« Freakonomics Radio

297. The Stupidest Thing You Can Do With Your Money (Rebroadcast)

2018-03-22 | 🔗
It's hard enough to save for a house, tuition, or retirement. So why are we willing to pay big fees for subpar investment returns? Enter the low-cost index fund. The revolution will not be monetized.
This is an unofficial transcript meant for reference. Accuracy is not guaranteed.
If you'd like to listen to free economic radio without ads the place to do that is sticker premium five dollars a month and you can get free month trial by going to stick your premium dot com and use a promo code freak, you also get access to all our bonus. Episodes and you'll be supporting our show to that sticker premium. Dot, com, promo code, freak thanks, hey there, it Stevens Abner. There is an upcoming date on your calendar them show. You ve got circled April fifteen tax day, so exciting? We are currently putting together a couple of all star episodes on the new. U S, tax bill, but first, since a great many of you are already planning on how to spend your tax refund. We thought we play you a two part series from last year to the most popular episodes we ve ever made. The first one which you here right now is called the stupidest thing you can do with your money. Thanks for listening,
Would you say if I told you that every day investors, people like you and me, are just throwing away billions and billions of dollars? It's not something that just started today. It's been going on for the last twenty or thirty years. Is it some kind of attacks, its attacks on smart people who don't realize their propensity for doing stupid things. Just how stupid is stupid. Thing basically were saying it charging people for stuff. You can deliver, but in recent years there has been a backlash, some would even say it's become a revolution definitely a revolution. We are in the middle of the Copernican Revolution, a bout, the the price four way to invest, or at least the right away with us today and Economics, radio, the Revolution
in low cost index, investing also known as well streets worst nightmare in others too much bs Wall Street. from W and Y see studios. This is freak economics, radio, the podcast that explores the hidden side of everything. Here's your host, Stevens Abner, it's hard to think any other realm? Where empiricism, or at least, what's dressed up to look like empiricism clashes so directly with delusion. I'm talking about investing the stock markets, primarily the alleged empiricism comes in the form of sales pitch data
easy to think by seeing the ads and reading the newspaper articles and stuff. That approach is clever enough, you're, gonna win the delusion comes in the form of how stock markets actually work. We don't understand the negative some nature of active, investing whatever you win, I lose Whatever I win, you lose and we both paid to play that game. That's can French, I am the wrath family, distinguished professor finance, at school, a business environment, so the negative some nature of investing is. One problem is often overlooked
and then the second problem we all have. I suppose we dont all added, but most people suffer from overconfidence, particularly a noisy environments where the feedback is weak and that describes the stock market incredibly noisy and it's really easy to misinterpret what the return on your portfolio meat, but wait a minute You know how to interpret our portfolio returns. Don't we those big money, management firms and mutual funds firms and investment advisers, there's so helpful in telling us how much Our hard earned money is growing right. Ok, it can be kind of hard to keep track of all the fees their deducting, but still
amazing that the firm you chose, the matter which one you chose just happens to be better than everybody else. At picking the best stocks in funds, in others too much bs in Wall Street and being able to say, hey, here's what the data shows is really a useful skill. That's bury results. I run an asset management farm results. Wealth management are so explain how you bury writ halts, actually make money who he's paying you to do what so we get paid a percentage of assets, I want to say I haven't looked at it this quarter, but it somewhere are under one percent about point eight aid or point eight nine somewhere in the range. So the more assets we gather envy, better. Those assets perform the more revenue. The firm sees that is a pretty typical set up. Many investors pay for
firms to manage their money, sometimes a percentage of asset sometimes flat fee in return, you may get a variety of services, including advice about insurance or taxes and, of course, investment advice. How best to save for a house or your kids to nor retirement whatever. Now, why pay someone for that advice because, let's face it, investing can be confusing and intimidating. About terminology all those options, so you hire someone to navigate that for you and they in turn, use their expertise to pick the very best investments for your needs. This is called active management. They actively select, let's say the best mutual funds for your needs and you pay them for their expertise,
