April 26, 2010

Still Paying Mutual Fund Commissions???

I come across a myriad of investors in my workshops and the question of mutual fund commissions still arises and continues to amaze me.  Don't take this the wrong way because I understand this is a business I understand well and most don't but please use common sense!  Heck I'm no mechanic but when I go to get my oil changed and the guy says, that'll be $475, I know something isn't right.

As recently as the early 90's, stockbrokers got paid as much as 8.5% of the total investment to steer clients towards a particular mutual fund!  Insurance guys still see those kinds of commissions. 

Believe it or not, stockbrokers and financial advisors still get paid as much as 5% for some mutual funds and sometimes this fee is taken out of the original principle which means all of your money isn't going to work immediately, this ought to be a crime.  When the 5% is not seen or 'hidden', clients are told not to worry, there is no commission, arrgghhh!

What happens is that the mutual fund wants the money back that they paid to the stockbroker or financial advisor.  Either one of two things; that mutual fund will be charging you 1-2% a year more or there is a lock up period whereby if you sell that mutual fund, you will be assessed a fee.  Neither is good and both are bad.

What to do?  If you are convinced you need to own a mutual fund, ok, then, look for;
  • no load mutual funds
  • no lock up period whereby selling incurs a cost
  • very low fees lower than 0.5%
Buy through a well known discount brokerage firm which by the way will offer advice for free.  That's it.  Stay away from high fee mutual funds, loads, stockbrokers and financial advisors.

April 21, 2010

Dollar Cost Averaging Is Why 401k's Work and Buying Individual Stocks Doesn't

Dollar cost averaging (and time) is exactly why 401k's are so successful.  People mindlessly (in a good way) add to a diversified portfolio when its up, and when its down.

Buying more when your individual stock goes down is exactly why people rarely make money outside of 401k's. You know the scenario, you buy XYZ and it goes down, you buy more and more and again and again until your portfolio has ten or fifteen losers in it. You hold until breakeven (if you are lucky) and sell, whew, only to try again, most times with the 'aid' of a stockbroker.

Thats why I tell people to buy no load mutual funds or etf's and treat monies inside and outside of 401k's the same. Its a winning strategy so don't mess with it.

April 6, 2010

Emerging Markets and Overseas Investing

I am asked on occasion about investing in emerging markets.  While it is tempting to invest in markets such as China, India, Brazil, Korea, Russia, etc, it is also quite risky. 

Risks inherent to investing in companies in countries outside the US include;
  • less stringent reporting requirements
  • currency fluctuations
  • government regulation and policy changes
I tell people that when you invest in a broad based US index fund, you are already getting some international and emerging market exposure since the companies within such as Caterpillar, IBM, McDonald's, Exxon & GE are already investing in those countries.

In my opinion, the reward does not outweigh the risk and besides that, the fees within mutual funds or etf's that deal in emerging markets and overseas markets are quite high and if you have been following this blog for any amount of time, then you already know what I think of fees.  Arrghh.

Stick to a domestic index fund, keep your fees super low and emotions in check and you are doing about all you can.  With that simple strategy, you will beat 90% of the people including investment professionals.

April 1, 2010

Mirror The Index's And Save Money

Fact - over 90% of financial professional money managers cannot beat the S&P 500 nor the Dow Jones 30.

Fact - neither can you, your friend, your stockbroker, financial advisor of financial planner.

Fact - with a stockbroker, advisor or planner, you will pay a lot in fees, sometimes 1%-3% just to get the same or lower returns. 

See the chart to the right, VTI (blue) and Dow Jones 30 (red). VTI is vanguards total market return etf which I own personally but any market based etf or mutual fund will do. They all mirror the indices as you can see which will outperform over 90% of the so-called financial professionals who will charge fees for that underperformance!

The fees on this particular etf are .07%, thats right, less than 1/10th of 1%.

Stop being the 'stupid money' stockbrokers refer to when you open up your account with them and start being the smart money who beats 90% of all investors and pays less to do it.