Investing

If you are investing in stocks, bonds, or mutual funds, you have a wide range of options to help manage your portfolio—everything from traditional brokerages to mutual fund companies to online financial firms. But as consumers search for an investment company, many pay little attention to the fees they’re being charged, according to a just-released Consumer Reports survey of more than 46,000 CR members. Penelope Wang, writing for Consumer Reports:

Four out of 10 surveyed said they weren’t sure what they paid in fees. And of those who knew the costs, only 60 percent rated their investment company in our survey as Excellent or Very Good on the amount charged.

“Hidden and confusing fees are proliferating across the marketplace, making it hard for consumers to know what they’re getting for their money, and to comparison shop across providers,” says Anna Laitin, director of financial policy at Consumers Union, the advocacy division of Consumer Reports.

“It is concerning that so many investors don’t know how much they are paying in fees and that many of those who do understand the fees don’t appear to think they are getting their money’s worth,” she says.

When Cao downloaded the Qiangqiantong app, he certainly never expected it could ruin his life. So Cao invested the equivalent of $11,600 — his entire savings — with Qiangqiantong. And why not? The app claimed to offer amazing investment opportunities, with high returns and little risk. Instead, this June, the company shut down. Now Cao does not know if he will ever see his money again. The Washing Post reports:

Over the past decade, millions of investors sunk their cash into thousands of companies like Qiangqiantong (which roughly translates to Get Rich Quick) and others with names like Money Pig and Qianbao, or Wallet.

The promises were the same: steady growth, big dividends and a chance for investors to put financial worries behind. Investors lapped it up. It was once among the largest small-investor cash flood in the world, with as much as $200 billion riding on P2P dreams.

Some state-owned banks even helped facilitate payments, and government officials spoke of some of the P2P companies in glowing terms.

But since June, hundreds of upstart investment companies have gone bust — many falling victim to credit runs, risky bets or the same Ponzi-scheme unraveling that brought down fraudsters such as Bernie Madoff.

More evidence that it’s very hard to beat the market over time, 95% of finance professionals can’t do it. Mark J. Perry writes on American Enterprise Institute: “The percentage of active managers who do beat the market is usually pretty small – fewer than 8% in most of the cases above over the last 15 years; and they may not sustain that performance in the future. For many investors, the ability to invest in low-cost, passive, unmanaged index funds and outperform 92% of high-fee, highly paid, professional active fund managers seems like a no-brainer, especially considering it requires no research or time trying to find the active managers who beat the market in the past and might do so in the future.”

S&P Dow Jones Indices, the ‘de facto scorekeeper of the active versus passive investing debate,’ recently released its SPIVA U.S. Year-End 2017 report. Here’s an overview of the SPIVA Scorecard:

There is nothing novel about the index versus active debate. It has been a contentious subject for decades, and there are few strong believers on both sides, with the vast majority of market participants falling somewhere in between. Since its first publication 16 years ago, the SPIVA Scorecard has served as the de facto scorekeeper of the active versus passive debate. For more than a decade, we have heard passionate arguments from believers in both camps when headline numbers have deviated from their beliefs.

During the one-year period, the percentage of managers outperforming their respective benchmarks noticeably increased in categories like Mid-Cap Growth and Small-Cap Growth Funds, compared to results from six months prior. Over the one-year period, 63.08% of large-cap managers, 44.41% of mid-cap managers, and 47.70% of small-cap managers underperformed the S&P 500, the S&P MidCap 400, and the S&P SmallCap 600, respectively.

While results over the short term were favorable, the majority of active equity funds underperformed over the longer-term investment horizons. Over the five-year period, 84.23% of large-cap managers, 85.06% of mid-cap managers, and 91.17% of small-cap managers lagged their respective benchmarks.

Similarly, over the 15-year investment horizon, 92.33% of large-cap managers, 94.81% of mid-cap managers, and 95.73% of small-cap managers failed to outperform on a relative basis.

Warren Buffett officially wins his bet that the S&P 500 index fund would beat selected hedge funds over the last 10 years. Fortune reported:

In 2007, Warren Buffett bet a million dollars that an index fund would outperform a collection of hedge funds over the course of 10 years. This week he won that bet, but the big winner in the wager is a charity called Girls Inc.

When he placed the bet a decade ago Buffett said he would hand over any proceeds from the victory to charity. The charity he chose was his local Girls Inc. affiliate, The Wall Street Journal reports. The charity provides after-school care as well as summer programs for girls ages 5 to 18.

Buffett officially “won” the wager on Friday, but said throughout 2017 that he was confident that he would win. Over the course of the bet the S&P 500 index fund returned 7.1% compounded annually, significantly more than the basket of funds selected by an asset manager at Protégé Partners. That basket only returned an average of 2.2%.

It’s official: Bitcoin has surpassed “Tulip Mania” and is now the biggest bubble in world history. Tyler Durden reported on ZeroHedge:

One month ago, a chart from Convoy Investments went viral for showing that among all of the world’s most famous asset bubbles, bitcoin was only lagging the infamous 17th century “Tulip Mania.”