You also pay those mutual funds by the way, sometimes it was called the sales load when you buy it and an expense ratio recurring fee. The fund deducts from your account so between the mutual fun fees and the investment fees. That might be a couple percent off the top and that's what your funds go up or down by the way. So, hopefully they go up. Hopefully, the active management you're paying for is at least covering the costs. Where we actually found was the top two to three percent had enough scale to cover their cause and the other ninety seven or ninety eight percent didn't even have that in two thousand ten can French and Eugene Pharma published a study in the journal of finance. Called luck versus skill in the cross. Section of mutual fund returns
So one farm- and I were doing in the paper- is trying to figure out when a fun does really well. Should we a tribute that too, this is a manager that is incredibly talented and really beating the market, or are we just looking at the result of luck? That is, did their funds rise in value because of their stock, picking skill or perhaps simply because the market was rising and again the file a french finding, so the top due to three percent enough scale to cover their costs. Everybody else down below that ouch. It's enough to make. You think that maybe it's not worth paying those investment experts for their exports if only there were some simple, cheap way to avoid all that active. Investing that often doesn't pay off and just passively own say. A small piece
entire stock market? Well, as you may know, there is there called index funds and a t f, Spore exchange traded funds. They can be bought very cheap, and in recent years a lot of people have been buying them. when we look at the fun flows over the past few years there they massive out flow from active fund management. The number do? I think around a trillion and a half following an index funds- and I have a tree and flowing out of active- was which is a two trillion dollar shift and invest preferences. It's definitely a revolution that is John Bogle, often call jack. I'm the founder of Vanguard and the founder of the world's first index fund? How big a deal is Jack Bogle? Here's! What bury revolts thanks? Jack Bobo is one of the unsung heroes of the American Middle class. He has allowed people to invest
over the law of all very inexpensively with best, results in a way that they provide probably wouldn't, have been able to do without him and without Vanguard. Warren Buffett, the most famous investor in the world had this to say recently. If a statue is ever erected to honour the person who is done, the most for american investors, the hands down, choice should be Jack, Bogle Vanguard is clearly the leaders and low cost indexing there. Now four trillion dollars right? That's an US On fishing number, how astonishing four trillion dollars could buy you every major sports League in America and Apple the company, all of it, and put eight million kids through college and its love a trillion dollars left over. That's how much money we have collectively, given the vanguard. Why? Because they were the first to offer an alternative to the old school expert
given the high fee investing model. Let's get back to Jack Bobo. You said recently what's clear we're in the middle of a revolution caused by indexing, its reshaping Wall Street, a reshaping the mutual fund industry? Now for the man who really can claim Waymore credit than anyone else for starting the revolution. Does it seem like Gay Revolution or mormon evolution? Other words, it's been a long time coming It is a revolution still what's going on it started in the last few years, is actually kind of accelerate and I don't think that acceleration can continue, but I do think the dominance of the index fund will continue because we're in an industry where costs is everything and no one wants to compete on cost managers no want to compete because they want to make money themselves. It didn't bother me that, a long time. It takes time for people to understand, keep up. I did
my best to help one way. Bogle helped was by setting a vanguard as a cooperative, its owned by the funds shareholders rather than destroy. hitting profits. It lowers its fees, you, as the founder, a vanguard. You is the Father of index fund investing. How have you turned out financially? Are you billions and billions and billions now I'm not even worth a billion, they laugh at me. not even worth a hundred million, but I you know I was now in this business to make a lot of money for myself. May I log on I've been nicely paid predictin in the days when I was running the company- and I am not a spender I, but but I mice the sweater and once in awhile, or a new shirt from L, L bean and Emma wives the same way or just not interested in things, toys.
