Whether a simple language blunder or insight into the psychology of the rich and powerful, Svanberg’s comments touch on a belief held by many – that in this world there are rules for the privileged and then rules for the rest of us little people, conjuring up memories of the late Leona Helmsley’s famous statement that, “only the little people pay taxes”.

Wall Street is founded on the little people premise. One manifestation is seen in the ubiquitous conversation by wealth managers about AUM or Assets Under Management. AUM is the measuring rod of their success and compensation -a topic of their urbane, cocktail-party banter. Every wealth manager or investment adviser is aware of his AUM as well as that of their friends and competitors because it indicates how much one earns.

Wealth managers trim 1% to 1.5% in fees off of “their” AUM every year. The bigger your retirement account, the more you add to your manager’s AUM and you become a “bigger person” in his eyes. If your account is under $500K, you are likely a little person. Some top managers won’t even answer you’re call if you can’t add $5 million to their AUM.

While AUM is the accepted business model, we have a huge problem with it. What value does a wealth manager add that gives him the right to extract a fixed percent every year off the spoils of your life’s work?

We deliver our advice to all for the same low cost regardless of a portfolio’s size. We treat every investor as a big person. There are no special investors who are on the inside track with access to special insights or favors.

At MarketRiders, we’ve begun measuring our success, in part, by AOM, or Assets Out of Management. We track the amount of draining fees from the AUM game that we’ve helped you escape. This week, we celebrate reaching $500 million of AOM and you — our thousands of investors that are now saving millions in fees. Here’s to no little people!

Similarly with such market volatility in recent weeks, a few MarketRiders members have been asked to make some tough calls when, depending upon the portfolio, our rebalancing algorithms have alerted them to add to positions like, of all things, Europe. “Are you serious?” one member moaned. “Everyone knows Europe is blowing up. Why buy more now?”

Just like the man from the quote above, this member was having a tough time sticking with the plan. Sorry, but “buy low sell high” is tough to do. Successful investors must continually bet against the crowd, always with deep conviction, coupled with a tug of “unbelief.”

The MarketRiders system of buy, hold, rebalance is an investment approach, based upon solid research and unshakable facts. We can never remove all doubt, but we’ve harnessed the most scientifically verifiable investment approach known today. Rebalancing adds to returns and helps manage risk. You maintain your target allocations, and the risk level you set for yourself when you built your portfolio. Riding winners if fun, but what goes up, certainly comes down. Moving from religion to the casino: rebalancing forces you to “take money off the table” and add to losing bets that will be tomorrow’s winning ones.

It’s tough to maintain your allocations, and trimming a gold position or buying Europe while it is apparently swirling down the toilet is not easy. At moments like these, lean into the facts of the scientific research, push back your emotions and then rebalance your portfolio. You will be glad you did.

You may be wasting your time.  Does persistence, effort, practice, and increased activity over time make one a better investor?

In most every field of endeavor, we are paid on amount and quality of our output.  Lawyers paid to write contracts, negotiate, or litigate. Teachers are paid to teach, janitors to clean and engineers to code.  Unless you are a hyper-kinetic professional trader with a true edge, one of the paradoxes of investing, is that activity and knowledge, have little or no correlation with success.  In fact more activity usually leads to bad results.

Active investing is about being right, not what you “do.”  Warren Buffett has 2 great quotes on this topic:  “Much success can be attributed to inactivity. Most investors cannot resist the temptation to constantly buy and sell….We don’t get paid for activity, just for being right.”

Do you know enough to be right, to bet against everyone else?  If not, just use MarketRiders.

If you must actively invest, at least measure whether you’re adding to your net worth or just engaging in expensive entertainment.  Use our online portfolio manager to build a virtual  portfolio to benchmark yourself.  Let’s say you have a portfolio with 1/3 equally spread amongst your favorite tech stocks, a few large caps and some commodity stock.  You can use our 5 step process (the right yellow box when you click “Create A Portfolio”) and build a virtual portfolio with 3 ETFs:  a tech, large cap and a commodity.  Put an equal amount of capital in your virtual portfolio and see who wins – your portfolio or the ETFs.  The lesson may be sobering.

