Forum Mailbag: Mutual Fund Underperformance, Telemedicine, Bond Ratings, and More!

There is so much great information on personal finance forums. I regularly participate on several message boards, including Bogleheads, White Coat Investor, and Rockstar Finance. This is a roundup of my favorite discussions happening around the internet.

1. Bogleheads: Why Mutual Funds Underperform

Question: Matjen posted an article from Bloomberg, “The Math behind Futility”. He was looking for the community’s thoughts on this article, which argues that the skew of returns on individual stocks explains why so many mutual funds underperform the S&P 500.

WSP’s Take: This was a very interesting article and does explain why we see 75% or more of mutual funds underperform the market each year. The explanation goes like this: the returns of individual stocks are not distributed normally (like a bell curve). There is a skew to the left, because each year there are a handful of stocks that do very well, shifting the average return up and leaving most stocks to do worse than average. It’s kind of like how you got 100% on the test when most students got 50%, but your 100% pushes the average from 50% to 55%. Because you “broke the curve”, most students will do below average.

Because mutual fund managers hold a basket of individual stocks, their returns are distributed in the same way. Using our test analogy, the S&P 500 got a 55% on the test, while most mutual funds only got 50%. This is why more than half of mutual funds underperform the market.

While I think this is an interesting statistical phenomenon, the ultimate reason why investors underperform the market is because of high fees, not because of skew. While most mutual fund managers will underperform the market, those that overperform more than make up the difference. Unfortunately, you cannot know in advance which fund managers will outperform the market. In the absence of fees, your expected return would equal the S&P 500, although in any given year, you are more likely to underperform. It’s the fees that mutual funds charge which erode your returns, not the skew.

2. White Coat Investor: Telemedicine Apps

Question: Jsr52 noticed that there are a number of telemedicine apps which allow you to interact with a doctor without physically going to their office.

WSP’s Take: I believe telemedicine will eventually become part of the medical system. However, it is still in its early stages and experiencing some growing pains. For example, I read an article in JAMA Dermatology last year which tested several dermatology telemedicine platforms with hypothetical cases. They found that most telemedcine platforms were excellent in routine diagnoses that r

equired evaluation of the skin lesion alone, without an H&P. However, the telemedcine platforms did terribly when faced with diagnoses that required you to get an H&P. For example, most of the telemedicine systems struggled to diagnose polycystic ovarian syndrome in a female with acne, because they did not get pertinent additional history (obese, amennorheic).

3. White Coat Investor: Store Closings = Recession?

Question: Resident_1 has noticed that a number of retail stores in his area are closing. He is worried that this could be an early indicator of an upcoming recession.

WSP’s Take: Brick-and-mortar retail and malls have been taking a beating in the past 15-20 years, as consumers do more and more of their shopping online. As a result, many stores have been closing and their employees have been laid off. However, this does not mean that a recession is looming. This is simply a consequence of consumers shifting their spending from physical stores to online. If stores were closing because consumers were spending less money, than I would be concerned. I don’t see any indications of that, with consumer confidence continuing to rise.

4. Bogleheads: Can We Trust The Ratings of Credit Ratings Agencies?

Question: SpideyIndexer notes that the major credit ratings agencies (Standard and Poors, Moody’s) did not correctly rate many of the mortgage-backed securities that

caused the financial crisis of 2007-2009. He was wondering whether he could trust these agencies’ ratings of corporate bonds today.

WSP’s Take: It is true that the credit ratings agencies terribly misrated mortgage-backed securities during the financial crisis. However, this is because they were new, complex securities which required very complex models to value. Their model was incorrect, and securities that were rated AAA ended up being far from it.

However, the rating of corporate bonds is much simpler, as it is just an assessment a company’s risk of default. This is something Standard & Poor’s and Moody’s have done for decades. I would expect them to more likely get it right. Further, Moody’s bond ratings are of little consequence to an investor who puts their money in broad-based bond index funds. If a few “investment-grade” bonds are misrated and are actually high-yield bonds, it’s not a big deal.

Wall Street Shares: 5 Articles I Enjoyed Reading This Week

It’s been a great past few weeks for the Wall Street Physician blog. My articles were featured multiple times around the internet:

1. White Coat Investor highlighted my article about the Saver’s Credit in his April 2017 newsletter.
2. Physician on FIRE featured my article about Wall Street and poker in his Sunday Best
3. Dads Dollars Debts included my article about the Fed rate hikes in his Hump Day roundup
4. Life of a Med Student featured my article about the moving expenses tax deduction in his Wednesdays Around The Web
5. Rockstar Finance featured my Vanguard three-fund portfolio article on their home page on 4/12/17. Thank you also to The Financial Diet for picking up my article as well.

As a result, the blog saw an all-time high in traffic this week. Thank you to all of the bloggers above for featuring my work, and I thank all of you for stopping by the blog. Alright, enough about me, let’s get to the roundup:

1. Physician on FIRE: I’m Equal Parts Doctor, Scribe, and Mouse Jockey – PoF rants about EMRs and documentation; I think all doctors can relate to his experiences.
2. Some Random Guy Online: New Attending Physician Baby Steps – Modeled after Dave Ramsey’s baby steps, this is a great article about the small steps new attending physicians can take to improve their personal finances.
3. Picky Pinchers: Things That Don’t Actually Matter – It’s always refreshing to take a step back and think about what’s really important (and not important) in life.
4. The Biglaw Investor: I’m Paying $7/mo for My iPhone Plan – I’m not going to switch, but this is a clever way to save a ton of money on cell phone service.
5. Rogue Dad, M.D.: My First Mistake – I respect this pediatric emergency doc for writing publicly about his past mistakes.

What do you think? Do you agree or disagree with any of my responses? What’s your take on the topics in this week’s forum mailbag?