"Cost Matters" in Investing

[scomac]

Now for a 'sacrilegious' notion; following Norbert's analogy to the financial world, might investors actually be better off spending their money and not saving at all? There are several situations where the grasshopper fares better than the ant . . .

This is a terrific analogy that shouldn't be ignored. It really doesn't matter whether or not the vast majority of boomers have their financial houses in order. [s]They[/s] We are the dominant political demographic group and hence will wield the most power. Policy will be set to meet the needs of the majority, consequences be damned. It should be of no surprise that we are experiencing this growing polarization of political ideals in this country. The haves will have a decidedly different adgenda from the have nots. What's missing from the analysis is the realization that the have nots might just be in their position by their own designs and actions.

[smelly]

But you are saying...

I'm saying that the question, as posed, has no clear, provable answer. It's my opinion versus yours versus jiHymas'. Pick one. Spin to your heart's content.

I suspect the number is much higher than the industry is willing to admit.

But no one holds Bylo's feet to the fire to prove his suspicion like he would if I took the opposite position. Things that make you go, Hmm.

Since it seems that you're allowed to express strong, inflexible opinions based on broad, sweeping generalizations, but I'm not even allowed to have a suspicion, there's simply no use in continuing this or any other "debate" with you

Of course the question posed was too hypothetical for there to be a right or wrong answer nor could any position be proven.

What happened was that we both formed our response to the questions based on our own presumptions. To use your term, we both "spun". I asked for clarification on yours in order to understand, and of course challenge your spin. Then you challenged my spin and told me to provide proof to substantiate my spin.

Smelly

The former? That means the first example, right? The person with the plan that gets abandoned? Wow!

Bylo

I see. So you'd go with "a story, backed up by glossy reports, television ads and some competition, that is at least interesting enough to get them to forgo either the two weeks in Mexico or the two weeks on Georgian Bay and stick the money in a relatively high cost mutual fund?"

In other words you'd provide a nice song and dance routine, then sell investment "entertainment" in direct competition with vacations in Mexico/Georgian Bay. (And, of course, that you earn a nice living as an "entertainer" would have no bearing on your preference for the latter over the former.)

Smelly

Maybe I misinterpreted James' scenarios but it seemed to me that person that abandons the plan has zero but the person who was "sold" some product has more than zero. Doesn't that make the second person richer than the first person? Did I mis-read?

Bylo

Two colossal presumptions.

1. that people who fail to follow a financial plan are doomed to a portfolio value of zero. Their returns may well be poor but where's the proof of an inevitable death spiral to zilch value?
2. that people who follow "a story, backed up by glossy reports, television ads and some competition..." are guaranteed a non-zero outcome. Ask e.g. those who bet big on the dot.con (or Bre-X or...)

Smelly

I’d say that anyone answering that question would have to apply some presumptions so don’t throw mine back at me or tell me to prove anything unless you're prepared to post and prove yours.

But you are saying that “for a typical retail client” “who needs encouragement”, giving them an investment plan and sending them off to implement the plan only to scrap it as soon as a more fun alternative like a trip to Mexico or some other spending rather than saving opportunity comes along, would be better off than if they dealt with an advisor who rather than just giving them a plan, encourages them to be smart with their surplus income and save regularly even if the advisor has to resort to glossy, flashy and interesting stories and pictures.

You impled that my presumptions are bigger and less provable than yours. Telling me to put up or shut up is unreasonable. As unreasonable as it would be if I told you the same.


On your second point, either we are both allowed to make broad sweeping pronouncements or unsubstantiated “suspicions” or neither of us can. Rules have to apply to everyone equally. That was the point I was making. If I expressed a “suspicion” that ran contrary to your opinion, you’d be all over me. Just asking for equal treatment is all.

[Bylo Selhi]

Further to the discussion on soft dollars, upthread...

Helping hand or kickback?

"Soft dollar" commission deals are legal, but they're starting to give some institutions the willies... My colleagues and I have a solution. Investment managers should be required to disclose the details of third-party commission payments -- who they're paid to, and the totals -- in their annual regulatory filings. Then, when firms like mine decide to do soft dollars, we won't be part of a conspiracy to keep it out of public view.

[Bylo Selhi]

A cute slogan from a current ING Direct TV ad.



(Too bad they don't apply (or rather didn't apply, when they had them) that thinking to their own mutual funds.)

