In investing there is only one variable that an investor can control, and that is cost. Cost is vital to your long-term investment success. Lower costs necessarily result in higher returns. There is no disputing this fact. As an example, take two funds with the same gross return, Fund A and Fund B. Fund A has a 1% expense ratio and Fund B has a 2% expense ratio. After fees are deducted, Fund A will return 1% more than Fund B. Anybody capable of basic arithmetic should be able to figure this out. Yet, millions haven’t. The mutual fund industry is jam-packed with high-expense-ratio-load funds … [Read more...]
Simple Arithmetic Vital to Your Investment Success
My arithmetic of portfolio losses chart shows the return necessary to break even after incurring a loss. The horizontal axis shows the assumed portfolio loss incurred. The vertical axis shows the portfolio gain required to break even. My chart clearly illustrates that the bigger the loss you take, the harder it is to recover. You can recover from a small loss. If your portfolio drops 10%, you only need a gain of 11.1% to get back to even. But if your portfolio drops by 50%, you need a gain of 100% just to get back to even. And if you take a loss of 70%, you need a staggering 233% return … [Read more...]
The #1 Investment in the World
You may recently have read the outstanding, in-depth article from Sports Illustrated “Sports Genes,” by David Epstein, who points out that “good genes” don’t necessarily equate to athletic success. Take Ethiopian runner Haile Gebrselassie, the world-record holder in the marathon and perhaps the greatest distance runner ever, who, at age five, ran six miles each way to school because that’s how you got to school in Ethiopia. “Every day is running. Every job is running: working in the fields or just getting somewhere. Life is running,” says Gebrselassie. Just as Gebrselassie wasn’t born a … [Read more...]
A Ticking Bomb
On Monday morning while driving to Boston for a meeting, I was listening to the news while waiting for the start of the award-winning Helen Glover Show. Helen came on at 7:00 a.m. sharp, and even though she greeted listeners with the same energy as always, you could immediately sense that something was different this morning. Her opening emotions made listeners sit up and pay attention to what had happened to her over the weekend, which she spent in New York City at the Marriott in Times Square, right across the street from the failed Faisal Shahzad van bomb. We learned how, just like that, a … [Read more...]
Stay Defensive
Confidence in the economic recovery is improving, and retail investors are moving back into equities. Here are four reasons to remain defensive in the face of this renewed optimism: Stocks are now discounting a sustained and robust economic recovery. A second contraction in economic output is no longer priced into the market. If the economy contracts or comes up short of expectations, stocks could be in for a significant correction. Taxes on income, capital, and possibly even consumption are going up. Higher taxes resulting from Obama’s health-care boondoggle are only the tip of the … [Read more...]
The Payday Indicator
Alert! My Payday Indicator is signaling the worst environment for investors during my investment career. Conservative investors have been left with scraps on the floor; there isn’t even a decent chuck burger to be had, let alone a T-bone steak. At the end of 2009, investors were asked to take on more risk and receive less reward than at any other time since I’ve been in this business. My Payday Indicator replicates a portfolio invested 50% in Dow Jones Industrial Average stocks, and 50% in three-month T-bills. As you can see from my chart, the yield on this portfolio is the lowest on … [Read more...]
Wall Street’s Dirty Secret
March 5, 2010 The New York Times ran a must-read article this week on the important differences between brokers and investment advisors. As I have written in the past, the difference between brokers, or self-labeled “financial advisors” who work for big brokerage houses, and registered investment advisors is stark. Brokers are held to a suitability standard whereas investment advisors are held to a fiduciary standard. The suitability standard is the great enabler of Wall Street. Securities distribution is the primary motivation of the brokerage industry. Brokers don’t get paid for … [Read more...]
Pop Quiz
You’re right if you guessed that the largest stock fund is an exchange-traded fund (ETF), a fact I always find somewhat surprising when studying the list of the largest stock funds in The WSJ’s monthly fund report. The one at the top of the list is the SPDR S&P 500 ETF (SPY), with $91.11 billion in assets. When I first started working in this industry, back in 1995, Fidelity Magellan was the largest stock fund. It was an actively managed fund, so it was a big deal when it was surpassed by Vanguard’s Index 500, a passive index fund. With the index fund, investors knew what they owned, … [Read more...]
Top 10 Mistakes #1
November 6, 2009 The #1 item on my list of the top 10 mistakes investors make is taking a casual go-it-alone approach to investing. Wall Street is dominated by PhDs, MBAs, CFAs, CPAs, attorneys, and other highly trained professionals who spend the vast majority of their waking hours looking for an edge. You have to recognize that the person on the other side of every trade you place may be more informed or knowledgeable than you. My staff and I spend our entire days reading about and analyzing companies, economies, and the financial markets. Individual investors allocating capital on a … [Read more...]
Top 10 Mistakes #3
October 23, 2009 Number three on my list of the top 10 mistakes that investors make is performance chasing. The quickest way to make a million investing in mutual funds is to invest two million in yesterday’s winners. No matter how often investors are warned not to select funds on the basis of past performance, they do just that-often with devastating consequences. The problem here is that success attracts inflows, which tends to limit both the agility and opportunity set of portfolio managers. When assets under management become bloated, portfolio managers often do one of two things: they … [Read more...]