So we are very happy with our standard of living. We have in a small house, though we love, we have a wonderful family. eighty eight years old, I might be the most blessing man than the United States of America. Bobo created Vanguard in eighteen, seventy five when things were going so well for him, it was a way for me to get back in the business to get back on. My old company, which had been fired from the old company, was Wellington Management where Bobo had spent more than two decades in nineteen. Seventy he'd become ceo. one thousand nine hundred and seventy four he was fired for making. What he admits was an extremely unwise merger decision. When he started Vanguard, it was just another traditional actively managed money, firm and part of that business still exists, but but we'll head long question the wisdom of picking stocks in Princeton University in nineteen fifty one when I was choosing a topic for my son,
Desus and I chose the mutual fund industry. The economic role of the investment company was a title of my thesis, and I examined the records of some. we didn't have a we had today and records, but I looked at our capital. Funds anecdotally- and I said in my thesis- is virtually a direct quote Mutual funds can make no claim to superiority over the market averages and that's the harbinger of the index fund a harbinger maybe but mobile spent is first. couple decades in the business dancing the same dances every one else, then, in nineteen, seventy four, the same, your Bogle was fired from Wellington. The Journal of Portfolio Management published a paper by the economist, Paul Samuelson, called challenge to judgment. I was inspired by his article. Samuelson was a Nobel winner and an extremely influential thinker, trying to think whether to say he was a thousand. I'm smarter than I was, or a hundred times
But it was something like that. Same Wilson's paper challenged the performance of active managers and suggested that quote at the least. Some large foundation should set up an enhanced portfolio that tracks the Essen P. Five hundred in Ex, if only for the purpose of setting up a naive model against which there in house gunslingers can measure their prowess Jack Bobo, who was
The midst of launching vanguard, took it to heart. Others had been thinking through the idea, but Bogle and Vanguard were the first real players to take the plunge. The notion was brutally simple: most stock pickers think they are better than the market and they aren't. Therefore, investors should just by the whole market and since you're not paying the big salaries and all the other costs it go along with those stock pickers. The fund would be much cheaper to buy when you found it. It was treated as heresy, even laughable by mostly on Wall Street talk about what it was like to experience that reception. Well, I don't. I don't cave in very easily make sense that and in a certain way and the more descent, I got the more confidence.
I thought I was right on that kind of a contrary in person, so people laughed and there was a great poster that said stamp out index fun. There's uncle SAM, whether cancellation stamp all over it all over the poster Next funds are on American and they were considered an American. That argument was what the argument is in Amerika, set settle for average we're all above average, but, of course not all above average, and but it was basically above the poster was put out by a brokerage firm when I think about the index fund, no sales loads, no portfolio. turn over you're gonna buy and sell everyday. Like these active managers do its Wall Street nightmare and it still is sold. It was. I am that kind reception didn't bother me in one was known what was folly and the original underwriting was supposed to be a hundred and fifty million as the original under writing the index one, and the underwriters sheepishly on,
the underwriting was completed, came in with eleven million dollars. Instead of a hundred and fifty million. And did you lose a little confidence then or no, said you know, what are we just drop? The whole thing was probably the worst underwriting in the history of Wall Street. I said no and we're not gonna drop it. We have the world's first index phone, that's good enough for me. So when I had started, run it. It took a long time for people to get the idea. But increasingly people are getting the idea that, rather than spending let's say, ten thousand there's two to buy five different mutual funds. Each made up of a basket of hands selected stocks. You spend all ten dollars on one fund that simply tracks and entire stock index the ESA. Ninety five hundred- maybe it's gonna, be a lot
Deeper than buying those separate actively managed funds, and as the data have shown again and again, it will likely perform better, is well over the past decade. According
to the Wall Street Journal between seventy one and ninety. Three percent of U S. Stock mutual funds either closed or failed to beat their closest index funds. If we go back to nineteen seventy, we find that there are approximately four hundred funds and business and I think basically, three hundred and thirty or forty have gone out of business, so it turns out. In that period there were two mutual funds who beat the market by more than two percent per year. To half of one percent of all funds has started the business, those your odds, those may be the odds, but the perception is different. Warren Buffett stock picker, who does beat the market, is a national hero in schools all across Amerika. When kids are introduced to the concept of investing their often encouraged to become little buffets playing stock market games. Where they pick individual stocks,
