Should I teach residents about active investing?

[Roentgen]

I am putting together formal, recorded lectures to residents and medical students about personal finance.  I'm no neophyte on the subject - I have a Masters degree in Personal Financial Planning from the College for Financial Planner, and passed the CFP exam back in 2008.

All of my reading over all the years has exposed me to maybe 50 - 100 studies which seem to validate John Bogle's philosophy on passive investing, which I follow personally with a four-fund portfolio.  I pretty much stopped reading new papers because at this point I consider it "settled law."  I have read less than five legitimate studies (maybe?) showing active investing is worthwhile when deployed for and paid for by retail investors; i.e. true alpha is provided to the retail investors, not the fund managers or "financial planners" being paid for their services.

My question to the hive-mind is this:  given limited lecture time, to what extent should I discuss active investing as a legitimate approach for mutual funds?  Or do I simply say "doesn't work for retail investors" like I will for technical market analysis?

I ask because there is SO MUCH out there pushing active mutual funds, and even some nationally know planners still use active funds, particularly in a "hub-and-spoke" or "core-and-satellite" investing plan.  And until they become mature investors, people tend to believe in their active funds with almost religious fidelity (I also did once . . . looking at you, Bill Miller).  So I don't want to offend anyone and have them turn off for the rest of my talk, but I just wonder if anyone else has struggled with this, and how did you handle it?

Many thanks in advance!

 

 

 

 

[Marko-ER]

Interested in this subject as well, as I will also be giving a intro lecture to retirement funding for incoming residents.  Out of curiosity, do people here consider DFA as 'indexing with a twist' or less active form of active investing that takes advantage of resources not typically available to retail investors.  I ask, because we may begin to have access to DFA funds as part of our 403b in the near future and I am sure this will be a follow-up.

[artemis]

Roentgen wrote:

My question to the hive-mind is this:  given limited lecture time, to what extent should I discuss active investing as a legitimate approach for mutual funds?  Or do I simply say “doesn’t work for retail investors” like I will for technical market analysis?

I ask because there is SO MUCH out there pushing active mutual funds, and even some nationally know planners still use active funds, particularly in a “hub-and-spoke” or “core-and-satellite” investing plan.  And until they become mature investors, people tend to believe in their active funds with almost religious fidelity (I also did once . . . looking at you, Bill Miller).  So I don’t want to offend anyone and have them turn off for the rest of my talk, but I just wonder if anyone else has struggled with this, and how did you handle it?

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I have little experience teaching residents, so bear in mind that my comments are worth what you're paying for them.      That said, most residents are financial neophytes; they aren't yet wedded to any particular investment philosophy (since they've never invested any money before).  So I'd push back HARD against the "active funds/individual stock picking is the way to go!" philosophy.  You'll save more than you alienate, and if you can also get across the message that many financial advisers are not fiduciaries and recommend things to their clients for their own wallets' benefit (and not the clients') first, that's even better.

[SerrateAndDominate]

You absolutely should!  It's great you are giving them any financial lecture because it's often ignored or taught incorrectly.  I want to say our leadership course had a "financial advisor" come speak, but I never saw who he/she was.  I've made sure to emphasize the person be vetted and not an insurance salesperson in disguise.

 

I think it's good to break down whole life/universal life because it's likely that your residents have already been approach about it.

[Lithium]

I think it's important to present a facade of neutrality.  A clear bias against active investing may present the impression you have an ulterior agenda, even if that's false.  Maybe put a simple pro/con slide up with info like this:

Benefits of active investing:

- Greater ability to customize

- Possibility of higher returns than the market

- Learn a lot in the process of research

Drawbacks of active investing:

- More work

- Higher fees

- More taxes

- Even ignoring fees, active management is a zero-sum game (you're only as good as others are bad).

 

[Donnie]

I would only spend time pointing out the underperformance of active funds, stock picking, market timing, etc. compared to passive funds. People tend to believe they are smarter than average and can beat the market. They likely hear stories about Uncle Jerry who turned $10k into $1M by stock picking and think they can do the same. Why people who are not professional investors believe they have any ability to correctly pick stocks, active funds, etc. is beyond me. Promote passive funds, diversification, and simplicity.

