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“Diversifying actively managed mutual funds within an asset class is a bad thing because it decreases the already low probability for outperforming a comparable portfolio of all index funds,” according to Rick Ferri. “If you can’t buy index funds, then pick one active fund per asset class and hope for the best.”
Ferri and Alex Benke of Betterment looked at thousands of actively managed mutual funds portfolios. They compared the performance of actively managed fund portfolios to that of index fund portfolios with the same asset allocation over the same time frame. In one scenario they look at portfolios holding more than once actively managed fund in three asset classes, U.S. stocks, international assets, and U.S. Investment-grade bonds.
“The three-fund index fund portfolio had an 82.9% probability of outperforming the actively managed fund portfolios when only one fund was selected in each of the three asset classes. The odds increased in favour of index funds when two active funds were selected for each of the three asset classes (a total of six funds). When three actively managed funds were selected for each of the three asset classes (a total of nine funds), the odds reached 91.0% in favour of index fund. The study has a margin of error of ±1.0%.”
Brian Belski: Putting The Stock Market Rally In Perspective (BMO Capital Markets)
“This has been one of the strongest stock market recoveries to date, yet it has also been one of the weakest economic recoveries. For instance, stocks are up about 144% from their March 9, 2009 low, almost double the average of 83% for all other bull markets up to this point in the cycle. In fact, no other post WWII bull market has shown such strong performance 53 months into the bull market (although the mid-1980s bull market was close).
“On the other hand, economic data has been disappointing up to this point into the expansion (Exhibit 6). Sooner or later, the macros are going to have to improve sharply in order to justify recent stock gains, in our view. For our part, we continue to believe that the economy will continue to grow at a moderate pace in the coming years – and significantly better than other major and emerging economies on a relative basis. But near term, we think stock prices have gotten a bit too far ahead of themselves.”
The Brazilian Bond Market Massacre In One Huge Slide (Bond Vigilantes)
We’ve recently seen a rout in emerging market bonds. Bond Vigilantes put together a slide that shows just how hard the Brazilian bond market has been hit.
SEC Approves FINRA Plan To More Widely Publicize Actions Against Brokers (The Wall Street Journal)
The SEC has approved the Financial Industry Regulatory Authority’s (FINRA) plan to publish in more complete forms cases that it brings against brokers and firms, according to The Wall Street Journal. A securities attorney told the WSJ that this will likely cause more brokers to challenge FINRA than settle with them and that the information that will now go up will be one-sided.
Three Ways To Make Sure Clients Hear The Message (Advisor Perspectives)
Clients often fail to or misremember what their advisors have said. Dan Richards says there are three key ways in which to get what they say to stick with their clients. 1. Wrap up meetings by listing the top three takeaways. 2. Send follow up emails after every meeting highlighting the most salient points from what was discussed. 3. Send emails with next steps and an audio clip thanking clients and that repeats the most important takeaways.
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