rather than being taught the sensible route of dollar cost averaging their way into low fee index funds? It's a bit like learning to drive on a formula, one circuit, the notion that we can all get rich by trading actively, it doesn't make any sense whatsoever. You have to understand one important thing about the market and that For every buyer, there is a seller and every seller. There is a buyer. Every time somebody wins. Somebody loses even more so untrue Sanctions take place the only winner net is the man in the middle of a croupier in the gambling cacena? You have to believe you really are superior the other folks at your trading against. I draw the parallel between being on outstanding market beating manager trader whatever with being an all
nor in any professional sports league. It's such a tiny percentage, if you don't think you're, really one of the best people out there doing this. You probably should name it start, but every kid whoever picked up a baseball bat a basket of a bull dreams of winning the championship hitting the bottom of the Iphone Home Run and the
Problem is, if you invest based on those fantasies, the odds are strongly that shook gonna be disappointed. So this is actually simple. Wisdom, simple, perhaps but elusive in part, because the alternative, the gamble of picking stocks, is so seductive, which may explain why it took so long for index funds to really catch on the index fund is more predictable and boring, which, as Jack Bogle sees things is its virtue. So it diversify away at the risk of individual investments. It diversified away the the risk of picking a hot manager and diversify away the idea, even pig market sectors like health care technology. Where might be, and then there is the cost comparison will start with the typical mutual fund. They charge a lot for this service. We estimate the average expense ratio
is almost one percent for an actively managed fund, and then these active funds warmer have sales loads. The index funds do not, and the active funds further turn over their portfolios. At a very high rate nets, costly and yeah, that all up and the cost of owning a mutual fund on average is two percent, and how does that compared to an index fund? You can buy index fun of ESA ninety five hundred and next fund, but scientists case for as little as for basis points for one hundreds of one percent, so in a seven percent market, you're gonna get sick, point nine six per said that difference, two percent versus for one hundreds of one percent may not sound like a lot, but over time those numbers are compounded by what Jack Bobo calls. The relentless rules of arithmetic
aftermarket return to seven percent, and the acting manager gives you five after that two percent cost and the index fund gives you six hundred and ninety six and that four basis point cost no overtime. If you don't appreciate but a year, but our fifty years believe are not a dollar invested at some percent grows too around thirty two dollars and a dollar invested at five percent growth to about ten dollars, so think what investor thinks about. When he looks at that number is as wait a minute I put up a hundred percent of the capital. I took a hundred per cent of the risk and I got thirty three percent of the return. Will anybody, I think, that's a good deal
I've got a bridge, I want to sell em here's the reality. This is a business. The neutral fund actively managed business. Where you know I don't get what you pay for. You get precisely what you do now pay for and therefore, if you pay nothing, you get everything. Jack Bogle is plainly a cheery leader for the revolution. He helped start. There are to be sure plenty of critiques of indexing, or these shortcomings will get into those later. But the fact is that the resolution does seem to be happening. The question is: why did it take so long? That's what the question really ought to be coming up on economics, radio? Why did it takes a long time in the academic world? Crest? The stuff basically immediately and when index funds are too much of a good thing, and so what will end up happening is everybody we overloaded and eighty, if so, be overloaded indexes and when the more
the crash is coming up after the brake on October, fourteenth of two thousand thirteen, the University of Chicago Finance, Professor Eugene Pharma, began his day just like any other, I was doing my exercises in preparing my class for their day when they call they being the Royal Swedish Academy of Sciences Committee that awards the Nobel Prize in economic. Ten minutes later they were reported that the door is amazing. How'd you like that I wasn't I look over class to go to? I can deal with equal, I wouldn't becoming less. They wanted it, into the class, and I said these kids play a fortune for these glasses. You stay out, they occur so you're sometimes called the Father
