{"id":41585,"date":"2013-09-02T21:50:52","date_gmt":"2013-09-03T01:50:52","guid":{"rendered":"http:\/\/countingpips.com\/forex-news\/?p=41585"},"modified":"2013-09-02T21:50:52","modified_gmt":"2013-09-03T01:50:52","slug":"how-to-escape-the-costs-of-investing","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex-news\/2013\/09\/02\/how-to-escape-the-costs-of-investing\/","title":{"rendered":"How to Escape the Costs of Investing"},"content":{"rendered":"<p>By <a href=\"http:\/\/www.MoneyMorning.com.au\" target=\"_blank\"><u>MoneyMorning.com.au<\/u><\/a> <\/p>\n<p>High costs and low returns  don&rsquo;t mix.<\/p>\n<p>In the good times generosity  abounds. Everyone gets to share in the spoils. Investors, fund managers and  financial planners all make money. It is only when the good times stop <strong> investors<\/strong> sharpen their focus on the genuine value derived from fees.<\/p>\n<p><\/p>\n<h2>The Cost of Investing<\/h2>\n<\/p>\n<p>Fees and taxes act like  friction on your <strong>investments<\/strong>. They slow down the compounding rate of return you  can achieve. Where possible, it is imperative to minimise both. <\/p>\n<p>There are generally three  layers of fees in the investment industry. The fees will vary depending on  amount invested; services offered; type of <a href=\"http:\/\/www.moneymorning.com.au\/best-investment-opportunities\" title=\"best investment opportunities from Money Morning \">investment<\/a> recommended and type of  administration service. The following are indicative fee ranges offered by the  investment industry:<\/p>\n<ul>\n<li>Financial planner:  0.5% to 1.% &mdash; note with the introduction of Future of Financial Advice (FOFA)  on 1 July 2013, the percentage based fees have largely been replaced by a  dollar amount monthly retainer e.g. $100 per month ($1,200 per annum). If you  have an investment of $200,000 this equates to 0.6% of funds invested.<\/li>\n<li>Investment  manager: 0.2% to 1.2%<\/li>\n<li>Administration:  0.3% to 0.5%<\/li>\n<\/ul>\n<p>The total level of fees can  vary from 1.0% to 2.7%. In my experience the average fee for the average client  tends to be around 1.8% to 2.0%<\/p>\n<p><\/p>\n<h2>Are Investment Managers Value for Money?<\/h2>\n<\/p>\n<p>The theory is professional  investment managers will more than justify their fees by outperforming the  market.<\/p>\n<p>As usual there is a  difference between theory and reality..<\/p>\n<p>The vast majority of  professional managers measure their performance to a relevant index. A manager  <strong>investing<\/strong> in the <a href=\"http:\/\/www.moneymorning.com.au\/category\/stock-market\/australian-share-market-stocks\" title=\"more on the Australian Share Market from Money Morning \">Australian share market&#8217;s<\/a> Top 200 companies benchmarks its  performance against the ASX 200 Accumulation index. <\/p>\n<p>Professional investment managers  undertake extensive company research to identify the winners and losers in the  index. The managers aim is to back more winners than losers to deliver superior  performance. This is easier said then done.<\/p>\n<p>Investment managers suffering  from Illusory Superiority Syndrome (above average effect) are inevitably  brought back to earth by the performance tables.&nbsp; <\/p>\n<p>The following chart from  S&amp;P Dow Jones Indices Report 31 Dec 2012 shows over a 1, 3 &amp; 5 year  period the percentage of investment managers who were outperformed by the index up to 31 December 2012.<\/p>\n<p> <img decoding=\"async\" src=\"http:\/\/www.dailyreckoning.com.au\/images\/dr20130807f.jpg\"> <\/p>\n<p>In my opinion the Five Year  column &mdash; a decent amount of&nbsp; time for a  trend to be established &mdash; is the most relevant. With the exception of Large Cap  Value Funds (and only by a very small margin), the majority of professional  investment managers did not beat the  relevant index.<\/p>\n<p>The following extract from  the reports Executive Summary (emphasis is mine) pretty much sums it up:<\/p>\n<blockquote>\n<p>&lsquo;<em>The performance  figures are equally unfavorable for active funds when viewed over three- and  five- year horizons. <strong>Managers across all  domestic equity categories lagged behind the benchmarks over the three-year  horizon. The five-year horizon yielded similar results, <\/strong>with large-cap  value emerging as the only category that maintained performance parity relative  to its benchmark.<\/em>&rsquo; <\/p>\n<\/blockquote>\n<p>The above data is on the US  investment industry. However, Morningstar Research has conducted similar  studies on the Australian industry and produced roughly the same results.<\/p>\n<p>While the data clearly  indicates the majority struggle against the index, there are a select group who  do consistently out perform the index. <\/p>\n<p>Selecting these consistent  outperformers in advance is not easy. The task doesn&rsquo;t get any easier by using  past performance either. There is absolutely no guarantee the results will be  replicated.<\/p>\n<p><\/p>\n<h2>How to Play the Percentages Game<\/h2>\n<\/p>\n<p>We know from the S&amp;P Dow  Jones table nearly 70% of investment professionals fail to beat their relevant  benchmark.<\/p>\n<p>The other major consideration  is cost. There is a significant difference in the percentage charged to run an  index fund and that charged by investment professionals. <\/p>\n<p>Index funds employ computer  models (not expensive analysts) to simulate the index. <\/p>\n<p>Without the high cost of  personnel, an Australian share index fund (Exchange Traded Fund) operates on a  management fee of approx. 