From Low Cost to No Cost–the Index Fund Has Won

This month, the investment giant Fidelity began to offer two broad-based index mutual funds with zero purchase and management fees and no minimum investment.

This is the latest salvo in a healthy competition between mass-market investment giants Vanguard (which started the index fund revolution under the leadership of Jack Bogle), Charles Schwab, and Fidelity. The result of the competition is a victory for main street investors, who traditionally have played the role of peasants forced to pay lordly fees.

As the Wall Street Journal quipped in their coverage of the story, “the race to zero in the investing world has finally reached bottom.”

Hurrah.

The two funds in question are variations on very broad indexes. One is US domestic (Fidelity ZERO Total Market Index Fund aka FZROX) and resembles the Russell 3000 index–a proxy for the total US market. The other is international (Fidelity ZERO International Index Fund aka FZILX), which buys the top 90 percent of stocks in terms of market capitalization in every market outside the US).

Fidelity also slashed the cost of most of its other index funds, which is great for folks like me with Fidelity retirement accounts.

Looking at their SEC filing to open these funds is kind of thrilling. Zeros all the way down. I got the filing from the message board Bogleheads, where there is a lively discussion about this development. If it were just marketing hype, these diehard index investors would be pointing it out, but the consensus seems to be that this is real, not smoke and mirrors.

An old chestnut on Wall Street, the title of a humorous book by Fred Schwed, is a rhetorical question: Where are All the Customers’ Yachts?

Nowhere. The customers got skinned. Their pelts where hung on the wall.Michael Lewis and others wrote some amusing books about this.

A businessman named Jack Bogle started Vanguard in the 70s with a counter intuitive idea: stop buying yachts and instead return the profits to shareholders. The company would function as a quasi nonprofit, where the shareholders functioned as owners. This structure allowed any profits to go toward making it cheaper to invest. For many years, Vanguard stood alone as the low-cost, investor-first option.

Within the past decade massive amounts of money have flowed into index (or “passive,” since they passively track market indices) funds for good reason. Here is some data from CNBC:

Flows out of actively managed U.S. equity mutual funds leaped to $264.5 billion in 2016, while flows into passive index funds and ETFs were $236.1 billion, according to data provided by the Vanguard Group and Morningstar. That was the greatest calendar-year asset change in the last decade, during which more than $1 trillion has shifted from active to passive U.S. equity funds.

This makes sense. Index funds usually reflect the best deal for a retirement investors and other casual market participants. Fidelity, Charles Schwab, and others such as Black Rock started to compete with Vanguard in order to capture as much of this avalanche of money as possible.

The big difference between Vanguard and these companies is that that they have a more limited ownership structure. Much of Fidelity’s owership is the private property of the Johnson family.

When a family-owned private company — one that built its reputation on active money management a la Peter Lynch — starts to offer market access without cost, that is a breathtaking development in my book.

So where will the competition go from here? Likely further in the everyday investor’s interest.A lot of the talk on Bogleheads was about how technically Fidelity’s move makes the cost of their funds comparable to Vanguard’s since Fidelity makes profit loaning stocks, whereas Vanguard returns these profits to shareholders. Yet Vanguard, which is massive, may move to match lower costs.

Of course many investors may retreat from index funds during the next protracted bear market. But for folks who can hold on throughout the cycles, no fee index funds are a gold mine.

Book Review: Flow by Csikszentmihalyi

flow

One hallmark of good philosophy is timelessness. The observations of Plato and Aristotle are relevant today. Much has changed since the dawn of Western civilization, but the best philosophy survives and thrives. People have been reading Lord Montaigne since the sixteenth century, though his stature as a lucid and wise thinker continues to grow.

Most people would probably use the word psychology rather than philosophy to describe Flow, the Psychology of Optimal Experience, a book that psychologist Mihaly Csikszentmihalyi published in 1990. Cracking it open, I fully expected to read a typical psychology book: A few narrative vignettes with clunky references to research studies. This, in my opinion, is often the weak point of books that strive to give the impression of scientific rigor. I’m all for scientific rigor, but the emphasis on detailing experimental process rather than meaningful synthesis is, in a word, boring.

On the contrary, to my surprise, Flow is one of the most elegant, succinct, well-written, and persuasive philosophical works I’ve encountered. It has almost instantly become one of my favorite books–one to which I hope to return over and over. It’s that good. Instead of experimental weeds, the book delivers a landscape of human potential. It navigates this landscape with the hypothesis that climbing the highest heights requires the practice of flow.

