December 9

 

Today’s Letter from Grandma Sylvia

 

Dear Reader,

 

Us and Them is often Us versus Them.  One against the other.

The topic today is about Us, the individual investor, and Them, the public pension funds that have professional managers.

 

 

 

The Big Picture

When is it better to let someone else do your management and make decisions for you?

 

Sometimes we think of the example of doctors and relying on their judgments for medical decisions. If we have good doctors, then it’s reasonable to rely on their thinking, but not without asking questions and doing as much thinking and research as we can.  We also compare recommendations if we are taking an important medical step.

 

We have to decide when it’s better to pay someone to manage something for us and what the alternatives are.

 

Managing investment funds is an important instance of this.

A Story

A friend of mine was a member of a retirement board.  At one board meeting he asked the general manager of the fund why they didn’t invest in index funds.  The general manager replied that their active investing could do better than the passive index funds and that’s why they were hired.  This retirement fund usually did very well so he didn’t pursue it.  In fact, the fund has beaten its benchmark and has exceeded its policy index return for at least 15 years.  In this case, the pension fund looks well managed, but that’s an important question for board members to ask and then to follow-up to see if the results live up to that assertion.

 

Today’s Topic: Us AND Them

 

I want to discuss public pension funds because we can get information on how well many of these funds performed.  These are high-stakes investment funds because of the public funding and because of the needs of the retirees.

 

Whether you have a public pension or not, there is something to be learned here.

 

In a November 25 article in the Dallas News, a reporter found that a large percentage of the public pension funds in Texas would have had higher returns if they had invested in passive index funds rather than pay active managers.  Some of the investment returns meant the funds were actually underfunded.

 

It is critically important to have pension funds perform well in order to meet the future obligations of funding retirees’ annual benefits. All retirees with a pension should check to see how their pension plans are performing.

 

Now, pension funds and other big investors are using some index funds to reduce expenses and better manage their total accounts.

Important Idea

 

♠  More public pension funds are using index funds to gain higher returns.

 

If many highly trained managers in high stakes pension funds can’t beat the index funds, and pension funds are using index funds more, then we might be wise to invest in index funds also.

 

*****

Tis the season to start baking cookies to have with warm mulled cider on a cold December day.  The oven is on and I’ll start the spice cookies.  Wish you were here.

 

Grandma Sylvia