Friday, July 19, 2013

You’re Not Supposed to Look at That Stuff!

When I recently told a friend - who works for a major U.S bank - that I check my equity holdings at least daily, he indignantly responded with “you’re not supposed to look at that stuff.”

His intentions were good, basically reminding me that one should leave your investments alone, allowing it to grow and compound, as it always does.  He wasn’t wrong, but merely misinformed.

Regrettably… growing is not what investments automatically do, nor is it what they always do!   

The worst case scenario is dumping your hard-earned cash into mutual funds, hoping that you will enjoy growth, leading to wealth, resulting in a comfortable retirement!

And since I mentioned hope: please remember that although hope may work as a political strategy, hope cannot ever be viewed as a sound investment strategy!

This blog site already offers many references and insight into less desirable investments, like mutual funds, more desirably ones, like ETFs, and several better alternatives for people willing to pay just a little attention.

Checking up on your stock portfolio once or twice a day is easy… as easy as making Google Finance your home page.  Today, most people would probably be able to log in at least once a day, assuming they have Internet connectivity?

You can also create your investment portfolio for free on many websites.  Then, when you have the ability to view it once a day, you’ll start paying attention.  Or do you really think your Mutual Fund manager is checking in on your returns daily?

Add CNNMoney site to your bookmarks.  Then, if you see that the Dow is up e.g. 18% YTD, compare it with your 401k investments.  You may find that your mutual fund holdings are only positive in single digits.   

Ask the 401k Fund Manager why your mutual funds are under-performing the Dow (a relatively low-risk index made up of 30 multi-billion dollar, blue-chip U.S. corporations).  After all, you’re paying his management fees!

He or she will respond by saying that mutual funds are safer for you than holding equities (individual company stocks).  They’re not, because mutual funds also typically invest in equities.  Or they'll offer that their diversification mitigates downside risk.  This is partially true, because most mutual funds create indices made up of equities.  It would be true that you are exposed to much greater investment risk if you only invested in one favorite stock, e.g. Apple... or worse, if you place all your investment cash into your employer's stock (i.e. if you don't diversify)!  Remember Enron?

They may even say that you benefit from expert managers who have the ability to professionally identify excellent investment opportunities for their fund index, with the ability to move between different investments continuously, to avoid taking losses (for a fee, commonly called a MER).  Now, this last one is just poppycock.  Most funds only change their glossy, published prospectus (shows what they invest in, fees, etc.) once a year!  Remember when Apple $AAPL was trading at $700/share?  Apple may have represented 10% of your fund’s investment allocation.   

Guess what… Apple at $400 may still be 10% of your mutual fund’s investment allocation.  That’s one of the reasons why your mutual fund may be delivering +5% YTD, and Dow 18%. Another reason could be that the MER - at a compounded cost of e.g. 2% annually - is eating away at your capital, regardless of the fund performance.  Owning Dow stocks costs you nothing, save for brokerage fees when you buy/sell.

Ask the fund manager if there are better fund picks than the ones you had selected for investment. Ask, ask, ask… and then ask some more questions!  You don't have to be satisfied with answers you don't understand - make sure you understand what he or she may be telling you.

Maybe you’ve never spoken to your 401k Fund Manager before?  Maybe he or she will never call you?  They certainly don’t offer much investment advice, and when they do… their advice may often be (at least somewhat) questionable.

It’s your money, and he or she is supposed to be working for you!  In the meantime, time flies by, and seemingly, the older you get, the quicker time goes by.

Don’t delay, start taking action today!  Start by paying attention to your investments.  Yes... go on... look at that stuff!

In fact, you should pay attention to your investments and savings as if your wealth and future well-being depends on it... because it does!

Sunday, July 14, 2013

Mutual Funds – Epic Fail

The mutual fund industry, reliant on unsophisticated and financially illiterate investors, just keeps chugging along without a care in the world.  And why should they care… after all, employees keep dumping their savings into their products, hoping to save for a grand retirement, ideally aged 60-65.  What a sad state of affairs!

Let’s explore some high-level facts:

1.    Mutual funds are managed by expert, licensed, investment professionals.”   

While "expert" may be true for the guy at the top of the pyramid, it is only half-true for everyone else responsible for investing… aka as taking… as much of your hard-earned cash as possible. They're all obviously licensed... and "investment professionals" is a debatable designation.

Generally, the expert guy (yes, it’s usually a guy, and yes, he’s been raking in fees for his employer for a long time) at the top of the food chain has achieved outstanding returns in terms of fees generated for his employer.  A required, and a primary, expert skill.  That is, expertly managing and raking in fees for the company he works for, while expertly delivering some ideally positive returns, to the simple and poor saver, who is diligently contributing to his or her 401k.

While it is true and possible – occasionally – that mutual fund ‘investors’ achieve a nice return, most of the time the mutual fund under-performs the stock market.  But, you may say, my mutual fund is invested in blue-chip stocks, like $AAPL, $GOOG, $MSFT, etc.  That is true as well, and the difference in the returns achieved by these companies and the investment return on your mutual fund portfolio was gobbled up by your Mutual Fund Company and its employees.  The fees are generally referred to as the MER, which stands for Management Expense Ratio.

2.    Mutual Funds are managed, that’s why they charge me a fee.  It makes me feel safer, knowing I have a professional managing my portfolio.”

Not really, mutual funds are required to publish a prospectus, showing investors exactly what/where they invest contributions into, for example as per the equities mentioned above.

Most mutual fund companies are fabulously inefficient and/or slow (or both) when it comes to actually managing the investments in their prospectus (i.e. your portfolio).  They mostly just buy and hold good stocks.  That’s why, when the stock market tanked in 2008/9, mutual funds tanked along with the stock market, because that’s where they invest!

In reality, you could simply copy the top-10 investments in their published prospectus, thereby building your own index of funds, cherry-picked by their “professional and expert team of advisors.”

3.    "Mutual funds simplify my investment choices, and mitigate my investment risk.”

What rubbish!  Simplify... yes.  Mitigate risk... absolutely not!

Firstly, saving for your retirement is a good thing, because government hand-outs are rapidly becoming a thing of the past.  The problem is more mathematical (or actuarial to be more specific) than political, mainly because people are living longer. The social systems in place since the 50’s were designed along the same lines as any insurance company’s business model: “contributions of many pay for the losses of few.” 

Back to the comment above about investment choice and mitigation of risk: On Friday (7/12) the Dow closed up 18.1% YTD.  Let’s imagine you are close to 50 years of age and you plan to retire around age 65.  For your employee 401k contributions, you selected the American Funds 2030 Target Date Retirement Fund® $RBETX. 

At the time of writing, $RBETX is up 12.64% YTD… quite a delta between “the market” and this fund.  Why?  Poor fund management, fees, coupled with an inability to move as fast as e.g. a smaller investor, between different investment vehicles. 

I am not advocating that you stop making contributions to your 401k!  In fact; quite the opposite is desirable.  You should maximize your contributions to maximize your employer contributions.  If all your employer’s 401k allows is a basket of mutual funds to select from, you should still maximize your contributions in order to receive the employer contributions.  The generally poor returns and fees attached to your mutual fund choices will be topped-up by the additional money from your employer… possibly delivering a more competitive, market-related performance for your investment, overall.

Outside of your 401k, first get rid of your debt (especially expensive, short-term loans like credit cards) and then stay away from mutual funds.  Invest in ETFs (similar investment to a mutual fund, but lower fees), or ideally... build your own index of good quality equities, and hold these investments while reinvesting dividends!

Happy trading… and get onto a path to wealth creation asap!