Beware of the new-age financial wolves

The investment industry is a remarkable industry. There is so much innovation in a space where the nuts and bolts have always been the same. Put them in the hands of investment bankers and you will see them conjuring up products to sell to you. Whether that is to your advantage is another matter.

We always advocate that going to a fee based advisor is a better route due to less economic bias in their advisory service. Yet this article by FELDER Report highlights the CON ARTISTS are shifting to a fee based model. And you may not be there to gain:

Make no mistake. There are plenty of wolves left on Wall Street. They just don’t call themselves wolves anymore. In fact, they do everything in their power to look like innocent, cuddly sheep. They setup as RIAs now. Many even preach a low-cost, passive or index-based approach to investing, aligning themselves with the likes of Burton Malkiel, Warren Buffett and Jack Bogle, some of the most respected names in the business.

It’s the ultimate hypocrisy. You see, while they preach a low-cost approach and may actually use low-cost products like index ETFs, they’ll charge you an arm and leg for the privilege – as much as 2% per year. As Meb Faber put it, “you’re a predator if you’re charging 2% commissions and or 2%+ fees for doing nothing.”

This doesn’t seem surprising to Singaporeans, considering the Infinity Global Index Fund cost 0.95% in expense ratio! In Singapore, the index ETF are low in liquidity, high in expense ratio compare to their US and UK counterparts.

Beware of the new age financial wolves Screen Shot 2014 09 11 at 9.57.55 AM 1024x463

That chart above shows the growth of $100,000 over 40 years assuming a rate of return of 9.68% for the index fund (the return over the past 40 years) and 7.68% for the investor paying 2% to his adviser. The DIY guy ends up with a little over $4 million and the guy with the wolf, I mean adviser, ends up with a little less than $2 million. That’s right, the wolf ends up eating over half of your profits.

Many failed to realize the benefits of these index ETF or funds is firstly about COST Advantage and secondly the passive nature of the fund. The most simple analogy is that, if you purchase a HDB flat, you would sourced for the lowest interest rate.

Suppose on your $300k mortgage over 25 years, you found a fixed interest of 2.6%. Your total interest paid over 25 years equals $106k ( bet you might not realize your interest is almost 1/3 of your mortgage. Compounding works negatively as well!)

You found a competitive mortgage at 1.6% fixed interest. Your total interest paid over 25 years equals $63.7k. You save 40% in interest.

Think about what you can do with the $42k interest saved.

You can rationally evaluate this proposition, yet you cannot evaluate high cost investment products the same way.

To get started with dividend investing, start by bookmarking my Dividend Stock Tracker, which shows the prevailing yields of blue chip dividend stocks, utilities, REITs updated nightly.

Some observations from 5 severe bear markets

Wealth of Common Sense summarized some good observations on Servo Wealth Management data on  5 bear markets since 1920s.

What I find more interesting is reinforcing the point that, you can pull money out 100% from a bear, but that doesn’t kill investors return since most people won’t know where it ends. The issue is that most don’t get back in FAST ENOUGH. And they missed out on a large part of the recovery.

Some observations from 5 severe bear markets Bear Mkts

The general idea is that these events will come, and psychologically you can talk until the cow comes home how to prepare for it, and another to see your money decimated. Or how you are so strong in a bull market, that your skillset translates to a bear.

Managing the psychological part is important. If you are not ready to loss psychological capital, don’t have a 100% stock allocation.

Have a fundamentally sound plan. Understand what matters the most amongst all the noise.

A few observations on Nelson’s data:

  • You don’t need to get fancy with black swan disaster hedges. High quality intermediate-term bonds have been your best option for preserving capital during an economic disaster. They do their job as the portfolio anchor during periods of stress to give investors dry powder for rebalancing purposes to buy stocks on sale or for spending purposes so stocks don’t get sold after a crash has occurred.
  • Stocks can fall far and fast but also tend to recover very quickly. That’s why bailing out of stocks after they crash just compounds your problems if you held them through the crash in the first place.
  • Balance is the key to surviving these periodic crashes. The Balanced Asset Class Index which included large caps, small caps, value stocks and bonds fared much better than the all-stock options and outperformed the other options over the full cycle 4 out of 5 times.
  • Value and small cap stocks are great diversifiers and return enhancers as you can see from the All Stock Asset Class, but be prepared for large losses as well.