What is flow? Csikszentmihalyi’s composing this book undoubtedly exemplifies flow, which he describes as follows:

The optimal state of inner experience is one in which there is order in consciousness. This happens when psychic energy–or attention–is invested in realistic goals, and when skills match the opportunities for action. The pursuit of a goal brings order in awareness because a person must concentrate attention on the task at hand and momentarily forget everything else. These periods of struggling to overcome challenges are what people find to be the most enjoyable times of their lives. A person who has achieved control over psychic energy and has invested it in a consciously chosen goals cannot help but grow into a more complex being. By stretching skills, by reaching toward higher challenges, such a person becomes an increasingly extraordinary individual. (p. 6)

Flow is thus a kind of trance in which one’s best work is done. It is the state in which a person can reach their highest potential. It can involve creative intelligence as easily as bodily strength, and my guess is that it typically involves both.

What follows from this description of flow is Csikszentmihalyi’s brilliant synthesis of how flow can be generated and controlled, how positive meaning can be discovered in life, and how this discovery process within each individual has bearing on the future of humanity. Sounds philosophical, right? I thought so too. I believe that with this book, Csikszentmihalyi fully became the extraordinary individual he describes.

Flow was published a few years before the internet became commonplace (manual typewriters were still used) and just as the collapse of the Iron Curtain gave rise to new geopolitical realities. To return to the observation that good philosophy is timeless, reading this book helps me better understand today’s dilemmas. The author spends a good deal of time discussing the human tendencies and actions that tend to prevent flow: things like retreating to the television set at the end of the day and allowing perception to be pushed around by profit-oriented mass media. Csikszentmihalyi thinks that the natural state of the human mind is chaotic, and that ordinary life is characterized by entropy. Flow is the ability to overcome the chaos and temporarily hold entropy in abeyance.

How does this relate to today’s issues? I think the reactionary politics we have in 2018 is fueled by people not becoming citizens, which requires education and effort. Instead of being citizens, they consume ideas marketed to them online and on TV. Trump shaped a popular perception through reality TV. The ads worked, but they masked the man’s chaotic nature. In the future it may be someone of more progressive persuasion that does the same. We live in a time characterized by a sense of increasing chaos. Entropy is no fun. Those who can master the art of flow have an opportunity to help change this reality, at least for a time, and lead the way to less chaos.

In short, this is an inspiring book–one of the best I have ever read–and I highly recommend it to anyone.

 

The rechargeable battery theory of running

So much in life comes down to a simple principle: use it or lose it. This principle applies to the mind as well as the body. Our muscles and neurons are like rechargeable batteries which can have a remarkably long life if they are consistently utilized. I perceive this principle quite strongly when it comes to running: the more I run, the easier it gets to run, and the healthier I feel. Running is like charging up a battery in a car by driving for a half an hour on any icy cold day. It helps ensure that the battery will start up again the next day, and the day after that.

A few observations help validate this principle:

Getting started in running can be as frustrating as trying to turn on a car with a dead battery. Many people need a jump start in the form of a coach, a friend, a goal, or a challenge. The main obstacle in the beginning is the desire to quit. But with some persistence the energy level in the battery starts to rise. For this reason, I think beginner runners should limit the number of expectations they have on themselves (speed, etc.) and simply concentrate on building up mileage. Once the battery is brimming with a full charge, new goals can set that go beyond simply getting out there.

Running is also immensely popular among those in middle age. It’s entirely possible to peak as a marathon runner in one’s 50s, and I see it a lot in the runners I follow on Strava. These elders are real road warriors who tend to stack up miles in a methodical way. Their training level makes most of their workouts practically effortless unless they are throwing a speed workout into the mix, which they do strategically when training for races. A lot of folks qualify for Boston when they hit their 50s. This is in part due to the easier qualification time limit, which is a bit more lenient, but not much. You still have to finish a qualifying marathon in 3h 30 min until the age of 55. Yet I’ve seen this awesome feat, which only a small portion of all runners can achieve, completed by people I know. They are not superhuman. They are just very motivated to keep at it. I get the sense that rather than becoming more tired, running makes them more energized. This makes me think that our battery life can extend into old age, and following the use it or lose it principle, improve the quality of old age.

