« Freakonomics Radio

297. The Stupidest Thing You Can Do With Your Money

2017-07-27 | 🔗
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.
This podcast dynamically inserts audio advertisements of varying lengths for each download. As a result, the transcription time indexes may be inaccurate.
Hey there. Even Dublin. I thought you might like to know about the latest episode of our other live podcast. Tell me something I don't know. The episode is called behavior change, ultra egghead addition and features from the smartest people in behavioral science, including people you ve, heard before on reconnects radio like Angela Duckworth, the ten psychology professor author of Grit and David Labs and Chair of the Harvard Economic support economists, my academic expertise is crossed nation. Thirty seconds or less. How can someone get greedier green is passion and perseverance for very long term goals. It takes more than thirty seconds
You can find tell me something I don't know where ever you get for economics, radio and if you want to be on the show or attend alive, taping visit, Tm S, eye decay that come. We ve got six shows coming up in New York City in early October, Jos PER, but the public theater of the sea there. What would you say if I told you that every day, investors like you and me- are just throwing away billions and billions of dollars. It's not. Something then 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 this stupid thing basically were saying it charging people for stuff you can't deliver, but in recent years there has been a backward.
Some would even say it's become a revolution. It's definitely a revolution. We are in the middle of the cap, I can revolution bout, the the proper way to invest, or at least The rational way to invest today on freedom, radio, the revolution in low cost index, investing also as well streets worst nightmare in others, too much bs in Wall Street. I'm here. From w, and why see studios this is freakin comics radio, the pod cast at explores the hidden side of everything. Here's your house, Stephen Dogma, it's hard to think of any other realm,
the 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, it's 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 the stock markets actually work. We don't understand the negative some nature of active 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, Fox School of business at Dartmouth, so the negative some nature of investing is one problem too often overlooked
and then the second problem we all have. I suppose we dont all have it the most will suffer from overconfidence, particularly and 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. We 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 is 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 Riddle I run an asset management, firm, called results. Wealth management are so explain how you bury writ halts, actually make money who is paying you to do what so we get paid a percentage of sets? I want to say, I haven't looked at this quarter, but it somewhere. Are under one percent about point eight aid or point eight, nine somewhere in that range, so the more assets we
gather envy better. Those assets perform the moon or revenue. The firm sees that is a pretty typical set up. Many investors pay 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 wishing nor retirement whatever. Now, why pay someone for that advice because, let's face it, investing can be confusing and integrity
all that 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 does mutual funds by the way, sometimes there's what's called the sales load when you buy it and an expense ratio or recurring fee, the fund deducts from your account, so it between the mutual fund 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 skill to cover their cause
the other. Ninety, seven or ninety eight percent didn't even have that in two thousand ten can French, An Eugene farmer published a study in the Journal of Finance, called luck versus skill in the cross section of mutual fund returns. No 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 former french finding, so the top due to three percent enough skill 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 for 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 is a massive out flow from active fund management. The number comes out: do I think around three and a half flowing in index funds, and I have a tree and flowing out of active funds, which is a two trillion dollar shift in investor preferences. It's definitely a revolution that is John
Google 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 results thinks 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 excellent results in a way that they pray 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 the person who is done the most for american investors, the hands down, choice should be Jack Vanguard is clearly the leaders and low cost indexing there now four trillion dollars right, that's in us,
on a sheer number. How astonishing four trillion dollars could buy you every major sports League in America and Apple the company, all of it and put a million kids through college and its leverage really now is left over. That's how much money we have collectively given to vanguard. Why? Because they were the first to offer an alternative to the old school expert hi fee investing model? Let's get back to Jack Bobo. You said recently last year, what's clear we're in the middle of a revolution caused by indexing, its reshaping Wall Street, its 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 a evolution or morven evolution. Other words, it's been a long time coming It is a revolution still we're 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 up vanguard as a cooperative, its owned by the funds shareholders. Rather than distributing profits, it lowers its fees, you, as the founder of 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 that we love. We have a wonderful family and almost eighty, eight years old, it might be the most blessing man than the United States of America Bobo created Van, in nineteen, 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 coming.
