When evaluating your investment choices and trying to understand ‘what is an ETF?’ it is in your best interest to read a recent article in USAToday ‘Is an ETF the right investment for you? Look beyond the hype’that defines exchange traded funds and warns investors on types of ETFs to steer clear of. For those investors that are wanting to take control of their investments and in doing so keep more money in their own pocket, ETFs are a great investment vehicle if done right. An ETF has many advantages as outlined in the above mentioned article — “They offer a low-cost way to invest in stocks, bonds, commodities and real estate, and they let you move in and out at any time during the trading day. And they allow you to buy slices of the market, rather than choosing a few individual stocks that could blow up.” On top of that, ETF investing offers greater tax efficiency than mutual funds and have a lower cost structure. So, as you re-evaluate how you are investing your money in the market, make sure to check out ETFs.
Online Brokers Lower Fees on ETFs Benefiting Investors
As John Spence of MarketWatch recently writes, ”Online brokers are fighting hard for a greater share of the fast-growing exchange-traded fund business, and investors stand to benefit from lower costs.”
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.’
Mutual Fund Fees Siphon off 33% – 50% of Your Money Within 10-15 Years
Perhaps the typical 2% management fees charged by mutual funds and financial advisers don’t look too damaging at first glance-especially if you believe the managers will deliver on their market beating promises. But because of the Law of Compounding, taxes and fees paid to Wall Street to “beat the market” will compound over time and can easily take 33% of your money within 10 – 15 years.
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.
How Wall Street Works And How To Protect Yourself
In one of this week’s articles Wall Street Journal writer Jason Zweig, reports that an investor, Philip Eberlin reportedly put 80% of his assets in CDs and fixed annuities because: “I don’t have trust in Wall Street to help the small investor in any way, shape or form.”
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.
How Wall Street Works
The veil over how Wall Street works is slowly being lifted. Wall Street’s real mission isn’t to help you make what the markets return, rather it’s to keep your money in their control so they can use it to take some of those returns for themselves. No wonder Wall Street wages a constant propaganda machine to convince you that brokers can help you beat the House. But if you believe their message, you are simply being duped. As in a casino, no one really beats the House because the odds are stacked in favor of the casino — an Investing 101 concept oftentimes ignored. Even if someone does win big on occasion, the odds eventually catch up and the winner will lose.
Look at all the media attention that Wall Street buys in an effort to keep you at the table. Think about all the newspaper ads and fund prospectuses boasting stellar returns. Consider the relentless flow of guests on financial programs and websites touting their stock-picking expertise. Add to that the millions of dollars spent on investment magazines, financial newsletters and other efforts to keep Wall Street in your face. It’s all about keeping your money-and keeping you convinced that you can beat the House. Wall Street wants disempowered investors. They want to make sure beginners as well as the average investor see investing as complicated, confusing and something to be handled only by “experts.” So when you read their stories about how complicated the market is, and how you shouldn’t try this at home, just consider the source. Keep in mind that Wall Street is selling market mystique. By convincing you not to take on added risk by doing it yourself, they keep their hands on your money and stay profitable.
Rebalancing – How the Pros Make More Money Than You
We were honored that Rob Silverblatt at U.S. News & World Report listened to us and rigorously dug deep with us into the powerful secret of event based rebalancing over traditional quarterly or annual rebalancing. He questioned our numbers and assumptions and did a great job describing the issue. Finally someone is helping us make the distinction between “time based” and “event based” rebalancing in the press. To read Rob Silverblatt’s article, click here.
Most retirement investors rebalance via calender alerts on a quarterly basis. This method, however, is trumped by the deeply researched practices of large endowments that rigorously perform event based rebalancing. These large institutions have hundreds of millions if not billions at work in and understand that by setting pre-defined bans by asset class or index, they are able to have thier technology keep a watchful eye on market dynamics and harvest gains at the exact moment the portfolio moves outside of rules for the portfolio. This contrarian discipline allows these endowments and large institutions to add as much as 2% a year to their returns, not including taxes and trading fees.
At MarketRiders, we have created an retirement platform that empowers everyday retirement investor with rebalancing technology enjoyed by wealthy endowments. In our MarketRiders engine, you too can set the rebalancing bands for your retirement portfolio. If it is in a tax free account and you have low brokerage fees, you may go under your dashboard and choose Set Alert Levels to increase your rebalancing sensitivity to a setting of 4 or 5. If you are in a taxable account, we recommend a setting of 3. Whether you are a MarketRiders member or not, what matter most is that you follow the examples of the pros through disciplined event based rebalancing. For more information about this strategy, download our free report by clicking here.