I disagree with Lithium. Present a clear bias but back it up with facts and data. What possible ulterior motive could you have? Look no further than Vanguard. Vanguard had $4 trillion of AUM. Jack Bogle is worth less than $100M. Blackstone has actively managed and PE funds with $400B of AUM. Its founder made $800M in 2017 alone and is worth $10B+. It’s obvious that value flows straight to the top in actively managed funds. Active managers are the ones with the ulterior motives.

[Zaphod]

Donnie wrote:

I would only spend time pointing out the underperformance of active funds, stock picking, market timing, etc. compared to passive funds. People tend to believe they are smarter than average and can beat the market. They likely hear stories about Uncle Jerry who turned $10k into $1M by stock picking and think they can do the same. Why people who are not professional investors believe they have any ability to correctly pick stocks, active funds, etc. is beyond me. Promote passive funds, diversification, and simplicity.

I disagree with Lithium. Present a clear bias but back it up with facts and data. What possible ulterior motive could you have? Look no further than Vanguard. Vanguard had $4 trillion of AUM. Jack Bogle is worth less than $100M.

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Agree with Donnie it is not at all important and detrimental to appear neutral. This idea is put forth all the time as just a reasonable approach to things but where the current data (even if incomplete or wrong longer term) are highly one sided its a ruse. Everyone wants to appear fair and balanced as it seems correct and fancy, when really it is just a clever way to undermine the veracity of the more correct option. Its really just a great weapon/tactic for debate, dont be suckered into using it where the two sides arent even close.

Imagine all the time you'd waste in life if you didnt just absolutely toss all other options out the window when making a decision of any kind. When you make a decision for one thing, you are choosing against every other option, aka approaching an infinite number. No one has the time, cut the trash out. We dont give neutral time to blood letting or the moral theory of disease versus antibiotics and known pathologic processes. This is no different.

Maybe someone can beat the market enough years to make a difference in their life, someone wins the lottery as well, but its still a bad strategy. However, you'd be nearly guaranteed to turn out right telling people that they will do better in index funds, and likely save them the pain of learning it themselves which many of us have endured. Just go with the over whelming odds.

[The White Coat Investor]

I do what Jonathan Clements and Bill Bernstein did at the conference when asked about it. I dismiss it out of hand. The data is quite clear on this subject. Why run underperformance risk when you don't have to?

If you feel like you need to address it, show them the data. It's quite convincing.

[Lithium]

What I mean is that the residents are probably already getting swamped with sales pitches from Edward Jones and Northwestern Mutual, and I'd be wary of coming across like I have an axe to grind against them.  Neutrality is a nice antidote.

Salesmen can also back up their pitches with plenty of cherry-picked facts and statistical legerdemain (such as touting managers, valuations, and cherry-picking active funds that have a recent track record of outperformance).  Sophisticated WCI readers know how to debunk all that, but I don't think that within an hour, you can give the residents those tools.  You can at least prime the pump for them to develop their own investing philosophy, rather than take the sales pitches at face value.

[The White Coat Investor]

Lithium wrote:

What I mean is that the residents are probably already getting swamped with sales pitches from Edward Jones and Northwestern Mutual, and I’d be wary of coming across like I have an axe to grind against them.  Neutrality is a nice antidote.

Salesmen can also back up their pitches with plenty of cherry-picked facts and statistical legerdemain (such as touting managers, valuations, and cherry-picking active funds that have a recent track record of outperformance).  Sophisticated WCI readers know how to debunk all that, but I don’t think that within an hour, you can give the residents those tools.  You can at least prime the pump for them to develop their own investing philosophy, rather than take the sales pitches at face value.

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It only takes 2 minutes to show the data. This table should cut it:

 

[The White Coat Investor]

The other interesting fact, above and beyond the % of active funds that outperform passive funds, is that when outperforming, they typically barely outperform and when underperforming, often dramatically underperform.