Was Wellington Management where Bobo had spent more than two decades in nineteen. Seventy had become ceo. Nineteen sent me for he was fired for making. What admits was an extremely unwise merger decision. When he started Vanguard, it was just another traditional actively managed money. Firm and partlet business still exists, but Bobo had long question the wisdom of picking stocks in Prince in university in nineteen fifty one. When I was choosing a topic for my senior thesis, I chose the mutual funds the three, the economic role of the investment company. With the title of my thesis examined the records of some funds, we didn't have a we had the day and records, but I looked at risk. Capital funds, anecdotally- and I said in my thesis- is virtually a direct quote. Mutual funds can make no claim superiority over the market averages and that's the harbinger of the index fund, a harbinger me
but 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 Nelson's paper challenged the performance of active managers and suggested that quote at the least. Some large foundation should set up an in house portfolio that tracks the Essen p fight
hundred index, 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 in 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 homer, and since you're not paying the big salaries and all the other costs to go along with those stock pickers. The fund would be much cheaper to buy when you found it. It was treated as Harry. See even laughable by most people. On Wall Street talk about what it was like to experience that reception. Well, I don't
I dont cave in very easily. You may sense that and in a certain way and the more descent. I got the more content, I was that 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 fund, there's Uncle SAM with a 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. We don't settle for average, we're all above average but of course not all about average, and but it was basically above the poster was put out by a brokerage firm but think about the index fund, no sales loads, no portfolio, turnover of buy and sell everyday, like these active managers do its Wall Street nightmare and it still is sold. It was a m
That kind of reception didn't bother me. The one was known as baubles folly. The original underwriting was supposed to be a hundred, and fifty million is the original under writing the index, one and the underwriters sheepishly on the day the underwriting was completed, came in with seven million dollars instead of a hundred and fifty million, and did you the little confidence then or no said you know what are we just drop the whole thing? It 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 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 dollars to buy five different mutual funds, each made up of a basket of hands selected stocks, you'd 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 betters 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 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 as 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 cool
Its 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 formal One circuit, the notion that we can all get rich by trading actively, doesn't make any sense whatsoever. You have done their one important about the market, and that is for every wire. There is a seller and every seller. There is a buyer. Every time somebody wins, somebody loses even more so on transactions 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
outstanding market beating manager trader whatever, with being all star in any professional sports league. It's such a tiny percentage of euro think you're, really one of the best people out there doing this. You probably should mean start, but every kid whoever picked up a baseball bat, a basketball for dreams of winning the championship hitting the bottom of the knife, 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 Bobo sees things, is it
What you saw 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. What might be and then there's the cost comparison will start with the typical mutual fund. They charge a lot for the service. We asked the made the average expense ratio is almost one percent for an actively managed fund, and then these active funds, woman, have sales load 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 funds on average is two percent, and how does that compared to an index fund? You combine index fun of ESA ninety five hundred a next fund, but say in this 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 may not sound like a lot, but over time. Those numbers are compounded by what Jack Bogle calls the relentless rules of arithmetic and of the market return. A seven percent and the active manager gives you five after The market return to seven percent and be acting manager gives you five after that two percent cost and the index fund gives you six hundred and ninety six and for that four basis, point cost no overtime at the you don't appreciate, much in a year, but over fifty years believe are not a dollar invested at seven percent grows too
around thirty two dollars and a dollar invested at five percent grows 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 I've got a bridge. I want to sell em here's the reality. This is a business. The neutral fund, actively managed business were usually don't get what you pay for.
You get precisely what you do not pay for and therefore, if you pay nothing, he read everything. Jack Bobo is plainly a cheer leader for the revolution. He helped start. There are to be sure plenty of critiques of indexing. Early shortcomings will get into those later, but the fact is that the resolution does seem to be happening. The evidence is in the data and the evidence is in the air. Five months ago, a journalist tweeted out a washing tony and article suggesting that White House Press Secretary Sean Spacer was going to be replaced. Spacer tweeted, back quote, getting government updates from Washingtonian is getting stuck tips from us weekly to which US weekly, replied thanks. Spicy US weekly does not recommend investing in individual stocks. Stick with a broad mix of low cost index funds. That said just last week:
on Spacer did resign, but that doesn't make us weekly wrong about index once 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 stiff basically immediately and when index funds too much of a good thing, and so what will end up happening? Is everybody, but we overloaded and eighty, if so, be overloaded indexes and when the more crash is coming up after the break hey everybody, I'm Tika Sumpter and I'm an actress, and most recently you can see me on ABC 6Ish. This is tyrande off and I'm the boss at Kevin Hart's, laugh out loud network and we the host of the sugar, a sweet space where we she to indulge on topics we sometimes get left out of its face by
bore and about brown mom. This is a place of community where we want you to feel lots of love, peace and laughed aloud I was pregnant someone- those I oh when our hair, when I was in labour, I was like I was having a orgasm grow airs go now, some of you now somewhere baling, maybe You ve not actually had an this exists. We space Irma, like us to see ourselves and be ourselves, get ready to open up top, laugh even cry with sweet should complement the shit is out now? Listen on stitches, apple, podcast or wherever you get your Pat gas October, fourteenth of two thousand thirteen, the universe you Chicago Finance, Professor Eugene, alma began his day, just like any other, and I was doing my existence in preparing my class for their day when they call they being the royal.