finance, which things grandfather this point or is a thing that seem strange to me. You know to a lot of people given that it's the twenty first century and you're, not five hundred years old, hasn't dance been around for centuries Is it an academic discipline or if you go back to the late fiftys, the really was nothing called academic finance. While there was something being taught in business schools as finance, but I really had no strong research under meanings, and if you look back at that time, the people in finance weren't economists do they were hired character. the kind of inheritance more. They were professional people, some of them had come over. Accounting, but they words strong and economic, so they didn't think of that kind of questions in those terms. So, for example, if you took an investments caused at that time, it was
a curse on picking stacks. Basically, how do you analyze companies to fish stocks because they are now, then model of what determines prices. So there was really no way to answer that question any rigorous way, but you know that boy were developing lots of research. That said, this is basically very difficult to do, if not impossible and it's kind of pointless. Do we don't really know anybody who can teach people how to pick stocks? Because we don't know anybody who can text so you're, also famous for for developing. What we now know is the efficient market hypothesis, explain it to a lay person who see it's easy to explain its simple proposition proposition is that prices reflect all available information which, in simple terms, means
since prices reflect all available. Information is no way to beat the market that that's an extreme statement of the of the hypothesis and the difficult part is actually development tests of it, because you have to say something about what the market is trying to do. In setting prices because it so hard to test the efficient market hypothesis is not universally accepted. Some behavioral economists argue that the standard human cognitive errors create imperfect, praising the shrewd investor can exploit. What's Jack bogus take the markets are highly efficient, although importantly not perfectly efficient.
sometimes there very impatient and sometimes are not it's hard for. We poor souls on planet earth to know which is which you know the basic concept of. Can you beat the market its subtler than I think some people want to argue bury writ holds again: it's not black and white. It's not that you can beat the market you can in some people have and have for long periods of time. Look no further than Warren Buffett. The challenge is being able to select who's gonna, be able to beat the market for them to be the market consistently year in year out and then to do it in excess. Of course, fees, taxes, commissions and that's the brilliance, of Eugene Farm identifying that before any, but they'll sort farmer develop. The idea in the late nineteenth succeeds in the academic world, grasped this
basically immediately. There was no resistance to it at all. I mean it took a much longer time for it to penetrate into the applied community, and why was that? That's the twenty fourth question: where you get and even higher price, and that would be relevant given along its taken for people to really wake up to the the data and would it says about active, investing well in retrospect, was the objection simply protect and its thinking by the financial services industry, or was it something more than the financial and Sir his industry had a lot to lose from this line of research because basically were saying to them yet charging people for stuff you can't deliver. So I was not a popular care,
well. Obviously, the idea caught on its often said that right now were in the midst of a passive investment revolution. Disagree with that characterisation is revolution to strong word or no well it it. When we might go out again, French was: president of the American Finance Association. In his presidential talk, he said it is basically took fifty years ago from zero percent passive detour, percent passive and then in the next ten years. It's up to, like thirty, so we're still nowhere near taking over the world, so when is active management, a good thing, or maybe put another way. When is it worth it for me to pay my one or even two points for an active manager? I would say I dont know anybody for whom it's worth it began.
I dont think I ve analyze more data than almost any way given that I'm so old, but I think the problem that people don't understand is an active manages, almost by definition, have to be poorly diversified. Is it not really active, so they have to make bets and what that means is agreed, huge dispersion of outcomes that have totally consistent with just chance the snow skill involved in it. It's just good luck, a bad luck and you can't tell the difference the two based on returns alone, and this is looking at the world before costs. When you look at the world after costs, which is what people eat, they have to pay the costs to the people charging them. Well, then that there, the whole industry looks pretty bad. So if you want to give yourself a bad chance versus the market and pay extra for that's when you should get an active, basically, I guess it sounds kind of gonna college endowments no offense.