There were lots of great articles this week about tools for investing.  We were mentioned in Money Magazine and BusinessWeek as the do-it-yourself movement continues to gain steam. 

Investors who have decided to enter this tournament via day trading, market timing, technical analysis or even tactical asset allocation, need to pay close attention. You are playing a game that is very difficult to win, especially if you have fewer resources, knowledge and technology than your competition. Oh, sure, you might be lucky enough to win a few early hands but the long-term outcome is fairly predictable. Such investors live with a prevailing sense of unrest knowing that they have shown up to a shotgun duel carrying a pocketknife.

Wealthy families, endowments and elite institutions practice a different investment approach. These investors are wise enough to avoid, paying fees to managers trying to “beat” the averages in public stock markets. Sure, they may invest in private equity and venture capital where they enjoy an advantage via access to the best deals and terms. But when it comes to public markets, these investors commit a large portion of their portfolio to passive indexed strategies – the MarketRiders approach. The only bet such investors are making is that the world is in fact not coming to an end any time soon and that its markets, companies and their portfolio will continue to grow over long periods of time.

This approach provides amazing freedom from having to stare at your portfolio several times a day. Unconcerned about the daily gyrations of Jim Cramer and the rest of the bobble-headed finance media, long-term and disciplined MarketRiders can go about their daily lives with peace of mind. Sure, the market is down May and your portfolio probably dropped with it, but with a retirement time-horizon that is years away, your portfolio will not only recover, but grow quite nicely.  And by rebalancing you are taking advantage of these swings.  This knowledge frees you from staring at a computer monitor and gives you time to go about the real business of living your life.  In the end, isn’t that what the money is actually for?

And of course, a plethora of explanations quickly followed. We heard about the “fat thumb” scenario describing a trader who, keying in the wrong trade, sold billions of shares instead of millions, triggered the collapse. One of the more interesting explanations is a truly bizarre account involving Nassim Taleb, trader and author of “The Black Swan,” a book that discusses high-impact, impossible-to-predict, and rare events that are beyond the realm of normal expectations.  According to this grand irony, Taleb’s fund placed a sizable S&P short that got the ball rolling for Thursday’s violent selling — creating his own “black swan.”  In the end, however, the 1000-point drop remains a mystery, and in the absence of any truly credible and complete explanation, market fear has been resurrected.

More important than understanding the cause of this event is understanding how you responded to it.  Did you yawn, or did you freak? For those who live by the market’s vicissitudes, May 6th was an apoplectic ride on a terrifying roller coaster. With each swing of the market, such investors sit glued to the ticker, at one moment thrilled, the next gripped by dread. For those of us who are MarketRiders, such days produce a yawn.

With our investments sheltered by a distant time horizon, low fees and smart diversification, we are free to go about the more important business of our lives. Some investors prefer drama. We prefer peace-of-mind.

If you haven’t sold your actively managed mutual funds, then at least look at what you are paying for them. You’ll get a free customized report comparing your mutual funds to ETFs in seconds. Here is the link: Mutual Fund Fee Analyzer. Pass it along to friends and family you care about.

Once you find out how expensive your funds are, you might say: “I have good mutual fund managers. They do beat the market.” You are missing the point – it’s not the fund, it’s the portfolio. As Rick Ferri says in last week’s Forbes article, “we buy a portfolio of five or more funds. Accordingly, the right question that investors should ask is this: What is the best portfolio approach?” He then proves that the chances of a portfolio of mutual funds beating the market are close to 0% over a long time horizon.

“The more active funds you own, the smaller the chance you’ll beat an all index fund portfolio. A portfolio composed of five actively managed funds had a 32% probability of beating an all index fund portfolio over one year, 18% over five years, 11% over 10 years and just 3% over 25 years.”

