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Wealth Management

Hidden Taxes Still Cost Money

A recent article from Russell Investment only confirms what some of us already know; 

"Your mutual funds taxes are impeding your progress"

The article is a good one and kudos to Russell Investments on writing it. It confirms for us however, factors we've known for a long time. Your investments are incredibly expensive and those costs make the chances of your meeting your long term investment goals or any financial goal for that matter, daunting at best. 

If the math is correct in the article (we have a lot of faith in the Russell organization, so let's assume it is ok?) a taxable capital gain of nearly $8,969 is bad enough, but with having 15% of that being a short term distribution, the tax impact is considerable. 

Look we're not saying that all or even a majority of your investment decisions should be driven by tax factors, but if they aren't driven by them, clearly they should at least be a consideration in the grand scheme of things shouldn't they? We think that they should especially when they can be avoided without too much effort. 

As we've written before, how may layers of costs can the mutual fund industry heap on investors before they wake up and stop the insanity? 

If we have expense ratios (the cost of operating the fund) of about 1.3% to 1.5% of assets (Source: Investopedia) and if the Wall Street Journal was right a few years back that "undisclosed trading costs to mutual fund investors was annually about equal to the funds expense ratio, then we've got just the cost before commissions or fees of owning the damn things at about 2.6% to 3.0% per year.

Add to that, either commissions or advisor fees and you've got costs of about 3.0% to 4.0% per year. Now let's factor in taxes because if we take the hypothetical investor from the Investopedia article, taxes in his case were ANOTHER 2.4% getting the total costs to about 5.4% to 6.4%. 

Ever wonder why actively managed mutual funds can't beat an index fund or passive ETF with any consistency? If you did, just go back and re-read the last paragraph again. 

So, let's take and example for a minute. Let's say we're trying to pay for a child's college education in ten years. Here's what we can reasonably count on for our math.

1. The average cost of a college education will come in at roughly 2x the inflation rate. For the sake of this post, let's consider the inflation rate to be 3.1%. That means that the average college tuition will increase year-over-year by about 6.2% so we have at least earn that

2. We then have to earn enough to cover the expense ratio, another let's say 1.3%, so now our investment has to earn 7.5% just to keep pace

3. Then we have to cover the trading costs of another 1.3% so our "required earnings" are not up to 8.8% and then; 

We have to earn enough to cover any tax bill and any fees or commissions. 

If you believe that's going to happen I've got an actively managed mutual fund I can sell you. (That bridge reference just wasn't appropriate here, even though based on recent infrastructure analysis "it" has about as much of a chance as falling down on the job as your actively managed mutual fund will.) 

If you're saving for college and you can clear that probably about 9% a year hurdle, you're on your way to making some real money.....just one problem.  If you make 11% you're not keeping much of any of it now are you? 

Nuveen investments some 20 years ago used to run an add campaign that said, "it's not what you earn, it's what you keep." 

I wish I'd have though of it, because it may be the only thing about investing that still rings true today. 

I know what your saying, that since Barry Capital doesn't use active management (we'd prefer that you keep them money that otherwise gets wasted) we've got a bias. Well, you'd be right on both counts, we don't use active management and we have a bias. Our bias just happens to be spreading around the world.  If you've got 81 mintues to spare you can check it out here. 


As I wrap this up, I just took a look at the four largest portfolios that we manage in each of our core investment strategies.  The grand total on this years (2014) capital gain distributions were: $0. (Unless we rebalanced your portfolio at some point and realized a gain as a result of that effort, an effort we can assure you at some point you'll be glad we undertook on your behalf.)

If you can't change your investment program, you'll have a tough time. If you can change it please do so for your own benefit. 

We'd be happy to help. 

Be very aware.

A recent survey conducted by Rebalance IRA found that 46% of Baby Boomers don't understand that they're paying fees on the investments in their 401k account. 

When you dig a bit deeper into the numbers, those that do not understand that they're paying something for their investment accounts are a bit scary.  Only 4% of the respondents believe that they're paying more than 2%.  

If we're talking about your typical 401k, largely invested in actively managed mutual fund offerings the 4% who believe that they're paying more than 2% are off by about another 2% when you take manager expense ratios and undisclosed trading costs into account. 

For the record, these costs along with restrictions on what investments you can own (your investment offerings are generally dictated by the plan) are the main reasons why a rollover of your retirement plan when you leave work is an optimal idea. 

The survey goes on to say that the average fees were about 1.5% (that doesn't include undisclosed trading costs which are generally about equal to a funds expense ratio), among smaller plans, the average is 2.5% or has high as 3.86%.  