[Zaphod]

Lithium wrote:

What I mean is that the residents are probably already getting swamped with sales pitches from Edward Jones and Northwestern Mutual, and I’d be wary of coming across like I have an axe to grind against them.  Neutrality is a nice antidote.

Salesmen can also back up their pitches with plenty of cherry-picked facts and statistical legerdemain (such as touting managers, valuations, and cherry-picking active funds that have a recent track record of outperformance).  Sophisticated WCI readers know how to debunk all that, but I don’t think that within an hour, you can give the residents those tools.  You can at least prime the pump for them to develop their own investing philosophy, rather than take the sales pitches at face value.

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Sounds like you already have a great way to approach it and how to prime them so these things do not fool them. Seriously, just adapt the above to them in a warning fashion as how these guys will approach you, try to trick you, etc...they understand cherry picking, bias, etc...use it to give them tools to protect themselves from this sort of thing.

[Lithium]

The White Coat Investor wrote:

Lithium wrote:

What I mean is that the residents are probably already getting swamped with sales pitches from Edward Jones and Northwestern Mutual, and I’d be wary of coming across like I have an axe to grind against them.  Neutrality is a nice antidote.

Salesmen can also back up their pitches with plenty of cherry-picked facts and statistical legerdemain (such as touting managers, valuations, and cherry-picking active funds that have a recent track record of outperformance).  Sophisticated WCI readers know how to debunk all that, but I don’t think that within an hour, you can give the residents those tools.  You can at least prime the pump for them to develop their own investing philosophy, rather than take the sales pitches at face value.

Click to expand…

It only takes 2 minutes to show the data. This table should cut it:

 

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That's a high yield chart, and if it's enough to win a lot of converts to indexing, great.  I think salesmen will just say they only invest in the 10-20% of funds that outperform benchmarks over 15 years.

I don't think I became a true Boglehead until I understood the efficient market theory and realized (thanks to you) that backtesting is just as flawed for predicting investing returns as retrospective medical studies are for making treatment guidelines.

[q-school]

i feel that public talks for groups of residents--no need to encourage active investing.  most of them know someone who knows someone who bought apple and retired super mega rich.  you can't always cover everything well in a single talk and I have some concerns that it would replace something even more important.  there are probably only three pearls that many will remember (some less), and at that point in their life, they should stay away from active investing.

jmo, ymmv

 

[The White Coat Investor]

Lithium wrote:

The White Coat Investor wrote:

Lithium wrote:

What I mean is that the residents are probably already getting swamped with sales pitches from Edward Jones and Northwestern Mutual, and I’d be wary of coming across like I have an axe to grind against them.  Neutrality is a nice antidote.

Salesmen can also back up their pitches with plenty of cherry-picked facts and statistical legerdemain (such as touting managers, valuations, and cherry-picking active funds that have a recent track record of outperformance).  Sophisticated WCI readers know how to debunk all that, but I don’t think that within an hour, you can give the residents those tools.  You can at least prime the pump for them to develop their own investing philosophy, rather than take the sales pitches at face value.

Click to expand…

It only takes 2 minutes to show the data. This table should cut it:

 

Click to expand…

That’s a high yield chart, and if it’s enough to win a lot of converts to indexing, great.  I think salesmen will just say they only invest in the 10-20% of funds that outperform benchmarks over 15 years.

I don’t think I became a true Boglehead until I understood the efficient market theory and realized (thanks to you) that backtesting is just as flawed for predicting investing returns as retrospective medical studies are for making treatment guidelines.

Click to expand...

Sure, if you want your presentation to be an hour long argument for passive investing, you can go through each objection one by one. The next thing you show is the data that shows how difficult it is to pick the winners in advance for instance.

But when I'm presenting to a group, the active vs passive investing portion of the presentation is a TINY part of what I talk about. Maybe one or two slides is it. There are just so many topics that are far higher yield for these audiences - student loan management, life style management, retirement accounts, getting good advice at a fair price etc. Just be sure to give them the bottom line- invest in index funds because the data shows they're the best way to invest. You don't have to show them every piece of the data.