The trust is by nature a relationship fastened upon the properties of the trust. Considerable debate has been focused upon the rights of a beneficiary in the trust properties.5 In a private trust, the trust is a means of disposition of properties by way of gift. The trust corpus in the private trust, even when the settlor is one of the beneficiaries, is the subject matter of a gift. In this sense, the trust has a distributive character that makes use of equity’s recognition of a multiplicity of interests within a trust. A beneficiary’s interest is an interest in a gift. His interest is a matter of degree of ownership. If he is a beneficiary under a discretionary trust, he has nothing more than a right to be considered as a beneficiary. Read the rest of this entry »
You need to be concerned with the psychological aspects of investing in a managed futures program from two distinct points of view. First, what type of investment best meets your needs? And second, if you’re going to personally interview and select a CTA, what psychological characteristics should you be looking for?
The type of futures investment you are suited for depends on your attitude toward risk. If you are an aggressive risk-taker, you might be looking for an emerging CTA with a short, but incredible, track record. A moderate risk-taker might select a seasoned trader with a five- to ten-year track record in the moderate volatility range. Safety-conscious investors prefer to define their maximum risk in advance. They look for limited partnerships and “guaranteed” funds. We’ll have a discussion of the various types of offerings later in this text. Read the rest of this entry »
A group of 10 investors decide to form a limited partnership to trade futures, but none of them has the time or experience to act as general partner (GP). Nor does anyone want to assume the unlimited risk that falls on the shoulders of the GP. They take this challenge to a commodity pool operator (CPO).
A CPO is an individual, corporation, or organization in the business of operating and promoting commodity pools. On occasion, a CTA can also be a CPO who promotes his or her own trading programs. In this case, our investors seek a CPO independent of CTAs. They take this approach to get an unbiased analysis of potential traders. Read the rest of this entry »
While traditional finance is based on rational economic behavior of investors, behavioral finance claims that investors do not always behave rationally. This “irrational” behavior causes prices to move in anomalous patterns that cannot be explained by traditional finance theory but can be explained by behavioral finance. To be sure, traditional finance does allow some investors to behave irrationally, but those investors lose and are quickly driven out of the market by smart investors. Behavioral finance, on the other hand, believes that smart investors do not necessarily have the resources to dominate other investors. For example, limits of arbitrage point to the limited nature of arbitrage activity, which may cause irrational investors to persist and may allow them to influence prices in a significant manner. Read the rest of this entry »
Traditional finance theory is based on actions of rational investors who can process information efficiently in a timely, unbiased manner and consistently make informed, value-maximizing decisions. However, as mentioned above traditional finance does not assume that all, or even most, investors are rational. But it does assume that irrational investors will be driven out of the market by smart, rational investors.
Behavioral finance theorists question the primary assumption of rational investor behavior. Based on concepts and models developed by cognitive psychologists, they claim that psychological forces prevent decision makers from acting in a rational manner. There are two basic themes of behavioral finance: heuristic-driven bias and frame dependence. Other characteristics of irrational behavior can usually be deduced from these themes.
The term heuristic refers to a rule of thumb that is developed by an individual based on trial and error. Note that the rule of thumb is developed not by scientific reasoning but simply on the basis of one’s own experience or knowledge. Read the rest of this entry »
Few other innovations have made as big an impact on the fund industry as the mutual fund supermarket. Today’s popular version of the mutual fund supermarket was introduced by discount brokerage firm Charles Schwab in 1992 and has since transformed the way investors purchase and sell funds. Like the supermarket from which most people purchase food, fund supermarkets bring together a variety of similar products from different vendors. In other words, they allow investors to purchase and hold a broad range of funds from many different fund sponsors through a single brokerage account. Similar to the grocery version, fund supermarkets soared in popularity because of their ability to provide a high degree of convenience, breadth of product, ease of comparison and simplicity of transaction. Read the rest of this entry »
Client research by Benefits, Inc. shows that plan participants may be usefully grouped into three major segments based on their attitudes toward, and sophistication with, investment concepts. Plan sponsors should consider positioning options to relate to the needs of each segment.
