Saturday, May 18, 2013
Danger Ahead, Ignore It
In this week’s column, Zweig states that
some investors are starting to invest in their brokers company. The important
thing is not what they are doing, but why they are doing it. Their motivation comes
from the fact that the market is at record highs, gold is tumbling and bonds pay
nothing. He doesn’t come right out and say it, but the implication is that it’s
time for investors to start making adjustments in their portfolio. This is the way it always happens. At first
there’s whisper about the need to do something. Then as time goes by and the
market continues to climb, the whispers turn into a shout. At this point it is
critical that 401(k) index investors remember that “there are some things you
can know and some things you need to know.” What you need to know is that index
investing will outperform your ability to time the market. So, ignore the media and devote your time and
energy to something you enjoy.
Friday, May 17, 2013
An Inexpensive Lunch
A lot of ink has been used examining the
impact that fees and turnover costs have on mutual fund performance and minuscule
amount of ink has been used to explain that not every investor’s goal is performance.
During my career as an investment professional I ran across many people who were
willing to accept a reduced rate of return in exchange for a reduction of risk.
Many advisors respond to this situation using a portfolio of mutual funds that
are periodically rebalanced. In return for their advice on the selection and
rebalancing of the portfolio the broker charges a fee in addition to that of
the mutual fund. Some may criticize this approach, but if the investor fully
understands what they are paying and what they are getting, this is a
reasonable solution. The important disclosure is that the investor understands
the ramifications of this approach on performance.
Thursday, May 16, 2013
No Free Lunch
Most investors, particularly those with
401(k) accounts, could improve their investment returns by spending less time
focused on the market and more time monitoring their investment expenses. Wall
Street is very good at charging fees and making them less than
transparent. Every mutual fund, whether
it is a load or a no-load fund, charges a maintenance fee. The fee results from
the trading activity within the account that is supposed to increase the
investment performance. However, the data show that the performance of the
mainstream equity mutual funds is equal to the performance of the market minus
the maintenance fee. Or to put it another way you are paying for something that
you are not getting. A major reason index funds outperform actively managed
funds is that their low trading volume results in extremely low maintenance
fees.
Wednesday, May 15, 2013
A Fee By Any Other Name
The first mutual funds were owned by the
shareholders and paid the fund manager a small portion of the assets to manage the
portfolio. The early years of the fund industry witnessed slow growth as the market
recovered from the Crash of 1929, but it matured in 1940 Congress when passed
the Investment Company Act. The next decade saw the US fully engaged with World
War II. By the late 1950s, the economy had recovered as technology companies
such as Polaroid, Xerox and Sperry Rand came into being. Wall Street has never backed
away from an opportunity to make a buck. A Boston broker by the name of Jerry Tsai
created a group of mutual funds that focused on the dynamic growth of the technology
sector. Soon the investing public would refer to them as GO GO funds. Demand
for these funds skyrocketed and as they did the fund industry discovered new and
creative ways to charge investors to participate.
Tuesday, May 14, 2013
Changes Blowing In The Wind
For the past few years we have had three
constants; low inflation, low interest rates and Ben Bernanke as Chairman of
the Federal Reserve. Indications are that sometime in the not too distant
future one of these constants will change and the others will follow like
dominos. The Fed has announced that they will maintain a low interest rate
policy through this year and through a portion of next year. There is a small
vocal minority who opposes the Bernanke plan and favors an immediate terminate
of QEII. There are hints that Mr. Bernanke will not return after his
appointment expires at the end of this year. The biggest hint was a Wall Street
Journal article that explored who might succeed him. His departure will most
likely be accompanied with a return to moderate inflation and rising interest
rates.
Monday, May 13, 2013
The Origin Of "Mutual" Fund
The mutual fund industry was born in
1924 when a Boston stockbroker started the Massachusetts Investment Trust. MIT truly
was a mutual fund because it was a nonprofit entity run by a board of directors
that answered to the fund’s investors. Fund managers were paid a small
percentage of the assets under management, not a fee based on performance.
Since the trust was owned by its investors any money over and above the small
for cost of running the business was returned to them. Today’s mutual funds are
operated by a for- profit investment company. Investment companies hire the
managers, do the bookkeeping, take care of advertising and keep any money that
exceeds their costs. Some investment companies deliver their product using for-
profit brokers as their point of sale. Other investment companies deliver their
product online and thus eliminate the extra cost of broker delivery. The for-profit
operations are called load funds while those who deliver online are called
no-load funds.
Saturday, May 11, 2013
They Have More Money
This week’s “The Intelligent Investor”
reports on a study by three Ivy League professors on the investing habits of
the super-rich. In order to be included in the study you had to have an
investment portfolio in excess of $90 million. The study notes, what to me was
obvious, that the super-rich have access to investment vehicles that the rest
of us straphangers don’t. What was somewhat of a surprise to me was that the
percentage that the super-rich have in hedge funds is a relatively minor
percentage of their total portfolio value. The conclusion of the study is that
the super-rich are not all that different than the general investing public. In
their words; “They (the super-rich) chase investment fads’ like dogs chasing
cars. They freeze with fear just when bravery is most likely to be rewarded.
They are not all that different from the dumb money that Wall Street likes to
mock.” The study concludes that the super-rich would be better off if they put
money in index funds and left it alone.
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