We just 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 said, looking class. To go to. I can deal with equal, I wouldn't like unless they wanted comes into the class and I said these kids play a fortune for these classes suit stay out, they occur so you're sometimes called the father of finance, which things a 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 finance been around for centuries. Not as an academic discipline or if you go back to the late fifty's, the really was nothing called academic finance. While there was something being taught in business, schools is
inspector really had no strong research under paintings. 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 from accounting, but they weren't straw, on an 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. Of course, on picking stacks. Basically, how do you analyze companies to pick stocks because they are now a model of what determines prices. So there was really no waiting answer that 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 fix the so you're, also famous for or developing. What we now know is the efficient market hypothesis explain it to allay 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. There's no way to beat the market that that's an extreme statement of the of the hypothesis and the difficult part is actually developing tests of it because you have to say something about what the market is trying to do. When setting prices, because it so hard to test the efficient market hypothesis is not universally accepted. Some behavioral economists argued
the standard human cognitive errors create imperfect, praising the shrewd investor can exploit. What's jack bubbles take the markets are highly efficient, although importantly, not perfectly They know sometimes are very a vision and sometimes are not and it's hard for. We poor souls on 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 very writ holds again it's not black and white. It's not that you can't 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 too. 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,
anybody else or 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 four question where you get. And even higher price, and that would be of given along its taken for people to really work up to the data and what it says about active, investing well in retrospect was the objection simply protectionist thinking by the financial services industry, or was it something more than the financial industry this is 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
Well, obviously, the idea caught on its often said that, right now we are 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 d three percent passive and then in the next ten years it's gonna, be 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
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 Why is it not really active so they have to make bets and what that means is, as agreed, huge dispersion of outcomes that have totally consistent with just chance. There's no skill involved in it. It's just good luck, a bad luck and you can't tell a difference between 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, verses, the market and pay extra for that's when you should get an active man alone, basically gave me. My guess is what sounds kindly college endowments no offense
I know how you you see, runs its endowment, but the Ivy League in the old objects Is this not a laughable manner? in the old days these to invite me annually to go talk to them person who ran the endowment and it was clearly was totally not interested and finally, I gave up and they gave up the joke. That Harvard is a thirty billion dollar hedge fund with a small college attached to it very revolts manages money, but he's got a couple side. Gigs to thy also columnist for Bloomberg View, when I hosted weekly pod gassed 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 Harvard endowment shook up its management team. After years of poor returns, I asked results about this harbours analyzed net returns. For the past ten years or lessen six per cent. In fact, 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 Just out of curiosity, I went and looked at my boring, my own kids College Savings Fund, which is that in a pretty dull and very a cheap, five. Twenty nine plan and is just you know, a handful of choices. Index funds is one growth. On one value fund a couple, a bond funds and it costs 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 an earth. Would anyone want to pay those kind of fees for active management? there? You are an 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 the come to the same sort of cognitive errors and psychological failings, that every other human being does there's group think there's a refusal to admit that you were wrong. There's even bigger embarrassment of saying I dont know. What am I favour things It was any time I'm on tv, and someone asked me a question here- where's, the DOW dog to be a year from now I love to say I don't know, 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 they're all sort of group dynamics 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 but the data show forget about whether its Ivy League Endowment data or across the board investment data. The data show that a lot of money that investors spend to get better returns is essentially wasted. Firstly, 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. 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 and that the Means 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 doing stupid things look at all the endowments look. It look at the house. 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, 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 nobody wants to believe that their above average well sure it's hard to beat the market. But I can watch me thing 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 in an EU that is attacks on stupid years, verily paying whatever double triple five times for exactly the same product, not that that's right a triple. I want to tell you that an guard s MP, five hundred this fund is about five or six basis points and Schwab recently cut one to two or three basis points. There are s and be five hundred funds with fifty and seventy five and one hundred basis points it's an insult. In that that is a tax on dumb the 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 doesnt, quite
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 flow, into each other s in is an exchange traded fund which may look a lot like a passive index fund, but what's unique about e g S, his? U can trade them all day and the volume of trading in each other s French, says suggested. 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 immediate marketplace. The people are certainly doing that, but it appears
large fracture. The marked 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 to her lot more cynical about. These that are being charged and services that are being provided by Wall Street and, at a certain point, the investing public turns around and says hey. You know this is rigged. This is it gig. Why am I wasting my time picking stocks paying coming genes, 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.
