• “Do You Know What Your Real Mutual Fund Returns are for Your Retirement?”

    Posted on February 24th, 2013 James No comments

    Money down drain

    It takes no special intelligence for a broker or financial adviser to place a client into an equity fund. All you need to have is a securities license and that’s about it. The planner you choose—or that someone refers you to—will often check your pulse for risk and then make the selection for you; or worse yet, have you make your own selection of funds for your retirement account. As you read on later in this chapter, you’ll find out how well these funds work—or more appropriately don’t work—for long-term planning like retirement.

    According to Goldman Sachs, an astounding 88% of active stock funds underperformed the S&P 500 in 2011. Last year, 65% of large-cap funds underperformed the S&P 500. Mutual-funds managers were not the only ones struggling. The Economist reported that, except for 2008, the S&P 500 Index has outperformed the average hedge fund index for a decade.

    1929 similarity graph

    SEC Chairman Arthur levitt, Jr. warned of growing unfairness in the relationship between individual investors and mutual funds in January 2001. Mr. Levitt made the following comment:

    “There are a number of instances that, quite frankly, do not honor an investor’s rights. Instances where…hidden costs hurt an investor’s bottom line, where spin and hype mask the true performance of a mutual fund, and where accounting tricks and sleight of hand dresses up a fund’s financial results.”

    What most people don’t know is that there are five separate bills that mutual funds charge. The best way to determine if an investment is effective for you or not is to dollarize the benefit or the burden. When you invest in the typical mutual fund (assuming outside of a qualified retirement plan), you face costs that erode your benefit.

    The five costs of mutual fund investing are:

    1. Tax costs – excessive capital gains from active trading.

    2. Transaction costs – the cost of the trades themselves.

    3. Opportunity costs – dollars taken out of portfolios for a fund’s safekeeping.

    4. Sales charges – both seen and hidden.

    5. Expense ratio, or “management fees” – no end to increases in site. This is a calculation based on the operating costs of the fund divided by the average amount of assets under management.

    How do fund expenses affect you? Well, with the expense ratio, which averages 1.6% per year, sales charges of 0.5%, turnover generated portfolio transactions costs of 0.7% and opportunity costs of 0.3%—when funds hold cash rather than remain fully invested in stocks— the average mutual fund investor loses 3.1% of their investment returns every year just on fees. While this might not seem like much on the surface, costs and fees alone could consume 31% of a 10% market return. Think about that. You could be losing almost a third of your return before it’s even taxed. You’re losing a third of your return just for the cost of maintaining your investment. Add in the 1.5% capital gains tax bill that the average fund investor pays each year and that figure shoots up to 46% of your return being lost to fees and expenses, nearly half of a potential 10% return. When you hear that, don’t you feel like you’re taking one or two steps back instead of going forward? This what most working Americans and middle class are relying on for retirement.

    In the long run, stock returns depend almost entirely on the reality of the investment returns earned by corporations. The perceptions of investors reflect speculative returns. It is economics that controls long-term equity returns; emotions, so dominant in the short-term, don’t play a major role in the actual return on investment.

    After subtracting the cost of managing the fund—management fees, brokerage commissions, sales loads, advertising costs and operating costs—return to the investors as a group falls short of the market return. In a market that returns 10% as a gross return, what is the actual return to the investor after expenses? There are two certainties: 1) Beating the market before costs is a zero-sum game. 2) Beating the market after costs is a loser’s game.

    In equity funds the expense ratio, which is the management fee and operating expenses combined, averages about 1.5% per year of fund assets. Add another half percent in sales charges, assuming a 5% initial sales charge is spread over a ten-year holding period. If the shares are held for five years the cost would be twice that figure.

    There is also another cost for portfolio turnover that’s estimated at a full 1% per year. The average fund turns its portfolio over at a rate of 100% per year, meaning that a $5 billion fund buys $5 billon of stocks each year and sells another $5 billion. At that rate, brokerage commissions, bid-ask spreads (the difference between the bid price and the sale price of a stock) and market impact costs add a major layer of additional cost. In the end, the cost could be as high as 3% to 3.5% per year for expenses.

