri

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Sprache: Englisch

Seitenzahl: 447

Veröffentlichungsjahr: 2010

Beschreibung

A practical guide to passive investing Time and again, individual investors discover, all too late, that actively picking stocks is a loser's game. The alternative lies with index funds. This passive form of investing allows you to participate in the markets relatively cheaply while prospering all the more because the money saved on investment expenses stays in your pocket. In his latest book, investment expert Richard Ferri shows you how easy and accessible index investing is. Along the way, he highlights how successful you can be by using this passive approach to allocate funds to stocks, bonds, and other prudent asset classes. * Addresses the advantages of index funds over portfolios that are actively managed * Offers insights on index-based funds that provide exposure to designated broad markets and don't make bets on individual securities * Ferri is also author of the Wiley title: The ETF Book and co-author of The Bogleheads' Guide to Retirement Planning If you're looking for a productive investment approach that won't take all of your time to implement, then The Power of Passive Investing is the book you need to read.

Leseprobe

Contents

Foreword

Preface

Acknowledgments

Part I: The Active Versus Passive Debate

Chapter 1: Framing the Debate

In the Beginning, There Were Active Funds

Passive Investing Makes Its Case

All about Indexes and Benchmarks

The Portfolio Management Debate

Summary

Chapter 2: Early Performance Studies

Cowles Commission Report

The Quiet Period

The Rise of Mutual Funds

The Roaring 60s

Summary

Chapter 3: The Birth of Index Funds

The First Indexed Portfolios

The First Index Fund

Summary

Chapter 4: Advances in Fund Analysis

The Early Years in Review

Building on Success

The Three Factor Model

Three-Factor Analysis for Everyone

Four-Factor Models and Beyond

Does Anyone have Skill?

Summary

Chapter 5: Passive Choices Expand

The Growth of Indexing

The First Fixed Income Index Fund

International Equity Index Funds

Real Estate Investment Trusts

U.S. Small Cap

Revisiting SPIVA Performance Studies

Active Management Invades Indexing

Summary

Chapter 6: Portfolios of Mutual Funds

Efficient Portfolios

Portfolio Choices

The Bottom Line Is Your Bottom Line

Summary

Part II: Chasing Alpha and Changing Behavior

Chapter 7: The Futility of Seeking Alpha

All That’s Needed Is a Crystal Ball

Past Performance as a Way to Predict Future Returns

Fund Expenses as a Predictor of Top Performance

Ratings as a Predictor of Top Performance

Qualitative Factors as a Predictor of Top performance

Summary

Chapter 8: Active and Passive Asset Allocation

Tactical Versus Strategic

Mutual Fund Flows Show Bad Timing

Measuring the Timing Gap

Dumb Money versus Smart Money

Putting It All Together

Summary

Chapter 9: Changing Investor Behavior

Helping People Go Passive

Three Non-Indexers

Investing Is Serious Business

Summary

Part III: The Case for Passive Investing

Chapter 10: The Passive Management Process

The Five Step Process

Investment Policy Statements

Summary

Chapter 11: The Passive Case for Individual Investors

Begin at the End

Estimating Future Obligations

The Asset Side

Matching Assets to Obligations

Asset Allocation

Risk!

Investment Decisions

Hired Help

Summary

Chapter 12: The Passive Case for Charities and Personal Trusts

Your Role as a Trustee

Laws Governing Trusts

Trusts and Passive Investing

Private Trust Management

Nonprofit Organizations

Passive Versus Active Investing

Watch Out For Conflicts of Interest

Summary

Chapter 13: The Passive Case for Pension Funds

Legal Acts Governing Pensions

The Plight of the Small Plan

Self-Directed Retirement Plans

Summary

Chapter 14: The Passive Case for Advisors

More Risk Means More Fees

Types of Advisors

The Role of the Fiduciary Advisor

What Clients Expect from Advisors

What Advisors Present

Summary

Glossary

Notes

About the Author

Index

Additional Praise for The Power of Passive Investing

“The retail stockbroker will soon become as extinct as the dinosaur, and good riddance. Thousands of investment professionals, tired of selling the same old lies, and millions of their clients, tired of hearing them, have deserted the brokerage business for a more elegant, effective, and honest way of managing money. Twenty years ago, Rick Ferri helped pioneer that transition. If you’re an advisor or a broker, you owe it to yourself to read The Power of Passive Investing; if you’re an investor, you owe it to your pocketbook.”

—Bill Bernstein, author, The Investor’s Manifesto

“I’m a big fan of Rick’s books, and this is his best yet. It’s the book on how to effectively harness the power of passive investing. Whether you are an individual investor or are responsible for billion-dollar portfolios, this book is critical to your success.”

—Allan Roth, author, How a Second Grader Beats Wall Street

“Rick Ferri has written yet another terrific book. The numerous studies he reviews provide powerful support for passive investing and guide trustees and other fiduciaries toward this ideal solution.”

—W. Scott Simon, principal, Prudent Investor Advisors, LLC

“Passive investments deserve a place in almost all investors’ portfolios, but the range of choices has never been so complex or treacherous. There are now every bit as many flawed, gimmicky, or overpriced index funds as there are those from active managers. If you want to navigate this new terrain successfully, you’ll find Rick Ferri’s The Power of Passive Investing an essential text.”

