Richard A. Ferri - The Power of Passive Investing: More Wealth with Less Work
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Time and again, individual investors discover, all too late, that actively picking stocks is a losers game. The alternative lies with index funds. This passive form of investing allows you to participate in the markets relatively cheaply while prospering all the more because the money saved on investment expenses stays in your pocket.
In his latest book, investment expert Richard Ferri shows you how easy and accessible index investing is. Along the way, he highlights how successful you can be by using this passive approach to allocate funds to stocks, bonds, and other prudent asset classes.
- Addresses the advantages of index funds over portfolios that are actively managed
- Offers insights on index-based funds that provide exposure to designated broad markets and dont make bets on individual securities
- Ferri is also author of the Wiley title: The ETF Book and co-author of The Bogleheads Guide to Retirement Planning
If youre looking for a productive investment approach that wont take all of your time to implement, then The Power of Passive Investing is the book you need to read.
Q&A with Author Rick Ferri
| Author Rick Ferri |
Passive investing is about achieving the returns you need in the markets by using low cost index funds and exchange-traded funds. Passive investing is all about earning your fair share of financial market returns whether the market is US stocks, international stocks, bonds, commodities, or any combination of those investments.
The opposite of passive investing is active investing. This is the act of trying to beat the markets by using an infinite number of higher-cost strategies that probably wont work. Nobel Laureates in Economics have been telling us for decades that passive investing is a better investment strategy than active investing. The Power of Passive Investing brings many of those studies together in one book.
How is this book different from your previous ones, such as The ETF Book, All About Asset Allocation, and All About Index Funds?
My previous books explain how to select low-cost index funds and ETFs, and how to create a portfolio using these funds. The Power of Passive Investing provides the proof about why this is a superior strategy to trying to beat the markets. The evidence in the book is irrefutable.
Who is the target audience of this book?
The Power of Passive Investing is written for any investor who wants to understand more about the mutual funds they are investing in, including people who have a 401(k) or similar work savings plan. Its also an important book for brokers and consultants who make a living recommending mutual funds and ETFs, as well as banks, trust departments and investment advisors who manage other peoples money. Finally, its a particularly important book for people who oversee endowments, foundations, and pension funds.
An observation you make is that while its possible to beat the market, its not probable. What are the odds a mutual fund will beat the market?
Mutual fund companies that try to beat the market argue that its possible to do so. They are right. It is possible; its just not probable, and the payout stinks.
Active managers often point to Warren Buffett, the famous CEO of Berkshire Hathaway as an example. They imply that since Warren beats the markets that we should believe that they, too, will win. Thats nonsense. Here are three reasons why it cant be true:
- About one-third of mutual funds go out of business every 10 years, and about 50 percent are defunct after 20 years. Only about 1 in 3 of the surviving funds outperform index funds. Surviving funds are the ones that dont close, and it assumes you know which ones those will be, which is not possible. The excess return from the winning surviving funds doesnt come close to the shortfall from the losing funds, and this is before accounting for the losses in the defunct funds before they closed.
Weve addressed one mutual fund versus one index and the low probability for active fund success. But thats doesnt define the whole problem because people dont own just one mutual fund. They own several funds across diversified asset classes such as US stock, international stock, bonds, real estate, and so forth.
Having several active funds in a portfolio exponentially lowers the probability that the portfolio will beat a comparable index fund portfolio. As more active funds are added, and the longer their held, the probability that a portfolio of index funds will outperform the active fund portfolio increases dramatically to the point where the index funds have a 99 percent probability of outperforming a comparable portfolio of active funds. Now thats something that all investors should consider!
Why do active investing strategies fail to beat the market for the vast majority of investors?
There are several reasons that active funds fail to deliver, not the least is the cost of trying to beat the markets. Hundreds of thousands of investment managers, investment advisors, brokers, mutual funds manager, pension funds managers, banks, trust departments, individual investors, traders, etc., are attempting to out-fox the markets. They spend hundreds of billions of dollars each year trading securities, paying managers and consultants, buying research, etc. The cost of trying to beat the market makes doing so impossible for most people.
A second reason investors fail to beat the market is due to poor behavior. They seek high returns by looking in the wrong places for outperformance. Active investors chase after past performance, they chase star ratings, and they chase the news. Theyre putting money in places today where they should have already had money. This tail chasing game costs investors dearly.
You make the case for low-cost index funds. But mutual fund fees arent the only cost. What other costs do investors bear?
There are trading costs, commissions, advisor fees, taxes, 12b-1 fees, administrative costs, research costs and the list goes on. Much of these costs are hidden from investors. For example, most investors in 401(k) plans dont provide investors good transparency on the costs theyre paying.
Another bastion of gluttony is high advisor fees. This issue is just starting to come out in the media. The typical investment advisor charges one percent per year to manage a portfolio of mutual funds for clients. Thats crazy-high given the huge advances in portfolio management software and other technology that have occurred over the years. Advisors today should be able to handle five times the amount of clients with half the amount of staff than they did in the 1990s. These productivity gains have not been passed on to clients in the form of lower fees.
What should investment advisers charge their clients?
Well, its not one percent, which is the standard fee youll hear in the marketplace. I believe Investors shouldnt pay more than 0.5 percent per year to an advisor, and probably less. My firm, Portfolio Solutions, charges only 0.25 percent in annual fees. Weve been charging this low fee for more than a decade, and it has saved our clients millions of dollars over the years. Thats real money is in their pockets.
Why do so many people try to beat the market if the proof that passive investing outperforms active investing is irrefutable?
