There's a real problem with mutual funds and the investment industry that promotes them. Understanding how the mutual fund industry is hurting your future isn't hard, but the solution is even simpler.
In this article, I'm going to introduce you to the source of problems in today's mutual fund industry. The place I'll start is someplace that you may not think is connected, but it is. I'm referring to a speech that was given on January 17, 1961. President Dwight D. Eisenhower had been running our country, and this was his farewell address to the country. This was a pretty dramatic moment. He had nothing to lose, no political office or fundraising to worry about. It was a moment of truth. Here, almost 50 years later, his speech is still remembered. It was really striking at the time.
He was warning us of a rising problem that he called the "military industrial complex." As a former general of the US Army, he really had a front row seat to the workings of the military. And then, of course, he was not a general but also Commander-in-Chief for eight years. From his front-row seat, he watched the massive buildup this country was undergoing in regards to the industrial complex. He talked about how this sector was intrinsically prone to moral hazard.
If you don't know what "moral hazard" means, it's when someone is protected from the risk or downside of his or her own actions. In other words, there is no negative consequence to their self-serving actions. As you might imagine, this can lead to very risky practices. This is true not only in the military or industrial military world, but also in the financial world.
Given Eisenhower's background, many people were stunned that he specifically used that term, "moral hazard," or even talked about this as a problem at all. He also described about how the military-industrial complex was prone to what is called "principal agent" problems. That's when the person you hire to help or protect you is more aligned with his or her own self-interests than yours. It's also a nice way of saying crooked. All this sounds familiar when you consider what has been going on at Wall Street and the financial world.
The third term he used was "rent seeking." That's when you hire someone who then makes money unfairly by manipulating the system he is operating in. This amounts to lying so skillfully that almost everyone buys it. Even the liar may come to believe it. Even so, it's still a lie.
President Eisenhower saw this happening in the 1950's, and he was quite concerned about it. This is also a very good description of what's been going on in the U.S. since the 1980's.
Now, in general terms, Eisenhower was talking about defense contractors when he talked about the military- industrial complex. But in a broader sense, he was also talking about the Pentagon, the Congress and the Executive branch. It's very similar to what's going on today, a kind of "industrial-investment complex." In the 1950's, 1960's, and 1970's, the industrial-military complex was putting the US at risk of collapse. And in the 1980's, 1990's, and 2000's, it's the industrial-investment complex that is more dangerous to the stability and safety of this country. The industrial-investment complex is not only Wall Street, but also credit card companies, banking companies, insurance companies, Congress and the Executive branch. They're all in on it. The SEC, the Commodities Futures Trading Commission, the Treasury and the Fed are all involved here. No one wants to admit it, but they're all systematically part of the problem.
If you are serious about making your money grow, then you have to understand how this complex works against you. It's not so much a conspiracy as a powerful force that moves against your wealth.
How the problems we heard about from Eisenhower were repeated is another topic, but we didn't learn from them. So we continued the pattern of greed and deception, and that laid the groundwork for where we are today. The conventional methods, ideas, and approach to wealth are crumbling. The status quo is rapidly changing. You have to ask yourself which side of the bursting bubble you want to be on, because there are always two sides.
courtesy of http://EzineArticles.com/?expert=Ronald_Peck
Sunday, October 25, 2009
Wednesday, October 14, 2009
Buying Mutual Funds - Be Fooled Or Be Angry
Over the years, practices that hurt mutual fund investment results have become more and more common. The only protection is to understand and to act on this information. Modern mutual funds are typified by something I call mismanagement fees. These are expenses that don't have to happen, that aren't called fees, and aren't deliberately deceptive, like ones I've written about elsewhere. But these are kinds of fees, nonetheless. These fees reduce the growth of your money, with no penalty for anyone but you. They're typical of the industry, and really are a kind of mismanagement of your money.
There are two types of fees I will describe in this article. I'll call the first one "hyper-trading fees," and it includes everything negative that comes with that practice.
About hyper-trading fees: The first mutual fund ever started was started in 1924. For fifty years, they did things differently. From the second half of the 1920's up through the 1970's, trading by the mutual fund managers just wasn't done that frequently. The average stock was held for 6 years. Another way of saying it, turnover of investments was only about 7% a year. Then came the shift. And that shift was called the 401(k). From the 1980's and 1990's until now, trading frequency changed.