And what about performance? The typical respondent believes that his/her account went up in value by about 5.2%, yet target benchmark indices were up about 9.5% meaning that the average respondent underperformed the market by over 4%. I'm sure that the fees that were paid had something to do with the material underperformance of their investments.  And yet, as is often typical, the average respondent said that they were happy with their under performing by about 100%. My sense here is that most Boomers relate returns to bank interest rates and 5.2% certainly sounds good when you compare it to what you earned on a savings account. 

The additional feedback from respondents centered on savings rates and other factors. Rebalance IRA found that 28% of respondents aren't actually saving for retirement and 66% said that they are either very anxious or somewhat anxious about their readiness to retire.

Bottom line, most people make (and have continued to make) fundamentally flawed investment and retirement decisions. 

Thankfully, the Client's of my firm are NOT among them.

The Tax Man Cometh and Your Investment Returns Goeth...away?

Clearly, 2013 was a great year in the market. But just like Halloween, your 2014 return is coming around to haunt you. 

Last weeks dip in the market prompted many mutual funds to sell of considerable gains that they had carried forward from 2013. Both stock and bond mutual fund managers were sitting pretty, with built up gains that they had yet to get out of, poised but waiting for the right moment. And, sure enough for many, last weeks dip in the market was the exit point. 

Mutual funds must distribute their realized gains to shareholders. When that happens, the shareholders must then pick up those capital gains on their tax returns. The cost of paying those taxes should be considered a direct reduction in your return because they are in fact a direct expense of owning your mutual fund investment. 

A recent Reuters article goes on to say that stock mutual fund investors could be hit worst of all. Morningstar Analyst Russel Kinnel estimates that stock funds could be sitting on gains of around 20% and could end up paying the majority of that out as gains to shareholders. 

Coupled with ongoing expense ratios for mutual funds in the range of about 1.4% per year and adding in undisclosed trading costs of what amounts to another 1% or so, the typical investor who owns an actively managed mutual fund is paying somewhere around 2.4% of their portfolio value every year in expenses, and that's before you factor in taxes and commissions. No wonder American's are having such a hard time building a nest egg for retirement or any other goal. 

This coming April might be especially daunting for investors.  Many people had carry-over losses from the last market downturn and had been able to offset gains for a few years with those losses, but for many, the pool of available offsets has run out. 

The Rise of ETF's and Indexing

More and more investors are realizing that investing is a zero-sum game. There's only so much money to go around.  One mutual fund managers 10% gain has to be by definition another mutual fund managers 10% loss. While fund managers struggle to out perform a passive benchmark (the S&P 500 would be one example of a passive benchmark) they all seem to have forgotten that their desire to "beat the market" is inexorably complicated by the fact that by and large, they are the market. 

Indexing and the use of Exchange Traded Funds (ETF's) can minimize many of the costs that an investor faces. Not only is there no "management" team who have to have salaries paid, space rented, research conducted and distribution costs paid, but indexing by definition will largely eliminate the costs of any active trading in the portfolio as well. That could amount to a reduction in expenses to the end Client of as much as 2/3 over an "active" strategy. 

And there's a potentially more important payoff; the possibility of higher and more consistent performance. 

No one can guarantee or assure performance improvements, we all know that. But a recent study by Dimensional Fund Advisors shows the following factors as it relates to "active" vs. "passive" investing; 

  • LARGE CAP CORE- active fails to outperform passive roughly 95% of the time
  • MID CAP CORE- active fails to outperform passive roughly 94% of the time

(Note: the best performing active option is in Small Company Value with a 54% in Small Company Value as noted below.)

And even where active stands a fighting chance in asset classes such as Small Company Equity, active still fails to beat a passive bet 68% of the time in Small Company Core, 77% of the time in Small Company Growth and 54% of the time in Small Company Value. 

The track record on bond funds in the "active" vs. "passive" debate is even worse, where Municipal Bond Funds  (failing 98% of the time), Intermediate Municipal Bond Funds (failing 100% of the time), Short Term Municipal Funds (failing 96% of the time), High Yield Bond Funds (failing 97% of the time) and TIPS (failing 100% of the time) make an active management decision a benefit to the sales person and the fund company but clearly not the investor. 

For the record, no one can tell you what active funds will [a] beat a passive strategy, [b] that beating a passive strategy in one period provides any assurance that the same manager will beat it in the next or [c] that beating a passive option one out of five out of ten years will accumulate more money than the passive option since that would be dependent on what the actual returns were period by period. 

