Avoiding Fees. Pay less get more Borring chapter 2.

Can I just hire somebody real smart to manage my money and beat average returns?



Yes/No. What you described is called an active mutual fund. Here is the problem. your smart mutual fund manager needs to get paid. And they get paid well to produce nothing. expense fees for actively managed mutual funds are commonly over 1 percent compared to an index fund with an easy to find expense ratio of .3%. So in order to profit from these smart managers they have to beat indexes buy .7% to break even. They don't. Everybody has a "smart" money manager and they all play against each other, looking for the best deal in the market, and getting rid of the worst deals. A easy way to picture this is a game of tug o war with a bunch of strong (smart) men on one side and a bunch of strong men on the other. on average No real work gets done. On average the average mutual fund should produce average market returns minus their inflated costs. Pay less get more.



Another way to do the same thing just more so is hire a broker to manage your money. He/she takes 1% or so off the top and typically selects a bunch of"hot" actively(read high expense ratio) managed mutual funds. The financial sector is by far and away the biggest sector of our economy(think gas + health care), guess who feeds em? Pay less get more.


For those who are more impressed by numbers, it is far bleaker for active funds.

for the past 25 years a s&p 500 index fund 12.3% return
for the past 25 years actively manage funds returned 10.0%

subtract taxes and inflation for the same period (active mutual funds with higher turnover generate more taxes) and you get

s&p index fund real returns 8.2%
active fund real return 4.9%

Pay less get more.

Anyway enough explaining. If you want a return on your investment that is better than 95% of investors, and want to avoid fees, think about the following or something similar.



First come up with what percentage stocks and bonds you want. IF you are aggressive and can sleep through anything and are young 100% stocks may be OK (some good books I have read have said nobody should be 100% stocks, but historically 100% stocks have never been beat over long term)

other popular theories are take your age and buy that % of bonds
This is a hard personal choice and one that once made should be stuck with no matter how scared or greedy you feel as speculation kills. (only adjust for say age or amount of risk you can take not how the stock market is doing) www.ifa.com is a great website and has a good risk evaluator to find out what kind of person you are and can give you an idea of how to allocate, although in a more complex way. Remember that every 1% lost is a massive hit to your retirement, that it is a long time till you actually pull the money out, and historically you should allocate as much stock as you are comfortable.

Know thy self. If the market drops 50%-65% and you are in stocks at 100% can you sleep or would you sell? how about 70%? IF you would freak out and sell do not go 100% stocks. better to figure this out now and stick with your plan. It should never drop 100%, as that would mean the top 5000 businesses in the country simultaneously went broke, and we would have bigger problems (think a huge comet takes out earth everybody dead so doesn't matter) . What is good for me isnt good for you. bonds have historically been trumped by stocks as far as performance. you do get compensated for taking risk and due to the majic of compound interest, It makes a huge difference in retirement.




how do i know what indexes to buy?

buy a total market representing either the Dow Jones (wilshir 5000) index with the lowest fees you can find.

or buy S&P 500 index with the lowest fees you can find

here are two I found

vanguard VTSMX expense ratio .18%

Fidelity fstmx

expense ratio .10%(min investment $10,000 though)

the lowest cost fund I have found is a fidelity fund similar to above at .07% but you need $100,000 min good luck!

If you want bonds buy look at a total bond index

here are two i found
vanguard VBMFX
expense ratio .22
fidelity FBIDX
expense ratio .38%

There are also blended funds that may work well for you. (fidelity 4in 1, etc)

as long as you are indexed (the broader the less risk) and lowest cost possible you are good.

by buying total market the only risk you have is "market risk" which is plenty for most people. The more specific you get the more risk you take on, the less diversified you are. more on that later.

now just buy and hold (watch out for 90 day short term trading fees) and you have done you best to avoid FEES.

The above is a good plan. It may not be a perfect plan but a good plan is good, simple and you will beat the pants off most people over the long haul (95% of people for similar stock bond allocation apple to apple comparison).

If youy are looking at ETF's be careful, the expense ratio excludes certain costs(not an apple to apple comparison with mutual funds). the bid ask spread is one example and sometimes there is a market premium aka the amout you pay is more that the etf is worth (book value/per share type deal. you gotta pay $10 to buy it. These all end up being a hidden 2 time loaded fee (one to buy and later to sell) Most of my reading recomends against etfs to avoid fees/keep it simple. also it is hard to get 100% of your cash into an etf which creates cash drag.(cash sitting and doing nothing) I have screwed this up myself.