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Archive for the ‘Mutual Funds’ Category

Free Iphone, fixing your 401k, and evil mutual fund managers (via expense ratios and fund fees)

Monday, February 4th, 2008

I know, first thing you are wondering is FREE Iphone? WHERE CAN I GET IT!? Well, just hold on a few and read through. I was talking to one of my friends from work about viking death metal (no joke) and rock band (pretty much the best video game ever) and somehow the conversation drifted toward the 401k plan at our company. He said he had been dabbling in a few of the funds offered and seemed surprised when I said I was dumping 90% of mine (and my girlfriends) into our one index fund. So of course he asked me why? Well, its very very simple. Nearly every mutual fund available in our plan has an expense ratio greater than one.

Mutual Fund fees ruin returns

What the hell is an expense ratio and why do I care?

The expense ratio is the percent of total assets that the investor is charged just to be in the fund. This is supposed to cover the costs of running the mutual fund…but honestly it really is how mutual fund houses and managers steal your money to make themselves multimillionaires. Here is the simple version:

The Penny Saved IphoneMutual fund from your 401k you are in:

BIG MUTUAL FUND: expense ratio: 1.50%

Lets say youve been working for a few years so you have 20k in your 401k. Lets say you get a return this year of 10%. Wow sweet an extra $2000! But wait a minute, your mutual fund that are in has an expense ration of 1.50 so they keep 15% of that. You only get $1700 and they keep that other $300.

Lets say you were instead investing in the index fund with an expense ratio of .10 (actual number for mine). Instead of the fund keeping $300, they would be keeping $10. That extra money, why, thats your free iphone right there. Ok so maybe you can’t actually pull that $300 out and buy an iphone (though you could if it was a Roth IRA) but you get the point.

But dont mutual funds make more money than index funds?
No, 85% of mutual funds fail to beat the market average.

Other types of expenses that mutual funds might charge:

Front-end load
This is basically a fee paid when shares are purchased. It is also known as a “front-end load,” and this fee goes to the brokers that sell the fund’s shares. Front-end loads reduce the amount of your investment. A good example is if you have $1,000 and want to invest it in a mutual fund with a 5% front-end load. The $50 you pay comes off the top, and so only $950 will be invested in the fund.

Back-end load
This is where the brokers take their cut when you decide to sell shares. This is even worse because they take part of your capital gains as well. Some mutual funds let you out of these if you stay with them long enough but its just one more robbery trick.

Level load / Low load
The only difference between level loads and low loads as opposed to back-end loads, is that this time frame where charges are levied is shorter.
Load of Crap
Most of the above fees.

Dont get screwed by big mutual funds

Wednesday, January 23rd, 2008


I was reading my favorite weekly football column called TMQ and he did a blurb about mutual funds that hit the nail right on the head:

Suppose the General Manager of the Miami Dolphins Awarded Himself the Same Bonus as the General Manager of the New England Patriots: Last week, this story appeared buried inside the business pages of The Washington Post. Why wasn’t the story on Page 1? The Post reports that the blue-blooded five, Wall Street’s five top investment banking houses, awarded their management $39 billion in bonuses for 2007 — a period when those firms combined to earn investors about $11 billion in profits. Merrill Lynch lost $8 billion in 2007, Morgan Stanley $3 billion and Bear Stearns $230 million, yet the executives of these companies were showered with billions of dollars in bonuses. Otherwise, they would refuse to do any work! Which, apparently, would be in shareholders’ interest. Merrill Lynch and Morgan Stanley could have done better by their shareholders in 2007 by simply purchasing Treasury bills; a software program designed to make simple conservative investment decisions about market-following mutual funds would have performed better in 2007 than the top management of most investment banking houses. And the software program would not have paid itself billions of dollars in bonuses for screwing up! (TMQ owns no stock in any of the mentioned firms.)

It’s one thing when profitable firms shower money on their CEOs and other top brass; often the amounts are indecent, but as long as shareholders come out ahead, the executives have at least some justification for their windfalls. But in the modern milieu of corporate kleptocracy, even when the company does terribly and the CEO makes decisions that blow up in the firm’s face, the CEO awards himself hundreds of millions of dollars, anyway. Why is this not seen as white-collar crime?

Last week’s buried Post story included this priceless quote: “‘To many people, [the bonuses] will be shocking and questionable,’ said Jeanne Branthover, managing director of Boyden Global Executive Search. ‘People in New York in the world of investment banking will understand it. It’s critical that pay is still there or you’re going to lose really good people.'” Beyond that executive headhunter firms such as Boyden have a self-interest in running up CEO pay — this can increase the search firms’ headhunting commissions — consider the reasoning: OMG, we can’t lose the really good people who cost our shareholders billions of dollars with dim-witted decisions! The notion that top corporate managers must be paid fantastic amounts because they possess incredible, astonishing expertise often is used to justify CEO pay, even when the managers who claim the incredible, astonishing expertise make foolish decisions. “We’ll put billions of dollars of money entrusted to our care into subprime gimmick mortgages backed by no documentation of income; my incredible, astonishing expertise tells me this is totally safe!”

