February 23, 2010
This is timing risk and it is why active activists measure themselves using time-weighted returns instead of dollar weighted-returns because they cannot control WHEN they will outperform for any particular client which is what is needed to actually produce more wealth (luck sometimes works too).
If we are going to call ourselves wealth managers (see: Measuring Temperature with a Ruler – Is Your Wealth Manager Really a Return Manager in Disguise?) it is time we stop playing this misleading statistical game that deceives investors into thinking that higher returns or lower standard deviations will necessarily have a monetary benefit. They could, but they might not. Try spending a percentage return or low standard deviation at a grocery store if it is NOT backed up by dollars of wealth!
So, in my $2 Million Charity Challenge, I reject the idea of just one lump sum being invested with no contributions or withdrawals (how many of your clients neither save nor spend money?) and measuring things on statistics that do not necessarily equal dollars of wealth. Instead, how about we make a bet that is more realistic to real people and measure it in dollars rather than potentially misleading statistics?
I challenge twenty active (or passive or pseudo-passive) managers to put up $100,000 each in the form of ten years of annual $10,000 contributions deposited to the account the first business day of each calendar year starting January 2, 2011. Isn’t this more like a real client? Don’t you have some clients that are accumulating wealth? At the end, we simply measure the dollars in the account…no misleading statistics that can’t be spent!
Any active manager whose account value after a decade (measured as the portfolio value on December 31, 2020 net of all costs) beats the dollars in our net-of-fee Growth Portfolio (available to any of our 401(k) plan participants) wins and they choose the charity for their account value and we kick in an extra $10,000. If their account (or whatever is left of it) is less than our account value, we get to pick the charity.
While I didn’t invite Schreiner in my original bet, he and any others who wish to take this challenge on are welcome to join in. I know some will beat us, but I know many will not. The odds are in my favor because we aren’t taking non-systematic risk and are likely to have far lower expenses. Just like the tables in Las Vegas, some will win against us despite the odds being against them. But that doesn’t mean that gambling in Vegas is a winning bet. So, in reality, like Schreiner and even more like the tables in Vegas, my deck is stacked against my challengers too. The funny thing about that is that my challengers won’t admit they are making a bet against a stacked deck, even though I’m telling them they are up front (unlike Schreiner). But, at least it is a game where challengers have a chance to win (like Vegas) and measures what matters… dollars.
The full rules of the contest are available here.
A popular industry speaker and writer, David B. Loeper is the CEO and founder of Financeware, Inc. in Richmond, VA,. He is author of the top selling book Stop the 401(k) Rip-off!, three other books being released in 2009 by John Wiley & Sons (Stop the Retirement Rip-off, Stop the Investing Rip-off and The Four Pillars of Retirement Plans) and numerous whitepapers. He has appeared on CNBC and Bloomberg TV, served on the Investment Advisory Committee of the $30 billion Virginia Retirement System, and was chairman of the Advisory Council for the Investment Management Consultants Association (IMCA). Before founding Financeware in 1999 he was Managing Director of Strategic Planning for Wheat First Union. He earned the CIMA® designation (Certified Investment Management Analyst) from Wharton Business School in 1990 in conjunction with IMCA.
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