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Thursday, May 4, 2017

A First Pass Investment Test

We are responsible  for our own retirement. Defined benefit plans are going the way of the dinosaur. Now we manage our own IRAs, 401(k)s and taxable accounts to create a nest egg from which we will drawdown at some point in the future, hopefully when we are retired or semi-retired.

What is not well known, despite considerable publicity, is that billions are going into the coffers of advisors at the expense of the people who need sizable nest eggs to finance retirement. Literally, people are giving up a sizable chunk of their nest egg for a service that doesn't produce results. This has been emphasized by John Bogle (founder of Vanguard), Burton Malkiel (author of Random Walk Down Wall Street), and also Warren Buffett (arguably the top investor of our era).

So what is a fast test to whether we may be in the large group of investor novices being taken advantage of?

Actually, it is quite easy. Take a recent statement and see what you are invested in. You should see ticker symbols for each of your investments. But, even if the investment does not not have a ticker symbol just Google the Fund's description and you should find a ticker symbol.

For example, you may find your IRA holds the Davis NY Venture A Fund. Google "Davis NY Venture A Fund" and you'll find the ticker symbol is NYVTX.

Next, go to and type the ticker symbol into the quote box. The summary page you'll come up with shows that the Fund has a load of 4.75% and annual expenses of .89%.

This is an interesting Fund in that it has performed well over the short-term with an out performance of +3.98% over the past year which you can see by scrolling down on the summary page. It is the type of Fund that a "friend" would suggest because he has had good recent performance.

But, alas, your investment horizon extends over decades. And over the long term the performance has not been good versus the S&P 500 Index. Over 5 years, for example, it has underperformed the index by -1.26%/year.

An important factor in this sub par performance is a .89%/year expense charge in addition to the load referred to above. In contrast, the SPY,  S&P 500 Index ETF Fund charges .10%/year.

So, which will perform better over the long term? Obviously, we can't tell unless we have the proverbial crystal ball but my interpretation of considerable research is that the probability of NYVTX outperforming over the longer term is approximately 10%. In other words its like trying to pull a white ball when there are 90 red balls and 10 white balls in the urn.

Interestingly the odds are better than 50% when you ignore costs. These managers are smart and are skilled at picking stocks. The problem is the high fees.

Thus, if you want to get a quick feel on whether you are investing efficiently do this simple ticker test and see first hand the fees you are paying for the Funds you are invested in.

This. of course, hasn't even looked at the other aspect - that of what you pay your advisor.

If you follow the financial news you know that all of these fees - what Funds charge and what advisors charge are coming down because investors are proactively moving to the lower cost Funds.

The suggestion here is that it is easy to see where you stand and to avoid being the last one on the bus.

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