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Well, that was interesting. Last night, I went along with son Andrew (SMI's esteemed webmaster) to visit with friend Hugh Hewitt, who was in town (Louisville, Ky.) doing his talk show for the evening. Hugh usually broadcasts from Southern California, and has (according to Talkers magazine) an audience estimated to be about 1.75+ million listeners who tune in at some point during the average week.
 Hugh was in town for personal reasons, and was broadcasting from the studios of his local Salem Radio Network affiliate. The drawing card for us was not only a chance to visit with Hugh again, but to also connect with some Young Life friends who head up the YL outreaches in the UK — Tom and Ninie Hammon.
Andrew and I and our wives are friends and financial supporters of the Hammons, and always enjoy our visits to learn the latest about their efforts in England, Scotland, Ireland, and Wales. Hugh had invited them to be interviewed on his program last night.
It was really Andrew's deal, but at the last minute he invited me to tag along. Thought it would be fun to see everyone, and also be in a radio studio again. As many of you may know, I was a regular guest on Larry Burkett's call-in program throughout the 1990s, and continued on with Howard Dayton for a few years after Larry went home to heaven.
The last thing I was expecting was to be on the air, speaking off the cuff, to a national audience. But that's what happened. On something of an impulse, Hugh asked if I would be willing to do a segment and talk a little about SMI as well as the market's wild behavior yesterday. No prep time, but being the seasoned veteran that I am, I foolishly agreed.
It was fun, went by quickly, and it wasn't until this morning that I began thinking of how I might have expressed myself better. So I decided to give myself something of a "do-over" and write all about it in the upcoming June issue of the Sound Mind Investing newsletter. Look for my editorial "What I Should Have Said" (working title).
If you'd like to hear what, in fact, I did say, you can listen to that below. The first two segments contain Hugh's interview with Tom Hammon. I believe you'll find it very interesting — Hugh, Andrew, and I sure did. Then I come along in segment three. Those segments cover a total of about 25 minutes.
A huge audience tuned in to a sporting event that took place in my hometown over the weekend: the Kentucky Derby. In addition to the tens of millions who watched on television, almost 156,000 crowded into Churchill Downs on a rainy day to experience the tradition, wagering, and cheering firsthand.
Before the race, a "vote" was taken as to which horse would win. Participants voted with their pocketbooks by placing their bets, and the horse on which the most money was wagered became the favorite. Rarely do the fans in any sport spend more time studying data, reading commentary, or listening to experts before reaching a decision.
 The eventual favorite reflected the collective wisdom of the racing world. Given this, you'd expect the favorites in this race to have a record of success. Surprisingly, you'd be wrong — very wrong.
Over the past 30 years (including this past Saturday when pre-race favorite "Lookin At Lucky" came in sixth), the favorite has made it into the winner's circle only twice. That's a failure rate of 94%!
Based on their extensive knowledge of the horses' recent histories, people "in the know" make educated judgments about how the horses will perform on a given day. But actually, they're just guessing. No one knows for sure.
In a sense, the financial markets aren't much different. When an investing professional offers stock, bond, and mutual fund recommendations, he doesn't know where the markets are going any more than you do.
He knows where they've been, of course; that is, he knows how they've behaved in the past under similar economic circumstances. Based on that knowledge, he forms opinions as to how the markets will behave in the near future. But reality isn't that simple.
There are two difficulties in making accurate forecasts. The first is that one or more of the governing assumptions will turn out to be wrong. The forecasters don't know which ones, so they can't fix them. The other is that the underlying assumptions are incomplete. But the forecasters don't know which factors have been left out, so they can't include them.
Despite this, publishers of the leading financial magazines and web sites regularly offer bold headlines such as "Where to put your money now" or "Eight stocks to buy today."
This incorrectly conveys a sense of predictability concerning the economy and markets, and downplays the reality of risk. (Frankly, financial magazines have a mediocre track record when it comes to their specific investment recommendations.)
Sound Mind Investing typically doesn't make forecasts as to what the future holds for the markets. We're willing to admit we're clueless about that. It's our belief, however, that it is impossible to self-destruct financially if your decision-making is pointed in the direction of God's glory.
One characteristic of investing that glorifies God is that it respects His wisdom, not man's. If it's your desire to have confidence in managing your finances rather than relying on the guesswork of others, ask God to help you learn the essential basics you need to become a faithful and effective steward. In tandem with your praying, begin your education by reading our recent Financial Literacy 101 series.
And here's something to keep in mind: Asking for the Lord's help is not a gamble. It's a sure thing. "If any of you lacks wisdom, he should ask God, who gives generously to all without finding fault, and it will be given to him" (James 1:5).
Below are several quotes about money management from late U.S. presidents. Some quotes relate to personal financial management, others to the management of the government's finances. Some touch on both areas.
First, from Kiplinger.com:
George Washington: "As a very important source of strength and security, cherish public credit. One method of preserving it is, to use it as sparingly as possible… but remembering also that timely disbursements to prepare for danger frequently prevent much greater disbursements to repel it" (Farewell Address, 1796).
