Before you get all in a lather, the title is addressed to me. How much did I give Wall Street last year in "management" fees. How much have I given them over the last 10 years. I know what they gave me - 60 cents on the dollar. Yep, I am down at least 40% for the year. What do I get for the pleasure - excessive fees from Fidelity, American Fund, and JP Morgan. Well, I say no more and I hope you will join me.
If you still have faith in the market (ahem) and/or you think that we have hit a floor (my opinion), then now is the time to start to rethink your equity investment strategies. I have always been skeptical of the fees charged by "managed" mutual funds and their Wall Street brethren. Do they really make sense? Now I think I have found my answer - from someone that I assume is much smarter than myself.
In an article published by Economics and Portfolio Strategy, Mark Kritzman, an instructor at MIT Sloan School of Management comes out and shatters the myth about mutual funds, as well as, hedge fund returns for any investor.
For years, many have argued that after fees and taxes, an index fund (such as the S&P) performs as well or slightly better than a managed fund. With the marketing muscle of Fidelity, Putnam, et al telling us to invest with them, it is difficult to go against the flow. Well, it seems as though Kritzman finally has devised a method of measurement that puts the case to rest.
Mr. Kritzman devised an elaborate method to take such contingencies into account. Then he calculated the average return over a hypothetical 20-year period, net of all expenses, of three hypothetical investments: a stock index fund with an annualized return of 10 percent, an actively managed mutual fund with an annualized return of 13.5 percent and a hedge fund with an annualized return of 19 percent. The volatility of the three funds’ returns — along with their turnover rates, transaction fees and management and performance fees — was based on what he determined to be industry averages.
As many have argued before, it's the fees dummy.
For both the actively managed fund and the hedge fund, those expenses more than ate up the large amounts — 3.5 and 9 percentage points a year, respectively — by which they beat the index fund before expenses
So how many of these 432 masters of the universe actually deserved their pay (fees)? 13. According to Kritzman, this is slightly less than 3% of all funds beat an index fund. He goes on to suggest that even your "actively" managed 401k or IRA (no or deferred taxes) have a hard time beating an index fund. Right now, I have a sinking feeling that my mutual funds are probably not part of the 13 - sigh.
So what should you do? Well, I would look closely at an index fund that tracks the S&P, then I would look at an "emerging" market index fund to get some international exposure, and then I would put a chunk into cash/Treasuries.
Read article: The Index Funds Win Again
The only way to eliminate the greed is to stop giving them our money. There is no need for high-paid hedge fund managers or mutual fund czars. All we need is a clearinghouse to perform the transactions and then charge us a modest .5% fee to cover the expenses. Over 20 years, the masters of the universe pocket billions in fees and then watch as our retirement funds go down the tubes. Why do we continue to play along?