Meditations on Money Management

Simple money management strategies are effective but frowned upon

July 20, 2013 

For many people, there’s nothing more intimidating than investing. Any investment, whether in the form of an individual stock or bond, mutual fund, or exchange-traded fund (ETF), comes with a blizzard of numbers. To make matters worse, the figures are wrapped in dense jargon and packaged in seemingly endless legal documents. Periodically your mailbox, and shortly thereafter your recycling bin fills with unread volumes of annual reports and prospectuses.

The marketing materials produced by the money management industry aren’t very helpful either. Most of them are filled with glossy pictures of smiling retirees playing golf or college graduates receiving their degrees. The risks and costs of most financial products are usually relegated to microscopic print at the bottom of the ad copy.

My hope is that this column will, in a small way, help you break through the opacity thrown up by the money management industry. Moreover, I expect to demonstrate that so-called “sophisticated institutional investors” aren’t any more adept or skilled than the average investor. Frankly, if you strip away the jargon and keep away from complicated investment strategies, there’s no reason why you can’t successfully manage your own financial assets.

So, who is this guy making these claims? I am a recovering money manager, who managed the North Carolina pension plan about 10 years ago. I have carried just about every business title in the money management business: chief investment officer, director of research, chief operating officer, strategist, and even lowly analyst. I’ve worked for banks, brokerage firms, independent money managers, and the public sector. In other words, I have a pretty fair idea about how the investment business works, and I hope to share my insights with you.

Index investing

After more than three decades in the business, I’ve concluded that index investing is by far and away the preferable way to invest. Active money management, or hiring someone to pick stocks and bonds, is a losing proposition. Active management is far too expensive, and its practitioners have not been able to beat a well-constructed index like the S&P 500. Remember, I was one of those active managers and an institutional investor picking those managers for the state pension plan. By the time an active manager extracts all his fees and trades in your account, there is little hope that he can deliver better performance than an index fund over the long run.

Some investors, especially pension plans, have decided that the road to riches is paved with alternative investments. Instead of investing in stocks and bonds, these folks are loading up on real estate, private equity and hedge funds. While there are a few gifted money managers in the alternative world, just as there are in stocks and bonds, the vast majority of alternative investments will underperform. The only consistent winners in the money management business are money managers. There’s nothing wrong with alternative investments; you just need to have extraordinary skills in due diligence and investment strategy and special access to the elite ranks of money managers. Most of us don’t have the skills or access and ought to stay away from alternative investments.

Madly trading

Sadly, a large number of investors aren’t really investors at all. Rather they are speculators madly trading securities. Trying to day-trade stock or bonds in a world where computers are vacuuming up tiny price discrepancies in fractions of a second is a loser’s game. Thus, long-term investing is the only way to consistently build wealth.

My message is simple. Investment success is best achieved by being a long-term investor in low-cost index funds comprised largely of stocks and bonds. However, the message can hardly be heard because money management is one of the most powerful and savvy industries on the planet. Money managers have the power and influence to convince pension plans and individual investors alike to pour billions of dollars into active management, alternative investments, and trading schemes. They’re doing this for one reason: to use your money to make themselves rich.

Andrew Silton is a retired money manager living in Chapel Hill. He was CIO for the North Carolina Retirement System from 2002-2005. He writes the blog

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