Mark T. Hebner

IFA's Position Statement on Investing

 1. Capitalism earns a profit for it’s shareholders on average.

 2. Companies have a cost of equity capital of about 10% and that cost of capital is paid to the shareholders.

 3. Nobody can see the future and future prices are randomly moved by unpredictable news. Bad news results in lower prices and good news results in higher prices, all in an effort to keep expected returns essentially constant.

 4. Free markets work best and current prices are the best estimate of a Fair Market Value. Fair prices result in a distribution of future returns that resemble a bell curve and are equally likely to be above or below the expected return.

 5. Greater expected returns only come from greater risk. The expected return from speculation is zero and becomes negative after costs and taxes.

 6. The expected annual returns for any of 20 risk calibrated IFA Index Portfolios are about 5% plus 1/2 the annualized standard deviation of returns over the last 50 years.

 7. In a study of investor behavior over the 20 years ending 2008, the average equity mutual fund investor under performed the IFA Index Portfolio 100 by a 7.3% annualized return. The primary cause of the under performance was that investors chase past performance.

 8. In a study of 2,100 stock pickers over 32 years, 99.4% of managers were shown not to have verifiable stock picking skill.

 9. In a study of 15,000 predictions over 12 years from 237 Market Timers, there was no evidence of market timing skill.

10. In a study of 660 hiring and firing decisions of investment managers, the fired managers beat the hired managers.

11. In a study of 8,755 hired investment managers, the average hired manager out performed their benchmark by about 3% per year for the 3 years before hiring, however, they under performed their benchmarks by about 0.5% per year for the 3 years after hiring.

12. Over the 81 years ending 2008, the annualized return of a US small value index of equities beat large growth by 4.53% per year.

13. IFA uses Modern Portfolio Theory, including the work of Eugene Fama and Kenneth French, and many empirical studies to guide its selection of Funds and construction of Index Portfolios. The following studies are particularly relevant:

• Harry Markowitz, “Portfolio Selection,” Journal of Finance (1952)
• William Sharpe, “Capital Asset Prices - A Theory of Market Equilibrium Under Conditions of Risk,” Journal of Finance (1964)
  
• Gary P. Brinson, L. Randolph Hood, and Gilbert L. Beebower, “Determinants of Portfolio Performance,” The Financial Analysts Journal (1986)
  
• John Graham and Campbell Harvey, “Market Timing Ability and Volatility Implied in Investment Newsletter’ Asset Allocation Recommendations,” National Bureau of Economic Research Paper #4890 (1995)
  
• Eugene Fama and Kenneth French, “The Cross-Section of Expected Stock Returns,” Journal of Finance (1992)
• Eugene Fama and Kenneth French, “Common Risk Factors in the Returns on Stocks and Bonds," Journal of Financial Economics (1993)
• Eugene Fama and Kenneth French, “Size and Book-to-Market Factors in Earnings and Returns, ” Journal of Finance (1994)
• Eugene Fama and Kenneth French, “Value versus Growth: The International Evidence, ” Journal of Finance (1998)
  
• Laurent Barras, Olivier Scaillet, Russ Wermers, “False Discoveries in Mutual Fund Performance: Measuring Luck in Estimating Alphas,” Journal of Finance, Forthcoming.
  
• Amit Goyal and Sunil Wahal, “The Selection and Termination of Investment Managers By Plan Sponsors,” Journal of Finance, Forthcoming
  

14. Save 10% of your annual income while you are working and spend only 5% per year of your savings in your retirement.

15. Buy a risk appropriate, globally diversified, small and value tilted portfolio of index funds anytime you have money to invest. Hold. Rebalance. Loss Harvest.

16. Only sell your investments when you need the money.

17. Hire a good passive investment advisor. Everybody will benefit from their expertise, teaching, coaching, service and independent advice. A study concluded that indexers with an advisor were 27% more successful at capturing the returns of index funds than those without good advice (see here).

I rest my case.

Sources: see links and ifa.com