Now, how you you see, runs its endowment, but the Ivy League, certainly in the old objects it's not a laughable manner but in the old days these to invite me annually to go talk to them person who ran the endowment and it was clear he was totally they not interested. And finally, I gave up and they gave up the joke is that Harvard is a thirty eight billion dollar hedge funds, it with a small college attached to it. Barry Ritholtz manages money, but he's got a couple side. Still. They also, I may columnist for Bloomberg View when I hosted weekly, podcast called asters in business. In one column, he wrote if ever there was an argument for endowments to turn to passive indexing. Harvard is it
This was shortly before the harmony endowment shook up its management team after years of poor returns. I asked results about this barbarous analyzed. Net returns for the past ten years were less than six percent act. When you look at the top performing ivy endowments, they were all around eight percent for those ten years again sophisticated expensive management with access to all kinds of information and investment. So out of curiosity. I went and looked at my boring, my own kids College Savings Fund, which is dashed in a pretty dull and very, very cheap five. Twenty nine plan and is just you know, a handful of choice, index funded loser one growth, fun, one value fund, a couple, a bond funds and it cost pretty much nothing. And then lo and behold, my tenure analyze net returned b. every single ivy endowment. Those are the best in the brightest. So why
earth. Would anyone want to pay those kind of fees for active management, whether your individual investor, like me or huge endowment like Harvard look just because you're, an endowment running billions of dollars associated with some of the most sophisticated investors, there's no reason to think you're, not gonna come to the same sort of cognitive errors and psychological failings. at every other human being. Does there's group think there's a refusal to admit that you were wrong, there's uneven Bigger embarrassment of saying I dont know what are my favorite things There was any time I'm on tv, and someone asked me a question hey when that way the DOW Gonna be a year from now. I loved you to say I know now and they don't know how to respond. Do it when you were in a room full of peers when you're in a room full of consultants- and everybody is
pretending to be knowledgeable and sophisticated. There are all sorts of groups now makes that led to the technical term, is sub optimal decision making. So the financial services industry is obviously gigantic. A lot of people have a lot of relatively high paying jobs for which you know they're supposed to create value for people who are investing more, but the data show forget about whether its Ivy League Endowment data or across the board investment data, the data. though, that a lot of money that investors spend to get better returns is essentially wasted. First, what would you agree with that statement? Most of the money they spend is essentially waste is not a lot. I would say the vast majority are so the argument would be that they'd be better off buying a few index funds for essentially pennies on the dollar, compared to what they're paying their investment professionals, and in that the Mena Financial Services industry is kind.
