From Chapters 17, 18 and 19

Research on Safe Withdrawal Rates

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JWR1945
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From Chapters 17, 18 and 19

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From Chapter 17

Chapter 17 of our featured book, Common Sense on Mutual Funds by John Bogle, is about the effects of (information) Technology. It has made a tremendous amount of knowledge available, but it has not conveyed wisdom. Instead of lowering costs and introducing more discipline into investing, it has brought out the worst in investment behavior such as aggressive trading.

My way of saying this is to assert that a large fraction of mutual fund managers constitute the stupid money in the stock market. It is not that they are intellectually unable. It is that their outlook and temperament are unsuitable.

From Chapter 18

Chapter 18 is about mutual fund Directors and their conflict of interest. The normal structure of mutual funds is that the directors hire a management company, which does all of the routine services and which recommends the fees of the directors. The ownership of the typical independent director cost a total of only $30000 but (in the top ten fund complexes) he got paid $150000 annually.

From Chapter 19

In Chapter 19 John Bogle looks deeper into the contrast between mutual funds that provide their own in-house management and the traditional structure which hires a management company. The distinguishing feature is that, in the traditional structure, even though the shareholders own the fund, the management company actually controls it.

Figure 19.2 on page 380 summarizes how each structure influences profit, pricing, service, risk management, product, indexing and marketing. As we might expect, the table show that traditional structure causes managers to focus on their own profits and to charge whatever the traffic will bear. The arguments for some of the entries are plausible but not compelling.

Two of the entries are worth our attention. The traditional structure favors introducing faddish new products. In addition, it tolerates high-risk investment choices since shareholders bear the risk, not the managers.

John Bogle foresees several possibilities that could shift the mutual fund governance more toward shareholders and away from their management companies. The catalyst might be uninspiring returns over a prolonged amount of time or plunging returns in a bear market. Investor might then learn that costs matter. Shareholders might walk away from expensive funds with their corresponding low performance. We might even see the rise of activist boards of directors.

Have fun.

John R.
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