Today the market fell sharply, while Wall Street executive bonuses rose in futures trading.
If corporate managers who screwed up received $5.85 an hour, the federal minimum wage, for the year in which they screwed up — that is, if their wallets were at risk when they perform poorly — then they might fairly argue for huge bonuses when they perform well. But there is no evidence that the people who made the big investment calls on Wall Street last year (except at Goldman Sachs, which avoided the subprime mess) are any better at what they do than people chosen at random off a Brooklyn street. You bet “people in New York in the world of investment banking” will understand huge executive bonuses paid in the same year as huge losses. What’s happening is basically a hustle, intended to enrich the executives while separating the investors from their cash. “People in New York in the world of investment banking” understand that, all right!

Pretty unbelievable… but then again I have been railing against actively managed mutual funds for quite a while.  They are making much more money on you than most people realize.

Another reason to keep tabs on your 401(k)

Friday, March 23rd, 2007

For a long time I had been meaning to have a look at my girlfriend’s 401(k).  She knew she was putting money into it but other than that she hadn’t looked at it much.  Both of us assumed that it was just chugging away piling up and doing what it should.  She is a very smart woman with good financial sense but doesn’t have the interest in personal finance that I do…so when we got online and looked at her current portfolio we both had a bit of a surprise.  Her money was doing almost nothing.

 In fact, it was automatically putting her money 100% in a default money market fund.  Oh it gets worse.  I did the calculations and she returned around a whopping 3% for the year!  Thats right, a little over half of the return on high yield savings account.

To put this in perspective if she had been index fund that is available through her company she would have returned roughly 10%.  When I showed her the difference in cash she was uh, “not pleased” to say the least.  I went ahead and reallocated her funds into a mix of the index fund, a small market cap fund, and an overseas fund.  The latter two just being a small portion for fun.  Just for fun I showed her a scenario of what we might have just saved her.  At her current rate of return, versus a 10% return on JUST the money that was already in there (ie not counting any new contributions) off the top of my head, she would have had about $70,000 more by age 60.  I should have told her I will be charging a 10% fee.  Hey, that’d buy a boat…and when I retire, I would like to have a boat. 

Also as it turns out she was also not maxing out the company matching so we added her extra 2% to get the extra company 1%.  What difference did this all make in the end? To take it one step further, with continuing contributions, if she never got a raise in her life, and worked until 60, with proper allocation (assuming the market keeps rising at its average that is has risen at for the past 100 years) it made literally a million dollar difference.  Thats right $1,000,000.00.  Talk about a change in personal finance.   

There are lessons to be learned here:
 
1) Just because you are contributing to your 401(k) does NOT mean you are doing your due dilligence toward having a good retirement.  Don’t assume that the company is doing the right thing for you.  If you are young you should not be completely invested in a low risk portfolio.

2) Max out your company match.  It is free money, and compounded over 40 years it is a TON of free money.  It’s a truckload of free money. 

I imagine a truckload of free money to look something like this:

Personal Finance Money Truck

Just in case you are wondering, and since the name of this blog is The Penny Saved …that truck is a standard 18 wheeler and if you do not count the weight of the truck itself, it could legally carry about 14,514,955 post 1983 pennies.  That comes out to $145,149.55

So really that million dollar savings would take more than more than 7 of these trucks full of pennies to haul. 

Mutual Funds Basics

Thursday, March 22nd, 2007

Introduction to Mutual Funds

Most people have heard of mutual funds….or at least seen those investment TV commercials with the proper looking dude who promises to make you a whole bunch of money with your investments.

What is a mutual fund?
The concept is actually very simple. It is a collection of stocks and or bonds. The easiest way to think about it is that it is a group of people that have come together to invest their stocks. Each person owns shares which represents a portion of the fund. A mutual fund might invest in 20 stocks or it might invest in 200. It just depends on the fund. Mutual funds are managed by professionals that it is their job to manage everyone’s money.

What are some of the advantages of mutual funds?
Its Simple – Its very easy to set one up through a local broker or online and a lot of places have automatic transfer so you don’t even have to do anything….it just takes say, $100 per paycheck out.
Diversification – Mutual funds allow you to logically put your money in one place, but physically have it spread out, lessening risk.
Low Trading Cost – Because the manager moves all the money in big amounts, there are not the huge costs of moving money around that can pile up with piecemeal stocks.

What are some disadvantages of mutual funds?
Less Money Control – What is an advantage is also a disadvantage. You do not get to pick the exact stocks that your money is buying.
Costs – Mutual funds take some of your profits as a price for being in the fund.
Management – Professional managers don’t necessarily know anything more than an average Joe off the street. I saw an article recently in Men’s Health where they picked stocks by throwing darts at a paper and then compared it against a few different peoples picks and funds. Guess what? The dart won, HANDILY.
Most Funds SUCK – Ok so this is somewhat biased, but the VAST majority of mutual funds (80%) actually under perform compared to the market!