—Don Phillips, Managing Director, Morningstar, Inc.

“Powerful! The extensive research behind this book makes a compelling case for a passive investing strategy. Ignore the information in this book at your own peril.”

—Mel Lindauer, Forbes columnist and co-author of The Bogleheads’ Guide to Investing and The Bogleheads’ Guide to Retirement Planning

“The Power of Passive Investing is as much an enlightening history lesson as a compelling argument for building a portfolio on a foundation of index funds. Rick Ferri invigorates a long-standing debate with fresh proof and perspective that come from managing millions of dollars and reading reams of research. Don’t mistake passive for wishy-washy; Ferri’s arguments are as sound, precise, and forceful as you’d expect from a retired Marine Corps fighter pilot.”

—Robert Brokamp, CFP, Senior Advisor, The Motley Fool’s Rule Your Retirement service

“If you doubt the power of passive investing, check out Rick Ferri’s new book—and you’ll discover a wealth of evidence that should sway even the most ardent fan of active investing.”

—Jonathan Clements, author, The Little Book of Main Street Money

“Rick Ferri convincingly lays out the damage done by investing in actively managed mutual funds. He proves why we should be grateful to Jack Bogle for implementing index funds as a shield against Madoff-type shysters, lawsuits, unnecessary risk, and high costs. His clear writing, serious research, sound logic, and nuggets of wisdom illuminate both old and new-to-me dimensions of the compelling case for indexing.”

—Ed Tower, Professor of Economics at Duke University

Old-school index investing seems so simple, it’s amazing that someone like Rick Ferri, who just tells us the truth, is so rare. And what is the truth? That most investors are underperforming the market and being fleeced by Wall Street. We’re lucky to have a crusader for common sense like Rick on our side.

—Jim Wiandt, President and CEO, IndexUniverse

“Few people understand indexing better than Rick Ferri. In The Power of Passive Investing, Rick clearly explains the sophistication of passive investing and how it will enhance account performance. If you haven’t yet incorporated passive investing into your portfolio, this book will convince you.”

—Taylor Larimore, co-author of The Bogleheads’ Guide to Investing and The Bogleheads’ Guide to Retirement Planning

“Rick Ferri has brilliantly assembled hordes of unbiased, highly technical investment research so that the average investor can understand and benefit from what the smart money has known for decades. If you care about how much you’ll retire with, you’ll read The Power of Passive Investing.”

—Mitch Tuchman, CEO, MarketRiders, Inc.

“Rick Ferri has gathered a wealth of research. A passive investment strategy is a great approach because it allows a person to focus on more important things in life.”

—Craig Israelsen, author of 7 Twelve: A Diversified Investment Portfolio with a Plan

“I found this book to be an outstanding resource for the passive investor as well as those who could benefit from this approach. It’s another most excellent contribution by Rick Ferri.”

—Sheryl Garrett, CFP, AIF, Founder, Garrett Planning Network

“This book is an enormous gem of a history lesson on a profoundly sophisticated (and simple) strategy that has changed the world of investing forever. Rick Ferri’s work is a must read for everyone who accepts responsibility for their own financial well-being, giving readers the authority to turn away from Wall Street and make intelligent investment decisions on their own.”

—Bill Schultheis, advisor and author, The New Coffeehouse Investor

“Enemies of passive investing aren’t going to like this book, but who cares what they think? Ferri provides more damning evidence against stock picking and other money-losing strategies that bomb investors’ portfolios. In the end, passive investors win.”

—Ron DeLegge, host, The Index Fund Investing Show

“Having originally been trained in the hedge fund space to think actively, I know there is a large group of investors with an ‘active management’ state of mind. However, given what I know of many retail investors and a surprising number of institutional investors, I can’t help but think that for their own benefit, the passive-oriented approach espoused by Rick in this book is a likely path to minimizing future regret.”

—Richard C. Kang, Chief Investment Officer and Director of Research, Emerging Global Advisors, LLC

“‘Odds are you’ll earn well below market returns in your portfolio over your lifetime if you believe that the mutual funds you’re choosing or your advisor selects will beat the markets.’ Strong words, but in this eminently readable book, Rick Ferri makes a more than compelling case in favor of passive investing. Wouldn’t you like your portfolio to be managed by nothing but managers who shoot par? If you’re a professional or a retail investor, following the lessons introduced in this book will unquestionably improve your bottom line.”

—Harold Evensky, President, Evensky & Katz

“In this well-crafted book, the author ponders the question of why pay high fees to active managers when index funds—those that follow a real market benchmark, not just a disguised active investment strategy—can do better on a risk-adjusted basis? A strong case is built for passive investing, with arguments backed with market facts and a thorough review of decades of unbiased academic and practitioner studies. At the same time, Rick reminds us of the power of strategic allocation over tactical allocation in meeting a client’s long-term financial goals. This book is a valuable resource, and I highly recommend it.”