Too bad so much of contemporary life conspires against us filling up our batteries. The rat race keeps us sitting (or standing, for the clever) at a desk, and the built infrastructure keeps us driving around in a “clown car lifestyle” to quote Mister Money Mustache. I keep waiting for the day when my beloved running trails in the DC area are flooded all the time with people who know how to live the good life. But no, even in a super running and bicycling-friendly region, the trails remain remain tranquil except during peak weekend hours.

My prediction for the future, perhaps in my daughter’s generation (she is now in elementary school), most people will have a much clearer picture of their battery condition. She and her peers will have a wealth of data about how healthy they are for their stage of life, how healthy they could be, and hopefully they will set their goals accordingly. If I were a city planner, I would be building more trails for all generations so everyone can have a place to recharge.

Eventually our batteries wear down so they don’t fill up as well, and life continues after that. But I’m inspired by people I’ve met who are bullish on their battery, who take the time to stoke it.

 

 

 

Trails: the Washington, DC, area’s secret strength

Washington, DC,  and its environs may be known for prestige and politics, but these are among my least favorite aspects of this region I call home.

What is the best aspect?

The trails.

The trails frame the region’s abundant natural beauty. They flow through the traffic-clogged landscape, offering a secret source of strength and tranquility for anyone to discover.

The mighty Potomac river with its whitewater and rocky cliffs at Great Falls is flanked by one of America’s best dirt trails (the 184.5-mile C&O Canal Trail).

CO_Canal_Trail_-_Winding_Path
The C&O Canal Trail (image:Wikimedia)

The C&O Canal Trail offers a superior walking, running, or biking experience. You can also fish in the canal or the Potomac. Parts can be crowded, such as the area around the Great Falls Overlook, but for the most part its a simple rustic wonderland. The views are excellent. You’ll also find 19th century ruins along the path.

This trail alone is consolation enough for the Beltway and Congress.

Want to take in the city’s architectural splendor from afar, check out the Mount Vernon Trail that stretches between the Key Bridge (across the Potomac River from Georgetown) and Alexandria, Va. This is a great way to see the Tidal Basin and the city’s low-profile skyline from the riverside trail.

Another gem is the Rock Creek Trail, which descends to Georgetown through Rock Creek Park from Lake Needwood near where I live in Rockville.

These are just three (admittedly my top three) in a region stacked with gems. Other favorites include the W&OD Trail and the Sligo Creek Trail. A bit north of the city is the epic Seneca Creek Greenway Trail, which is long enough for a trail ultra-marathon. These trails are likely a big reason why the DC often tops lists for America’s fittest city (this year it gave up the #1 spot to the Twin Cities, another place with awesome trails).

But you don’t need to be an endurance athlete to appreciate the DC area’s secret strength.  As Lao Tzu may once have said: a journey of 10,000 miles begins with a single step.

The Q Bus Lives

Today I checked the Washington Metropolitan Transit Authority’s “better bus” webpage and clicked on the slate of upcoming service changes for 2016. To my surprise and delight, the Q bus I ride each day between Rockville and Silver Spring will survive and live another day, at least for the time being. Metrobus will put aside a plan to chop the line in half and force folks to transfer at Wheaton Station.

Last fall they collected feedback the plan that would have ended the eastern (Georgia Avenue and Silver Spring) portion of the Q line, which extends to Shady Grove at its Western end.  The plan would have stopped the line at Wheaton Station, and passengers traveling to Silver Spring would have gotten a free transfer onto the Metro line. Going the other way, passengers transferring on to the Q line from the Metro line would ride the bus free.

Why was this idea seriously considered and almost implemented? Beltway traffic on Georgia Avenue north of Silver Spring is predictably snarled, particularly during the evening northbound rush. With Y line buses already covering this part of the route, why not remove the cross-county Q buses from the congestion?

I disagreed fundamentally with the plan. The buses are a engulfed in a sea of passenger-less cars. They are a rafts of sanity and fiscal sense on these nasty currents of wasteful driving. Why punish those trying to make a positive difference by taking public transportation? I realize something has to give, but cars can’t just win because they are harder to control. Seemed like punishing those with the weakest voice (poorer riders) to accommodate people rich enough to drive solo.