    It’s important to think of all this math as a blueprint by which you can gauge how successful your investment in a fund has really been. If you’re returns, after management fees and taxes, don’t surpass the rate of inflation, then you might as well have stuck your money in a savings account.


    The performance of equity funds from 1980 to 2005 as a measured return (S&P 500 Index) averaged 12.3% per year. This is the formula that John Bogle, creator of the Vanguard 500 index fund, points to in his book The Little Book of Common Sense Investing and it looks like this:

    Market return – costs – inflation = investor return

    When you do the math, most funds just don’t cut it.

    There is also the problem of dollar-weighted returns, which is when money flows into a fund after a good performance and out on a bad performance. Essentially funds experience tides in the rate of participation in them based on how well they’ve done. The dollar-weighted rate is affected by the amount and the timing of cash flows during a given time period. This rate is an effective measure of the fund’s rate of growth, giving full weight to the impact of cash flows on fund assets.

    Breakdown of actual earnings to an individual investor
    • 12.3% – average market earnings for the past twenty-five years.
    • 10% – the return on the average mutual fund
    • 7.5% – the average dollar weighted return to the individual investor
    – (2.5%) – reduction from market to fund return is about the 2.5% expense ratio
    – (2.3%) – reduction for inflation
    – (1.8%) – for taxable investors (no state applied)
    Equals = 0.9% + or actual investor return (AIR) from the average mutual fund.

    We cannot stress enough that you need to remain aware and understand all that little print in the prospectuses and ask your financial adviser/planner or broker to explain all the fees on each product they suggest. Otherwise, you might be better off just purchasing the stocks direct from the company under their DRIP or dividend reinvestment plan and do this through a self-directed pension plan that you set up and control.

    Stay alert,

    James Burns
    (866) 544-8825

  • Long Term Nursing Care – are your prepared?

    Posted on September 29th, 2010 James No comments

    Many states have a high cost for long term care and nursing but California is very explosive in expenses.

    State Median Annual Care Costs for 2010 are:

    Nursing Home Care

    1. Private Room                                                      $87,345
    2. Semi-private Room                                          $73,000

    Assisted Living Facility

    1. Private, one bedroom                                     $42,000

    Adult Day Health Care

    1. Adult day health care                                    $20,020

    Home Care

    1. Home health aide                                           $46,904
    2. Homemaker Services                                   $45,646

    The statistics are that 7 in 10 people will require one of these types of long term care in their senior years. The question is what have you done to take care of this potential problem?

    You need to look at a long term care policy or better yet, an insurance policy that provides for supplemental retirement income but also has living benefits if you need them like nursing care. To ignore the numbers is to ignore a fact like you’re going to get old and that everyone has to pay taxes. You need to be responsible to your loved ones and in order to preserve all that you are and have worked for from going out the window to pay for this.

    James Burns, Esq.


  • Domestic Financial Terrorism – How do we defend?

    Posted on September 27th, 2010 James No comments

    The level of destruction on our financial system is incredible compared to what even Timothy McVee did as a domestic terrorist. You have to ask yourself who do some of these bankers and investment firms work for when you look at what they’ve done to the once wealthiest nation in the world.

    Right now we’ve got $2 trillion in short-term debt that has to be refinanced this year of 2010 and China, India and Russia are not buying. This is not counting the extra deficit spending which should top $1.35 trillion this year…more or less. The fact the countries we’ve relied on are not buying means we have to fire up the printing presses again. We would already acknowledge that we are at a 10% inflation but the money folks have been using tricky phrases like “core inflation” which ignores half the things we spend money on so that way they can keep the numbers looking low.

