Friday, June 21, 2013

One Local Government Makes Sense By Investing Its Pension Funds Passively and in Low Cost Funds

We've long recommended DIY investing for individuals. Passive equity index funds like the Vanguard or Fidelity 500 are great places to put your long term money and watch it grow over time.

Now even cities are getting the message about low cost investing, and that's a good sign for being able to meet the needs of future retirees. Let's hope more individuals chose that route, too.

Pension Fund Take Neighborly Advice says this:

"When officials with Montgomery County, Pa., became troubled by their pension fund's investment fees and recent performance, they turned to a neighbor for advice. His take: Park money in low-cost index funds.

And that is what they are doing, a move that highlights the growing frustration many pension officials feel toward expensive Wall Street investment managers. The county is now shifting nearly all its $470 million in pension assets to a handful of index funds run by Vanguard Group Inc.

But the neighbor's strong opinion on this issue wasn't a surprise either: He is John C. "Jack" Bogle, Vanguard's founder and the godfather of index funds, which track the broader stock and bond markets.

"It's not pie in the sky," says Mr. Bogle, 84 years old, whose office on the Vanguard campus is about 13 miles from the Montgomery County courthouse. "The arithmetic says it's all indexing."

The county, in the Philadelphia suburbs, says the move is expected to reduce investment fees by roughly two-thirds. It will be paying about 0.13% of its pension assets in investment fees by switching 90% of its assets to Vanguard's funds. It had been paying about 0.43% in fees to its current crop of so-called active and passive managers. . . .

As of March, Montgomery County's pension fund had an annualized return of 8.22% in the previous three years. Over that same period, a Vanguard index fund tracking the S&P 500 returned an average of 12.51%.

Index funds aren't just cheap but also offer one of the simplest types of investing, which is why they have become staples for individual investors. But pension funds have long been privy to the most sophisticated, complex financial products money can buy. . . .

Providence, R.I., Mayor Angel Taveras is similarly concerned, and asked a consultant to explore alternatives to his city pension's 15% allocation to hedge funds. "To me, it's a question of whether we can get the same performance for less risk and fewer fees,'' says Mr. Taveras, who heads the pension investment board.

Most pensions aren't ready to forsake Wall Street entirely. Desperate to hit high annual-return targets, but worried about big swings in the stock market, pensions have sought so-called alternative investments to reduce volatility.

Officials in Montgomery County and other experts admit that the index-fund approach increases the risk of volatility.

"We'd all love to flip a switch, shut off the lights and go home,'' says Keith Brainard, research director for the National Association of State Retirement Administrators. "But it's more complicated than that."

Officials in Montgomery County, home to about 800,000 people, started pondering changes when a new crop of pension board members took office in early 2012, and consulted with a number of investment experts. . . .

The county is moving 90% of its assets into Vanguard stock and bond index funds ....

In recent months, Mr. Shapiro has been spreading the word. He has talked to about a dozen Pennsylvania lawmakers about switching the state's pension assets into index funds . . . ."

Summing Up

It's time for investors, both institutional and individual, to wise up and face the facts.

Low cost DIY investing results in the best performance over the long term.

And that's because DIY investors don't have to subtract costs that they don't pay for results that they don't get from the "pros."

So if the shoe fits, wear it.

Thanks. Bob.

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