Today we have a turnover of 100%, meaning the average time a fund manager holds a stock is for a year or less. There are some mutual funds that even have a 200% or 300% turnover ratio. That means on average, they're only holding onto stocks for four to six months. They're no longer investing. They're no longer being prudent, doing due diligence, and looking for long-term results. They've become day traders.
Now, why should this matter to the investor? Well, there are a couple of reasons. For every 100% of turnover in stocks each year, there's about a 1% additional expense that gets added to an already-high management fee. An additional 1% expense, when it applies to an industry that manages $10 trillion, is huge, $100 billion huge. When numbers get that big, it boggles the mind.
The size of the numbers tells you, first, why there's so much energy put into making this look like they're taking care of the investors' interests when clearly they're not, and second, this tells one that when there's a problem with the system, it adds up fast. A portion of expense relating to hyper-trading comes from the taxes on holding stocks so short. Every trade that results in a gain gets taxed. So when trades happen this fast, the tax applies over and over and over, compared to holding on to stocks longer.
Here's another one: A fund manager routinely moves hundreds of millions of dollars, and sometimes even billions of dollars, in and out of a stock. Because of this volume, they're basically bidding up the price of the stock when they buy. What could be worse than buying a stock for more than it's worth? This: Same factors, same results, only in reverse when they sell. So the effect is doubled. They're pushing the price of stock down when they sell. Because of their size, they can pay more; at the same time, they're getting a lower price when they sell.
This hyper trading is absolutely hurting the returns that investors get on their money.
John Bogle, who founded Vanguard, does a lot of research on the mutual fund industry. He did a study from 1980 to 2005. He found that over this period, the S&P 500 grew an average of 12% a year. Then he looked at mutual funds' investment results for that same time period; over the same time period, mutual funds grew at 10% a year, 2% less. At first blush, 2% may not seem like that much. But a lot of little things add up to big things. This is one of those big things. Banks get rich by understanding the difference of a couple of percent over the years. You can too. Multiply the results over that period, and you find that these mutual funds end up not making an additional 2% a year for 25 years. That will earn the investor 44% less money over 25 years. Instead of making $1,440,000, the investor only makes $1 million over the same time period, a difference of $440,000.
The reason for that difference is the fees: hyper-trading fees, direct brokerage fees, fund supermarket fees, pay-to-play fees; basically, mismanagement fees. Without knowing this going in, it will be difficult to protect your money.
courtesy of http://EzineArticles.com/?expert=Ronald_Peck
There are two types of fees I will describe in this article. I'll call the first one "hyper-trading fees," and it includes everything negative that comes with that practice.
About hyper-trading fees: The first mutual fund ever started was started in 1924. For fifty years, they did things differently. From the second half of the 1920's up through the 1970's, trading by the mutual fund managers just wasn't done that frequently. The average stock was held for 6 years. Another way of saying it, turnover of investments was only about 7% a year. Then came the shift. And that shift was called the 401(k). From the 1980's and 1990's until now, trading frequency changed.
Today we have a turnover of 100%, meaning the average time a fund manager holds a stock is for a year or less. There are some mutual funds that even have a 200% or 300% turnover ratio. That means on average, they're only holding onto stocks for four to six months. They're no longer investing. They're no longer being prudent, doing due diligence, and looking for long-term results. They've become day traders.
Now, why should this matter to the investor? Well, there are a couple of reasons. For every 100% of turnover in stocks each year, there's about a 1% additional expense that gets added to an already-high management fee. An additional 1% expense, when it applies to an industry that manages $10 trillion, is huge, $100 billion huge. When numbers get that big, it boggles the mind.
The size of the numbers tells you, first, why there's so much energy put into making this look like they're taking care of the investors' interests when clearly they're not, and second, this tells one that when there's a problem with the system, it adds up fast. A portion of expense relating to hyper-trading comes from the taxes on holding stocks so short. Every trade that results in a gain gets taxed. So when trades happen this fast, the tax applies over and over and over, compared to holding on to stocks longer.
Here's another one: A fund manager routinely moves hundreds of millions of dollars, and sometimes even billions of dollars, in and out of a stock. Because of this volume, they're basically bidding up the price of the stock when they buy. What could be worse than buying a stock for more than it's worth? This: Same factors, same results, only in reverse when they sell. So the effect is doubled. They're pushing the price of stock down when they sell. Because of their size, they can pay more; at the same time, they're getting a lower price when they sell.
This hyper trading is absolutely hurting the returns that investors get on their money.
