"You're Paying Too Much For Investment Help"

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Taylor Larimore
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"You're Paying Too Much For Investment Help"

Post by Taylor Larimore »

Burton Malkiel, author of "A Random Walk Down Wall Street," wrote a carefully documented article titled You're Paying Too Much For Investment Help.

This is the Boglehead ending:
The lesson for investors is very clear: You can’t control what markets can do, but you can control the costs you pay. The less you pay to the purveyors of investment services, the more there will be for you. The quintessential low-cost investment vehicles are index funds, which should comprise the core of every investment portfolio. The high fees charged for active management cannot be justified.
Best wishes
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
ScottW
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Re: "You're Paying Too Much For Investment Help"

Post by ScottW »

Have you looked at today's Letter to the Editor section? They printed one letter from a reader in agreement with Malkiel, followed by 6 dissenters. You might be shocked to learned that 5 of the 6 were money managers. The 6th was apparently a law professor who railed about how the market would collapse if everyone indexed, and all that money spent on active management fees was therefore not wasted.
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telemark
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Re: "You're Paying Too Much For Investment Help"

Post by telemark »

ScottW wrote:The 6th was apparently a law professor who railed about how the market would collapse if everyone indexed, and all that money spent on active management fees was therefore not wasted.
I love this argument. It amounts to saying that indexing is better, but somebody needs to be the sucker who pays to keep the market efficient. Oh, wait. Isn't that what hedge funds are for? :happy
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EternalOptimist
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Re: "You're Paying Too Much For Investment Help"

Post by EternalOptimist »

Great point Taylor, this is arguably the biggest misstake naive investors make.
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Random Walker
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Re: "You're Paying Too Much For Investment Help"

Post by Random Walker »

I started a thread today on those letters to editor responses. I missed this thread. :happy

Dave

[I took care of it. --admin LadyGeek]
umfundi
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Re: "You're Paying Too Much For Investment Help"

Post by umfundi »

The credit in the WSJ refers to "Mr. Malkiel". Actually, he has a Ph.D. from Princeton.

Keith
Déjà Vu is not a prediction
jebmke
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Re: "You're Paying Too Much For Investment Help"

Post by jebmke »

telemark wrote:
ScottW wrote:The 6th was apparently a law professor who railed about how the market would collapse if everyone indexed, and all that money spent on active management fees was therefore not wasted.
I love this argument. It amounts to saying that indexing is better, but somebody needs to be the sucker who pays to keep the market efficient. Oh, wait. Isn't that what hedge funds are for? :happy
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Cautious Optimist
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Re: "You're Paying Too Much For Investment Help"

Post by Cautious Optimist »

Long time lurker, first time poster. From one of those WSJ letters to the ed., I found interesting:
Index funds have a structural problem—they look backward, not forward.
Does this apply solely to index funds..??
Managed funds, on the other hand, care about the future business prospects of companies. They evaluate a company's balance sheet, the development of its revenue pipeline, the health of its industry, the price of its stock, etc., and invest accordingly.
This is essentially believing in the ability to see the unforeseeable, no..?? And even if a fund gets it right (outperforms its index) , what are the chances they'll continue to do so consistently..??
Random Walker
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Re: "You're Paying Too Much For Investment Help"

Post by Random Walker »

There is nothing more forward looking than being there already when the market makes its sudden moves. Most of a given years gains are made in just a few days which can't be timed. Indexing makes sure you're already there. Now that's looking forward!

Dave
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mickeyd
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Re: "You're Paying Too Much For Investment Help"

Post by mickeyd »

I dug these quotes up from my archives. They seem appropriate here.

“The most critical factor in future performance is fees and expenses.” Jason Zweig Your Money & Your Brain

“Financial advisors recently ranked expenses as the 8th most important factor when analyzing mutual funds.” Jason Zweig Your Money & Your Brain
Part-Owner of Texas | | “The CMH-the Cost Matters Hypothesis -is all that is needed to explain why indexing must and will work… Yes, it is that simple.” John C. Bogle
Iorek
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Re: "You're Paying Too Much For Investment Help"

Post by Iorek »

My favorite letter was the one who started off by citing Buffett, Gross and Soros as examples of money managers who beat the market and then (IIRC) segued into saying it was likely that most money managers would beat index funds.
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baw703916
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Re: "You're Paying Too Much For Investment Help"

Post by baw703916 »

The only problem with the article is that given Malkiel's new position as CIO of Wealthfront, it sounds a lot like advertising for his company.

The only place I've gotten any investment help in the past 10 years has been on this board, and the M* one before that. Can't get any cheaper, or better, than that!

Brad
Most of my posts assume no behavioral errors.
Grt2bOutdoors
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Re: "You're Paying Too Much For Investment Help"

Post by Grt2bOutdoors »

I like the fellow from Morgan Stanley Wealth Management "investors will not tolerate the lack of a hand on the wheel." Really? Were their hands on the wheel in 2008 and 2009? :oops: How was the performance of those actively managed funds?

