The following are in response to last week’s article, It’s No Shell Game, by Roger Schreiner, which was in response to Dave Loeper’s article the previous week, The $2 Million Charity Challenge to Active Investors:
Mr. Loeper,
If you want to make the playing field more realistic, you would not set up your challenge based on “dollar cost averaging” (a $10,000 deposit each year). Investors’ cash flow behavior varies. A better challenge would be to have three scenarios – one with a lump sum deposit, one with annual contributions (per your original proposal), and a third, (more pertinent to retiring boomers!) with annual distributions!
Why not analyze how a varying “sequence of returns” will affect that last scenario! Too many advisors and investors still do not understand this reality.
Why not discuss and propose these scenarios for a more realistic challenge of active versus passive investing.
What do you say?
Sincerely,
William E. Sawyer, CFP®
Conservative Asset Management, Inc.
Louisville, KY
Dave Loeper responds:
Bill:
I agree that each client has different cash flow needs, desires, and goals. The timing risk of when returns occur will impact the outcome. In some cases there is a positive impact and sometimes there is a negative impact, but it has nothing to do with the fiction of dollar cost averaging.
The scenario I proposed was a real scenario…people do accumulate money towards future goals. For you to win that bet, you would have to make sure you do not underperform in the last two or three years when there is a lot of money at stake. Ironically, my proposed bet still stacks the odds against me because if you outperformed at any time along the way, all you would need to do is replicate our portfolio for the remaining period to make sure you do not underperform after most of the wealth has been accumulated.
If we modeled a client with the goal of distributions, you had better make sure you don’t underperform in the first couple of years when the client portfolio is at peak wealth.
I’ll gladly accept your bet provided we choose one client scenario instead of several where random luck of when superior or inferior returns occur will no doubt produce at least one winner for you. How about one that accumulates for five years and distributes for five years? You better hope your investment style doesn’t underperform in years four, fix or six. Can your active management approach control which years in a life-goal plan you will outperform?
You are basically admitting that “superior” market relative returns represent no real value to any particular client because you have no control over whether an active management bet will be a win for any particular client, even if it wins on a risk and return perspective. What is your value to a client who is distributing wealth when you underperformed the year they were at peak wealth? What is your value to a client accumulating wealth who was harmed by underperformance during later years?
Active management continuously subjects the investor to a risk of underperformance at the wrong time for their unique wealth plan. Hopefully, when you make such gambles you accurately disclose this risk to your clients and share the reality with clients that the risk of underperforming at the wrong time can be avoided with certainty by indexing.
We are about managing the wealth of each unique investor’s life goal plan. I can’t do that if I subject them to uncertain timing of market relative returns. As you acknowledged, nor can you.
David B. Loeper, CIMA®, CIMC®
President/CEO
Financeware, Inc. DBA Wealthcare Capital Management