Insecure investors usually compose the largest single participant group. These individuals describe themselves as “beginner” investors. They express a lack of confidence and understanding in matters related to investing and doubt their ability to accumulate enough assets to retire. Their lack of confidence has pushed them into relatively safe investment choices such as money market, fixed income and stable value options. They tend to be the least well diversified. Some avoid participating in a 401(k) plan altogether because of their lack of confidence. Read the rest of this entry »
Focusing on the Investor, Not the Investments
Every day, defined contribution plan participants make investment decisions that will affect their income in retirement. Some make these decisions easily; others are less confident that they are making appropriate choices. Benefits, Inc. understands that participants‘ investment decisions should be driven primarily by an accurate assessment of their retirement income needs and the time they have to accumulate the appropriate nest egg. But Benefits also understands that participants‘ own personalities and attitudes toward investing are often a barrier that prevents them from doing the right thing. Benefits therefore attempts to target the plan design and communication programs it develops for its clients to take into account these behavioral differences. By understanding that there are different types of investors with varying concerns and needs, plan sponsors have an opportunity to provide employees with suitable investments—ones that improve the likelihood of being utilized effectively by participants. Read the rest of this entry »
The Problem
Since the beginning of 1997, the U.S.-sold Japan Fund has experienced substantial cash inflows and outflows from investors, and portfolio manager David Smith has voiced his concern recently about the volatility. He also noted that extremely large shareholder orders seem to coincide more and more with news affecting Japan, and cash flow management is taking up a large percentage of his time that might otherwise be spent selecting securities.
Smith suspects some shareholders are trying to increase their profits by “timing” the market—quickly moving their money from one fund to another within the complex. Furthermore, he speculates that these investors might be attempting to profit from the methodology that the fund complex uses to compute the daily NAV of the fund by trading on stock price information that may become available between the time when the Japanese markets close and the time the fund values its holdings. Read the rest of this entry »
James M. Clash
A wave of consolidation is washing over the mutual fund business. So far this year funds totaling more than $125 billion in assets have changed hands. To hear the consolidators tell it, mergers are good because they bring fund investors economies of scale and breadth of choice within a fund family. Will these promises be fulfilled? It is instructive to consider some of the bigger recent mergers. The results are not encouraging.
Take the Dreyfus funds, purchased in December 1993 by Pittsburgh’s Mellon Bank. In the three years before the merger, the 12 domestic stock funds at Dreyfus performed, on average, on a par with the S&P 500 index. In the three years since, these funds, on average, have underperformed the index by a stunning seven percentage points a year.
Then there’s the American Capital/Van Kampen merger in August 1994. In the 26 months prior to the marriage, the 11 stock funds here outperformed the S&P 500 index by an average of two points annually. In the 26 months since the merger, the funds have underperformed, Read the rest of this entry »
Underlying the policy debate about merits of institutional activism is the empirical question: Does such activism have a significant impact on corporations that are the target of that activism? The short answer is that it’s unclear.
In an attempt to provide an intermediate-level answer, let us review a few points that emerge from this debate on the impact of institutional activism. To begin, the studies do not usually include proxy fights or takeover bids since these are rare events for institutional investors. In addition, these studies are all premised on the efficient markets theory, so they assume that the impact from shareholder activism can be measured by looking at a change in stock price after a specific event, such as a pension fund’s submission of a stockholder proposal.
These economic studies tend to show no or little positive price effects from proposals to change general governance procedures, such as the introduction of confidential voting or the appointment of an external board chairman (separate from the CEO). Read the rest of this entry »
In most cases, mutual fund advisers vote to support the recommendations of company management. This is true not only for management’s proposed slate of directors, which routinely receive the support of 99% of those voting, but also for management proposals on other subjects. For instance, during the 2000 proxy season, management proposals on proxy statements were supported on average by 85% of the stockholders who voted; proposals opposed by management were opposed on average by 74% of the stockholders who voted. This high level of consensus between stockholders and management is not surprising, at least for actively managed mutual funds. Owning the stock of a company ordinarily indicates a belief in the ability of the company’s management; supporting management’s position in voting matters often follows as a matter of course. Read the rest of this entry »
Institutional activists can be divided into three groups: those who seek to implement sound corporate governance, those who target underperforming companies and those who advocate a social or political agenda. In practice, the first two groups tend to converge on companies that have substantially underperformed their peers or a market index. The last group focuses on companies whose businesses or corporate policies are viewed as detrimental to the social welfare in some fashion. Read the rest of this entry »
E. Recent Improvements
Notwithstanding the difficulties outlined above, many U.S. institutional investors attempt to exercise their voting rights in many markets around the world. As in the United States, mutual fund complexes are rarely activist overseas, although an institution may become involved when fundamental factors affecting the value of its investments are at issue. Indeed, as their foreign holdings increase in size, institutional investors have recently become more successful in certain situations in asserting their rights as shareholders. For example, in 1997, institutional investors in the French company Eramet, including Fidelity Investments and TIAA-CREF, successfully forced the company to abandon a politically motivated and financially damaging plan to dispose of assets engineered by the French government, its majority shareholder. Read the rest of this entry »
I am always amazed when investors fail to consider after-tax returns in assessing their performance. Perhaps this oversight is a direct result of the sin of pride—they can’t puff up their feathers and crow as loudly with an after-tax return number. Perhaps it’s a result of envy—they are driven to brag about their great results and lesser results won’t allow them to respond effectively to their feelings of envy. Perhaps it’s simply sloth— they are too lazy to think about the difference between after-tax returns and pre-tax returns or to do the math. Whatever sin causes them not to obey this commandment, they end up deluding themselves about how well their investments are doing.