Thomas Jefferson: "Never buy what you do not want because it is cheap" (from "A Decalogue of Canons for Observation in Practical Life," 1825).
Abraham Lincoln: "That some should be rich, shows that others may become rich, and hence is just encouragement to industry and enterprise. Let not him who is houseless pull down the house of another; but let him labor diligently and build one for himself" (from an address to the New York Workingmen's Democratic Republican Association, 1864).
Now, a few more from other sources:
Grover Cleveland: "I feel obliged to withhold my approval of the plan to indulge in benevolent and charitable sentiment through the appropriation of public funds.... I find no warrant for such an appropriation in the Constitution" (from an 1887 veto message, when vetoing an appropriation to help drought-stricken counties in Texas).
Calvin Coolidge: "I favor the policy of economy, not because I wish to save money, but because I wish to save people. The men and women of this country who toil are the ones who bear the cost of the Government. Every dollar that we carelessly waste means that their life will be so much the more meager. Every dollar that we prudently save means that their life will be so much the more abundant. Economy is idealism in its most practical form" (Inaugural Address, 1925).
Franklin D. Roosevelt: "Any government, like any family, can for a year spend a little more than it earns. But you and I know that a continuation of that habit means the poorhouse" (from address made as a presidential candidate in 1932).
And here's a personal favorite, specifically about government, but apply it to your household finances as well — and take warning:
Ronald Reagan: "Government always finds a need for whatever money it gets."
The New York Times' "Wealth Matters" column — targeted to wealthier readers — has served up a profile of Princeton economics professor, Burton G. Malkiel, author of the long-time bestseller, A Random Walk Down Wall Street, and now (with Charles Ellis), The Elements of Investing (Wiley, 2009).
Dr. Malkiel is a strong proponent of investing via no-frills, low-cost index funds. He argues that even the wealthy are more apt to come out ahead by using simple indexes, rather than hiring advisers to help them try to find outperforming stocks, hedge funds, and/or alternative investments.
From the Times:
For the wealthy, index funds have an image problem. They are considered the economy cars of the investing world: they'll get you there but not in style and you're always worried they may break down. Anyone at a serious level of wealth, the thinking goes, needs the equivalent of a luxury sedan, with strategic stock choices, hedge funds, private equity, real estate.
Burton G. Malkiel says this is all hogwash....
[He argues that the wealthy] would have fine returns without the volatility and high fees if they simply used indexes to diversify their money across asset classes. "This is still a strategy that is good for people of all income levels," he said.
Malkiel says many wealthy people waste money by paying for advice that doesn't improve their investment performance beyond what they would experience with index funds.
While the old adage says you get what you pay for, Mr. Malkiel argues the opposite. "The one thing I'm absolutely sure about is the less I pay to the purveyor of the service, the more that will be left for me," he said....
This makes sense for the modest investor with a straightforward portfolio. But the counterargument is that the wealthy need more advice because of the complexity of their assets, and that the advice is worth the fees. (Mr. Malkiel would say the rich just need more tax-planning advice.)...
"You don't need a commodities fund if you're really well diversified and into emerging markets," he said. "You’re going to have some investments in Brazil, which is natural resource rich. It's simple."
We agree with Dr. Malkiel that many investors — including many wealthy investors — overcomplicate matters, thereby increasing expenses without any significant increase in performance. That's why we developed our simple Just-the-Basics strategy.
Although SMI's Upgrading strategy clearly offers superior performance to indexing over the long haul, if the simplicity of indexing strikes your fancy, you won't get any argument from us. Indexing is a solid approach that (as Dr. Malkiel says) "is good for people of all income levels."
Not an SMI member yet? Today's a great day to join and gain access to all of our investing strategies and online tools!
Here is an interesting tidbit from former Treasury Secretary Hank Paulson's new book, On the Brink: Inside the Race to Stop the Collapse of the Global Financial System.
 Back in my temporary office on the 13th floor, a jolt of fear suddenly overcame me as I thought of what lay ahead of us. Lehman was as good as dead, and AIG's problems were spiraling out of control. With the U.S. sinking deeper into recession, the failure of a large financial institution would reverberate throughout the country — and far beyond our shores. It would take years for us to dig ourselves out from under such a disaster.
All weekend I'd been wearing my crisis armor, but now I felt my guard slipping. I knew I had to call my wife, but I didn't want to do it from the landline in my office because other people were there. So I walked around the corner to a spot near some windows. Wendy had just returned from church. I told her about Lehman's unavoidable bankruptcy and the looming problems with AIG.
"What if the system collapses?" I asked her. "Everybody is looking to me, and I don't have the answer. I am really scared."
I asked her to pray for me, and for the country, and to help me cope with this sudden onslaught of fear. She immediately quoted from the Second Book of Timothy, verse 1:7—"For God hath not given us the spirit of fear, but of power, and of love, and of a sound mind."
The Wall Street Journal has a longer version of this excerpt, courtesy of the Hachette Book Group, Inc.
