May 27, 2024

A Fool and His Money

Recently, Jason Zweig wrote a fascinating article on how Wall Street continues to extract oversized fees from investors. The dollars are astounding, especially when almost any investor can open a free online brokerage account at any of several firms, invest their money in an exchange traded fund (ETF) that tracks the S&P 500, and charges as little as .03% a year.

Let me explain this carefully. This is not 3% which funds may still charge you. It is not .3%, or three-tenths, of a percent. This is 3 hundredths of one percent. If you put $100,000 into this fund, you would pay $30 a year in fees.

For example, today, you can go to Charles Schwab, open a free online brokerage account in about ten minutes, deposit any amount of money you like, buy an indexed ETF for the entire US stock market, pay no transaction fees, keep the money there for a week or a lifetime, and pay pennies a year in fees. You need look no further for a great deal.

But what are people doing instead? According to Mr. Zweig, they chase returns, buying alluring and sexy funds. Think hedge funds. Alternative funds. Funds that claim to return 2-3 times more money than the S&P 500 (the 500 largest stocks traded in the U.S., representing about 80% of the $43 trillion dollar capitalization of the U.S. public companies).

What are these funds? They vary, but they may use any of a variety of non-traditional and often risky strategies and investments, such as commodities or cryptocurrencies, or borrowed money. Of course, risk is rarely mentioned when they are advertized.

According to Mr. Zweig, the intermediaries in these funds "regularly rake off one-sixth of the gains... for themselves." He cites a recent study that over decades, average investors in stocks return sometimes as little as half of what the S&P 500 returned during the same period. He notes that while fees on index funds approach zero, alternative and hedge fund fees have barely dropped, some keeping more than half of all gains.

This isn’t new information. The reason for this huge inequity to investors is that Wall Street knows how to market. Fancy names and strategies, and highly selective marketing of occasional extreme gains is so much more enticing than the average return of the U.S. stock market.

But don't be fooled. These funds are highly selective in the data they share and the arguments they use. This enables them to make outrageous claims that are seemingly true, but don't work in reality.

I've said it many times in this blog and I'll say it again: If you invest in the S&P 500 with close to zero fees, you will far outperform most of the showy investments that people try to sell you. You should never pay a transaction fee to own a U.S. equity, whether a stock or a fund. You should not pay any annual fees for an unmanaged online account.

You should pay close to zero fees on a U.S. fund, indexed or otherwise. And although it's not sexy, you almost certainly will outperform most of these schemes that investors throw away their money on. And it is far less risky.

There are endless reasons that we have a world of big money confiscating the earnings of common investors. Numbers are hard to follow. People struggle to look back at data more than a few years old. Expensive clothes and soothing words give a false sense of security. These firms make used car salespeople look like Mother Teresa.
But while few of us have hours each week to spend trying to follow arcane figures and strategies, investment firms work tirelessly to confuse you into believing they are the good guys trying to help you out. But they are not. They are trying to keep you away from the easiest, cheapest way to earn money in equities - near-zero-cost indexed funds.

A close friend of mine understands the value of money and hard work, but does not like working with numbers. Periodically, he has asked me for help with his investments. I have said these same things to him multiple times. But he reluctantly handed his investments over to someone he trusted.

It went well for a couple of years, which was enough to keep him engaged during some trying years that followed. But then things went wrong and when he looked closely at what his advisor had done with his money, he again asked me for help. But this time he was determined to do it himself, which he has done ever since.

One day he again called me with a question on his investments. He told me how once a year, he takes a piece of paper, writes down all his gains or losses for the year for each of his accounts. Otherwise, he does little with his investments, keeping them in low-cost indexed funds, rarely making trades. He told me what his percent gains were, and he wondered if he had something wrong. They seemed too high. No, he had it right.

He hadn't spent the year agonizing over daily or weekly or monthly returns. He didn't move his money into any hot fund. No Bitcoin here. Just simple indexed funds that charge almost nothing. And he did very well, as he continues to do.

Unfortunately, there are many who want a portion of your money for themselves. Don’t listen to them. Keep it simple and keep your fees very low. And then you, too, can enjoy solid gains - and keep almost all of it for yourself.