Similarly, some investors sell a stock before it becomes eligible for capital gains treatment. For investors in the highest tax bracket, the difference is 15 percent instead of 35 percent if they hold the stock for a year and a day. Gluttons, of course, lack the patience to hold their stocks for that long. Angry investors, too, may be so upset that a stock has failed to meet their expectations that they may sell it because they have so much animosity toward it, heedless of the tax consequences.
If you want to adhere to this commandment, ask yourself the following questions:
- Am I using every possible dollar in tax-deferred, retirement-type vehicles, such as IRAs or 401 (k)s?
- Am I taking full advantage of 529 college savings plans?
- When thinking about fixed-income investing in a fully taxable account, am I aware of all my tax-exempt options and what the net yields are?
This is a counterintuitive commandment. Normally, when the market experiences a significant downward trend, people sell off some of their holdings or even get out completely. Vanity makes it hard for people to face their portfolio’s decline in value. Anger with the market makes them want to get out. Instead, these down periods are opportunities to invest a bit more than normal.
In moments of doubt, consider these facts: The Dow dipped below 8,000 after 9/11/01, but then rose to over 10,700 within six months. At the beginning of the Iraq war in March 2003, the Dow went below 7,400 and was over 10,000 by the end of the year.
The market is more resilient than anyone thinks during the times when it reaches its nadir. Time and again, it has bounced back, and you want to be invested in it when it springs upward.
To a certain extent, all investors react to good or bad news regarding the market. Investing gluttons, however, overreact. They are so hungry for action, they respond to the rumor of a merger or the hint of regulatory move by buying and selling. They become so worked up at the hint of bad news involving a stock they’re holding that they reflexively sell; they become so eager for profit at possible good news that they immediately buy.
The irony is that these gluttons think they’re getting a jump on the market, but in reality, they’re lagging behind it. Stocks can often move before the first trade by 5 percent on good or bad news. As a result, investors that use good or bad news as a trigger for a trade usually are dealing with unfavorable price movement. They deceive themselves into thinking that by reacting quickly to a news report about a stock or a broader economic trend, they are going to get a jump on other investors. In reality, they are lagging behind the market as well as other investors who make less frequent but more strategic investing decisions. Read the rest of this entry »
Are you actively looking for the next Dell? Do you want to find a stock that is under $1 a share (as Dell was, split adjusted, prior to 1996) and ride it to $50 (which Dell reached in 2000)? If this is what your goal is, you are better off studying gambling techniques and visiting a casino. Trying to make a killing causes you to invest in stocks that carry a lot of risk and that have relatively low odds of rewarding the risks you take.
If you feel the urge to make a killing and you’re particularly vulnerable to sins such as greed and gluttony, here is a good way to follow this commandment. Tell yourself that if you want to make a killing, rather than searching for a rags-to-riches stock, your money would be better spent by taking a risk on:
- Opening a restaurant
- Starting an Internet grocery store
- Buying real estate
- Buying swamp land in Zimbabwe
I’m not suggesting you actually do these things, only that you should consider them and then realize how much risk is involved in trying to make a killing in the market.
As we noted, angry investors sometimes lack a specific target and disperse their anger over the market in general. They rant about the market’s cruelty and indifference, and it is like ranting about fate. Many times, though, investors focus their anger on a specific person, group, or event. In some instances, this target is worthy of their ire—a CEO made a bad decision that negatively affected the stock price. In other instances, however, investors made mistakes and set up targets as scapegoats—they blame others for their oversights and lack of due diligence. Understanding what the common targets are and how they trigger our anger gives us a weapon to defend ourselves against it. Keep the following targets in mind the next time you find yourself furious at them for an investing loss: Read the rest of this entry »
It may be that as you look at the previous section and clearly identify yourself as a greedy rather than as a realistic investor, your response is, “So what?” You may rationalize this investing behavior as crucial to your success. You are aggressive, confident, and willing to take risks; you made a significant amount of money in the market in the past, and you intend to do so in the future, and the only way you know how to do so is by thinking big and investing like a big-time player.
In fact, big-time investors are big-time precisely because they aren’t greedy. They are highly successful because they understand the way the market works, do their homework, analyze their options carefully, and then make decisions with both short-term and long-term results in mind. The greedy investor, on the other hand, gets into all sorts of financial trouble because his greed is based on an unrealistic view of the market. Read the rest of this entry »