Of attacks on stupid people who think they're being really smart. Do you see That way, or is that is worse than that. It's not attacks on stupid people who think they're smart, its attacks on smart people who don't realize their propensity for doings stupid things? Look at all the endowments look. It look at how far behind the eight ball, most of the state pension funds are these aren't dumb people. These are really smart. Accomplish people they Unfortunately, I dont want to admit they don't know something are very put off by counter intuitive information. You know it's the lake Woebegone syndrome everybody wants to believe that their above average well sure it's hard to beat the market, but I can what, Mason is. There are actually ESA ninety five hundred index funds that have a giant fee attached to it. I can't explain:
how that were some stupid now, and that is a tax on stupid years, verily, paying whatever double triple five times for exactly the same product? Not that that's right triple. I want to tell you the and guard S M p. Five hundred this fund is about five or six basis points and Schwab recently cut one to two or three basis points. There are ESA. Ninety five hundred funds with fifty and seventy five and one hundred basis points its intense in that, that is a tax on Dumb Dartmouth finance. Professor can French has been closely watching the growing appetite for index funds. It's not something that just started today, it's been going on for the last twenty or thirty years. It does seem to have picked up speed. That said, French doesn't care,
see the passive investing revolution as a revolution. I believe we are seeing a shift from active toward passive. I think that's pretty clear, but I dont think it's quite as pronounced as most people argue that's because so much new money has been flowing Two eighty s idea is an exchange traded fund which may look a lot like a passive index fund. But what's naked body gives his? U can trade them all day and the volume of trading in each other s French says suggests that many traders are not truly pass. I think of passive is essentially a buying. They buy it today and they hold it for years and years and we're not seeing that an atm marketplace some of the people are certainly doing that, but it
large fracture remarked, that said, is plainly been an acceleration away from traditional active manage. Why I interpret that as one of the consequences of the financial crisis. so before the crisis. People had this view that Wall Street was our friend and after the crisis a lot more cynical about. that are being charged and services that are being provided by Wall Street and, at a certain point, the invest public turns around and says hey? You know this is rigged. This is a time gig. Why am I wasting my time? Picking stocks paying committee, means paying high mutual fun clause. I could just index. There are, of course plenty of alternative views, especially from those who profit from old school active investing. So
You can imagine that if every investor in the world held pretty much the same investments well, but with that led to a research note from the investing firm Sanford, see, Bernstein argued that passive, investing is quote worse than Marxism, in that it threatens legitimate given take that is central to any market. Can French again one of the beautiful thing as it happens out there in the market is price discovery, and I would never argue all prices are right, but I need prices are pretty darn good, and we learn an awful lot about how resources should be allocated from what the prices are in the financial markets. So if nobody is due in price discovery, we lose a really valuable service. So what I always say it is if it somebody I dont like a more than happy to have them, go out there
and spend their money investing actively because as it they're, making the world better up for what it's worth? Ken French for all his steps to them about how modern investing works. He himself does some work with the huge investment firms, dimensional funded via measures, so does Eugene Farmer for all the noise about the passive revolution, it's worth, remembering that only about thirty percent of all a mutual and exchange traded funds are being passively managed, but it's enough to concern plenty of people who worry about homogenization, especially when the federal government gets involved. My name's Anthony Scare, Muti of a founder of Sky Bridge capital. When we spoke with Scare Muky last year, he had just sold Sky Bridge Capital, in anticipation of getting a job with the Trump administration. He eventually got that job as White House Communications rector only to be fired after less than a week when we spoke,
I ask your movie about the yet to be reinstated. Fiduciary rule, that's an Obama, Europe, regulation that was pitched as ensuring that financial advisers act in their clients best interests you called the fiduciary rule- and I will quote you hear a case study in government over reach a clear example of how faulty regulation can have severe unintended consequences. You also promised to help President Trump repeal it. What are some of those unintended consequences of a rule to try to change the behaviour of the people who are paid to manage other Those retirement money was really not changing their behavior. What is doing is actually limiting the choices for the end user, the end investor, because if you read the entire role, which I have read I would really is it a governmental decision to allocate capital into index funds an atm funds that the governing