If you've chosen an active management bent to your investment program, the research is pretty clear, it'll be expensive in terms of costs, expensive in terms of returns and expensive from a tax standpoint. 

But how much difference does it really make?

On a $500,000 portfolio over a twenty year period a 2% difference in returns is the difference between $1,603,567 and $2,330,478 or roughly $700,000. 

Want to make progress toward retirement, college funding, buying a vacation home or just simply living out your life in reasonable comfort?  I'll bet $700,000 in additional wealth will help with no additional out of pocket cost!

Last year, PBS Frontline reviewed for everyone the negative impact of active management costs AND THAT WAS IN RETIREMENT ACCOUNTS.  That's important because of course, the implications for taxes aren't considered in retirement accounts. Taxes would be an additional costs on top of the expenses and any commissions paid.  I'd urge you to watch this series which is still available on the Frontline website. (Note: If you click on the graphic above it'll take you there.)

At Barry Capital we realized a long time ago that active management was, in our opinion, a fools game.  It's a story, artfully told about how, with time, talent and tenacity (and a whole lot of your money) a dedicate individual or group of individuals is going to show you how to beat the market. 

One small problem.....there's no chance that it will happen with enough frequency to make anyone any more money. Unless you're the fund company that is. 

Where Ease of Use and Disaster Meet

We've written before about "rules of thumb" and their imminently fallible future.  It appears that one of the most widely used "rules of thumb" may take a dive.

I'm thinking "maybe" not because there's a mathematicians chance that this often used "rule of thumb" actually works, but I say "maybe" because it'll be interesting to see if the public ever finds out. 

Target Date Funds....

Oh these are a help right. Here's the premise; 

a. Lay people can't do very well picking their own investment allocations (this is something that we know to be true and is widely supported by research)

b. You can purchase or invest in a fund that will take care of all that for you, AND;

c. It will automatically adjust the percentage of stocks vs. bonds that you own as you get older so that you're experiencing the lowest risk (i.e., owning the least amount of stocks) as you get older and experiencing the highest amount of risk (i.e, owning the most amount of stocks) as you're at your youngest. 

auto pilot

Think of it, on "auto pilot", all you've ever asked for. When you're young and your earnings are highest and you can afford the most aggressive portfolio and then, without even so much as a question or concern, an automated tilt to the conservative side of the table just as incomes drop, reliance on portfolio income increases and age sets in.

Problem doesn't work, and frankly, research indicates it never did. 

It was just a ruse from the mutual fund industry that you bought and paid for likely with a fair amount of your retirement nest egg, but hey, who needs more money, you or Wall Street?

Intuitively, consider the matter: 

a. you start out with the smallest amount of money invested in the most profitable asset class, stocks.....

b. overtime, you accumulate more money as you move toward a lower yielding option, a blend of stocks and bonds, then....

c. you wind up with the most amount of money at the exact time that you're in the poorest yielding asset class of the bunch....bonds dating doesn't sound quite that interesting when you explain it that way does it?

Well, once again, Wall Street's and the actively managed mutual fund industry would conveniently like to not let the "math" cloud the issue. 

Here's a typical Wall Street spin you can try.........

If you're ever in an elevator that cuts loose from it's cables and starts plummeting to the ground, all you need do is to jump in the air just prior to impact to save your soul. Seems to make sense right?  For 95% of the "trip" you're not even actually falling are you? I mean you're standing on the floor of a "fixed" object so a good hardy "jump" at just the right moment only puts your feet about three feet off the floor which means that if you only went up three feet, you'd only come down three feet right?

Sounds plausible. It's not.  But again it sounds plausible....if you ignore the math. (P.S. if you've ever watched Myth Busters you know how the elevator story plays out.)

Bottom line is that gimmicks can get a big tailwind, especially when they're sold as something that's so obviously awesome. 

But let's not forget, "bad" ideas always need to be sold

So if you're a "target" date investor, check and make sure that the target's not on your nest egg. 

What A Difference One Can Make



This weeks blog post was generously provided by Trish Colucci, a NJ State Registered Nurse with additional certifications in Gerontological Nursing and Case Management. Trish is the Owner of Peace of Mind Care Management Solutions, LLC.

You can learn more about Trish and her services on her website

Trish Colucci, RN-BC, CCM  Certified Geriatric Care Manager

Trish Colucci, RN-BC, CCM

Certified Geriatric Care Manager

The healthier we are, the more medical technology advances, the more and more we'll be confronted with the inevitability of caring for an aging population. 

