How to Win the Loser's Game, Part 10
https://sensibleinvesting.tv
Our journey is almost done. We’ve explained how the odds are heavily stacked against the ordinary investor - and how, by settling for an average return, and refusing to pay a small fortune in charges, you can end up as one of the winners, saving yourself a great deal of time, effort and worry in the process.
But there is a much bigger issue here. It’s not just we as individuals who are losing out. The whole world faces a pensions crisis. We’re living longer, and although most of us will work longer, there’ll be huge numbers of people retiring without enough funds to sustain them through their later lives.
In deciding to dispense with active management for its Local Government Pension Scheme, the UK has joined a list of governments - including Australia, Norway and California - which have started to question the traditional way of doing things.
Michael Johnson from the Centre for Policy Studies says: “There is a very strong economic rationale to have pension funds perform better.”
The investing sector has become a key component of the global economy. Here in Scotland, for example, hundreds of fund managers, brokers, advisory firms and consultants have concentrated around Edinburgh now Europe’s fourth largest financial centre.
Yes, the sector does make a key contribution to economic wealth and tax revenues. But, as we’ve seen, it also takes a great deal from ordinary investors through the charges it levies. So, has the investment industry just got too big for our own good?
Merryn Somerset Webb from MoneyWeek says: “The fund management industry needs huge reform. It doesn’t need quite so many people, and it doesn’t need to be so expensive.”
David Tuckett from University College London says: “I think the real problem is that there are far too many expectations in this whole area."
The industry says it accepts that passive approaches to investing are likely to become more popular but, not surprisingly, it doesn’t like the idea of the active fund sector contracting.
Daniel Godfrey from the Investment Management association says: “I don’t fear for the future because I think active will maintain a very strong rôle."
It’s true that the market system needs active managers to function. But the academic consensus is that a global fund industry just 20% the size it currently is would be more than sufficient to maintain market efficiency. Many of our experts also believe that the huge financial rewards on offer to fund managers are counter-productive in that they incentivise very short-term outperformance when most people are - or at least should be - investing for the much longer term.
In 2013, the average Wall Street bonus rose 15%, bringing the overall industry total to a staggering $26.7 billion. And remember - that’s not salary - that’s bonuses.
Somerset Webb says: “The bonus system is absolutely ridiculous."
If there were fewer fund managers earning more modest pay packages, perhaps more of our brightest graduates would shun the City, and pursue careers instead in sectors where they really can make a difference.
As John Bogle likes to say, it’s not the speculators or the markets that add value. Ultimately it’s successful businesses that drive investment returns.
And despite the lazy way which in which business and the markets are often lumped together by journalists and politicians, those are in fact two very different things.
John Bogle says: “99.5% of what we do as investors is trade with one another. And 0.5% is directing capital to new business. There is a system that has failed society. Period.”
Michael Johnson says: “Will change come from within? Pretty unlikely."
Richard Wood from Barnett Ravenscroft says: “Is the doing a better job of protecting the investor and making things more transparent for the investor? Definitely not.”
Michael Johnson says: “The media could usefully attune itself to the level of technical understanding of the man in the street in an explaining rôle."
Ultimately, though, it’s up to us, ordinary investors, to demand a better deal.
Yes, we need to put more into to our pensions and other long-term investments.
But we also have to start questioning why the industry is taking so much out. To start insisting on a fairer share of investment returns… Especially as those returns, in future, are likely to be smaller than they have been in the past.
We need to wise up. To be more realistic. We have to be less gullible and, yes, perhaps a little less greedy as well. There are no magic short cuts to successful investing. But, over the last 120 years so, we’ve learned so much about how it works that we simply no longer need to pay expensive “experts” to gamble with our money. Together, we will win this game in the end.
John Bogle says: “The ultimate object of all business should be to serve the consumer.”
https://sensibleinvesting.tv
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