[Bylo Selhi]

Investors' challenge: Keep fees low [Toronto Star, 21Jun06]

Your challenge when trying to ride along with the trend is to pay as few charges as possible that would increase the distance between you and stock market returns or bond yields. That will mean limiting every dollar you spend on administration and trading fees, and staying clear of the expense and uncertainty of trying to pick individual stocks, market sectors or investment managers. Over long periods, you will improve the odds of beating most professional fund managers, pundits and dabblers...

Bogle pointed out in a May 15 speech in Las Vegas [PDF] that only one in seven U.S. equity mutual funds managed to beat the 25-year performance of the Standard & Poor's 500 index. Nearly two-thirds of funds available in 1970 disappeared, and only one in 120 beat the index by more than 2 percentage points throughout the period. The chances of an untrained do-it-yourself investor doing better would be slimmer.

The importance of controlling costs will be particularly important over the next decade if Bogle is right that U.S. investment returns will not be as high as during the past quarter century. The yields on bonds and corporate dividends are lower now, while the price of stocks is far higher relative to profits...

[Bylo Selhi]

Bogle for BI

Charge 'em for the lice, extra for the mice
Two percent for looking in the mirror twice
Here a little slice, there a little cut
Three percent for sleeping with the window shut
When it comes to fixing prices
There are a lot of tricks he knows
How it all increases, all them bits and pieces
Jesus! It's amazing how it grows!
“Master of the House”, Les Miserables
...

Over the years, I've accumulated some of Bogle's wisdom. Among his maxims pertinent for measuring business performance and BI:
* We investors as a group get precisely what we don't pay for.
* Performance comes and goes, but costs are forever.
* The stars produced in the mutual fund field are rarely stars; all too often they are comets.
* The first shall be last. And they were.
* The greatest enemy of a good plan is the dream of the perfect plan.

[brucecohen]

A nice illustration of the impact of fees by Jim Daw of the Star.

As he does every few years, Jim compared current values for three mythical people who began RRSP saving in 1970. Mary has done GICs all the way while John and David have run balanced portfolios.

Her peers, John and David, went a different route. They invested in a mix of Canadian and U.S. stocks, long-term government bonds and short-term treasury bills.

They put the most into U.S. stocks that the foreign investment rules of the day would permit, then stopped at 30 per cent of their portfolio, despite the removal of limits in 2002.

Each year, they rebalanced their portfolios to keep no more than 55 per cent invested in the stock market, 40 per cent in bonds and 5 per cent in treasury bills. These ratios are roughly in line with the average balanced mutual fund, according to Morningstar Canada data.

John and David were equally skilled or lucky, hypothetically speaking, that is. They would have matched the performance of major stock, bond and treasury bill indices if not for fees they paid by investing in funds.

John bought the more expensive funds. His fees lopped 2 percentage points off his annual returns, which is less than the fees charged by 84 per cent of balanced mutual funds in Canada.

David bought lower-cost funds. His fees took off only 0.7 percentage points. That is somewhat less than the 0.84 per cent with a balanced fund from TD Canada Trust that also tracks the performance of major market indices. The fees are also in line with some mid-sized pension funds.

If they had paid no fees, John and David would have accumulated about $593,500 in the time it took Mary to accumulate $352,429, up to the end of May this year. They would have had more than $630,000 if they had missed last year's market collapse.

But John's fees trimmed his ultimate nest egg to $362,687, putting him only about $10,000 ahead of Mary. David did much better, accumulating $498,255.

So what's the lesson?

First, fees matter a great deal.

[George$]

A nice illustration of the impact of fees by Jim Daw of the Star.

A minor point. Daw's article had 13 reader comments but I can't seem to find a way to read them. Why?

[brucecohen]

A nice illustration of the impact of fees by Jim Daw of the Star.

A minor point. Daw's article had 13 reader comments but I can't seem to find a way to read them. Why?

I can't see them either. Maybe the Star kills them after a certain amount of time. FWIW I've never found Star reader comments interesting or useful.

[Bylo Selhi]

FWIW I've never found Star reader comments interesting or useful.

I've never found the reader comments sections of any Canadian newspaper either interesting or useful. One of the worst was the G&Ms before they began to moderate posts like the Star has been doing for months. But even so the usual small cadre of partisans post the same anti-Liberal or anti-Conservative or anti-any-government drivel in the comments section of every political story(*) The discussions in our SoapBox are far more civil and insightful.

To be fair, there are the occasional informed contributions, e.g. from real airline pilots who post on reports of tragedies like the AF447 crash, but they're almost always about non-political subjects.

(*) or so they did back when I used to waste my time reading them.