—Seddik Meziani, PhD, Professor of Finance and Economics, Montclair State University

“By focusing on the irrefutable facts, Rick Ferri has put together an unassailable case for The Power of Passive Investing. Advisers who implement the principles outlined within this book will strengthen their relationships with clients by delivering solutions in lieu of products.”

—Rudy Aguilera, Principal, Helios LLC

The Power of Passive Investing

Books by Richard A. Ferri

The ETF Book

All About Asset Allocation

All About Index Funds

The Bogleheads’ Guide to Retirement Planning (with Mel Lindauer, Laura Dogu, and Taylor Larimore)

Protecting Your Wealth in Good Times and Bad

Serious Money: Straight Talk about Investing for Retirement

Copyright © 2011 by Richard A. Ferri. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

Published simultaneously in Canada.

No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, [phone], fax [phone], or on the Web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, [phone], fax [phone], or online at http://www.wiley.com/go/permissions.

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Library of Congress Cataloging-in-Publication Data:

Ferri, Richard A.

The power of passive investing: more wealth with less work / Richard A. Ferri.

p. cm.

Includes index.

ISBN 978-0-470-59220-5 (hardback); ISBN 978-0-470-93708-2 (ebk);

ISBN 978-0-470-93712-9 (ebk); ISBN 978-1-118-00390-9 (ebk)

1. Index mutual funds. 2. Investments. I. Title.

HG4530.F428 2010

332.63'27—dc22

2010028567

Foreword

In The Power of Passive Investing, Rick Ferri has given us a comprehensive guide to what is proving to be a virtual revolution in investment strategy. Up until the 1980s, “stock picking” was the dominant method of investing by individual investors. Then, through the 1990s, professional investment supervision through actively managed mutual funds was ascendant. But, gradually, index investing—buying and holding a portfolio representing the entire stock (or bond) market, or various sectors of those markets—has attracted the most attention (and dollars) from investors.

Rick’s book begins with the historical background of index funds. As one who was present at the creation of the first index mutual fund in December 1975, I can attest to the accuracy of his chronology. (My first decision at the upstart firm Vanguard, which I founded and which began operations in May 1975, was to form the world’s first index mutual fund.) We also learn about the other pioneers of the concept of indexing, including Treynor, Samuelson, Malkiel, Ellis, and Sharpe.

The simple fact is that indexing wins because indexing must win. After all, we investors as a group are destined to be average. (In a stock market with a 7 percent gross annual return, we all divide up that 7 percent.) But after we account for the costs of investing—what I call the “croupier” costs, an estimated 2½ percent—we (again, as a group) earn a net return of 4½ percent. The best index funds win simply because they eliminate management fees and sales loads, and minimize operating costs and portfolio turnover and its costs. In so doing, they provide their services at an annual cost of as little as 1/10th of 1 percent of assets. It is the “relentless rules of humble arithmetic” that drive the theory of passive investing.

But Ferri takes us from theory to reality, providing scores of examples and tabulations that prove that very point. Like many analysts, he finds that it is not past fund performance but low costs that are the best predictor of future (relative) fund returns. In one particularly striking exhibit, he shows that an investor holding a portfolio of five equally-weighted mutual funds has but a 3 percent probability of beating the stock market index over 25 years. (For a holder of 10 funds, the probability is only 1 percent). Again, the historical record confirms the hypothesis.

The Power of Passive Investing also deals soundly with such broad areas as savings and investment, asset allocation, and the use of financial advisers. That is Rick’s profession, and he is an outspoken advocate for the indexing approach. By charging minimal fees for his services, he walks the walk that reflects the talk he talks in this fine book. I commend it to you.

John C. Bogle

Valley Forge, PA

September, 2010

Preface

Did you ever buy something because you thought it was a superior product, only to be disappointed with the results? That’s the problem with most mutual funds. They don’t deliver on their promise.

Investors buy mutual funds in most cases because they believe the fund manager will earn superior returns over a market average. But that’s not what typically happens. Most funds that try to beat the market underperform the market, some by a wide amount. Investor hope fades quickly as the reality of mediocre results roll in. Then they search for new funds, finding new hope, and fail again. This vicious cycle has been happening in the mutual fund industry for almost a century.

Odds are you’ll earn well below market returns in your portfolio over your lifetime if you believe that the mutual funds you’re choosing or your advisor selects will beat the markets. That’s not going to happen, at least not in the long term. Perhaps one or two funds will achieve this difficult goal if they survive long enough, but a portfolio of several funds will not beat the markets in aggregate over time. That’s almost a certainty.

The advertising from fund companies will always imply that their managers have delivered superior returns and that you can capitalize on this skill and earn superior returns in the future. That’s wishful thinking. As a group, mutual fund managers have no special talents and outperformance is more a matter of luck than skill. The academics have been saying this for decades.

There is an alternative. The failure of active fund managers to deliver on their promise of high returns while continuing to charge high fees creates a compelling case for passive investing. Passive investing is all about investing in low-cost passively managed index funds and exchange-traded funds (ETFs) that match the financial market returns less a tiny fee for expenses. This strategy lands your portfolio much closer to the market’s return than active fund management, and it ensures that you’ll earn your fair share of those returns.