Some good money reads from around the Web.

A strength of blogs (present company excepted!) is how they snappily zero in on the tastiest morsel in a smorgasbord of geeky data.

Update: This data is apparently an urban myth! Another strength of the Internet is its ability to spread information regardless of their truth, so let’s put the brakes on this one. Thanks to reader Tony who pointed to this rebuttal from Boeing.

Such was the case on Five Cent Nickel this week, which trawled this piece of writing on longevity [PDF] for one arresting table.

It shows how Boeing Aerospace workers who retired later died sooner:

Retirement Age	Age at Death
49.9	86.0
51.2	85.3
52.5	84.6
53.8	83.9
55.1	83.2
56.4	82.5
57.2	81.4
58.3	80.0
59.2	78.5
60.1	74.5
61.0	74.5
62.1	71.8
63.1	69.3
64.1	67.9
65.2	66.8

(Source: “Actuarial study of life span vs. retirement age” by Ephrem Cheng)

As blog author Nickel says:

Perhaps the scariest bit of data here is that those that work through the traditional retirement age of 65 only cash their retirement checks for an average of 17 months.

17 months!

Is that what you have in mind when you think about your future? That your “retirement years” will be reduced to little more than a “retirement year”?

One chunk of data does not a systematic review make: Boeing staff might have been particularly over-stressed, younger retirees might have been extra healthy (and they almost certainly were extra-wealthy, which has all kinds of positive impacts on lifespan).

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There now follows a whistle-stop tour of the features to look out for when choosing the best index trackers for your portfolio.

I use this rundown as a quick checklist to help me navigate the investing minefield without being reduced to bloody stumps. Even in the relatively benign terrain of passive investing, you can too easily choose a wealth-damaging product if you don’t tread carefully.

Note: I use the term index tracker here to refer to BOTH index funds and Exchange Traded Funds (ETFs).

I’ve split the checklist into four parts (watch out for parts two – four over the next few weeks), as it would be a lot to digest in one helping. Once you’ve bought your first fund or two, you should be able to skim through the checklist at speed, just using the big blue sub-heads to keep you on track.

First, choose your asset class

Each index tracker focuses on a specific part of the investable market. Do you want to hold equities or bonds, property or commodities?

You can keep things simple with total market type funds that hold a broad mix of an entire asset class. iShares MSCI World ETF, for example, represents the entire developed world equity market in one fund.

Alternatively, you can select exposure to subsets of each asset class.

• Most equity funds diversify by geography and size.

• Bond funds mostly diversify by geography, quality, duration and anti-inflation (or not!) characteristics.

Select the right index

Knowing which index your potential fund tracks is as important as knowing which route you’re going to take to work. You can’t get to where you’re going without that underlying understanding.

Google the index to find out:

• Which asset class it covers.

• How representative of the market is it? E.g. The FTSE All-Share covers around 98% of the UK investable market while the FTSE 100 accounts for less, about 81%.

• Is the index concentrated in particular sectors, companies, or countries?

• Is it liquid? Trading costs rise for stodgy indices.

• What are the index rebalancing rules? The more companies drop in and out, the higher the turnover costs (see checklist part two).

• Is it subject to any special rules? Most indexes are market cap-weighted, but some are price-weighted or select firms by certain fundamental measures.

• Which version of the index are you tracking? An accumulating fund should track a total return index. An income fund should be compared with a price return index.

• Do the index holdings overlap significantly with others in your portfolio?

Fund structure

Index trackers breakdown into index funds and Exchange Traded Funds (ETFs).

Index funds are simpler to use and have a longer track record of doing a job for passive investors. ETFs are innovative, more flexible, are multiplying like devil spawn and require a deeper understanding to use without hazard.

Index funds sub-divide into:

• Unit Trusts
• Open-Ended Investment Companies (OEICs)

The practical difference between those two structures is negligible for passive investors.

ETFs are part of the wider Exchange Traded Product (ETP) family that includes:

• Exchange Traded Commodities/Currencies (ETCs) – track oil, gold, cattle, renminbi etc.
• Exchange Traded Notes (ETNs) – a debt instrument for tracking hard-to-reach indices. Avoid unless you know what you’re doing.
• Certificates – Essentially the same as ETNs.

For completion sake, there are also one or two investment trust trackers on the market. They’re only worth a look if you understand the complexities of trading ITs at premiums and discounts.

Replication strategy

How does a tracker mimic its index? In order of preference choose from:

• Full physical replication – The fund holds every security in the same proportion as the index.

• Sampling/Optimised – The fund holds a representative cross-section of the index because it’s too expensive to hold every security. Replication is physical, but tracking error is likely to be higher in comparison to full replication.

• Synthetic – So-called synthetic ETFs use derivatives known as total return swaps to earn the return of an index, without having to hold any of its component securities. Swaps are good for tracking error but they expose you to counterparty and collateral risk.

That wraps up the basic criteria I think about when choosing the best index trackers out there. Part two of this checklist looks at costs, part three exposes some of the lesser publicised tracker wrinkles you need to know about, and part four looks at ETF-only quirks.

Take it steady,

The Accumulator

A few good reads from across the Web.

Some people should read more 1950’s science fiction to develop a sense of imagination, as well as to appreciate the impossibility of making accurate predictions about the future, even when you earn a living doing it.

The people to whom I’m prescribing a course science fiction (three times a week) are those people who will tell you there will be no jobs left in the western world by 2020 because we won’t make our own televisions, cars, or microwaveable meals.

“What will we do?” they lament.

More than a few of these blinkered thinkers – some of whom I count among my closest friends – are at the very upper-end of the intelligence spectrum.

In fact, I’d say intelligence is a curse when it comes to having a sense of the possible.

Smart people get used to logic, plans, causation and outcomes. But life doesn’t run much like that, and the development of human technology, society, and culture even less so. The pill, the smartphone, the personal trainer, the options trade, the £100 t-shirt – nobody foresaw any of that one hundred years ago. The biggest innovation of the next 20 years will probably also be something we’ve not yet even thought of.

Less clever people are regularly bemused by the world – as well as infuriatingly sanguine about human achievements to-date. Yet this sense of inevitability, that ‘they’ will invent something to sort out the problem, isn’t demonstrably less useful or even less accurate than the intricate fables to ruin that smarter people have been intoning since the Greeks.

This isn’t to say societies don’t fail, of course. They clearly do. But it’s very rarely for the reasons the gloomier predicted. History is more random than that, and we take steps to avoid the problems we can foresee.

• Monevator motto #23: Timebombs don’t explode.

Besides, even in the field of the futuristic, what goes around comes around. In Invasion of the body hackers, a very interesting piece of futuristic navel-gazing in the Financial Times this weekend, April Dembosky writes:

The concept of self-tracking dates back centuries. Modern body hackers are fond of referencing Benjamin Franklin, who kept a list of 13 virtues and put a check mark next to each when he violated it. The accumulated data motivated him to refine his moral compass. Then there were scientists who tested treatments or vaccines for yellow fever, typhoid and Aids on themselves.

Today’s medical innovators have made incredible advancements in devices such as pacemakers that send continuous heart data to a doctor’s computer, or implantable insulin pumps for diabetics that automatically read glucose levels and inject insulin without any human effort.

Healthcare is just one area ripe for tremendous new growth, even from its currently elevated position – the quest to preserve life has already begun to deplete the extraordinary wealth socked away by the Baby Boomers, and in 50 years time the Chinese and the Indian middle classes will follow.

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