Mark Hebner / Mary Brunson

IFA's Quote of the Week - 54 (Dan Solin)

"If investors learned how to invest intelligently, according to the teachings of John Bogle and many, many others, they would be far better off."

-Dan Solin, author The Smartest 401(k) Book You’ll Ever Read, 4/17/09 CNBC interview

 Cramer Fact Check

Fireworks flew when Dan Solin recently appeared on CNBC’s Power Lunch to express his dissatisfaction with the 401(k) offerings available to most employees in the U.S. private sector.

“The vast majority of 401(k) plans are really bad…They’re like a killing machine…they go around gobbling up assets of the 50 million people who have invested $2.7 trillion in these plans,” claimed Solin, a Senior Vice President for Index Funds Advisors and author of The Smartest 401(k) Book You’ll Ever Read.

When asked what could be done instead in the world of 401(k) investing, Solin answered, “One of the things that you could do instead is to give us more of ‘in Bogle we trust’ and much less ‘in Cramer we trust.”
 
Shortly thereafter, a characteristically contentious Cramer emerged to discredit Solin. 

“The S&P is flat literally for 10 years, that’s John Bogle’s world,” Cramer argued. “I’ve had it with the people who tell me about the index fund. For 10 years they’ve done nothing,” Cramer ranted. 

“You obviously have no understanding of what John Bogle’s world is,” Solin rifled back. “John Bogle’s world is appropriate asset allocation, a globally diversified portfolio of stocks and bonds. His world is not the S&P 500 for every investor, and if people had followed historically John Bogle’s world, they would be far, far better off either in or out of a
401(k).”

While Cramer’s vitriol may have perked up viewer attention, it was Solin’s facts that make him the clear winner of the impromptu debate.

Solin’s assertion regarding global diversification is strongly rooted in historical data. Proper asset allocation extends far beyond an investment in the S&P 500 Index, a large company index which invests only in the United States. No index funds advisor would encourage an individual to invest in this index alone.

Cramer’s oversimplification of index funds’ performance based on a single asset class makes him guilty of omissions so egregious that his statements rise to a level of gross misrepresentation.

Expanding on Solin’s argument, a globally diversified index portfolio was far from flat over the last 10 years, with the all-equity Index Portfolio 100 earning a total return of 72.39% for the 10-year period ending December 2008. The returns of this and 19 other risk-appropriate asset class blended portfolios starkly contrast Cramer’s portrayal of index funds’ performance. It appears that Cramer would have us throw out the baby with the bath water when it comes to index funds and the S&P 500 which underperformed its long-term average during the same 10-year time period.

The chart below shows a 10-year risk and return comparison between 20 IFA Index Portfolios and 20 Vanguard index portfolios that were created using IFA weights. The chart also plots the S&P 500 Index referenced by Cramer. The 10-year time period reflected in the chart ends December 2008.

True to Solin’s point, globally diversified index portfolios that were created using Vanguard indexes (the company founded by John Bogle) outperformed the S&P 500 Index. And the IFA Index Portfolios that are constructed with funds that carefully implement exposures to the Fama/French Five Risk Factors did even better.

Style purity, low expenses and total transparency make index portfolio investing a superior investment alternative to the commonly offered actively managed funds that litter the offerings of most corporate-sponsored 401(k) plans.

(Click to see the full IFA vs Vanguard report PDF)

The data in the above chart discredits Cramer’s sweeping statement regarding index funds investing. But what about Cramer’s own track record? To hear him tell it, had investors listened to him back in September, they could have exited the market at Dow 11,000 and re-entered at Dow 6,500. Certainly, any market timer who made such stellar calls would have an excellent track record, so what happened with Cramer?

According to CXO Advisory, an online group that tracks the accuracy of stock-picking gurus, Cramer’s track record is far from impressive. Tracking 59 measurable forecasts that Cramer made in New York Metro, CXO determined that 27 of Cramer’s picks or 46% were essentially right, while 32 or 54% were essentially wrong. With laws of randomness giving Cramer 50/50 odds of being right, he performed less well than what would be expected had he simply guessed or (borrowing from Burton Malkiel) thrown darts at The Wall Street Journal.

“All of us have that obligation to educate investors away from gambling, trading, speculating and listening to people who say they can pick stocks,” Solin admonished the interviewers.

“If investors learned how to invest intelligently, according to the teachings of John Bogle and many, many others, they would be far better off,” Solin concluded.