Mutual funds vs securities, etc.

[Guest]

As of this time, I have almost 90% of my money in various mutual funds (including mostly stocks, some regular bonds, municipal bonds, REIT's, and commodities, in descending order), and somewhat over 10% in individual stocks. I must say that in general, the individual stocks have done somewhat better, and I have greatly multiplied my investments by buying stocks in companies whose business models I like, such as apple, amazon, and starbucks (multiplied my money 10 times over 8 years with that one). Close to half of my money (the majority of my non-qualified money) is managed by Northwestern Mutual, and the money is basically all in mutual funds, including various stock funds, bond funds, including municipal bond funds, some in real estate, and maybe 5% in commodities. They charge 1.1% per year, plus whatever the mutual fund managers take.

Another investment adviser is suggesting I invest my money somewhat differently. He charges 0.8% per year, plus $5 per trade. He would put most of the money in individual investments, such as laddered municipal bonds, various stocks (about 50%), with some in various infrastructure (about 3%), plus energy infrastructure such as pipelines (5%), treasury inflation protection, hedged/covered calls, momentum. He feels this will improve my risk/return profile by increasing my diversification.

I've asked my brother, who's an MBA, but he thinks I should put basically all of my money in index funds (i.e. Spyders tied to the S&P 500) with low costs, which minimizes cost, but I think lacks diversification. Do we have any financial gurus here who can offer any advice?

[Kevin Slater]

I should put basically all of my money in index funds (i.e. Spyders tied to the S&P 500) with low costs, which minimizes cost

 

If you go this route, might I suggest you look at Fidelity's new no-fee index funds. Zero expense ratio, no account fees and no minimum to invest.

 

Kevin Slater

[+ Topseed]

Watch the fees, as this is an immediate subtraction from investment return. Unicorn, to offer any comment, it's important for an advisor to know your age, your attitude toward risk, the totality of your investment assets, and your complete balance sheet (which includes real estate you own, mortgage and credit card debt, etc).

 

Let's face it, since the crash any idiot could make money in equities. All you had to do was be there. Investment performance since then has been above-trend. If you believe in math (as I do), then at some point we will have a period of sub-trend investment return...and maybe a prolonged period. The idea of "return-free risk" is sobering and real. I suggest shifting your investment mix to lower percentage of equities, invest only in vehicles that you understand, clean up your balance sheet, and challenge yourself to increase your personal savings rate. Over the past number of years, cash was a default asset. Prospectively, I think cash will become a viable asset class in and of itself once again. Modest returns (i.e., low/mid-single digit) beat many other outcomes.

[+ Keith30309]

The idea of "return-free risk" is sobering and real.

:p:p

I’ve never heard that.

[gallahadesquire]

:p:p

I’ve never heard that.

I think he means losses.

[gallahadesquire]

ETFs (exchange-traded funds) are inherently diverse. You cAn do the Dow 30 industrials; the S&P 500; NASDAQ; Russell; and the ultimate, the Wiltshire 5000. They have been shown over and over, to beat out managed mutual funds.

 

The $5/trade would lead to a complete churning of your portfolio.

 

One strategy that worked well for me was “The dogs of the Dow.” The 10 stocks with the lowest PE ratio (price to earnings) every quarter were bought! And sold after a year and a day. Returns were usually greater than the market’s.

 

Why is your mutual fund company charging you 1.1% above the mutual funds cost? You’re being ripped off.

[mike carey]

Why is your mutual fund company charging you 1.1% above the mutual funds cost? You’re being ripped off.

Sounds like a personal portfolio management arrangement where the manager isn't the company that manages the individual mutual funds. This sounds similar to an arrangement my broker is pitching to me. For a fee of that sort of level, they would manage the shares and mutual fund investments I have in a single structured account and provide consolidated cash flow statements, portfolio valuations and annual income statements for tax returns, and on-line access to all the account details.

