Fees, Fees and More Fees

There’s an obvious phenomenon in the world of personal finance and that is an obsession with fees.

As an entity with decades of experience advising human beings with $1000 to invest up to $100 million liquid net worth, the attention paid to fees is warranted and overdone.

We humans are apt to commit to a philosophy when it comes to investing like we do when it comes to political, religious or social affiliation.  It is the animal in us that wants to belong to the group.

Unfortunately, politically, socially and financially, group-think can be harmful to our health.  Take mutual fund investors, particularly index advocates, without mentioning a group of devotees to Vanguard’s John Bogle by name.

Indexers, the ones I’ve encountered both in person and in the comments section of articles I’ve written elsewhere, are often absolutists; regardless of the evidence indexing is the only way to go and you are an idiot if you pay higher fees for any other type of fund.

Now, let me be clear, I use index funds and have done so for many years.  They serve a great purpose and can be the building blocks to the core of a portfolio.  But there are many, many other fund choices in the world with higher fees and also superior performance.

The stat toted around by many in the biz is that “80% of funds do not beat their benchmark in any given year.”

OK, so what?  It would take even a novice about three minutes to go to Morningstar.com and find mutual funds that have beaten the S&P 500 over any period we wish.

In a mutual fund universe with, I don’t know, lets say conservatively 10,000 funds (I know there’s more), 2,000 of them are beating their index.  Net of fees.

This goes for other investment products as well.  The issue isn’t fees on their own.  The statistic fund investors should be focused on is total return net of fees, because that is the number reflects how much money you’ve put in your wallet.

And I’ve really had conversations with people who, despite superior net returns, opted for an inferior performing index fund rather than the superior performing actively managed fund.

To each her own.  Me, I look for net returns.  I know there are a ton of great funds that beat their benchmark.  But I also index.  That part of my portfolio is at the core.  It remains largely unchanged.  And my active investing is done with what I call “satellite holding”.. That is where I earn my alpha.  And every investor should do this.  A core of the basic building blocks of a portfolio (large, mid small cap, international, fixed income, et al.) and seek out sized returns with a revolving cast of characters depending on circumstances.

There are a lot of people who don’t have the time, talent or temperament to do anything other than buy and hold with index funds, and that’s fine, really.  But if this is you, realize that buy and hold with a blind adherence to the belief that index funds are the solution can lead to disaster.  This is not an indictment of index funds, but an acknowledgement that blindly buying and holding, without periodic reviews and the counsel of a professional other than the Bogleheads Message Board (they’re not pros anyway) can lead to problems.

Remember the shorter your time horizon the less likely any fund can counted on to perform the way it did in the past.  10+ years return data is only applicable to investors who have 10+ years to buy and hold over.

Pre and post-retirees with short time horizons or the complicating factor of periodic withdrawals for income supplementation have a whole host of other concerns.  And are most likely to need professional help.

A twenty or thirty-something with many decades to go, fine, set up a periodic investment program into a diversified portfolio index funds or ETFs or mutual funds, work hard, and take a peek once a year.  But the closer you get to retirement, th more vigilant you must become.

The bottom line is this: successful investors are not committed to a group mentality, not committed to a type of product, nor devotees of a an investment guru (except the author of course) nor are they closed to hearing about different options, even ones that John Bogle says you should avoid.  Mr. B. did great things in his career and deserves all the credit he gets for his innovations.  But the world of investing moves forward.  There are new products and services introduced every year.  And even a deep a cynic as I am understands that yes, some of these products are designed to fatten the bottom line of the organization that is manufacturing it, but not all.  Keep an open mind.  Learn about different strategies, products and services.  You’ll be glad you did.




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