John Bogle, who founded Vanguard, does a lot of research on the mutual fund industry. He did a study from 1980 to 2005. He found that over this period, the S&P 500 grew an average of 12% a year. Then he looked at mutual funds' investment results for that same time period; over the same time period, mutual funds grew at 10% a year, 2% less. At first blush, 2% may not seem like that much. But a lot of little things add up to big things. This is one of those big things. Banks get rich by understanding the difference of a couple of percent over the years. You can too. Multiply the results over that period, and you find that these mutual funds end up not making an additional 2% a year for 25 years. That will earn the investor 44% less money over 25 years. Instead of making $1,440,000, the investor only makes $1 million over the same time period, a difference of $440,000.
The reason for that difference is the fees: hyper-trading fees, direct brokerage fees, fund supermarket fees, pay-to-play fees; basically, mismanagement fees. Without knowing this going in, it will be difficult to protect your money.
courtesy of http://EzineArticles.com/?expert=Ronald_Peck
Friday, October 2, 2009
Take the Mystery Out of Mutual Fund Jargon
We all know what it's like - you finally have some time and start reading, or you find a Web site that looks inviting and you come face to face with words, phrases, acronyms and technical terms that are just foreign to you. What do you do? If you're like most people, you forge ahead and try to discern and understand the intent and meaning of words and phrases that aren't in your everyday vocabulary, and then you kind of give up. Obviously that's not going to help achieve your investment objectives, goals and aspirations.
Here are a couple of examples that may help to illustrate the point. What's a "fed wire?" Should there come a time when you might need money quickly you can have cash sent to you overnight with a fed wire. This procedure involves the Federal Reserve System which is able to transfer monies form one bank to another overnight. The custodian of your fund is almost invariably a commercial bank and a member of the Federal Reserve System. By making arrangements in advance you can set up your fund account to use a fed wire to transfer money from the proceeds of a redemption (which you can arrange by phone) and send the proceeds to your bank where it will almost always be at your bank, in cash, the next business day. It's easy to do, just contact your fund's transfer agency (that's the shareholder service organization that maintains all of the records of all the shareholders of the fund you own).
Let's take it a step further and get a little more technical. What's the difference between ARMs and CMOs? Don't worry, it has nothing to do with either fingers or toes. The point is that there may come a time when having a convenient source or glossary of commonly used mutual fund terms may be helpful to you in arriving at a more informed investment decision. There's no doubt that you really can't know too much about anything that affects your financial future and well being.
A final note - has anyone ever spoken to you about a mutual fund withdrawal plan? You may have heard a great deal about how and which fund to invest in, but what about a system that allows you to withdraw a specific amount of money from your account either monthly or quarterly, which amount you can change or stop at any time (often with a simple phone call). Well, it can be done and many people enjoy this convenience while maintaining full control of the amount and frequency of regular, periodic cash withdrawals.
courtesy of http://EzineArticles.com/?expert=Dan_Calabria
Here are a couple of examples that may help to illustrate the point. What's a "fed wire?" Should there come a time when you might need money quickly you can have cash sent to you overnight with a fed wire. This procedure involves the Federal Reserve System which is able to transfer monies form one bank to another overnight. The custodian of your fund is almost invariably a commercial bank and a member of the Federal Reserve System. By making arrangements in advance you can set up your fund account to use a fed wire to transfer money from the proceeds of a redemption (which you can arrange by phone) and send the proceeds to your bank where it will almost always be at your bank, in cash, the next business day. It's easy to do, just contact your fund's transfer agency (that's the shareholder service organization that maintains all of the records of all the shareholders of the fund you own).
Let's take it a step further and get a little more technical. What's the difference between ARMs and CMOs? Don't worry, it has nothing to do with either fingers or toes. The point is that there may come a time when having a convenient source or glossary of commonly used mutual fund terms may be helpful to you in arriving at a more informed investment decision. There's no doubt that you really can't know too much about anything that affects your financial future and well being.
A final note - has anyone ever spoken to you about a mutual fund withdrawal plan? You may have heard a great deal about how and which fund to invest in, but what about a system that allows you to withdraw a specific amount of money from your account either monthly or quarterly, which amount you can change or stop at any time (often with a simple phone call). Well, it can be done and many people enjoy this convenience while maintaining full control of the amount and frequency of regular, periodic cash withdrawals.
courtesy of http://EzineArticles.com/?expert=Dan_Calabria
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