These indicators seem to be difficult ones. That causes me to wonder if many who experiment with technical analysis fail to understand them and thus to carry out a disciplined investment plan. Masonson provides an easy-to-use, computerized format for using these triggers. He claims that once an investor understands them and gets set up to monitor them with the help of a computer, the required time to carry out the strategy is minimal. He also provides a detailed analysis of ETFs, including several resources that can be used to monitor them on your computer.
If you use technical analysis in your investing practice (or are considering it or want to learn about it), this is a good book for your library. If you don't use technical analysis and don't want to spend the time necessary to learn how to do it diligently, you're better off not to try it. When I spoke with Masonson, he made it clear that anything other than total commitment to this form of trading will not be worthwhile. Worse yet, it could be disastrous.
The second book, The Power of Passive Investing: More Wealth With Less Work, by Richard A. Ferri, with a foreword by John C. Bogle, recommends the exact opposite strategy. Ferri, a Forbes columnist and founder of Portfolio Solutions, traces the history of active versus passive investing back to 1924 when the first open-end mutual fund, Massachusetts Investors' Trust, an actively managed fund, was introduced. Of course, we know that the first retail passive fund, the Vanguard 500 Index Fund, was introduced by Bogle in 1976.
Ferri provides a chapter on performance studies on active investing from the 1920s and 1930s up through the 1960s, showing that it falls behind the market by a larger portion as time goes on. Interestingly, Ferri notes that after the introduction of index funds, active funds began trading more because the goal became "to beat the market."
Turnover in the active fund industry is about 15 times higher today than what it was in the 1960s, he says. We know the drill on the advantages of passive investing, too: Active funds carry higher costs, result in higher taxes, often include sales loads, are more risky and, over time, lose to index funds by a 2 to 1 ratio. Like Masonson, Ferri likes ETFs, which offer buy/sell opportunities throughout the day while mutual funds only offer them at the close of business.
A study by Dalbar Inc. covering the 20-year period ending in 2009 found that equity mutual fund investors had average annual returns of 3.2% while the S&P 500 averaged 8.2%. Fixed income fund investors had average annual returns of 1.0% compared with the Barclays Aggregate Bond Index, which averaged 7.0%.
"Are individual investors and advisors really that bad at timing the markets?" Ferri asks. The data suggests they are. He includes a useful chapter, "Changing Investor Behavior," which talks about behavioral finance and answers arguments against passive investing. He also discusses how to set up a passive portfolio and explain it to clients.
"Why do more advisors recommend active strategies over passive, even though they are supposed to be acting in a fiduciary capacity?" Ferri asks. His answer: because they don't believe clients would hire them otherwise. "Many advisors falsely believe that competing on returns is the only way they'll attract new clients," he says.
Some of them reason that clients won't need them if all they do is buy index funds and that their fees are not justified if they follow such a simple strategy. They fear clients will expect them to "do something" in a bear market and that they will lose business to others who invest actively and outperform them. All untrue, Ferri says. I say that for the best advisors, managing an investment portfolio is the least valuable thing they bring to the table. But advisors need to have their own response to these questions.
I enjoyed these books because both were professional and each made a good case for its strategy. Both of them might be rewarding to advisors who wish to learn more about this subject and better educate clients.
Mary Rowland can be reached at [email protected]. She has been a business and personal finance journalist for 30 years and has written two books for financial advisors: Best Practices and In Search of the Perfect Model.