Or the fellow from LPL (why am I not surprised?) - "Index funds have a structural problem, they look backwards, not forward". "Managed funds, on the other hand, care about the future business prospects of companies". "Yes, their fees might be triple or quadruple that of an index fund, but a managed fund that charges 0.75% may be worth it". :o

Or the fellow who should stick with the practice of law instead of his amateur try at explaining this gem "If all investors followed Mr. Makiel's advice to buy only index funds, stock prices would become wildly inaccurate. Active investors are the ones who analyze information and keep prices reasonably correct. In other words, a world of all passive investors is a disequilibrium" :oops:
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
Novine
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Re: "You're Paying Too Much For Investment Help"

Post by Novine »

Is there a link to the letters?
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Random Musings
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Re: "You're Paying Too Much For Investment Help"

Post by Random Musings »

ScottW wrote:Have you looked at today's Letter to the Editor section? They printed one letter from a reader in agreement with Malkiel, followed by 6 dissenters. You might be shocked to learned that 5 of the 6 were money managers. The 6th was apparently a law professor who railed about how the market would collapse if everyone indexed, and all that money spent on active management fees was therefore not wasted.
What should be exposed is how mutual fund managers, hedge fund managers and financial entities invest their dollars.

Of course, some eat their own cooking (at least to a point), but I'm thinking a dirty little secret would be exposed.

RM
I figure the odds be fifty-fifty I just might have something to say. FZ
Grt2bOutdoors
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Re: "You're Paying Too Much For Investment Help"

Post by Grt2bOutdoors »

Random Musings wrote:
ScottW wrote:Have you looked at today's Letter to the Editor section? They printed one letter from a reader in agreement with Malkiel, followed by 6 dissenters. You might be shocked to learned that 5 of the 6 were money managers. The 6th was apparently a law professor who railed about how the market would collapse if everyone indexed, and all that money spent on active management fees was therefore not wasted.
What should be exposed is how mutual fund managers, hedge fund managers and financial entities invest their dollars.

RM
It has been exposed - Page A1 of today's WSJ - "SAC sees Investors Pulling Out $3.5 Billion" Something to do with returning an average of 27% to 29% per year since 1992. The last person I heard who offered returns like that has gone away for 100+ years. Being fined $616 million by the SEC earlier in the year must have something to do with that exposure you speak of RM.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
Rolyatroba
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Re: "You're Paying Too Much For Investment Help"

Post by Rolyatroba »

Novine wrote:Is there a link to the letters?
Is this it? http://online.wsj.com/article/SB1000142 ... %3Darticle I'm thinking they are referencing the Comments tab.

EDIT: If that link doesn't work, go to Google News and search for ""you're paying too much for investment help". A WSJ link should appear, and that works for me (unlike when I clicked on the link above).
umfundi
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Re: "You're Paying Too Much For Investment Help"

Post by umfundi »

Novine wrote:Is there a link to the letters?
Try this:

http://online.wsj.com/article/SB1000142 ... 16168.html

Keith
Déjà Vu is not a prediction
talisman
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Re: "You're Paying Too Much For Investment Help"

Post by talisman »

[quote="Grt2bOutdoors"]I like the fellow from Morgan Stanley Wealth Management "investors will not tolerate the lack of a hand on the wheel." Really? Were their hands on the wheel in 2008 and 2009? :oops: How was the performance of those actively managed funds?

This is really an incredible comment by the MS guy. Before I switched to Vanguard, I was a "managed account" sucker at Morgan Stanley Smith Barney. I had a very nicely diversified portfolio with them from 2005- Feb 2009. However, in Feb 2009, my "advisor" called me for the first time in a year and said he thought the system was going to actually collapse and he wanted to "get defensive". Naively, I went along while he cut my equity exposure by 25% and bought Pimco Total Return. His "hand on the wheel" cost me a massive amount when the stock markets rallied. Had I been managing my own assets at the time, I would have done nothing....he blinked before I did. I fired him in 2011 and moved to Vanguard. As they say, fool me once...

TM
Jeff7
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Re: "You're Paying Too Much For Investment Help"

Post by Jeff7 »

Grt2bOutdoors wrote:I like the fellow from Morgan Stanley Wealth Management "investors will not tolerate the lack of a hand on the wheel." Really? Were their hands on the wheel in 2008 and 2009? :oops: How was the performance of those actively managed funds?

Or the fellow from LPL (why am I not surprised?) - "Index funds have a structural problem, they look backwards, not forward". "Managed funds, on the other hand, care about the future business prospects of companies". "Yes, their fees might be triple or quadruple that of an index fund, but a managed fund that charges 0.75% may be worth it". :o

Or the fellow who should stick with the practice of law instead of his amateur try at explaining this gem "If all investors followed Mr. Makiel's advice to buy only index funds, stock prices would become wildly inaccurate. Active investors are the ones who analyze information and keep prices reasonably correct. In other words, a world of all passive investors is a disequilibrium" :oops:
Oh, that must be why so many mutual funds performed wonderfully during the dropoff in 2008: They skillfully looked forward, saw it coming, and acted accordingly.
:|


"...may be worth it."
may be. The author really should put some qualifying asterisks after this statement.
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mickeyd
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Re: "You're Paying Too Much For Investment Help"

Post by mickeyd »

His "hand on the wheel" cost me a massive amount when the stock markets rallied.
Sounds like the broker had his hand on your wallet instead of the wheel, unless you keep your wallet on your wheel.
Part-Owner of Texas | | “The CMH-the Cost Matters Hypothesis -is all that is needed to explain why indexing must and will work… Yes, it is that simple.” John C. Bogle
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