Next you owe it to yourself to ask: Who’s really in charge of your mutual fund?  How are important decisions made? Read this recent Wall Street Journal article that addresses those questions. ”When mutual-fund investors think about who’s responsible for the performance-or underperformance-of their shares, they usually tag the fund manager.   In doing so, though, investors too often ignore the people who ultimately oversee their funds: the fund trustees. The trustees have a legal responsibility to evaluate the performance of fund managers, the power to hire and fire them, and the authority to set the fund’s fees as well.”

So now, after knowing what you know, consider looking at ETFs.  A must read is Tools To Help Pick ETFs.  ”Exchange-traded funds have become increasingly viable as core ingredients of a diversified portfolio. Originally pitched as low-cost alternatives to stock index funds, ETFs are now available for almost every asset class.  But with more than 800 ETFs on the market, choosing which funds to buy has become more difficult.  Some online services from brokerage firms and others can help with both tasks…”

Hopefully, after using the mutual fund fee analyzer and reading these articles you’ll finally be convinced to sell every actively managed mutual fund that you own on Monday and replace them with low cost ETFs. It could mean the difference between retiring in a tent in your backyard instead of in a villa in Cabo.

To draw a parallel, we assembled a few articles that describe how random investment success really is.  For example, if you own actively managed mutual funds, you’ll retire with a lot less money than if you’d just bought, held and rebalanced the boring ETFs others and we recommend.  This is a non-debatable fact that’s been proven over and over again.

But why do so many want to believe something that just isn’t true? Ivy League MBAs who are smart, motivated and work hard must be able to beat a dumb computer managing an ETF or an index, right?  Wrong for two reasons.  First, investment pros charge fees that are an impossible handicap to overcome.  And second, unlike other professions like a surgeon, litigator, race car driver or a pilot where success can be accounted for by how well one manages risk, most professional investors who beat the market one year, are just plain lucky.  They win for short periods of time because of random events, not skill or intelligence. Just luck.  We all became acutely aware of this in 2008 when all the gurus somehow didn’t see it coming.

Consider it likely that the great professional investors may really be no better than the 4 finalists in the 8th round of a 1000 monkey coin-flipping contest.  Yes, there will always be a winner. But why did the winner win?  Did someone know something?

This point is made in an article in The New Yorker:  “Blowing Up” by Malcolm Gladwell author of “The Tipping Point” and “Blink.”  Gladwell interviewed Nassim Taleb, a professional options trader.  Taleb’s book “The Black Swan” describes about how random events in the financial markets are common and unpredictable – essentially dismissing 90% of the value of professional investing.

“Wall Street was dedicated to the principle that skill and insight mattered in investing just as they did in surgery and golf and flying fighter jets….  For Taleb then, the question of why someone was a success in the financial marketplace was vexing.  Taleb could do the arithmetic in his head…”

In another article in Fast Company, called “The Myth of Mutual Funds,”  Chip and Dan Heath the authors of “Made To Stick,” explore why we don’t always want to believe the truth about investing.  “Let’s pull off the Band-Aid quickly. You’ve come to believe that mutual funds are a smart place to put your money. They’re not. That’s the assessment of the smartest minds in finance, supported by a mountain of historical data. So two questions: How can this possibly be true? And why, in gleeful defiance of the data, do more people keep buying mutual funds every year?”

Last, read Moneywatch’s  “Hedge Funds – Case Against, part 2” if you’re considering investing in one. Allan Roth writes some compelling pros and cons for doing so.  He addresses the question:  Are these fund managers lucky or smart?   “If I had a dime for every time I’ve heard that hedge funds provide above market returns with lower risk, I’d be a very rich man. Every time I hear this claim, however, I ask for any evidence that supports it. I have had no takers to date, though maybe this column will change that.  Unless you happen to have a few billion to invest (and give me a ring if you do), I’d steer clear of hedge funds as they provide too much risk with too little return.”

