Mutual Funds That Consistently Beat the Market? Not One of 2,132

No actively managed stock or bond funds outperformed the market regularly over the last five years. Index funds have generally been better.

Writing for The New York Times, Jeff Sommer, explained the results of a recent study of actively managed mutual funds conducted by S&P Dow Jones Indices that concluded "not a single mutual fund — not one — managed to beat its benchmark in either the U.S. stock or bond markets regularly and convincingly over the last five years."

 

"These findings support practical advice that has been the academic consensus for decades. Forget about trying to beat the odds and outsmarting everybody else. Instead, use low-cost stock and bond index funds that mirror the overall market, and keep them for decades." 

In summary, "most actively managed mutual funds do worse than their benchmark index, both over the long run and in the vast majority of calendar years, in the United States and elsewhere around the globe."

Bottom line: Invest in low-cost index funds and Exchange Traded Funds (ETFs).

High Mutual Fund Fees Tied to Fund Complexity

 “The larger the fee the less that it performs. It’s kind of a straight line." financial adviser David Marotta charted the fees and 10-year returns for dozens of S&P 500 index funds. "Since these funds all track the same index and their performance is roughly the same, the fees will largely determine how much of the return the investor keeps and how much goes to the mutual fund company."

"The fees for the S&P 500 index funds he analyzed... ranged from one-tenth of a percent to 2.5 percent of the invested assets." 

Read the Squared Away Blog post at: https://squaredawayblog.bc.edu/squared-away/high-fees-tied-to-mutual-fund-complexity/

Fees really do matter! Check out this useful tool: The FINRA Fund Analyzer https://tools.finra.org/fund_analyzer/ that shows in dollar the impact of fund fees over time.

 

How did you pick the funds in your retirement account? ABC...

A paper published in the Financial Review concluded that when selecting funds within their 401(k) plans, many people choose the options at or near the top of alphabetical lists. "It's absolutely amazing how powerful this effect is and how much it is really distorting what's being invested in," said paper co-author Jesse Itzkowitz. As reported in The Wall Street Journal.

Review your mutual fund choices and rebalance your portfolio before the end of the year! 

Vanguard mutual fund company lowers fees on index mutual funds

Vanguard is famous for its low investment expenses but now the deal gets even better. 
The Wall Street Journal reports that Vanguard is lowering the minimum investments needed to qualify for admiral shares which charge lower expenses than the regular investor class of funds. Instead of $10,000 minimum to qualify for lower expense ratios, one only need to invest $3,000. The new lower fees apply to 38 index mutual funds.
Details at: https://investornews.vanguard/our-index-funds-changed-investing-forever-now-were-making-them-even-better/

Fund fees really do make a difference!

The Center for Retirement Research at Boston College has released a new Issue in Brief:

“How Do Fees Affect Plans’ Ability to Beat Their Benchmarks?”

by Jean-Pierre Aubry and Caroline V. Crawford

The brief’s key findings are:

• One way that public pension plans assess their investment performance is to compare returns by asset class to selected benchmarks.
  
  
• Plans pay fees to external asset managers with the expectation that they will exceed the benchmarks.
  
  
• As these fees have come under greater scrutiny, the question is whether higher fees help plans outperform their benchmarks.
  
  
• The analysis, using new data for 2011-2016, found that plans that paid higher fees experienced worse performance relative to their benchmarks.
  
  
• This finding held across all major asset classes, but was particularly pronounced for alternative assets, such as private equity and hedge funds.

Read details: http://crr.bc.edu/briefs/how-do-fees-affect-plans-ability-to-beat-their-benchmarks/

Thanks to the Squared Away Blog, a great resource: http://squaredawayblog.bc.edu/

Money Market Fund Changes Coming

The Securities and Exchange Commission recently passed new rules for money market funds effective in October 2016. “One requirement under the new rules is that the shares of money-market funds that cater to institutional investors and invest in corporate or municipal debt must float in value, like the shares of most other mutual funds. That’s a change from the stable $1-a-share value traditionally maintained by all money-market funds.”  “Another big change is that all money-market funds that invest in corporate or municipal debt will be allowed to charge investors a fee to redeem shares when the funds are under pressure or temporarily block investors from withdrawing cash.”

“Money funds can be divided into three categories according to their investments: prime funds; ‘government’ funds, which invest in U.S. government and federal agency debt; and municipal funds, which invest in the debt of state and local governments.” Source: Prepare for New Money-Fund Rules by Kirsten Grind, The Wall Street Journal, March 8, 2015.

