I guess you don’t have to be a US citizen to get underperformance in your mutual funds. According to a recent article in Canada’s The Globe and Mail, “Longer-term, though, the results are more discouraging for mutual fund investors. Over three years, only 12.5 per cent of actively managed funds beat the index, and the average annualized return drops to a loss of 2.4 per cent. And over five years, just 7.45 per cent of funds beat the index, with an annualized gain of 4.5 per cent, versus a 7.7 per cent gain for the index.” As short sighted as we may all become, we can not lose site of a longer timeframe, and the financial benefits of investing in index funds — that is if we want to be financially comfortable when it comes time to retire.

This past weekend’s Wall Street Journal ran an article titled Earlier Retirement:Beating Back High Fees that thankfully discusses how many employees are finally starting to challenge their employers on 401(k) fees within their company plans.  This article offers some great warning signs and tips. My vote is to work with your employer to have them entertain offering index mutual funds and exchange traded funds to the investment options mix. With their low cost fee structure, one can then actually look to earlier retirement.  For beginners new to the investing game, or those that are nearing retirement, investing in index funds and exchange traded funds in fees alone will allow you to retire earlier than you would paying the higher fees inherent in mutual funds.  That too, is only the beginning as returns on index funds have been quite promising over the years relative to mutual funds.  I encourage you to check them out.

Think of the conversations that occur behind closed doors at the White House, corporate boardrooms or U.S. Central Command. We all understand that there are elements of those conversations that are deemed, for whatever reason, unsuitable for public consumption. They are tucked into the classified file, sworn to secrecy and solemn oaths. But every now and again, some of the untold story leaks out – finds its way to the common person. Sometimes the information is so unbelievable, that it is marginalized as ridiculous. Other times it is corroborated with such credibility that all we are left with slack jaws and nodding heads.

Below are three brief but shocking behind-closed-doors accounts about Wall Street and investing that left me stunned.

CEO of a Top Publically Traded Tech Company: Having participated in the Silicon Valley for years and sat on the board of Baidu, I come into contact with a broad network of technology leaders and professionals. Recently, I became part of a stunning conversation with one of the top executives in The Valley.  This individual, while surprising humble, is also profoundly wealthy. For years he used the “top” wealth managers who have access to elite money managers who in turn “outperform” the market to justify their fees. After years of high cost and poor performance and tens of millions lost, this executive was seriously underwhelmed. He pulled his money out, embraced a simple indexing strategy and global diversifications. It takes him only a few hours a year to manage the money himself. He save hundreds of thousands if annual fees and achieves a much better result. Why don’t we ever see that ad during Wimbledon?

Former Banking Firm Top 500 Producer: Imagine being an investment advisor who has built a dream business – over $1B in assets under management (AUM) and a coveted Chairman’s Club member. Making just over 1% a year on AUM, this wealth manager was grossing over $10MM annually in fees. Unfortunately, he had a huge problem – he still had a conscious. The more he study active money management, the more he learned that it not only failed to add value to his customers, but was in fact deleterious.  When he approached management about this problem and sought an indexing approach, he was run out of town. After a legal battle and negotiations, the firm and the manager struck a settlement. He left his customers in the hands of the banking firm and he had to move on. I guess someone is now making money “the old fashion way – earning it.”

$750 An Hour Tax Attorney to the Uber-Wealthy: I was once invited into a private conversation with the uber-wealthy about tax management. The strategy was architected by top legal minds in the country. Profoundly expensive to set-up and maintain, this apparently legal and sophisticated offshore strategy would result in profound tax reduction. Imagine most of your wealth free to compound without tax consequence. These uber-wealthy could invest in the most sophisticated and elite products. When I asked the attorney what the majority of his clients were investing in, he just snickered. Over 60% of their dollars were dedicated to simple and diversified indexing strategies. There was no Wall Street, no active managers, or Jim Cramers – just hundreds of millions, even billions, going into a simple, proven approach used by those in the know.

I hope you are doing the same.

With such a huge gap between those feeling comfortable investing in stocks themselves and those that feel stocks are an important component of their portfolio, comes the opportunity for one to turn to stock index funds and exchange traded funds.  With index funds you are still a player in the stock market, but the risks are less as you own a basket of stocks, not one individual company, and purchasing them through your discount broker is cost effective and quite easy.  Stock picking and market timing, though claimed to be figured out by many on Wall Street, is hardly ever done time and time again with great success.  The fundamentals of investing 101 might help you make a solid educated guess on what companies to invest in but let’s face it, investing in individual stocks, for beginners and experienced investors alike can still be a risky venture.  So, for those currently not comfortable investing in stocks on their own, check out index funds.  While you are at it, check out some of the on-line portfolio management tools out on the market to help you manage your overall portfolio.

For years, my husband and I have been watching her on the TODAY Show and every time we feel as though we walk away more financially savvy than we were before watching her segment.  Oftentimes, it seems that financial experts speak in a different tongue as they make the subject so complicated and difficult to relate to.  But once again, a recent article Retirement Investing: Tips for Creating the Proper Asset Allocation by Jean Chatzky, hits the nail on the head about how best to tackle retirement planning.

