“The Retirement Gamble” : How to Tip the Odds in your Favor….

retirement gambleDear Mr. Market:

How many times have we heard the comment that investing in the stock market is like gambling in Las Vegas?  The market allows people to build up their account balances and confidence only to watch it all be taken back and possibly more.  Many people experience this in ‘Sin City’ as their stacks of chips build up only to watch the casino take them all back in what seems like the blink of an eye.  While we could certainly debate the similarities and differences between Vegas casinos and the stock market there is no doubt that both have left investors feeling as though the system is rigged against them.

How nice would it be if you could tip the odds in your favor in Vegas?  What if you could see what the next card or roll of the dice would be or simply improve your chances of winning?  If investing is truly like gambling what if you could increase the odds that your retirement savings would grow more and be there for you when you need them in the future?

Recently we have heard from several investors about a very powerful and informative television report featured on Frontline titled “The Retirement Gamble”.  This presentation pulls back the curtains and exposes many of the dark and hidden secrets of the financial industry that the average investor is not aware of.  There are several factors that investors can control and limit the negative impact on their portfolio resulting in a profound difference on long-term portfolio returns.  We encourage everyone to watch the online presentation of “The Retirement Gamble” that first aired on April 23, 2013.  The presentation is approximately 50 minutes long however it could possibly be the most critical education you’ll ever receive on investing.

“The Retirement Gamble”, Frontline on PBS, April 23, 2013

This show does a tremendous job of getting down to the basics and avoiding all the financial jargon that clutters the industry.  It empowers the average investor to understand many of the key aspects of investing that they need to be aware of and more importantly what they can control.  Below are some of the key points that can be taken away from this program along with some charts and our thoughts:

1)   Avoid and limit unnecessary fees:  The financial industry is notorious for miscellaneous fees and charges.  As mentioned in the presentation many investment products have upwards of 5 or more different fees associated with them.  It is not uncommon to see fees with vague descriptions like: administrative fees, record keeping fees, marketing fees, asset management fees, trading fees, 12b-1 fees and more…  As with any purchase individuals need to take the time to research what their options are before making any investment decision.  Why would someone pay a fee of over 5% up front for a fund and then ongoing yearly management expenses when a similar fund with no up front charges and significantly lower management fees performs just as well if not better?!  Think of it this way… for every charge and fee paid the investment product will need to post returns of the same amount to just break even! If you were car shopping this would be like paying $10,000 more for a car and getting no warranty when the dealership just down the street is offering both!

Mutual Fund Fees 2

2)   How does your advisor or broker get paid:  Every single investor should ask their “investment professional” how they are paid and incentivized.  Are they essentially a salesperson that is selling their companies products and/or services?  What drives them and how are they compensated? NEVER feel awkward asking this question.   Are they acting in your best interest, theirs, or their companies?  Over the last several years there has been much debate over “Fiduciary Responsibility” in the financial industry.  Essentially what this means is that the advisor puts their clients needs and goals first.  All decisions and transactions are made in the best interest of the client and only the client.  Does your advisor do this for you? Ask them point blank if they are willing to put it in writing. If your financial advisor cannot sign a simple promise that they are not compensated based on which product they sell/recommend…you need to find a new advisor!

Definition of ‘Fiduciary’ – from Investopedia.com                                                           – A person legally appointed and authorized to hold assets in trust for another person. The fiduciary manages the assets for the benefit of the other person rather than for his or her own profit.

3)   Performance and your options:  The saying “you get what you pay for” could not be any farther from the truth when it is applied to the financial services industry.  Just because a fund has a higher expense ratio or fee associated with it does not mean that it will perform better than another fund with significantly lower charges.  In this day and age there are so many investment options available to individuals – take the time to shop and/or ask your advisor if there are more cost effective options available. Investors are smarter today than they were 10 years ago. If you are not getting straightforward honest education and answers on things like performance and fees…you need to find a more ethical resource.

 Imagine if you could instantly cut one percent of fees from your portfolio and how through compound interest your portfolio would grow over the years.  Wouldn’t you prefer to keep those dollars in your pocket rather than lining the pockets of financial firms or executives sitting in their plush offices?

Expense Ratio Vanguard

Source – Vanguard

4)   Managed vs. Passive investing:  What this essentially comes down to is how a fund is managed and what its goals are. An index fund simply tracks the benchmark (ex: S&P 500, Barclays Aggregate Bond Index, etc.) An investor buying an index fund does so to match the market returns.  Managed funds are attempting to beat an index or benchmark on a yearly basis.  For example, if you purchased a fund that owned large companies like GE, IBM, Microsoft, and Disney, the applicable benchmark would be the S&P 500; an index created to track the 500 largest companies in the United States.  While many funds will post some respectable returns for maybe a year or two, the sad truth is that actively managed funds underperform their benchmarks more often than they beat them!  Investors are paying a higher fee for these funds and not getting the returns that they could by simply purchasing an index. Based on published data actively managed mutual funds typically do not beat their benchmark by over 75% of the time! Most investors are completely unaware that they are paying higher fees for underperformance. The very last person who will educate them on this is a commissioned financial advisor or a massive mutual fund company.

active funds vs index 2

After watching this presentation every investor needs to understand that now is the time to take control of their investments and get honest information regarding what their financial options are.  The days of simply trusting that the company pension will be there at retirement are not a reality for the majority of hard working Americans. Do not allow Mr. Market and his minions to control your financial future!  Ask your ‘investment professional’ to explain your overall strategy, how they are paid and if they are truly working in your best interest.  If they talk quickly or appear like a “deer in headlights”, like several of the executives featured in the report, then it’s clearly time to explore other options. With so much growth and dynamic positive change in the financial industry, there is no longer any excuse to not ensure that your portfolio is current and not being left behind.

We welcome your comments and questions. Feel free to leave a comment and we will get back to you or better yet… contact us directly!  You can also register to receive notification when future posts are added by signing up on the front page – right hand column with your email address.

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