One month later, the price of bitcoin has exploded even higher, and so it is time to refresh where in the global bubble race bitcoin now stands, and also whether it has finally surpassed “Tulips.”

Conveniently, overnight the former Bridgewater analysts Howard Wang and Robert Wu who make up Convoy, released the answer in the form of an updated version of their asset bubble chart. In the new commentary, Wang writes that the Bitcoin prices have again more than doubled since the last update, and “its price has now gone up over 17 times this year, 64 times over the last three years and superseded that of the Dutch Tulip’s climb over the same time frame.”

That’s right: as of this moment it is official that bitcoin is now the biggest bubble in history, having surpassed the Tulip Mania of 1634-1637.

The 401(k) plan is the most popular type of employer-sponsored defined-contribution retirement plan. According to the Survey of Income and Program Participation (SIPP), 60 million individuals or 33.0% of the U.S workforce participated in 401(k) plans in 2008.

By saving in the 401(k) plan, you get an immediate tax break, because contributions come out of your paycheck before taxes are withheld. You also get tax-deferred growth – meaning you don’t pay taxes each year on capital gains, dividends, and other distributions.

Each year the IRS can annually adjust contribution limits. For 2018, the pre-tax contribution limit to the 401(k) plan is increasing to $18,500 while the overall 401(k) contribution limit increases slightly. Here are the details of 401(k) contribution limits.

401(k) Contribution Limits

Roth and Traditional IRA contribution limits

Summary

For the 2018 tax year, you can choose to contribute up to $18,500 into the pre-tax 401(k) account, with an additional $6,000 catch-up contribution allowed if you are 50 and older.

The overall 401(k) contribution limit is $55,000. This overall limit includes employees’ pre-tax, after-tax or Roth contributions to the 401(k) Plan. For participants 50 or older with an additional $6,000 catch-up allowance, the overall limit is $61,000.

For Roth IRA and Traditional IRA, the contribution limit is $5,500 with an additional $1,000 catch-up contribution allowed if you are 50 and older.

Taylor Larimore, a well-respected Bogleheads, compiled a list of what experts say about market timing vs. staying the course. Market timing is essentially making portfolio changes based on market forecasts. Read the list below to educate yourself about the danger of market timing.

What Experts Say About Market Timing

“The stock market will fluctuate, but you can’t pinpoint when it will tumble or shoot up. If you have allocated your assets properly and have sufficient emergency money, you shouldn’t need to worry.” (AAII Guide to Mutual Funds)

“Endless tinkering is unlikely to improve performance, and chasing last period’s stellar achiever is a losing strategy.” (Frank Armstrong, author and adviser)

“It must be apparent to intelligent investors–if anyone possessed the ability to do so (market time) he would become a billionaire quickly.” (David Babson, author, adviser)

“What it really takes to improve your returns and diminish your risks is a willingness to stop focusing exclusively on the movement of the markets.” (Baer & Ginsler, The Great Mutual Fund Trap)

“If we haven’t said it enough, we’ll say it again: Market timing is dangerous.” (Barron’s Guide to Making Investment Decisions.)

“Only liars manage to always be ‘out’ during bad times and ‘in’ during good times. (Bernard Baruch, famed investor)

“Market timing recommendations have an impressive track record of being harmful to an investor’s financial health.” (Peter Bernstein, author, researcher)

“There are two kinds of investors, be thay large or small: those who don’t know where the market is headed, and those who don’t know that they don’t know.” (Wm Bernstein, author and adviser)

“If you’re determined to succeed at investing, make it your first priority to become a buy-and-hold investor.” (Jack Brennan in Straight Talk on Investing)

“When you give up teh hope that some advisor, some system, some source f of inside tips is going to give you a shortcut to wealth, you’ll finally begin to gain control over your financial future.” (Harry Browne, author)

“For the 12 years ending 1997, while the S&P rose 734% on a total return basis, the average return for 186 tactical asset-allocation mutual funds was a mere 384%.” (Buckingham Financial Services)

“We have long felt that the only value of stock forecasters is to make fortune-tellers look good.” (Warren Buffet)

[Read more…]

In a move that will benefit all investors, the world’s leading low-cost fund provider Vanguard continues pushing fees down as it grows. The fee wars across the fund industry will only heat up. Bloomberg reported:

Vanguard Group has a message for competitors trying to undercut its prices: Game on.

In recent years, rival asset managers such as Fidelity Investments and BlackRock Inc. have cut their fund fees to match or beat Vanguard, the low-cost investing pioneer with $4.4 trillion in assets. Tim Buckley, Vanguard’s new president and incoming chief executive officer, said the company will keep lowering fund expenses as it grows.

Tim Buckley, an incoming Vanguard CEO, stated on a company webcast: “As we continue to get scale, as we continue to grow and we get more efficient, we pass a large part of that back to our clients in the form of lower expenses. That’s not going to stop. If other people want to offer index funds, great. But you better be ready to keep lowering price, and we’re going to do it across every product.”