So when it comes to investing in any type of fund, be it index mutual funds, exchange traded funds (ETFs) or mutual funds, investors need to be their own advocate.  Do your homework to understand your true costs as no two funds are exactly alike.  ’Americans save trillions of dollars for college education and retirement by investing it with funds managed by industry and giants like the Vanguard Group and Fidelity Investments.’

If you are new to the game, beginners should brush up on Investing 101 basics. There are a lot of choices. Make the smartest choice for YOU.  Just remember, time is your friend.  Money spent on fees today, compounded over time, is money that could be sitting in your retirement account. Do your homework, you will thank yourself later!

To paraphrase Warren, most investors should “do as I say, not as I do.”  The world’s greatest investor warns us against trying to imitate his stock picking abilities.  His unwavering advice for years has been to buy index funds because:  a) very few people have it in their DNA to be a great investor, and b) those who charge you for their investment expertise can rarely outperform the market due to their onerous fees.

To bring home his advice we’ve pulled together a rare 8 minute Buffett video, evidence a $1 million bet he made, and a fable that he wrote.

A Fable.  Read excerpts from Berkshire Hathaway’s 2005 and 2006 annual reports where Buffett describes what happens to the imaginary Gotrocks family when they begin taking help from Wall Street.

“…imagine for a moment that all American corporations are, and always will be, owned by a single family. We’ll call them the Gotrocks… In the Gotrocks household everyone grows wealthier at the same pace, and all is harmonious.  But let’s now assume that a few fast-talking Helpers approach the family and persuade each of its members to try to outsmart his relatives by buying certain of their holdings and selling them certain others….  The more that family members trade, the smaller their share of the pie and the larger the slice received by the Helpers. This fact is not lost upon these broker-Helpers: Activity is their friend, and in a wide variety of ways, they urge it on.”

The $1m Wager. Buffett bet Protégé partners, a fund of hedge funds, $1,000,000 that over a ten-year period commencing on January 1, 2008, and ending on December 31, 2017, the S & P 500 will outperform a portfolio of funds of hedge funds, when performance is measured on a basis net of fees, costs and expenses.  Buffett’s bet is a bet on high fees.  His view:  regardless of how good the money managers are, the hedge fund fee structure is so high, that it will, over 10 years, wipe away any gains achieved from beating the market.

The Lecture. Warren Buffett spoke to a group of students at the University of Florida and answered questions for ninety minutes about his investment philosophy.   Fast forward to the 1:15 minute mark on this great video where he says:

“If you are not a professional investor, if your goal is not to manage money in such a way that you get a significantly better return than world, then I believe in extreme diversification. I believe that 98 or 99 percent – maybe more than 99 percent – of people who invest should extensively diversify and not trade. That leads them to an index fund with very low costs. All they’re going to do is own a part of America. They’ve made a decision that owning a part of America is worthwhile. I don’t quarrel with that at all – that is the way they should approach it.”

Just because you can pick up a golf club doesn’t mean you should bet all your savings on your getting on the PGA tour.  And just because you (or someone in a suit at an investment management firm) can place a trade at an online broker, doesn’t mean you figure out a better strategy than using index funds in an asset allocation strategy for your retirement investing.

Do as I say, not as I do.  Thank you Warren.

Robert Powell of MarketWatch uncovers in his recent article ‘Advice You Can Count On?‘ the dirty little secret of many managed IRA accounts – fees are out of control and returns are down. This has led to recent legislation to bring some fairness back to IRA investing.  Even the White House has chimed it stating, “if investment advisers receive compensation for steering workers into investment options with high fees and expenses, they face conflicts of interest that can undermine the reliability of their advice.”

It may be years before any law is passed protecting you from high fees and expenses, so in the meantime consider taking matters into your own hands by managing your own portfolio and investing in index funds or exchange traded funds.  The money saved on fees will compound over time making for a more financially stable retirement.

]]> http://www.marketriders.com/blog/watch-out-for-unnecessary-fees-in-your-ira/feed/ 0