I've had a long held belief that the nursing home system in America will at some point fall by the way side.  My sense is that the financial havoc that ravages families will be stopped, either by law or by its own obsolescence.  What will ultimately render that system obsolete will be the need, the desire if not the demand that our aged and infirmed be provided for at home. 

What that will portend for families is a maelstrom of issues, concerns, and desires. 

Let's hear what an expert who is providing the care that we all would love to have, has to say about the reality of the situation as it stands today. 

Not everyone knows what a “Geriatric Care Manager” a matter of fact, few people do.  However, when family members facing a care crisis with a loved one learn about the services a geriatric care manager can provide, they are relieved to hear that there is a professional upon whom they can rely to lead them out of the tangle.

 “Mom isn’t taking her medications correctly, she’s forgetting to eat, she’s not showering, her house is a disorganized mess, and I don’t think she should be driving anymore.”  That’s a pretty typical situation for which families reach out to a geriatric care manager.  But how can a stranger come into a scenario like this and make a difference?

It is a really tough job to be the adult son or daughter of a parent with dementia.   It doesn’t matter how old the adult child is...their parents generally don’t like a flip of the relationship dynamic which puts the child in charge of the parent.  The best thing that adult children can do for themselves and for their parent is to bring in the services of a professional.

As a care manager, I am the “objective third party.”  When I meet with a new client, I am given the opportunity to develop a brand-new relationship with the older adult, one not based on a long relationship history.  When called into a testy care situation for an assessment, I work hardest on building that relationship as a trusting and respectful one.  I let clients know that I am there to help but that their opinion is important too.  No one, at any age, or with any cognitive issue, wants to feel a loss of all decision-making capability.

At my initial assessment of a new client, I look to see where he/she needs support and assistance as well as the areas where there is still successful function, and develop blended solutions whenever possible.  

For instance, perhaps Mom can still remember when it’s time to take her medication if someone can set the pills up in a weekly pill box so she doesn’t have to scramble pills out of individual prescription bottles a few times a day.  Maybe Dad is willing to take a shower if he has a chair to sit on and someone available to assist him with getting into the shower safely.

Sometimes the older adult is defensive, worried, feeling powerless, embarrassed, and isn’t willing to allow me into the home.  I love those challenges!  Sweeping changes are rarely tolerated, so I enter the situation carefully and proceed lovingly and slowly.  I try never to miss an opportunity to get a foothold where I can make more progress to make the client safer while working simultaneously on building that essential trusting relationship. 

As a certified geriatric care manager, I am trained and experienced in working with the frail elderly, the mentally ill and the developmentally disabled client.  I am an expert at reading care situations and recommending the most appropriate and affordable resources for ensuring the best care.  It took years to get Mom or Dad to the point at which they need help, and it takes time, resources, and patience to get things back on track.  I know what resource to bring in at what time.

Meeting with a harried, mentally exhausted family is one of my favorite things because I know there is always something I can do to make their load lighter, their concerns less worrisome, their parent safer.  With a geriatric care manager taking the lead, families can help their loved ones accept the care they need while also providing them a better, safer quality of life.  Providing “Peace of Mind” is what I’m all about!

All You Really Need To Know.

Confusion is a good thing if you're fearful about moving forward. Confusion is one of the most reliable methods of ensuring you stay right where you are, without any requirement for change. 

When we're feeling especially fearful we focus on the uncertainties around us largely because those uncertainties fuel the confusion. And, keeping "confusion" active assures that we're likely to not take any direction action.

No matter how hard we try or how much analysis we look at, big decisions will never feel safe. 

One of the benefits of my work is the amount of data that there is that can be used in trying to help Clients resolve their personal financial issues. There are also an abundance of tools to use through which you can incorporate that data and fashion a reasoned and well thought out game plan.

Does that mean we should use all the data that there is?

We should if our goal is to create more confusion. 

Part of the "art" of Wealth Management planning lies in knowing how much data is the right amount of data.  As a rule, that would be the amount of data that allows for me to quantify why the "unacceptable today" has to be moved out of the way so that we can glimpse the "desired tomorrow." 

These concepts don't apply to only Wealth Management planning. They apply to all decisions of whatever kind. 

Taking action, beginning the steps toward resolution of a matter isn't going to begin with a focus on yesterday and tomorrow. You can talk about how you got here and where you'd like to be without ever once having to write down an action step. It all has to start from the realization that "today is an unacceptable tomorrow." 

All you really need to know is what's important now. 

If you can state that, you're on our way out of confusion and toward resolution and action.