 

They actually pitched it to me for my superannuation (retirement savings) which have to be kept in an investment product that has stricter rules than regular savings and investments. (There are mutual fund style investment products that meet the legal requirements for superannuation but the rules for moving between them are more complex than for normal assets. The structure they propose is its own superannuation account so it can hold any sort of assets, like shares, cash and regular mutual funds.)

 

There are regulatory reasons that mean I need to have a compliant structure for superannuation funds, but despite the management cost I am considering one for my regular investments as well. I could just retain separate share investments and do all the administrative work myself, but paying someone to do that seems like an attractive idea, and the fee is tax-deductible. Apart from the administrative work they do, I would manage the funds within the structure as if they were separate investments, making all the buy and sell decisions. If that is the way @Unicorn does it and doesn't authorise the advisor to make investment decisions $5 sounds (from this distance) like a good deal for each trade, and would remove the risk of churning the portfolio.

[+ Topseed]

Here’s what I mean: “return-free” risk is obviously a play on words. And it’s also a possible outcome for many equity and fixed income investors in the next several years.

[+ FrankR]

I’m with your brother on this one - low cost, broad based index funds are my preferred way to invest my brokerage funds. I dont have the time or inclination to personally track or hire somebody to advise me on a managed portfolio. Advisory fees take a big bite out of your returns, let the buyer beware. John C Bogle has been preaching this for a long time and I have not seen any evidence to refute his positiom. Warren Buffett gives the same advice. So I am pretty much sold on this approach.

[+ E.T.Bass]

Vanguard was historically the place to go for low expense index funds. I'm thinking about moving all my qualified investments there when the day comes to retire. Perhaps Fidelity is trying to catch some of that portion of the market touting their low expense funds. For now, over half of my qualified $$ is administered by Fidelity, like many company plans are.

 

Also, active trading of retirement funds was always discouraged in my world, that the people ending with the greater return over the years are the ones that let their money sit, not attempting to time the market, or move in and out of securities. So that is pretty much what I'm doing.

 

For non-retirement $$, one never makes a profit unless you sell at some point, which I have done, dollar cost averaging out of the market in order to pay down the mortgage.

[+ Keith30309]

I think he means losses.

Actually I prefer the original

 

Here’s what I mean: “return-free” risk is obviously a play on words. And it’s also a possible outcome for many equity and fixed income investors in the next several years.

[Guest]

I'm not hearing that any of you are putting any portion of your portfolio in commodities, infrastructure, covered calls, etc. If anything covered calls, from what I understand limit the risk (and gains). Are these not wise? When the stock market has a correction, it would seem that having money elsewhere would lessen the dip.

[+ Keith30309]

Commodities - I don’t care for them. For me to do well i would have to keep up with and understand the price drivers (eg., influence of geopolitical instability & foreign exchange on copper and emerging demand for biodiesel on soybeans). It’s just not something I would do well with, except perhaps for gold under certain circumstances.

 

Infrastructure- I assume you mean it as a sector or asset class of equity. I think of infrastructure as being a fairly low yield investment that’s subject to allot of regulatory influence, particularly outside the US, that I simply can’t keep up with. I think if you’re tied in to the sector somehow and have an awareness of emerging influencers, especially in other regions, it can work out.

 

Covered calls - If you’re becoming neutral or bearish then hedging like this can be a wise move to mitigate your risk It requires a little focus on a specific asset that I want don’t want to commit to.

As with anything you have to factor in the fees you incur and decide if they are more than offset by whatever small gain you realize.

[mike carey]

I'm not hearing that any of you are putting any portion of your portfolio in commodities, infrastructure, covered calls, etc. If anything covered calls, from what I understand limit the risk (and gains). Are these not wise? When the stock market has a correction, it would seem that having money elsewhere would lessen the dip.

nfrastructure- I assume you mean it as a sector or asset class of equity. I think of infrastructure as being a fairly low yield investment that’s subject to allot of regulatory influence, particularly outside the US, that I simply can’t keep up with. I think if you’re tied in to the sector somehow and have an awareness of emerging influencers, especially in other regions, it can work out.