    A great book called This Time Is Different: Eight Centuries of Financial Folly by Carmen Reinhard and Kenneth Rogoff shows that EVERY TIME a nation’s debt went above 90% of GDP or Growth Domestic Product…the nation failed. The book studies 25 countries over 800 years and there were NO exceptions to the 90% rule. Every nation that ran their deficits to this 90% ratio is now off the map or turned Third World.

    Right now, the US is above 90% and there appears no way to bring it down for decades unless some obscure genius comes out of the woodwork as they are not in the White House, Treasury or Fed.

    It is unclear what Americans will do, especially for their retirement as the very tool our bankers use against us (stock market) they expect us to hand over our life’s savings and just be ok with negative 30 or 40% loses. You know, its just the market reacting and it goes up and down. Why is that Ok? Why should we accept losses that take us forever to recover just to get back where we started be considered alright?

    We need to redo some of the Healthcare Reform Act that President Obama so valiantly promoted before 2013 when our investments could be ravaged with a sur-tax just because we are in a certain income bracket and that bracket is not hard to be in if you live in a state with a high cost of living. Where is Sarah Palin and the Tea Party when we need them.

    It is time to look at guaranteed opportunities that does not go down when the market goes down. When Wall Street was once honorable a man named Benjamin Graham (mentor to Warren Buffet) extolled what was an investment. It preserved principal and gave an adequate return. We need to get back to this simple idea and quit trying to find home runs since base hits get you to home plate just as well.

    We also need tax-free strategies to weather the storm our own government and their brainy bankers have left before us. It was like turning on the gas to an already smoldering economy.

    James Burns

  • To Dream the Impossible Dream – Beating the Stock Market

    Posted on June 18th, 2010 James No comments

    A few years ago after reviewing some portfolios for clients that tried their hand in stock market trading it was obvious to me that they were gambling as if they were at the roulette table in Vegas. As someone who has worked for a billionaire and observed the asset class relative to stock, the investments were safe blue chip stocks, bonds, Treasuries and Index funds because it is next to impossible to beat the market.  I then wrote my first book The 3 Secret Pillars of Wealth that discusses the fundamentals of what is an investment and what to look for every-time you start to consider an investment.  Benjamin Graham who was the mentor of Warren Buffet stated an investment was something that preserved principal and provided and adequate return.

    In the book we also discuss John Bogle, the founder of Vanguard Investments, views on investing and trying to beat the market. Mr. Bogle’s academic research proved that virtually no one could consistently beat the market over long stretches (like the 35 years we have to invest for retirement). The best you could hope for was to meet the market, which gave you returns that weren’t half bad. in my book we recount the research of looking at 355 mutual funds over the 35 years and that only 3 of them did anything compelling and that was in line with what the S&P 500 did. Hence, the idea is that going forward how would the average person who works uncover those 3 funds out of the masses; you can’t is the answer.

    To this end, Mr. Bogle said we need to invest in a broad swath of stocks and bonds through low-cost index funds and forget about your portfolio. Spend your time living your life instead of researching stocks and bonds. That’s much more fun than sweating over investments anyway. If you’re going to research anything it would be real estate and starting your own business as other assets.

    The other pundit of the idea that almost no one beats the market is Terrance Odean, a Berkeley professor who proved Bogle’s theory from another perspective. The more you trade, the more you lose, Odean discovered by examining the real-life portfolios and trading patterns of thousands of investors. His paper, Boys Will Be Boys, is a must-read for anyone who is trying to retire in comfort and not run out of money and for those who think they’re going to outsmart the stock market. You know the guys who have a super large screen in their office and they seem to be following the market and making trades. What they are really doing is creating taxes with capital gains and many of them short term which costs more, all for what?

    Steady and consistent gets to the finish line if we remember what Aesop tried to teach us in the story of the Tortoise and the Hare. The best way to invest with success is to get base hits and not try to get a home run all the time. If we look at baseball, a home run is great but really you accomplish more if you get a base hit and move it one base at a time to home plate; this is better than striking out.

    James Burns, Esq.