The Aleph Blog » Blog Archive » Personal Finance, Part 14 — Low Investment Expenses

Personal Finance, Part 14 — Low Investment Expenses

Getting help in investing is a tough decision.  Who is worth the money that you will pay?  Precious few.  In equities, I could probably come up with a dozen “long only” managers that have real skill, and are worth their fees with decent probability.  With hedge funds and private equity, the questions are harder, and would have a harder tme judging who has a sustainable competitive advantage.

With bond funds, the answer is simple.  Go to Vanguard.  Almost all bond managers earn roughly the same amount before fees. Over a long period of time, fees make up most of the difference in performance.  In general, low fees work with equities, but with more noise.  With index funds, the lower the fees the better, they are generic.

Now there are a few places where additional money might help.   Getting a good financial plan done can be worth the money.  For those that are wealthy, advice in limiting tax liabilities is usually worth it, though be careful when things get more complex than you can understand.  Also, insurance products can be useful, but don’t let someone sell you what is convenient for them.  Get advice from someone who won’t earn a commission, and then buy the products that you truly need.

Be careful, do your research, and buy what you want to buy.  Don’t buy what someone wants to sell you.






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5 Responses to Personal Finance, Part 14 — Low Investment Expenses

  1. James Dailey says:

    In general I think you have offered great advice for most people in your post. One caveat have is that there are a select few bond managers that are equally skilled and worth the money as on the equity side. Dan Fuss at Loomis Sayles has been a steady and insanely successful manager. The institutional share class is reasonably priced. Someone like Bill Gross would be worth it if not for the asset bloat at Pimco.

    In general, think the financial advice industry’s model is broken. The whole morningstar box system has ruined a lot of portfolios. I think the best active managers are those who have carte blanch to go where they see opportunity. Whether it is Fuss, or David Winters, Marty Whitman, Rob Arnott, the team at Ivy Asset Strategy, Ken Heebner etc, they tend to generate tremendous relative and absolute returns….BECAUSE they can go anywhere.

    My business is primarily fee derived, but servicing lower income/asset households becomes very difficult charging fees – they simply don’t see the value even though they are the most in need of help. As with any product, commissioned insurance/investment products are only bad if placed in bad hands….and there are unfortunately a lot of bad hands AND bad products!

  2. James, I agree totally. There are a few really good bond managers as well, certainly Fuss and Gross. It’s easier in some ways to add value in bonds than stocks. Beating the benchmark is easier, if one can keep the expenses low.

    I agree on the fund managers, and would add in Hodges, Muhlenkamp, and Rodriguez (FPA). The need to be able to venture outside the style boxes is crucial.

    Yes, small account sizes is a problem. They are expensive to maintain, compared to large accounts, and people don’t take well to explicit account maintenance charges.

    Advice costs money, and if one is not willing to pay a financial planner, or educate himself, then he will be prey to the salesmen that are paid to sell investment products. The salesmen do a useful service in getting people who won’t save to save.

  3. I will add to the argument for Dan Fuss and Loomis Sayles: I’ve managed money (fee-only) for 10 years and attempted to prudently allocate bond assets over a small handful of diverse funds with varying maturities, credit quality, and duration. It took me a few years to finally realize that the fixed-income world is much more complex than the equities world…

    Now, for most of my clients, it makes perfect sense to allocate bond assets to one good multi-sector bond fund, such as Loomis Sayles Bond, than attempt to navigate the bond markets myself with two or three separate bond funds. Mr. Fuss and his team have much more skill and a much better track record than I do and the fees are worth it…

    Thanks for the post…

  4. Josh Stern says:

    What is a good strategy for someone who wants to insist that their fixed income investments are either a) broadly diversified over denominated currencies or else b) strategically managed in terms of currency allocation by someone who is competent to do that?

    The last decade was a specially good period to be in emerging markets and out of dollars. IMO, some of that was predictable by only moderately sophisticated investors reading e.g. The Economist. No predictions from me that the next decade will be any kind of repeat, but the question, as posed above, seems to deserve more attention in this context.

  5. You could consider an open end international bond fund, one that doesn’t hedge currencies. I’m not up on the sector at present, but T. Rowe Price has one. Among ETFs, there is BWX. I would go look at some ranking table, but the trouble is, most international bond funds hedge currencies. You also could look at the FXY (yen) and FXF (Swiss franc).

Disclaimer


David Merkel is an investment professional, and like every investment professional, he makes mistakes. David encourages you to do your own independent "due diligence" on any idea that he talks about, because he could be wrong. Nothing written here, at RealMoney, Wall Street All-Stars, or anywhere else David may write is an invitation to buy or sell any particular security; at most, David is handing out educated guesses as to what the markets may do. David is fond of saying, "The markets always find a new way to make a fool out of you," and so he encourages caution in investing. Risk control wins the game in the long run, not bold moves. Even the best strategies of the past fail, sometimes spectacularly, when you least expect it. David is not immune to that, so please understand that any past success of his will be probably be followed by failures.


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Additionally, David may occasionally write about accounting, actuarial, insurance, and tax topics, but nothing written here, at RealMoney, or anywhere else is meant to be formal "advice" in those areas. Consult a reputable professional in those areas to get personal, tailored advice that meets the specialized needs that David can have no knowledge of.

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