“No matter what retirement savings vehicle you’re using – 401(k), Roth IRA, Traditional IRA, or some combination of the three – once you find the money to stash away, you can easily set up automatic contributions each month. By doing so, the money is whisked out of your bank account before you ever have a chance to spend it. But that doesn’t mean your role in the retirement savings game is over.”  This is where one’s role in their investing appears to be more daunting.  But as she comments, “you’ll need to weigh a few factors about yourself – including your age, your risk tolerance, and when you plan to retire – and then figure out how you are going to spread your money across the different investment categories. This is called an asset allocation.”    Whether you choose to hire an investment adviser to help you in this effort, or look to do-it-yourself portfolio management tools to assist you — such as one from MarketRiders Inc. – it is a step that must be taken for smart retirement investing.  Read her recent article and you too will feel more financially savvy, not to mention better armed to tackle your retirement investing strategy.

With the way things have played out on Wall Street in the last two years, now might be a great time to reconsider your investing strategy and turn to a buy and hold strategy that provides for diversification and less risk than individual stocks.   Look to index funds and exchange traded funds to build a low cost, globally diversified portfolio using asset allocation.  Just think of all the time you will have in your day for other things.  With all the time currently spent chasing the market, now you can quickly and easily buy and hold index funds and spend a fraction of the time rebalancing your portfolio.  Better yet, if you choose to utilize one of the on-line portfolio management tools out there, like one offered by marketriders.com, monitoring and rebalancing your portfolio, to keep it in check, is a breeze. 

Who better to trust with your own money than yourself!

His article  ‘Big brokers cut commissions to draw ETF assets, trading — Fidelity, Schwab waive fees as competition heats up; investors reap lower costs’ documents the seimic changes that will encourage investors to wake up and yank Wall Street out of their pockets.

As he points out, “Paying broker commissions to trade ETFs has been a major drawback for buy-and-hold investors who contribute small amounts to their retirement portfolios on a periodic basis. Those fees can quickly negate the cost advantages of ETFs.”  Now, for those employing the buy-and-hold investing strategy with an asset allocation that provides for diversification and rebalancing to keep to that allocation, these lower fees are a true win.  ‘The 25 iShares ETFs that can be traded commission-free at Fidelity are so-called core funds that can be used as the major building blocks in a diversified portfolio.’

The 2% you’re giving Wall Street can become 20% of lost investment profits when you consider the effect of Law of Compounding. If you factor the taxes you may pay as they churn your account, you can add another 1%, which means you’re going to give away 30%. But before you shut down the calculator, consider the sobering fact that when a fund does worse than the market, the loss will be even higher. And don’t forget about marketing charges and hefty sales loads on some funds. This kind of wealth erosion is eye opening to a lot of people, beginners as well as the average investor. With baby boomers now living well into their 80’s and 90’s, who can afford to put a nest egg in these hands?

Instead of turning to mutual funds and investment advisers, investing 101 of late would have you look to index mutual funds and exchange traded funds.  These investment vehicles will keep your fees and taxes lower while earning you returns of leading indexes.

Who or what is this bad, ugly beast called “Wall Street?”  Does anyone really know how Wall Street works?  When we blame it for all financial woes, who are we blaming?  Goldman Sachs?  Warren Buffett (he owns alot of Goldman)?   Is Wall Street your life insurance company, credit card companies, mutual funds, brokers, banks, and investment banks?  All or some?

The fact is, none of us are sure and it doesn’t matter because we don’t have much power over this ominous Wall Street — whatever it is.  But there is a Wall Street that we, as individuals can prevent from damaging us.

Most financial institutions want to control our money, which in turn, gives them a unique opportunity to bill us through fees that we don’t see or worse, don’t understand.  Because we’re not writing checks for these fees, we tend not to pay attention as our money flows out of our pockets and into theirs.  And that’s where the trouble starts!

Put $25,000 into a mutual fund and you’re hiring a Wall Street stock picker and paying him around $400 per year.  He and his fund now control your money.  Hire a financial adviser or a broker to manage your account – there you go again!  Wall Street now controls your money.

But here’s where Mr. Eberlin has it wrong — its investing 101.  If I buy an ETF of 1500 US companies, I own a part of all of them – IBM, Coke, Disney and Microsoft.  There’s no Wall Street.  A broker may hold my security, but they’re not charging me to invest.  I own great businesses, and my distrust of Wall Street should have no bearing on my decision to do so.

Buying low cost ETFs according to a prudent asset allocation, takes Wall Street’s hand out of your pocket.  You’re in control of your own money.

Our friend John Spence writes about this remarkable breakthrough.  When you trade Schwab ETFs or now iShares ETFs at Fidelity – you pay no commissions.  This lowers the cost of implementing an all ETF portfolio that is periodically rebalanced.  Schwab and Fidelity will also manage your ETF portfolio for you for about .6%.  While not as good as our service and way more expensive, it validates our approach and educates investors.  Go Schwab and Fidelity!

Responsible journalists like John Waggoner of USA Today are helping investors learn which ETFs to stay away from. He has a great style for helping beginner investors understand risk and financial information.  He gives a balanced view of ETFs and how to know which ones to stay away from.  We were quoted in this article, so we’re biased

Jason Zweig, is one of the most respected finance journalists in America.  In this article, he posits:  “For many investors, the market’s turbulence hasn’t just destroyed wealth. It has shattered their faith in the financial system itself.”

In the coming years, these trends will reduce Wall Street’s fees which will in turn, weaken its grip over Americans and their money.   We hope you’re riding these trends.