Randy Cass's talked was called "Myths, Math and Markets: The Truth About Saving and Investing Your Money in 2013". He is host of BNN's Market Sense show. His previous job was working for the Teachers fund.
When you think about what you are do to keep your money, you have 3 choices. We can invest in mutual funds, consult an advisor or do it ourselves. Math tells us there are problems with all three approaches.
First he talked about Mutual funds. Can Mutual Funds have 2.5% per year fees and give us a better return? The purpose given for the original mutual funds was that they provided diversification. Academics originally said that their lousy returns provided diversification.
Vanguard stated the first index fund for a low fee. After that Mutual Funds said that their new mission was to make people money. We no longer were paying for size (diversification) but paying for performance. This idea came from an advertising campaign. It did not come from any research.
Research has shown that over one year 76% of the mutual funds will under the index. Over 5 years, 98% of funds will underperform the index. There are some winners. However, a fund with higher returns over 5 years is no indication that it will do anything good over the next 5 years.
Mutual Fund results are random. Why do mutual fund managers do less well than average? The problem is that size of the pie does not change. The fees come out of the market return. Here the market is a zero sum trade. There is only so much to earn and fees come out of the return.
Next he talked about going with a financial advisor. First no one has an idea of what they are paying their advisors. Most think that they are paying nothing. However, there are payments of trailer fees to advisors.
Fees are revolving away to flats fees, which is a flat percentage of your portfolio. But the flat fees will increase the actual fees depending on the size of your portfolio. Say you invested $10,000 for each year for 40 years at 5%. You would end up with $1.2M.
If you were paying 1.5% fee each year you would end up with $875,000. The fees would be $400,000. This is the worse $400,000 you would ever spend. The advisor puts up 0% of the capital. They take 0% of the risk and get 30% of the return.
The last way to invest is to do it yourself. However, investing is not a level playing field. You could be your own worst enemy. There is also the problem of High Frequency Trading (HFT).
HFT means you are competing with a computer programmed to make money on difference in markets. These programs are making money and they are trading against you. They want you to pay a fraction more when buying and to get a fraction less when you sell.
Individuals underperform fund managers. The fear of losing is more than the joy of winning. We tend to buy stocks when they have gone up and sell stocks when they have gone down. Sometimes we keep a losing stock hoping it will get back to what we paid for it.
We see whatever we want to see and that is a problem. We should look at our mistakes as well as our successes. It is a myth that mutual funds outperform the market. It is myth that small fees do not matter. It is a myth that investing is easy.
Be in control, but be realistically in control. Control what you can control. You cannot control the market. You can have fun, but be realistic. When investing, boring is better for you. Randy Cass is starting a new web site called Nestwealth.
This blog is meant for educational purposes only, and is not to provide investment advice. Before making any investment decision, you should always do your own research or consult an investment professional. See my site for an index to these blog entries and for stocks followed. Follow me on Twitter.