The Ontario Teachers' pension fund has invested in toll roads in Australia. There are listed companies here that own toll roads (here and in Canada), and Sydney Airport is a listed company. If you're a teacher in Ontario, or you have a retirement investment structure that can buy infrastructure shares, you can invest in them. We have compulsory superannuation here, and the pool of funds is about AUD2.3tr at the moment. Some of the fund managers are 'industry funds' run cooperatively by businesses and unions, and they make direct investments in things like infrastructure, and anyone can open an account with those funds. You can't pick the individual investments where your savings are placed, but you can invest indirectly in those sorts of assets. Ours is a small investment space compared to the US, so I can't imagine that there is not a similar opportunity there.

[+ Keith30309]

The Ontario Teachers' pension fund has invested in toll roads in Australia. There are listed companies here that own toll roads (here and in Canada), and Sydney Airport is a listed company. If you're a teacher in Ontario, or you have a retirement investment structure that can buy infrastructure shares, you can invest in them. We have compulsory superannuation here, and the pool of funds is about AUD2.3tr at the moment. Some of the fund managers are 'industry funds' run cooperatively by businesses and unions, and they make direct investments in things like infrastructure, and anyone can open an account with those funds. You can't pick the individual investments where your savings are placed, but you can invest indirectly in those sorts of assets. Ours is a small investment space compared to the US, so I can't imagine that there is not a similar opportunity there.

I hadn’t heard that. Compulsory superannuation sounds like a good idea but it’d be labeled as socialist here... by Social Security recipients... and then be driven into the ground by legislators influenced by contributing special interests.

[mike carey]

I hadn’t heard that. Compulsory superannuation sounds like a good idea but it’d be labeled as socialist here... by Social Security recipients... and then be driven into the ground by legislators influenced by contributing special interests.

Superannuation is compulsory, employers have to pay 9.5% of your salary into the fund (and you can pay in your own money). It is tax-privileged (all income in the fund is taxed at 15%), but it's not a government entity like SS, it's in privately operated funds or the industry ones I mentioned, or you can set up a fund of your own much like a personal trust, but the employee owns the funds in their account. There are rules about taking it out (you have to be 60). Breaches of the rules can result in very high tax rates applying to the funds. However you manage it you have to keep firewalls between your regular funds and your superannuation fund accounts, and transactions between them can result in tax liabilities. In the end though, most payouts when you are retired are tax free if you take them as gradual payments (rather than just withdrawing all the money).

[+ Keith30309]

Superannuation is compulsory, employers have to pay 9.5% of your salary into the fund (and you can pay in your own money). It is tax-privileged (all income in the fund is taxed at 15%), but it's not a government entity like SS, it's in privately operated funds or the industry ones I mentioned, or you can set up a fund of your own much like a personal trust, but the employee owns the funds in their account. There are rules about taking it out (you have to be 60). Breaches of the rules can result in very high tax rates applying to the funds. However you manage it you have to keep firewalls between your regular funds and your superannuation fund accounts, and transactions between them can result in tax liabilities. In the end though, most payouts when you are retired are tax free if you take them as gradual payments (rather than just withdrawing all the money).

Yeah... it’s the “mandatory “ part that would ruffle feathers. Once you start requiring people to save for their own retirement it’s a slippery slope to taking away automatic weapons and fluoridating water. And before you know it we’ll all have chips implanted into our brains.

[gallahadesquire]

When I was at University if Chicago, their mandatory 403(b) contribution was 5% of your income. Our department chair upped it to 8%.

 

My next job started with 15% then dropped it to 5%. I was grandfathered in at 15%. Now I’m living the good life!

[mike carey]

Yeah... it’s the “mandatory “ part that would ruffle feathers.

Oh, I know that's how it would happen in the anti-socialist states of Murika. It doesn't come out of people's pay here. Workers agree on their pay, employers have to pay the 9.5% into superannuation on top of that. Next time we have a Labor Party government they will increase the percentage above 9.5.