Money funds currently pay an average of 0.03% a year, or $3 on a $10,000 investment, not enough to keep up with inflation. The last time they paid more than 2% was in 2008. Money funds are best used as a temporary holding place for cash, but even then most online savings accounts pay more, but still less than 1%.

Wall Street is bleeding investors dry

Quoted from “Americans Aren’t Saving Enough for Retirement, but One Change Could Help” by Eduardo Porter in The New York Times: March 3, 2015

“Everybody’s big focus is that we have to save more,” said John C. Bogle, founder and former chief executive of Vanguard, the investment management colossus. “A greater part of the problem is the failure of investors to earn their fair share of market returns.” His observation suggests a different policy prescription: shoring up Americans’ retirement requires, first of all, aligning the interests of investment advisers and their clients. A research paper by Mr. Bogle published in Financial Analysts Journal makes the case. Actively managed mutual funds, in which many workers invest their retirement savings, are enormously costly. First, there is the expense ratio — about 1.12 percent of assets for the average large capitalization blend fund. Then there are transaction costs and distribution costs. Active funds also pay a penalty for keeping a share of their assets in low-yielding cash. Altogether, costs add up to 2.27 percent per year, Mr. Bogle estimates. By contrast, a passive index fund, like Vanguard’s Total Stock Market Index Fund, costs merely 0.06 percent a year in all. Of course, Mr. Bogle has a horse in the race. He founded the Vanguard Group. He invented the first index fund for the public. His case is powerful, nonetheless.

“Assuming an annual market return of 7 percent, he says, a 30-year-old worker who made $30,000 a year and received a 3 percent annual raise could retire at age 70 with $927,000 in the pot by saving 10 percent of her wages every year in a passive index fund. (Such a nest egg, at the standard withdrawal rate of 4 percent, would generate an inflation-adjusted $37,000 a year more or less indefinitely.) If she put it in a typical actively managed fund, she would end up with only $561,000.” Read the details at: http://www.nytimes.com/2015/03/04/business/americans-arent-saving-enough-for-retirement-but-one-change-could-help.html?_r=0

One More Reason to Choose Index Funds

"Mutual fund managers would seem to possess myriad advantages over the average individual investor: a business degree, a deep understanding of corporate finance, and years of experience.
But you wouldn’t know it based on how their personal portfolios fare.
A new study of mutual fund managers in Sweden found that that they “do not exhibit superior security-picking ability” when managing their personal portfolios, compared with similarly situated private citizens who also invest for themselves.
Using detailed tax and investment information contained in Swedish government data bases, researchers from the University of Notre Dame and Michigan State University were able to link individual fund managers to their personal equity portfolios and returns, which were then compared with the returns of non-experts with similar socioeconomic characteristics, such as education and age.
Based on the risk-adjusted returns for each group, the researchers found that the fund managers’ personal equity portfolios – individual company stocks and also the stock mutual funds they hold – performed no better than the private investors’ equity portfolios."
Thanks to the Squared Away Blog: http://squaredawayblog.bc.edu/squared-away/investment-managers-are-human-too/

Taxation of non-retirement mutual funds

Investors in mutual funds held outside of qualified retirement accounts can be surprised by the income taxes they owe. "If the fund sells investments that have gone up in value since they were acquired, the resulting gains will be passed out to you in the form of dividend distributions. If you hold your fund shares in a taxable brokerage firm account, those distributions will be taxable. The tax rate you will pay depends on your income level and whether the gains were short-term or long-term." Learn the details in this article by Bill Bischoff: http://www.marketwatch.com/story/how-mutual-fund-profits-can-get-you-in-tax-trouble-2014-09-15

Middle aged with no retirement savings?

How can a middle-aged single parent with zero retirement savings reorganize her finances to start investing for the future?  Read the advice of Robert Stammers, director of investor education at the CFA Institute. http://time.com/money/3222252/retirement-strategy-when-nothing-saved/. Don't be put off by the high income figures he cites. Regardless of your income you need to come to grips with reality and start investing for retirement today. You can start an IRA with as little as $100 in the Schwab Total Stock Market Index Fund (SWTSX). Learn more on the Financial Planning for Women website (Click on Mutual Funds 2013): http://www.usu.edu/fpw/schedule/powerpoints.htm