Thursday, January 31, 2008

Want a $100,000?

It is extremely important for your financial future to understand fees.
If you are giving to your 401k, they are probably putting you in Mutual Funds.

Congress is trying to force 401k providers to disclose all of their fees because Wall Street is completely taking advantage of us.

Historically the Stock Market has averaged around 10% return over a long period of time.
The more fees you pay to buy the stock market the less money you will have when you retire.

In some situations all of your fees put together actually become higher than 10%.
Which means you aren't making any money.

Here is an example of American Mutual Fund (AMRMX) fees:
1) Total Expense Ratio - .55%
2) 12b-1 fee (Advertising) - .22%
3) Front Load (Sales charge) - 5.75%
4) Managers fee - .26%
5) End of year distribution - 1.29%
6) SAI fee (Statement of Additional Information) averages - 1.25%

Total if bought in 2007: 9.32%!!!
Total each year after: 2.28% minimum.

Note that using a financial planner could cost you a flat fee or 1% of your entire investment.
When you are ready to retire, the difference will be hundreds of thousands of dollars!

There are currently bills on Capitol Hill that are trying to force Mutual Funds to show all of their fees:

"[Education and Labor Committee Chairman Rep. George]Miller's bill, the "401(k) Fair Disclosure for Retirement Security Act", also would force companies to offer plan participants at least one low-priced index fund.

Sen. Herb Kohl, D-Wis., chairman of the Special Senate Committee on Aging, is expected to introduce a version of the Miller bill..."

While the House is expected to pass 401(k) fee disclosure legislation, the bill is not expected to make it through the Senate.

And the response of one of the Lobbiest:"...the proposed rules "would dramatically increase the administrative costs paid by plan participants while overwhelming them with information that is of little practical value as they make the decision to participate in the 401(k) plan and the decision of which investment option to select."

If we tell people how much it costs we will have to charge them more.
And they won't understand it anyway.

Image if you went into a store and bought some milk. At the cash register they say they can't tell you how much it costs because then they will have to charge you more and you won't understand it anyway. (No it doesn't make sense.)

Why does making something complicated make money for businesses?;_ylt=A9j8aqaG0KFHGLcA1J27YWsA

"By periodically investing in an index fund, for example, the know-nothing investor can actually outperform most investment professionals." ~Warren Buffett

We may never know all the fees associated with Mutual Funds because they don't have to tell us.
Mutual Funds hide their fees and the fact that most of them can't beat an Index Fund.

Friday, January 25, 2008


The main point of our discussion was the different between Index Fund Fees and Mutual Fund Fees.

I compared S&P 500 (SPY) vs American Funds (AMRMX)

In this picture you will notice that both funds have many of the same stocks.
Holding the same stock should give you the same returns.

One reason Index Funds do better long-term is their lack of fees.
The Index Fund (SPY) has a fee called "Total Expense Ratio" of .08%.

Mutual Fund AMRMX has many other fees:
1) Total Expense Ratio - .55%
2) 12b-1 fee (Advertising) - .22%
3) Front Load (Sales charge) - 5.75%
4) Managers fee - .26%
5) End of year distribution - 1.29%
6) SAI fee (Statement of Additional Information) averages - 1.25%

Total if bought in 2007: 9.32%!!!
Total each year after: 2.28% minimum

What is the difference between a few percentage points in fees?

Diversify means putting your eggs in multiple baskets instead of all your eggs in one basket.
Instead of buying one stock you are buying one index fund that has many stocks.

First you become diversified by buying an Index Fund that owns a lot of different stocks.
Then you become more diversified by buying multiple Index Funds.

Later in life you become even more diversify by buying Multiple Index Funds, Bonds and other things.

Ric Edelman's Guide to Portfolio Selection (GPS) gives an example of what a well diversified portfolio looks like for someone who has over 75,000 to invest.

It's good to read through the questions.
You do not have to put your personal information in when they ask for it.

For the rest of us, just start with a few well diversified Index Funds.
SPY - US Large Cap - Index Fund
EFA - International Large Cap - Index Fund
EEM - Emerging Markets - Index Fund

Here is some very detailed information about Index Funds:

In conclusion: a Warren Buffett quote to backup our thinking:
Index funds are appropriate for inexperienced investors. In response to a question about why Buffett recommends index funds to investors, he said that for "a know-nothing investor, a low-cost index fund will beat professionally managed money." He also said he had a standing offer to anyone who could name 10 hedge funds that will beat a low-cost index fund. No one has taken him up on his offer.