You can imagine that if every investor in the world held pretty much the same investments well, what would that led to a research note from the investing firm Sandford, 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, 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 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 is, if it somebody I dont like a more than happy to have them, go out there.
And spend their money investing actively because the group there making the world better up for what it's worth KEN French for all his skip. System about how modern investing works? He himself does some work with the huge investment firms. Dimensional fund advisers, so does Eugene Farmer for all the noise about the passive revolution. It's worth remembering that only about thirty percent of
a mutual and exchange traded funds are being passively managed, but it's enough to concern plenty of people who worry about homogenous Asian, especially when the federal government gets involved. My name's Anthony scare mutuality, founder of Sky Bridge capital. When we spoke a scare mochi a few months back, he had just sold Sky Bridge capital in anticipation of getting a job with the Trump administration. Just last week that finally happened. He was named Whitehouse Communications director. When we spoke, I ask a movie about the soon to be instituted. Fiduciary rule, that's an o bomber you're, a 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 Pulls retirement money was really not changing their behavior. What is doing is actually to limiting the choices for the end user, the end investor, because if you read the entire for which I have read
It really is a governmental decision to allocate capital into index funds and e t F funds that the government is deeming those things is being more efficient through more effective in terms of their lower costs analysis and for the time being, the gunners actually right. If you look at the last five or ten years, those funds had performed better in charge, less fees. Let's say, hedge fund or a private equity for, but the problem with that analysis is that you're not taking a one hundred and twenty year, modern, economic, historical analysis business cycles and stock market trends, you really only at the last ten years, and so the buffet table of investment opportunities for the average user, but say my mom and dad from super concerned about gets curtailed? I'm just gonna sell you. The thing said the girl,
It 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 crashes because they will have a limited many of the financial advisers to lose sixty to seventy thousand financial services jobs as a direct result of that wasn't that jobs killer, boarded also does It fails to recognise the full economic value of a financial adviser. The economic value a financial 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 It will need to be repealed and the people that really understand the role know that and by the way I love 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. There are
terms of what they can investment 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 Harry Writ Holts about how his industry plan to protect or reform it. So, 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. Three 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
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 for shuffling other people's money, on poorly, if there evolution 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 an second, you know the financial markets go. Through this regular creative destruction. Every few years in other, the back in the early seventies commission prices were fixed. You couldn't discount a commission, If you wanted to, it was actually a legal regulation and once that change suddenly everybody
predicted the end of the world to finance. Oh, my god. What. Happened, 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. Eighty ass didn't exist. We take for granted that wait for five box. 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 may be. 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 start being a reason for their own existence, so that's 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 tour global, investing or passive investing more day trading, yeah 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 future, all right, so we 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 you to be a fiscally scene and responsible adults glad you asked that's what we will talk about on the next economics radio, 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 have to look at these nine rules on this card, everything
you ever want to know about personal finance, and it fits one index cards that next time for economics, radio, Fr Economics radio is produced by w when my c studios and W productions. This episode was produced by Gregory Zawoiski. Our staff also includes Allison Hockenberry Merit Jacob Stephanie time: Eliza Lambert, Emma Morgenstern Harry Huggins and bring the terror, as we also help this week from SAM bear the music you hear throughout our Pont cast was composed by Luis Gara. You can subscribe to phenomena, radio on Apple, podcast or sticker. Where we get your PA guess, you should also
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Transcript generated on 2020-04-03.