Just weeks after Charles Schwab shook things up in the ETF world by introducing its own brand of commission-free exchange-traded funds, Fidelity has unveiled a commission-free model for 25 ETFs from iShares (managed by BlackRock). Schwab currently has only eight commission-free ETFs.
The no-fee ETFs from Fidelity include some of the most popular ETFs on the market, including the iShares S&P 500 Index, iShares Russell 2000 Index, iShares MSCI Emerging Markets Index, and the iShares Barclays Aggregate Bond fund.
A Reuters report characterized Fidelity's move into commission-free ETFs as a belated recognition that exchange-traded funds have gained a significant presence in the mutual-fund marketplace.
[Fidelity's] new alliance with BlackRock of New York marks a final acknowledgment of the growth of ETFs and their importance to retail investors, said Paul Justice, an analyst who follows the industry for Morningstar in Chicago.
Although the industry has more than doubled since 2005, to $1 trillion globally by BlackRock's count, ETFs will continue picking up market share, Justice said. Following Fidelity and BlackRock's move "you will see a great deal of competitive response," he added.
The rapid growth of ETFs offered by iShares, State Street Corp and others is in stark contrast with the skepticism investors have shown traditional stock mutual funds, which saw high outflows as stock markets sank.
Fidelity introduced a single ETF of its own in 2003, but never followed up with additional products....
Tom Lydon, editor of the ETF Trends newsletter, said he expects ETFs to continue to grow as investors realize their fee benefits. ETFs also have room to gobble more assets in 401(k) retirement-savings plans, where they have been little used to date, Lydon said.
Fidelity also announced it is replacing its current tiered-pricing model for stock trades with a flat $7.95 fee for online trades — $1 less than the stock-trading fee recently implemented by Schwab.
Neither Schwab nor Fidelity has announced any changes in their pricing structure for traditional mutual funds.
It's no secret that interest rates for money market funds are scraping bottom. Even the top recommendation in our current money rates table (subscription required) is paying a scant 0.30%. Vanguard Prime, one of the best-known and most popular MMFs available, is yielding a barely noticeable 0.05%.
So is it time to abandon the money-fund ship and move your savings elsewhere?
Russel Kinnel, editor of Morningstar's FundInvestor newsletter (and director of the company's mutual fund research), is advising MMF investors to hang on rather than bailing on MMFs and moving to short-term or ultrashort bond funds.
We're still wary of ultrashort funds [following the implosion of several such funds in 2007 and 2008]. Short-term bond funds can work if some losses in the short run are acceptable — for example, if you are parking money between investments, plan to hold for a year or two, or just want a conservative bond holding in your long-term asset-allocation scheme....
But for other uses, such as emergencies or upcoming big-ticket expenditures, I'd stay with money market funds. Think about what will happen when interest rates start to rise. Bond funds will initially lose money because their superlow-yielding bonds will be discounted in the face of new higher-paying bonds. On the other hand, money market funds will quickly start to have higher yields, yet they won't lose money when rates go back up.
Kinnel concedes that MMFs aren't exciting, "but money market funds are there to serve in an emergency. Insurance always costs you money, and that's how I'd look at money markets."
Another practical matter is simply: Is it worth the trouble to switch? A Los Angeles Times story (titled, "Look, Ma, Nearly No Yield") quotes Peter Crane, head of money-fund research firm Crane Data: "My general rule is, if you're not going to make $100 more [in interest] by switching, don't bother."
Although 2009 was the toughest year on record for money funds, the MMFs recommended by SMI outperformed the overall field (for the 12th year in a row). Details are available for SMI web members in our February Level 2 article.
In an article on passive vs. active approaches to mutual-fund investing, the Wall Street Journal quotes Vanguard founder (and passive indexing guru) John Bogle on what is perhaps the biggest challenge facing active investors: "Yesterday's winners," said Bogle, "are far more likely to be tomorrow's losers."
In other words, many actively managed funds are loaded up with stocks that did well in the past (that's why managers bought them) but that are in the process of becoming underperformers. Active managers are constantly playing a game of "move ahead, then fall behind" — which generates expenses, but not much to show in terms of actual profits in comparison with low-cost indexing.
Two observations: 1) Bogle is right — this is the general case with active management; 2) Nonetheless, many actively managed funds have runs of outperformance that can stretch for many months (even years in rare cases).
Identifying these outperforming funds and investing in them until their success begins to falter is the essence of our Upgrading strategy. Upgrading isn't perfect, but that's okay. There is no perfect strategy. What Upgrading has been able to do is generate annual returns that have strongly outperformed indexing in recent years (although not every year; as noted in our just-released February issue, indexing eclipsed Upgrading ever-so-slightly in 2009).
We're all for indexing for those investors who want to follow that approach — and we're thankful that Mr. Bogle's Vanguard firm offers a terrific mix of index funds that we use for our Just-the-Basics indexing strategy. But we're also glad that Upgrading offers a way to meet the "yesterday's winners, tomorrow's losers" challenge and (usually) come out ahead.
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