0.3% per annum. <\/p>\n<p>The management fee for  investment professionals &mdash; operating in the Australian share market &mdash; range  from around 1% per annum (Wholesale) and up to 2% per annum (Retail). <\/p>\n<p>Based on: a) The index  consistently outperforms the majority of investment professionals, and b) Index  funds operate on significantly lower fees, the question is, &lsquo;Why wouldn&rsquo;t you  just invest in the index?&rsquo;<\/p>\n<p>If investors adopted this  simple and logical approach, then nearly 70% of investment professionals would  close their doors. The investment industry will not surrender this ground  easily. This expains why marketing departments are an essential part of the  industry.<\/p>\n<p><\/p>\n<h2>The Return of the Secular Bear Market <\/h2>\n<p>\n<\/p>\n<p>The Secular Bull Market of  1982 to 2007 delivered an average return (income + growth) over this 25-year  period of 15% per annum.<\/p>\n<p>With this level of return on  offer, investors are happy to share the bounty and rarely question paying an  all inclusive investment cost of 2% per annum. <\/p>\n<p>It is a different story in a  Secular Bear Market. Low single figure returns are the norm for Secular Bear Markets  and paying 2% per annum strips away the majority of an investor&rsquo;s return.<\/p>\n<p>Only time will tell as to  whether we have entered a Secular <em>Bear <\/em>Market  or not, but it is reasonable to assume the sustained double digit market  returns are a distant memory. Therefore the luxury of higher fees for lower  performance is one you can definitely not afford (not that you should need a  Secular Bear Market to highlight this fact).<\/p>\n<p>In my opinion a prudent <em>optimistic<\/em> outlook for the future would  be for a low growth, low return era in all major investment markets &mdash; shares,  cash, fixed interest and property. <\/p>\n<p>The more <em>pessimistic<\/em> outlook would see negative returns in risk assets &mdash;  shares and <a href=\"http:\/\/www.dailyreckoning.com.au\/category\/property-market-1\/\" title=\"more on property\">property<\/a> &mdash; and very low interest rates on cash and term deposits.<\/p>\n<p>In either scenario, paying  fees totalling 2.0% per annum seriously erodes your net returns. <\/p>\n<p>Even if you disagree with my  bleak outlook for growth assets, <a href=\"http:\/\/www.dailyreckoning.com.au\/category\/investing\/\" title=\"more on investing\">investing<\/a> in index based ETFs compared to  investment professionals makes sense from both a cost and performance  perspective. <\/p>\n<p>With the market conditions we  find ourselves in, it is vital you reduce your friction to a fraction.<\/p>\n<p>  Regards,<\/p>\n<p>  Vern Gowdie<br \/>\n Chairman, <em>Gowdie Family Wealth<\/em> <\/strong><\/p>\n<\/p>\n<p><strong><a href=\"https:\/\/plus.google.com\/106516983215198267222\/about\" title=\"Join Money Morning on Google Plus -- and read about the things we can't always fit into our regular essays\"><u>Join Money Morning on Google+ <\/u><\/a><\/strong><\/p>\n<\/p>\n<div class=\"feedflare\">\n<a href=\"http:\/\/feeds.feedburner.com\/~ff\/MoneyMorningAustralia?a=whYJOM-CvgY:Qfk1S3ua7tY:yIl2AUoC8zA\"><img decoding=\"async\" src=\"http:\/\/feeds.feedburner.com\/~ff\/MoneyMorningAustralia?d=yIl2AUoC8zA\" border=\"0\"><\/img><\/a> <a href=\"http:\/\/feeds.feedburner.com\/~ff\/MoneyMorningAustralia?a=whYJOM-CvgY:Qfk1S3ua7tY:V_sGLiPBpWU\"><img decoding=\"async\" src=\"http:\/\/feeds.feedburner.com\/~ff\/MoneyMorningAustralia?i=whYJOM-CvgY:Qfk1S3ua7tY:V_sGLiPBpWU\" border=\"0\"><\/img><\/a> <a href=\"http:\/\/feeds.feedburner.com\/~ff\/MoneyMorningAustralia?a=whYJOM-CvgY:Qfk1S3ua7tY:gIN9vFwOqvQ\"><img decoding=\"async\" src=\"http:\/\/feeds.feedburner.com\/~ff\/MoneyMorningAustralia?i=whYJOM-CvgY:Qfk1S3ua7tY:gIN9vFwOqvQ\" border=\"0\"><\/img><\/a>\n<\/div>\n<p><img loading=\"lazy\" decoding=\"async\" src=\"http:\/\/feeds.feedburner.com\/~r\/MoneyMorningAustralia\/~4\/whYJOM-CvgY\" height=\"1\" width=\"1\" \/><\/p>\n","protected":false},"excerpt":{"rendered":"<p>By MoneyMorning.com.au High costs and low returns don&rsquo;t mix. In the good times generosity abounds. Everyone gets to share in the spoils. Investors, fund managers and financial planners all make money. It is only when the good times stop investors sharpen their focus on the genuine value derived from fees. The Cost of Investing Fees &hellip; <\/p>\n<p class=\"link-more\"><a href=\"https:\/\/www.investmacro.com\/forex-news\/2013\/09\/02\/how-to-escape-the-costs-of-investing\/\" class=\"more-link\">Continue reading<span class=\"screen-reader-text\"> &#8220;How to Escape the Costs of Investing&#8221;<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-41585","post","type-post","status-publish","format-standard","hentry"],"_links":{"self":[{"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/posts\/41585","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/comments?post=41585"}],"version-history":[{"count":0,"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/posts\/41585\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/media?parent=41585"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/categories?post=41585"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/tags?post=41585"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}