Buckley will suceed Bill McNabb as chief executive of Vanguard at the end of the year. He will continue the tradition of low-fee, passive management strategies started by Jack Bogle in 1975 when Vanguard was founded.

Last year alone 226 Vanguard funds and ETFs reported expense ratio declines, saving customers an estimated $337 million cumulatively, the company said.

The U.S. Department of the Treasury has decided to phase out the myRA retirement savings program and the program is no longer accepting new enrollments. However, existing accounts remain open and accessible at this time. Funds in myRA accounts remain in an investment issued by the U.S. Department of the Treasury

Due to low demand since the program started in 2014, The U.S. Department of the Treasury takes action to wind down the myRA program after a thorough review by Treasury that found it not to be cost effective. Just 30,000 people had opened a myRA after three years. According to Treasury, myRA program has cost taxpayers $70 million so far, and was expected to cost $10 million annually going forward.

“The myRA program was created to help low to middle income earners start saving for retirement. Unfortunately, there has been very little demand for the program, and the cost to taxpayers cannot be justified by the assets in the program. Fortunately, ample private sector solutions exist, which resulted in less appeal for myRA. We will be phasing out the myRA program over the coming months. We will be communicating frequently with participants to help facilitate a smooth transition to other investment opportunities,” said Jovita Carranza, U.S. Treasurer.

The myRa was designed to help low- and middle-income workers who don’t have access to a 401(k) or pension at work start saving for retirement. Participants could contribute $5,500 a year, or $6,500 for those age 50 and older. Contributions had to be made with after-tax dollars, but the money could be withdrawn in retirement tax-free. In a sense, myRA was similar to Roth IRA.

To aid low- and middle-income workers in their retirement savings, myRA was 100% risk-free and didn’t have any administrative costs. Funds were invested in super-safe Treasury Securities Fund that offered a return of 2.9% over the past decade. However, cumulative savings in a myRA were capped at $15,000 and the account could not be open longer than 30 years, at which point it would have to be rolled over into a private Roth IRA.

Any myRA with a zero ($0) balance as of September 15, 2017 or later, will be subject to possible automatic closure beginning on September 18, 2017. myRA account holders can open and transition to Roth IRA accounts.

Participants in the myRA program are being notified of the upcoming changes, including information on moving their myRA savings to another Roth IRA. Participants are encouraged to visit www.myRA.gov for additional information or to call myRA customer support with any questions.

According to Vanguard Group founder Jack Bogle, U.S. stocks are still the best and investors do not need to take any risk outside of the U.S. for big returns. “I believe the U.S. is the best place to invest,” Bogle told Bloomberg. “I’d bet that the U.S. will do better than the rest of the world. It is a simple bet on which economy is going to be the strongest in the long run.”

In fact, Bogle, who started the first index fund in 1976, put all of his investment in U.S. securities, with stocks and bonds having an equal share of his index portfolio.

One thing Bogle learned from his extremely long career in the investment world is to not follow the crowd. “Every single person I think I have ever talked to tells me I am wrong in this,” Bogle said. “If you believe in the majority, you can just throw my opinion in the waste basket. But on the other hand, I was brought up in this business and I am saying ‘the crowd is always wrong.'”

Since 1993 the S&P 500 Index has jumped more than 421 percent, more than four times the performance of MSCI’s index of world equities excluding the U.S. “I don’t think in the long run [emerging markets] will do as well as the U.S.,” he said. “They are more risky and more sensitive to interest rates, more sensitive to Federal Reserve statements and actions. They don’t have the diversity we have in the U.S.”

Data also show that money flowing into emerging markets and Europe this year dwarfs what is flowing into the U.S. It’s wise for investors to buy U.S. indexes. Why mess with what’s worked? Ignore the crowd and stick with U.S. stocks.

The world’s largest fund just got a bit cheaper for investors. The fee for Vanguard Total Stock Market ETF (VTI) and Admiral share classes were reduced to 0.04%. VTI’s extreme low fee is much lower than its peers’ 0.90% median fee. As a result, investors pocket these monies while VTI outperforms its competitors due to sizable fee advantage.

Vanguard Total Stock Market ETF and Vanguard Total Stock Market Index Fund gives investors option to invest in a diversified U.S. stock market. As reported on Morningstar: “Broad diversification is an intrinsic advantage of funds tracking market-capitalization-weighted total stock market indexes, which capture nearly the entirety of the investable market capitalization of the U.S. equity market… Low turnover is another key advantage of a fund tied to a cap-weighted benchmark. Lower turnover equates to lower costs and a lesser likelihood of taxable capital gains distributions. VTI’s median annual turnover was 10% during the trailing 10-year period. This compares with a median figure of 66% for its category peers.”

Normally, passively managed funds outperformed actively managed funds. Low fee from passive funds is one of the reason. Morningstar completed a study of 562 actively managed funds in the U.S. large-growth category and 25 passively managed funds. In the 10 years ending in 2014, passively managed funds’ asset-weighted return was an average 9.27 percent versus actively managed funds’ 8.05 percent. Overall, the reduction in fee to 0.04% from 0.05% for the the world’s largest fund is another win for investors and passive funds.