Along with 473 other riders, I filled out survey on the proposed change (in my case by going to their website). The results of the survey reflected some of my own concerns and are nicely summarized in the service change document, and I quote them below:

Route Q1,2,4 Service and Tariff Proposals (referred to as Q Line)
Q Line customers weighed two proposals which at first blush are offsetting: the first is to receive a free transfer between Q Line and Red Line and the second is to cut the Q service back at Wheaton station forcing a transfer. As you might expect, Q Line customers rated the free transfer as positive and the service reduction as negative.
A closer look was taken to segment customers who were positive of both changes, one or the other, or were negative about both changes.
Just 11 percent of Q Line customers were positive about both the free transfer and service proposal. Another 46 percent preferred one or the other, mostly positive toward the free transfer and negative by the service reduction. Finally, 43 percent were negative toward both proposals.
Written sentiments seem to echo this negativity. An additional in-house survey was conducted by the CSCM team on-board the Q2 and Q4 bus lines between 7:00 a.m. and 6:00 p.m. on Tuesday, September 29th, 2015 to collect additional data for the equity analysis. The survey results were consistent with the predominantly negative
sentiments reflected in the feedback gathered through the online survey, as described above.
Overall, service changes to the Q line would affect 76% of the riders surveyed on-board. The results showed a strong preference for bus over rail, with only 19% of respondents saying they would switch to the Red Line for access between
Wheaton and Silver Spring, if the Q Line service were to be cut. In terms of ridership, empirical evidence showed the north-bound Q line buses to be mostly full between 7:00 a.m. – 8:30 a.m., while the south bound buses were generally full throughout the day.
At the end of the document, Metrobus staff give their recommendation: “do not implement.”
Hurrah.
To put this in a larger context that’s easier to understand, I believe this represents a significant win for poorer riders–those who don’t have cars or can’t afford parking in particular–who need to commute across Montgomery county. Those going almost the entire route won’t be forced to transfer. Although this doesn’t solve the problem of snarled traffic, it at least doesn’t punish those who contribute to a more sensible commute for everyone. Now let’s start working on a better, cheaper, cleaner, transportation system.
Reading the document was also a refreshing taste of democracy in action. I learned how seriously Metrobus takes socioeconomic equity issues, and support the methodology overall. I might be signing a slightly different tune had the decision been opposite, but I still believe I’d respect the amount of work they put into their surveying (including sending out surveyors to capture the voices of riders unlikely to fill out online forms).

No more Dave Ramsey podcasts

For the last few months, I’ve tuned into Dave Ramsey’s radio show via podcast. There’s a lot to like about his simple method of getting and staying out of debt. America would be a better place if more people did something to get a better handle on debt. Henry David Thoreau made a similar point about signing one’s life away, and lamented how most men led lives of quiet desperation.

But I’ve decided that despite Dave’s strength as a teacher, the human interest of the people who call into the show, and the clarity of Dave’s ‘baby steps,’ aspects of the show trouble me enough that I have a hard time listening any further.

The things that bother me are:

  • The endless promotion of his network of financial advisers, insurance agents, and staged appearances
  • His rejection of DIY passive investing (the kind you can learn about on Bogleheads.org), which is a good option for individual investors who hope to avoid being ripped off
  • The clear relationship between the first and second points above
  • And then personally, the references to collecting guns as a hobby. I kind of enjoy his political rants, even through I usually disagree with them, because I can learn more about the perspective of the religious right. Collecting guns for fun, though, just reminds me of America’s tragic problem with guns.

So while I am grateful to Dave for constructing a good system to think about debt, I’m not about to become his customer.

**

The Roman emperor Marcus Aurelius coached himself to  “waste no more time arguing about what a good man should be. Be one.” That was about 1,845 years ago. His words, and those of Thoreau, echo through time. Easy to say, hard to achieve.

The machine never died

After a long journey with my friend Runzour, this Polar RS200 has been reborn to serve a new master.
After a long journey with my friend Runzour, this Polar RS200 has been reborn to serve a new master.

Today I spent $27 on batteries to relaunch a circa-2007 “running computer” given to me by my friend Runzour. While I was deleting his data, I noticed that he had logged more then 4,000 kilometers with it. The chest strap is weathered from use. This is ancient by today’s running-watch standards, but that gives it some character. Many physical objects don’t acquire much character during their first decade of use. The torch is passed. The machine never died. It was just sleeping, temporarily out of juice.

For someone who does as much running as I do, I’m a bit of an anomaly in that I’ve never used a running watch. Thus this is my first foray into this technology. One upside is that all the data the watch produces is intrinsic to this machine, as it has no connection to GPS.