Past Comments



Here is an article expressing my views on the notion of replacing 401(k) plans with a government option.

Close Hospitals & 401(k) plans

When we check into a hospital we know full well they are full of germs, viruses and sick people.  We also know that people are dying every day in hospitals, sometimes from infection but more often we are told the operation was a success but the patient died.  Those are the risks that society is willing to take because we all know there would be a lot more deaths and illnesses without them.  It is not society’s duty or responsibility to eliminate risk associated with hospital care. That risk cannot be eliminated but it can be managed by ensuring that hospitals meet certain standards of cleanliness and that the staff and physicians have the proper credentials of their profession.

Similarly, there is always a certain amount of risk associated with investing money in a 401(k) plan and some portfolios have died this past year.  But that ignores the fact that for many years millions of people have achieved a retirement lifestyle that would have been impossible without their 401(k).  One big difference is that we don’t allow untrained, unskilled amateurs to operate on people, but we encourage the least qualified investors, that no one else would hire, to operate on their 401(k) portfolios.

That is a danger that the Government could and should protect society against.  Yes, I know, last year even the professional portfolio managers lost money, but it was the participants who selected the highest risk most aggressive mutual funds right at the top that caused most of the losses. Alright, even if participants would have had access to professional portfolio managers to handle both asset allocation and manager selection, most of them would have lost money.  The difference is, most professionals would not have gotten out of the market at the bottom and would now have recouped a lot of the loss.

More importantly, there are times when even the most modern hospitals and qualified physicians are overwhelmed by dangerous events that spin out of control.  Remember the hospital in New Orleans that continued to provide medical services during hurricane Katrina…until the levees broke.  It had never happened before but with 20/20 hindsight the media and the politicians unanimously declared: everyone in the Federal, State and local governments should have known and been prepared for it.  There was even a call to prosecute the hospital staff for the deaths that occurred because the power went out and the building was flooded.  The solution was to fix the levees not close the hospitals.

We recently had a similar catastrophe in the financial markets.  The cover article of Time magazine on October 10th read, “Why it’s Time to Retire the 401(k)”.  Once again the media is telling us why everyone in the private and public sector should have known that a financial collapse unlike any that had happened before was inevitably going to happen.  It is time we face the fact that we live in a world of uncertainty – there isn’t any knowing.  We cannot eliminate risk but we can search for better ways to manage it.  The task now is to fix the financial levees that allow the flow of securities to benefit and not endanger the public. Closing down 401(k) plans makes as much sense as closing down hospitals.  Instead of exaggerating the occasional negative outcomes of risk taking by professionals, the Government and the media should encourage people to seek professional management in financial matters that they know little or nothing about.

Frank A. Sortino, Director

Pension Research Institute.

I welcome your comments

In my opinion econometric models are like wearing high powered binoculars to walk across the street.  You can’t see what really matters- Is it safe to walk or not?  What is even worse are the talking heads on TV.  They are unquestionably beautiful women and handsome men but most of them are there to entertain us, not inform us.

What I find useful is information about money and behavior.  When I read about trillions of dollars sitting in money market funds and the $ trillions the Fed is pumping into the markets while the Obama administration is trying to spend trillions more in an economic stimulus package,  I consider those to be the causes that will lead to the effect of positive economic results.  Too many forecasters are looking for the effects to determine when it is safe to walk instead of recognizing what has happened that will cause it.  By the time the talking heads announce the effects you will have to run to make it across the street.

When pessimism reigns supreme and all I hear is how “This could be worse than ’29”  I recall what the research in behavioral finance has uncovered.  Then I see the link between the talking heads and the reason investors are afraid and sitting on cash.  Fear sells television time even better than greed.  Let’s face it, investing for the long term is boring and doesn’t sell the products that pay for the constant interruption of commercials on financial news programs.  Speculating on short term moves is exciting and gambling, that’s highly leveraged speculating, is even more exciting.

On that note I solicit your comments on an  article in the WSJ  Aug 16 by Arthur Levitt Jr., former  Chairman of the SEC who claimed that high frequency traders provide a valuable service to institutional and individual investors alike and said “We should not set a speed limit  to slow everyone down to the pace set by those unwilling or unable to compete.” He then cautioned the SEC  to ignore complaints that “high frequency trading has no moral or economic value and is simply a game for those who want to profit from getting access to data a split second ahead of someone else.”

I look forward to your comments.

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The September 7th issue of P&I has an insert on “Commodities Investing.”  The pamphlet uses phrases like “Despite increased volatility” and, “a Regulatory Roller Coaster,” commodities are “No Longer A Sideshow.”  This begs the question, what is the difference between investing, speculating, and gambling and which one applies to commodities?  MPT proponents might claim that because commodities are highly uncorrelated with traditional asset classes they should be a desirable addition to all portfolios.

How would you respond to this claim?

2 Responses to Past Comments

  1. David Hopelain says:

    Arthur Leavitt, Jr. would have you believe that, with regard to financial regulation, “one size fits all.” That means that the rules applying to hedge funds and traders also apply to 40 year olds investing for retirement 25 years in the future. That makes as much sense as allowing Formula One race cars and drivers on the freeway, with the rest of us, and subjecting everyone to the rules of Formula One racing. The result, of course, would be everyone accustomed to driving 60 MPH would be on the center divider waiting for the freeway to close and the ambulances and tow trucks to come.

  2. David Hopelain says:

    Econometric models consist of two things: arcane calculations and data. The advice of the late statistician, David Freedman, is relevant: “(statisticians) can do all the arcane calculations we like but, if our sampling is wrong the results don’t mean (a thing). Do not use them to walk across the street or take an overnight hike, unless you already know the path. And, certainly, do not base your investments on them, unless you understand the calculations and believe the data.

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