Theres big advertising dollars promoting active management - much more than passive managers can afford. Remember, actively managed funds charge 5 to 10 times the fee of a comparable index fund. Much of this huge revenue stream is spent bombarding the public with nonsense about how active mangers can beat the market, and it basically ensures that the truth about passive investing gets lost in the noise.
Did you know that for every new book published on passive investing there are at least a dozen books published on how you can beat the market? Did you know that for every media interview with a passive investing advocate like myself there are at least 100 interviews with people who claim they can beat the market?
Its actually amazing to me that any information about passive investing gets to the public, and its a credit to investors who have looked beyond the smoke and mirrors.
How can someone adopt a passive investment strategy? Whats the first step?
The answer is to start learning the real facts about the markets and investing. You can start with The Power of Passive Investing if youre already knowledgeable about mutual fund investing. Ive also written several how-to books on low-cost index fund investing, exchange-traded funds, asset allocation and planning for retirement.
Richard A. Ferri: author's other books
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The Power of Passive Investing
Copyright 2011 by Richard A. Ferri. All rights reserved.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey.
Published simultaneously in Canada.
No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 646-8600, or on the Web at www.copyright.com . Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online at http://www.wiley.com/go/permissions .
Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.
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Library of Congress Cataloging-in-Publication Data:
Ferri, Richard A.
The power of passive investing: more wealth with less work / Richard A. Ferri.
p. cm.
Includes index.
ISBN 978-0-470-59220-5 (hardback); ISBN 978-0-470-93708-2 (ebk);
ISBN 978-0-470-93712-9 (ebk); ISBN 978-1-118-00390-9 (ebk)
1. Index mutual funds. 2. Investments. I. Title.
HG4530.F428 2010
332.63'27dc22
2010028567
Additional Praise for The Power of Passive Investing
The retail stockbroker will soon become as extinct as the dinosaur, and good riddance. Thousands of investment professionals, tired of selling the same old lies, and millions of their clients, tired of hearing them, have deserted the brokerage business for a more elegant, effective, and honest way of managing money. Twenty years ago, Rick Ferri helped pioneer that transition. If youre an advisor or a broker, you owe it to yourself to read The Power of Passive Investing; if youre an investor, you owe it to your pocketbook.
Bill Bernstein, author, The Investors Manifesto
Im a big fan of Ricks books, and this is his best yet. Its the book on how to effectively harness the power of passive investing. Whether you are an individual investor or are responsible for billion-dollar portfolios, this book is critical to your success.
Allan Roth, author, How a Second Grader Beats Wall Street
Rick Ferri has written yet another terrific book. The numerous studies he reviews provide powerful support for passive investing and guide trustees and other fiduciaries toward this ideal solution.
W. Scott Simon, principal, Prudent Investor Advisors, LLC
Passive investments deserve a place in almost all investors portfolios, but the range of choices has never been so complex or treacherous. There are now every bit as many flawed, gimmicky, or overpriced index funds as there are those from active managers. If you want to navigate this new terrain successfully, youll find Rick Ferris The Power of Passive Investing an essential text.
Don Phillips, Managing Director, Morningstar, Inc.
Powerful! The extensive research behind this book makes a compelling case for a passive investing strategy. Ignore the information in this book at your own peril.
Mel Lindauer , Forbes columnist and co-author of The Bogleheads Guide to Investing and The Bogleheads Guide to Retirement Planning
The Power of Passive Investing is as much an enlightening history lesson as a compelling argument for building a portfolio on a foundation of index funds. Rick Ferri invigorates a long-standing debate with fresh proof and perspective that come from managing millions of dollars and reading reams of research. Dont mistake passive for wishy-washy; Ferris arguments are as sound, precise, and forceful as youd expect from a retired Marine Corps fighter pilot.
Robert Brokamp, CFP, Senior Advisor, The Motley Fools Rule Your Retirement service
If you doubt the power of passive investing, check out Rick Ferris new bookand youll discover a wealth of evidence that should sway even the most ardent fan of active investing.
Jonathan Clements, author, The Little Book of Main Street Money
Rick Ferri convincingly lays out the damage done by investing in actively managed mutual funds. He proves why we should be grateful to Jack Bogle for implementing index funds as a shield against Madoff-type shysters, lawsuits, unnecessary risk, and high costs. His clear writing, serious research, sound logic, and nuggets of wisdom illuminate both old and new-to-me dimensions of the compelling case for indexing.
Ed Tower, Professor of Economics at Duke University
Old-school index investing seems so simple, its amazing that someone like Rick Ferri, who just tells us the truth, is so rare. And what is the truth? That most investors are underperforming the market and being fleeced by Wall Street. Were lucky to have a crusader for common sense like Rick on our side.
Jim Wiandt, President and CEO, IndexUniverse
Few people understand indexing better than Rick Ferri. In The Power of Passive Investing, Rick clearly explains the sophistication of passive investing and how it will enhance account performance. If you havent yet incorporated passive investing into your portfolio, this book will convince you.
Taylor Larimore, co-author of The Bogleheads Guide to Investing and The Bogleheads Guide to Retirement Planning
Rick Ferri has brilliantly assembled hordes of unbiased, highly technical investment research so that the average investor can understand and benefit from what the smart money has known for decades. If you care about how much youll retire with, youll read The Power of Passive Investing.
Mitch Tuchman, CEO, MarketRiders, Inc.
Rick Ferri has gathered a wealth of research. A passive investment strategy is a great approach because it allows a person to focus on more important things in life.
Craig Israelsen, author of 7 Twelve: A Diversified Investment Portfolio with a Plan
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