June 2017 KEEPING IN TOUCH
When we enter the second act of our life, when it is time to enjoy what we have made, we will have the freedom to work only if we want to. This is a significant part of the definition of financial success.
To have unconventional success, you can’t be guided by conventional wisdom. I have seen it time and time again. People follow the herd. The psychology of success is very difficult, I will admit. It is easier to follow the herd because people will consider you to be one of them. When they fail and you fail as well, they don’t condemn you because you failed together. If you choose to make your own decisions and go your own way, you will be considered an oddball. When you succeed where others fail, they may very well resent you. Psychologically, this makes success very difficult for most people. Many live out their financial lives on autopilot because of their need to be accepted as part of the herd.
There are 7707 different mutual funds in the United States. There are only 4900 individual stock companies. Mutual funds have a poor record overall. Ninety-six percent of actively managed mutual funds fail to even match market returns over a sustained period of time. Why would you want to pay someone substantial money to manage your funds in order to do worse than the market itself?
“When you look at the results on an after-fee, after tax basis, over reasonably long periods of time, there is almost no chance that you are going to beat an indexed fund”. —David Swensen
One of things we are encouraged to do is to put our money in mutual funds. For most people, this means a losing proposition. There are many opportunities which have greater potential for gain with little or no overhead cost. These are the ideas which tend to be highly profitable in the long term.
Chasing the high flyer is like chasing the wind. But it is human nature to chase performance. I have personally seen this over and over again over the years. People will read periodicals subsidized by mutual fund companies. In the periodicals they see that certain mutual funds did well the previous year. An almost automatic way to lose your money is to chase the best previous year’s performance. In all likelihood, that particular fund made a bet and won in the process. The following year, they are much more likely to lose all the money back than to repeat those gains. There are better ways to control our own finances and to invest to achieve far superior performance.
In the past one hundred years, the market has been up 70% of the time and down 30% of the time. That means three out of every ten years are losers. Most individuals lose heart during those down years and sell out at the bottom. Wealthy people wait for a drop in the market of their choice and commit their funds when prices are cheap and potential is high. Let me emphasize the fact that gambling in the market is only valuable for very few individuals. There are safer and more profitable options available for the normal individual.
We have been talked into the strategy of setting aside money during our entire working lives into government programs like IRA’s, 401k’s, and other similar schemes as well. Do you know that the average worker making $30,000.00 per year and saving 5% of his income in a 401k will pay $154,794.00 in fees in his lifetime? A worker who makes $90,000.00 per year and saves 5% of his income will pay an average of $277,000.00 in fees in his lifetime. Add to the fact that three out of every seven years is a down year, taxes are at their historic lows, and the government is eager to confiscate funds from qualified plans in order to eliminate the national debt, and you will see that setting money aside during your entire working career is usually a losing proposition.
his is a disturbing phenomenon. A common example is a client who had $7,000.00 in a 401k and was locked into paying more than $500,000.00 in interest on his house, cars, and other purchases. Do you believe that gambling $7,000.00 over his working career could ever make up for the $500,000.00 he was obligated to pay in interest? Wouldn’t it be much better to pay cash for the things he buys and eliminate the interest paid to others?
If you have any questions about the structure of mutual funds, you can go to the computer at www. personalfund.com. This site tells the costs and fees of each of the mutual funds. Over a lifetime, these fees become prohibitive.
The following quote is a big part of the explanation why we have been successful in this nation and why third world nations languish in squalor. I often notice that some people believe they can no longer trust anyone. In a sense, they feel betrayed, as they become enlightened and start to understand the real rules of the game. They think that they must now handle everything on their own and become an island unto themselves because “No one can be trusted”. A few years ago, an organization took a poll worldwide. They asked the question, “Can you trust the people you deal with?” In the United States, 70% of the people said they could trust others. In the third world, 70% said they couldn’t trust others. Mistrust leaves those unfortunate individuals adrift without the help from people who would be capable of giving them a real chance to make financial progress.
Here is a quote that will help explain why mutual fund managers can gleefully accept the profits they make without the risk that they create for you and me. Forty-nine percent of mutual fund managers own no shares in the mutual funds they manage and fifty-one percent have token amounts compared with their compensation and total net worth. A question for you. If the managers of these funds don’t commit their own funds to the investments they manage, exactly what does that tell you about the potential for you making money in those very same funds?
Don’t be shocked at this. Forty-six percent of financial planners are said to have no financial plan. I have long been aware that something like 60% of estate planning lawyers die intestate. Exactly what value is it to have knowledge without acting on the knowledge? This applies to all of us.
There is no good reason to trust the advice of brokerage houses or rating services. Recognize that brokerage houses give investment advice to their small clients based on what the company tells them to do. In most cases, a large client is trying to liquidate a position which he believes is a loser. As a result, the brokerage counts it as a sales opportunity and unloads one large investor’s shares onto the small investor who then takes the loss when the stocks drop. Rating services are paid by the companies they rate. If they rate a shaky company honestly, that company will stop paying them. It is a very simple and substantial conflict of interest. Just look at the record of some of these conflicts of interest and the losses they created.
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