deeming those things is being more efficient through more effective in terms of their lower cost analysis, and for that I mean the gunners. Actually right. If you look at the last five for ten years. Those funds have performed better in charge, less fees and lets, say hedge fund or a private equity for, but the poor without analysis, is that you're not taking a one hundred and twenty year modern economic, historical analysis of business cycles and stock market trends? You really only looking at the last ten years and so the buffeted table of investment opportunities for the average user, but say my mom and dad some super concerned about gets curtailed. I'm just gonna sell you the things that the government wants me to sell you, and so what will end up happening? Is everybody we overloaded and eighty, if so, be overloaded indexes and when the market crash is because
they were eliminated. Many of the financial advisers, Toulouse, sixty to seventy thousand financial services jobs as a direct result of that rules, it's a jobs, killer, boarded also does it fails to recognise the full economic value of a financial adviser, the economic value of actual visor is not just the return and the net return net of the fees, but it's also the psychological effect and the coaching that that financial and visor provides that family. So so the rule, the rule, is bogus Stephen we will need to be repealed and the people that really understand the role know that and by the way I my clients, as most financial advisers, do I'm not trying to rip off my clients, I'm not trying to do something. This this honest, I'm just trying to increase continually their options terms of what they can invest in think
what you will of scary movies take on the overconcentration of investments in index funds. If the trend does continue its hard to dispute, as he says that a lot of financial services jobs will be lost, I asked a writ halts about how his industry plan to protect or reform itself. As we have seen you know, throughout history with any industry or institution, that's got leverage, that's got money, that's got a hit We itself the reform never comes from within nobody's gonna, say you know what our industry is really not providing value were getting paid me, no billions trillions of dollars to manage the money and were actually do in a pretty crappy job, like a monkey with a dark board, would literally do better for just the price of monkey chow. So you know what, let's, let's break up, Let's, let send everybody home say we ve had a nice run. We ve had these nine hundred two hundred three
Fourteen thousand dollar jobs, just fur shuffling other people's money around poorly. If the revolution really does come to pass in the world kindnesses, we know what the financial services industry as it currently configured. we only need about five percent of it. What happens? Will first, no self respecting person and finance would work for those absurdly low figures you quoted. So let's put that aside and Anne and second, you know the financial markets go through this regular creative destruction every few years in other, the back in the early seven, these commission prices were fixed. You couldn't discount a commission. If you wanted to, it was actually a league regulation, and once that change, suddenly everybody predicted the end of the world to finance. Oh, my god,
what's gonna happen, then start cutting prices and that that is what happened. You cut prices. People were more people were able to access the capital markets. It worked out really well and every few years we go through one of these major innovations not too long ago. Each yes didn't exist. We take for granted that wait for five bucks. I could go out and buy and eat e f of every major index. I want that's a shocking change that that has also had a significant impact, and so as we go through this process of these convulsions- you know- maybe the not maybe definitely the financial services industry became too large became too outsize too became too overcompensate it. It was the tale that was wagging the dog it used to be financial services. Companies operated in service too,
big corporations and small investors and everything in between, but eventually they darted being a reason for their own existence, so that now going through a change, probably before we lose ninety percent of of people in finance or ninety five percent they'll be something else that happens. It seems that every time there is any sort of major trends, whether its towards global, investing or passive, investing more day trading, it'll last for happily years, and then something new and shiny comes along and enough people are interested in it that a substantial portion of the previous trend participants will chase that However, I will say that I think the evolution towards low cost towards indexing
and towards being aware of how your own behaviour impacts. Your investing is something that's gonna, be here for the foreseeable all right. So we learn. today that low cost indexing seems to make a lot of sense, at least for a lot of people in a lot of situations. But what about all the other things you have to to be a fiscally scene and responsible adults. Grudge asked that's what we will talk about on the next trigonometry or because a lot of people, including a lot of otherwise really smart people, are totally clueless when it comes to their personal finances. How do I save for retirement? How do I deal with all these questions about budgeting and went to buy a house and all this kind of stuff? Oh, I just to look at these nine rules on this card.
everything you ever wanted to know about personal finance and it fits one index cards that next time for economics, radio for economics, radio is produced by W and my c studios and W productions. Episode was produced by Gregg Resolve ski. Our staff also includes Allison Hockenberry Merit Jacob Stephanie, Tam MAX Miller, Harry Huggins and bring good care as well, who had help on this episode from SAM Bear. The music you hear throughout our upon cast was composed by Luis Gara. You can subscribe to phenomena, radio on Apple podcast or sticker Reverie get your PA guess. You should also check out our that freakin comics dot com- they are you can stream or download every episode we ve ever made can also read the transcripts and find links,
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Transcript generated on 2021-01-21.