Viewing entries tagged
portfolio design

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. 

Kick the Losers To The Curb

No doubt that as the capital markets start out 2014 either moving down or barely managing to tread water, our thoughts normally turn to "what do I own right now that I probably shouldn't?" I can hear the trades taking place even as I write this blog. 

But venting out the old in favor of the new may not be the best option that you have at your disposal. 

We always tend to pay and invest too much credibility in short term data.  And, that disconnect is off at more than one level.  If we have "long-term" goals then why wouldn't we match that with a view based on long-term data instead. 


In a recent blog post, Behavior Gap expert Carl Richards formulates a cogent argument for continued diversification based on the principal that what was once performing well, will one day not be and likewise, what was once not performing well, will one day be doing just that. 

In a seminal book on Asset Allocation, portfolio manager and financial advisor Roger Gibson noted that on average, your portfolio should at least be aligned in a manner consistent with overall global asset distribution. So, whether your emerging market stock or bond funds are performing well or not, they deserve a place among a well diversified portfolio and that level of representation in your portfolio should match your risk propensity and tolerance. While I don't think that emerging markets should dominate, surely they should be represented in your holdings and at a level consistent with your risk tolerance. 

My best bet would be this; if we look at past successful "investors" or "portfolios" or "Clients" we're going to find two things that really account for much of their long-term success; 

1. They tend to stay the course and invest more in a sound process than short-term data, and; 

2. They do the things that most people are not willing to do, they put money in when markets are declining and frankly, that means your betting on your losers, not getting rid of them

It's hard to argue that for many 401k plans are viewed as their most successful investment.  But can we tell why that's the case?

For many, it's their only savings plan, I get that, but that's not necessarily what makes it the most successful. I'll offer a counter claim to the success; 

1. Because contributions are made out of each payroll period, money goes in no matter what, and; 

2. Because investment options are so damn hard to discern for the average investor they're more likely to just stick with the allocation that they chose when they started and not monkey around with it all that much

That captures two important initiatives; 

1. Doing what most people won't do (making contributions to investments in declining markets) and; 

2. Staying the course

As an advisor I understand more than most the desire to avoid market declines and feel that we can side step adversity and it's easy to be fooled that we can.  Let me give you a real story to support that. 

A few years ago, we had a Client that demanded that they go to all cash during the very end of the 2008 decline. No matter what we did we couldn't convince them that staying the course was their best option. So, we agreed in the end that we'd move them to cash. That was the easy part; getting out is always the easy part. 

What we struggled with was getting them back in.  It never, to their way of thinking, seemed like the right time to put the money back in the market. They missed the first 11% of the run up that followed the rebound that started in 2009.  When we finally were able to convince them to get back to fully invested, we asked the following question?

"If, by getting out of the market we prevented a 3% decline and missed an 11% run up on the other side, didn't we effectively make avoiding a 3% loss into an 8% loss?"

We did. But you can't believe how hard it was for us to convince our Client of that fact. To their way of thinking, they avoided a loss.  Math would indicate that exactly the opposite occurred, they created a larger one. 

If the value of diversification is real, which it is, then one other factor remains immutably true about your winners, your losers and investing in general; 

"If they don't ring a bell to tell you when to get out, they sure as hell don't ring one to tell you to get back in....."

Change your way of thinking...your losers aren't your losers, they're your "just not making money now" assets.