Way back before I was doing any programming, I was working at Radio Shack in the Chicago area. Radio Shack, the company everyone loves to hate. Regardless of what your experience may have been, back in the day, in the Chicago area, it was a pretty good company to work for. We were encouraged to take stuff home and learn how it worked. Anything in the store was open to this option. The goal was that when a customer came into the store, one of us would know enough about the product that we could answer questions confidently.
The other thing they provided that was pretty nice was an employee stock purchase program that vested at the end of each year. This was a no brainer because they matched up to 3% of your salary. You contribute 3%, they match 100% of the contribution. It was like giving yourself a raise. Because even if the stock went down, we could count on the stock going up again.
That was the beginning of my love affair with investing and figuring out the stock market.
During the run-up to the dotCom crash, I was making quite a bit more than we spent and that all got socked away into stocks. During those days, it was hard to NOT make money. So, I did pretty well, as did anyone else who didn’t spend all they made. This was good, because I spent most of the year after the crash living off those savings!
For the next several years after that, I continued to invest. The problem is, it took a lot of time away from my keeping up with technology, and the best I could do was maintain my account balance. Finally, with influences from books such as The 4 Hour Work Week and some other Internet marketing gurus I was following at the time, I decided to start out sourcing my life. What better place to start than my investing? So, I interview several different financial advisors and ended up giving my money to one of them to invest for me.
Recently, I’ve been learning more about investing and I’ve discovered some rather disturbing facts:
Mutual Funds Have Hidden Fees
While not the first time I’ve heard of this, I started listening to an audio version of Money, Master of the Game recently where this fact was brought back into focus. This hidden fee fact has been documented all over the Internet.
- The Hidden Cost Of Mutual Funds (WSJ)
- The Hidden Cost Of Mutual Funds (Investopia)
- The Mutual Fund Fees We Don’t Talk About (US News)
If you are interested to see how much you are losing by investing in mutual funds, you can use one of these calculators:
There are others, but I’m sure you can use the search engines just like I can. What is interesting is what the power of compounding interest, does to your returns. Remember, you aren’t getting this fee money you should be getting year over year. It’s like a leak in your wallet that keeps growing.
The Rate of Return Isn’t the Rate You Will Experience
If you’ve already plugged in some of your real numbers into those calculators using your own mutual funds, you already realize that you are hemorrhaging money by using a mutual fund. And this says nothing of the trading fees involved in buying/selling the fund and any fees you are paying your financial advisor. Oh, and check this out. I found out recently that if I close my account, they’ll charge me for that too! What?!
But, it gets even worse. You see, the way these funds report returns ends up being rather questionable as well.
First, the returns they report are before any of the fees. It is how much they made with the money. Not how much you’ll make.
Second, and I think most of us get this but it still needs to be stated, the stated returns are year over year based on one investment at the beginning of the time period. If you only invest when things are going well, you’ll see returns that are worse. If you invest only when the market is doing poorly, you’ll get better returns. Now, if we could only figure out how to time things so that we only invest when the market is about to go up!
So, what good are the rate of return numbers in the marketing material? Since rate of return is regulated, the best way to use these numbers is for initial comparison purposes. Or not, because…
Over Time Hardly Anyone Beats the Market
There are a few super stars out there. But unless you have a lot of money already, you can’t afford them. Most of these funds are closed now anyhow.
And figuring out who will end up being the next Ray Dalio is practically impossible.
- Do professionals outperform the market? The data still says no.
- Do Mutual Funds Beat The Market? (Washington Post)
- How Many Mutual Funds Routinely Rout the Market?
My Consulting Gig Made Me Do It
Around the same time that I was (re)learning all of this, I got a new gig at a financial management company that is regulated by various security and exchange related regulations. They forgot to tell me before I started about all the “Compliance” laws that would be imposed on me. If I had known, I probably wouldn’t have bothered with taking on this contract. At least not in the present form.
But, I’m here now.
One of the things they wanted me to do was to get permission before trading certain securities. The problem is, if you remember from the beginning of this article, I don’t do my own trading. So this means that I would have to have my financial advisor clear every trade he makes with me. Oh. And he’d have to make the trade within 24 hours of the approval. Even my advisor was afraid of messing this up.
And, if I end up staying longer than 6 months, they want me to have all of my accounts in one of about 10 approved trading accounts so they can get the electronic feed.
I really don’t like the idea of being spied on. And why can’t we make laws where the punishment is so severe for doing something wrong that we no longer need laws that prevent something wrong from happening?!
But, there is a way out. If I put my money in a “discretionary” account, then all of these requirements go away.
So, I started talking to my advisor about getting a letter stating I had no discretion over the trading in my accounts. Seems like that would be a simple thing to do. Right?
My Advisor Can Only Invest According To His Company’s Rules
Only, he couldn’t put two of my accounts into any kind of discretionary account because they didn’t have enough money and the other accounts could only be moved if we combined some of them.
It was then that I realized, I could probably do better somewhere else. Between all of the above and the fact that I had recently been introduced to WealthFront, I realized it was time to make a change.
There are Better Options
You see, there is a kind of investment that you can make that consistently keeps pace with the market and has a very small fee factor. These are index funds. In particular, Vanguard index funds. My advisor claimed he couldn’t trade these unless I was in a certain type of account he had available. But, you can see if you go to Vanguard, the entry for one of their index funds is VERY small.
So, I could do better if I just go a regular trading account and traded on my own. But, to do it right, you need to do portfolio allocation, portfolio rebalancing, and if you are using an account that isn’t a retirement account, you’ll probably want to do some tax loss harvesting. Tax loss harvesting is a way of making it look like you have a loss but keeping your money invested. It is supposed to increase your returns.
Oh, and there is that whole spying thing. So, rather than doing it myself again, I opted to move my money to WealthFront. The management fees for WealthFront are just 1.25% and the first $10K is free, as in, no management fee. But, if you sign up using my link, you can get the first $15K free. I also get an additional $5K managed for free. So, you can help yourself AND help me.
I just got my money transferred recently and the market hasn’t been doing so well in general. What I can tell you is the account is doing as well as the market. I can’t really comment on returns. But, what I can comment on is the level of service. I’ve sent support A LOT of questions. They’ve always been answered within a day. They created a custom letter to make my compliance office happy with the accounts. They’ve helped me with the move of the accounts. They’ve clarified fee questions. NO FEE FOR CLOSING! No fee for opening. No fee for any trades. Just 1.25% of my account less the amount that is currently free.
How do they pull this off? Why are they so inexpensive when everyone else is charging so much? They’ve automated the whole thing.
Check them out. WealthFront
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