[BaronArtz]

If you go this route, might I suggest you look at Fidelity's new no-fee index funds. Zero expense ratio, no account fees and no minimum to invest.

 

Kevin Slater

 

Agreed. Say your mutual fund manager charges 1.5% and 0.5% in expenses, per year. Over a 20-year time period, you have paid him/her 40% of your capital! It would make sense only if your fund managers outperforms his/her market index in excess of the fees you are paying.

 

It is very rare that mutual fund managers outperform their market benchmark. Some do for a limited period of time, but not consistently. Picking the right manager is like looking at 1,000 golfers and deciding which one will be the next Tiger Woods. Or the next George Soros. You can't. It is a crap shoot.

 

Slater's advice is correct. Invest in a low or no-fee market index fund, like the ones offered by Fidelity and Vanguard.

 

And ditch the financial advisor who has been fattened up by your fees.

[+ Keith30309]

From 10/3/2017

 

The chairman and CEO of Berkshire Hathaway Warren Buffett said Tuesday that passive investing works in any market environment and so he'd be willing to wager again against active investing for the next 10 years.

 

A decade ago, the billionaire investor made a million dollar bet that the S&P 500 will beat a basket of fund of hedge funds over the next 10 years, ending this year. He will likely win that bet by a large margin.

 

The S&P 500 "will absolutely kill every one of the fund of funds," Buffett said on CNBC's "Squawk Box." "Passive investment in aggregate is going to beat active investment because of fees."

 

The investor explained if you don't pay 2 percent or 3 percent of fees to financial advisers, the your payoff for investing in the broad market will be "very good" over time.

 

When asked if he just got lucky with the timing of the bet, the Buffett said "the date of the start has nothing to do with it."

 

He said is willing to do another bet on active versus passive as long as anybody wants to put up "a significant percentage of their net worth" on the wager.

 

LINK

[Kevin Slater]

He said is willing to do another bet on active versus passive as long as anybody wants to put up "a significant percentage of their net worth" on the wager.

 

Is the 87 year old planning on being around in 10 years?

 

Kevin Slater

[edjames]

There are a number of factors to consider when planning your investment strategy.

First, your age. Are you nearing retirement age? How much money will you need for the future?

What is you tolerance for risk? The older you get, the more conservative you should be with your portfolio.

There are 3 words you should always consider when investing, "safe," "secure," and "insured."

Examine investments in bond funds or individual bonds in state and federal bonds that will decrease your taxes.

Diversify your portfolio to limit exposure.

Also, be careful of what friends and relatives advise you to do. Remember its not their money!

[gallahadesquire]

From 10/3/2017

 

The chairman and CEO of Berkshire Hathaway Warren Buffett said Tuesday that passive investing works in any market environment and so he'd be willing to wager again against active investing for the next 10 years.

 

A decade ago, the billionaire investor made a million dollar bet that the S&P 500 will beat a basket of fund of hedge funds over the next 10 years, ending this year. He will likely win that bet by a large margin.

 

The S&P 500 "will absolutely kill every one of the fund of funds," Buffett said on CNBC's "Squawk Box." "Passive investment in aggregate is going to beat active investment because of fees."

 

The investor explained if you don't pay 2 percent or 3 percent of fees to financial advisers, the your payoff for investing in the broad market will be "very good" over time.

 

When asked if he just got lucky with the timing of the bet, the Buffett said "the date of the start has nothing to do with it."

 

He said is willing to do another bet on active versus passive as long as anybody wants to put up "a significant percentage of their net worth" on the wager.

 

LINK

As of January 2, 2018, Warren Buffett won that bet. His S&P 500 index fund compounded 7.1% annual gain over 10 years beating an average increase of 2.2% by the basket of funds selected by Protégé Partners. The bet was actually worth 2.22 million at the end, because they moved the bet of 1 million into Berkshire class B shares in 2012.