All About Sectors and Investing

Sector funds, even low-cost index funds are risky and any adviser who recommends them is a shark attack. 

Sector funds, even low-cost index sector funds are risky, narrow part of the stock market, and must be avoided because they invest in only the companies that describe the fund.

[table id=11 /]

There are eleven sector funds available within the S&P 500 index:

• Communication Services: 9.9%
• Consumer Discretionary: 10.2%
• Consumer Staples: 6.7%
• Energy: 6.0%
• Financials: 13.7%
• Health Care: 14.9%
• Industrials: 9.7%
• Materials: 2.5%
• Real Estate: 2.7%
• Technology: 20.8%
• Utilities: 2.8%

Avoid sector fund investing. Any “adviser” who recommends a sector fund is a shark attack!

Here’s why: The percentage is their respective weightings by market capitalization. For example, technology has a 20.8% share of the S&P 500 index, and Utilities has a much lower exposure in the index at 2.8%.  The calculation of the capitalization is the total number of shares owned by investors and institutions x the current market price per share. The companies in the technology sector are more valuable than all of the other sectors. That doesn’t mean it is a good investment.

Finding the appropriate value of the company and its stock is complicated and beyond the purpose of this shark attack principle. What I can say with certainty is that some of the company stocks are overvalued, some of the stock prices are about right and the rest are undervalued. Meaning that some company stocks are worth more, about right or less than the actual value of the company going forward. The Intelligent Investor by Benjamin Graham devotes his entire book on how to assess companies’ value so that you can make an intelligent investment in those companies where the stock is below the value of the company.

The point I want to make here is putting most or all of your money in one or two sectors is not wise. I have personal experience with having a ton of money in the technology sector back in early 2000. We all know what happened from 2000 to 2002. That sector crashed as though it was an individual stock! I was not diversified even though the technology sector had hundreds of technology companies. I was not even close to being diversified. So by investing in the Total Stock Market Index includes all of the above sectors in this single fund. How cool is that! As the table says, the fiduciary mandated financial adviser will recommend the “repellent” broad diversification, NOT SECTOR INVESTMENTS!

Let’s review briefly the definition of a financial shark attack. Sharks are natural and dangerous predators. They don’t discriminate between humans and other prey. Movies and stories revolve around sharks since the famous shark movie of the 1970s, and perhaps of all time, JAWS!

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Steve’s BIO

Stephen A. Schullo, Ph.D. (UCLA ’96) taught in the Los Angeles Unified School District (LAUSD) for 24 years from 1984 to 2008 and UCLA Extension teaching educational technology to student teachers.

Two Annuities! YIKES

When I was a young teacher back in the ’80s, I bought two annuities, commonly called TSAs (Tax Sheltered Annuity). Later, when I learned that annuities are not a good plan for building a long-term retirement nest egg, I had discovered on my own, that lower cost and genuine investments, mutual funds, were also available. The first question I asked is why didn’t anybody in the district tell me this? Worse yet, when I asked district benefits for the list of low-cost mutual funds (called no-load), they refused! I was instructed to write them down on my own paper! What was wrong with this picture?  I wanted to invest 100% of my money in one of the lower-cost investments that was already on the approved list! Instead, the district treated me like a barnyard parasite for asking.

Something was seriously wrong when I also discovered that my union only selected high-cost plans on the “Union Approved” list (the union-approved process was terminated in 2008. Thank Goodness!). I wanted to stop this self-conflicted 403(b) system of our union members getting sold high-cost and non-investment products, annuities. Throughout the world of economics and investing, almost every expert says that annuities have high costs and pathetic returns. An annuity is an insurance product that is wholly inappropriate for building a nest egg because of the high costs. It is inappropriate because LAUSD educators already have a guaranteed retirement plan, our CalSTRS pension. We do not need another guaranteed plan. What was insane is that nobody was talking about this in any public way. UTLA had a retirement committee that I attended for years and their focus was on CalSTRS, our pension plan.

Yes, nobody, not the unions or the district in any public way openly discussed the 403(b). So I started writing letters to the board of education and benefits personally asking these questions. The UTLA union newspaper editor got wind of what I was doing when I sent him an article explaining the situation. I got lucky that the UTLA union newspaper editor happily accepted my articles. Thus for the next 12 years, I wrote about the 403(b) low-cost alternatives for the United Teacher-Los Angeles (UTLA) union newspaper from 1996 to 2008. Many union members responded positively. They emailed or called me at my worksite. I was an elementary teacher at Leo Politi.

I also got lucky when I reached out to the mainstream print media. Over the years, I have been featured and quoted in many mainstream media articles about 403(b) plans, including the Los Angeles Times, NY Times, and U.S. News and World Report. As a result of the Los Angeles Times article, I found LAUSD colleagues who had the same concerns and wanted to do something. With a new friend, Sandy, we co-founded an investor self-help group 403bAware for teacher colleagues. In an attempt to change state law that protected insurance sales-people rather than teachers, I testified at California State legislative hearings. I eventually was recognized and honored with the “Unsung Hero” award by my teacher’s union for my retirement planning advocacy.

For the last 14 years, I serve as a volunteer on LAUSD’s Investment Advisory Committee as a “Member-at-Large” and former co-chair. The committee contains collective bargaining reps from the unions and monitors the district’s new tax-deferred retirement plans, 457(b). When this plan was launched in January 2007, it began to reflect my image of low-cost genuine investments, what my colleagues and I were asking for. No annuities! Over the years we swapped out the higher cost mutual funds for lower-cost index funds from Vanguard and Blackrock. As a result, LAUSD won a rare Plan Design Award in 2014 from the National Association of Government Defined Contribution Administrators (NAGDCA). As of June 2020, 11,000 LAUSD employees with about $200 million in combined assets are invested in the 457(b).

LAUSD’s 60-year-old 403(b) has $2.8 billion in total assets. After all of these years, the annuity sales force never gives up. They continue to sell their high-cost plans with no end in sight! The district has a policy of prohibiting on-site presentations of 403(b) products or meeting with teachers in the school cafeterias, professional development workshops, and in teachers’ classrooms during recess. But the “sharks” openly violate the policy. 80% of those assets are in high-cost annuity products or high-cost mutual funds with expensive advisory fees.

There are two low-cost plans available on the 403(b), CalSTRS Pension2, and the giant pension familiar to higher education faculty, TIAA.

I started this blog in 2012 to help all PreK-12 public school educators nationwide, especially his Los Angeles Unified School District colleagues. I belong to a small national group of 403(b) advocates (mostly teachers) who want to bring closer attention to the 403(b).

During the last 25 years, 40 newspaper articles have been published and each one says the same thing, TSAs (Tax Sheltered Annuities) are terrible 403(b) plans. The only person who benefits is the salesperson with lucrative commissions and high-costs, and complimentary trips to the highest salespeople to Tahiti, Hawaii, and other exotic places. Nobody in educational leadership reads these articles NOR talk about the proper place for annuity products publicly.

Together we can fix the 403(b).

We come together at 403bwise.com and 403bwise Facebook page https://www.facebook.com/groups/349968819000560/ Come on over if you want to join us so we can help our colleagues avoid these self-conflicted and high-cost Tax-sheltered Annuities (TSAs).

I was so angry that I was taken advantage of that I authored two books, Late Bloomer Millionaires and Fighting Powerful Interests: Educators Challenge Tax-sheltered Annuities and WIN!, a story of how a handful of LAUSD educators struggled for years to improve the 403(b). Fighting Powerful Interests is specifically written for LAUSD teachers! This book expands on my story with LAUSD, UTLA, and AFT where I was on the selection committee in 2002 when AFT was selecting a national 403(b) vendor. It is all there and it is fascinating! (even if I am the author! LOLs). You will learn the business of tax-deferred retirement plans with LAUSD and how to become a savvy investor to grow your volunteer supplemental retirement plan.

I have learned that most people want to do the right thing for all LAUSD employees but powerful obstacles own interests block reform. Find out what they are by reading Fighting Powerful Interests, so together we can fix the 403(b) for future generations of teachers.

One definite answer to the high cost 403(b) is the non-biased and low-cost 457(b) plan. You will learn firsthand what is the 457(b) plan and why one insightful and compassionate benefits administrator brought it to LAUSD. He also asked my friends and me to serve on the volunteer advisory committee.

My LAUSD friends and I never quit either! As mention before, we were instrumental in LAUSD’s implementation of the new 457(b) plan and earned a very rare, but very precious “Plan Design” award.