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10 years later: How fund investing has changed

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NEW YORK — A decade ago, as Lehman Brothers went bust and the fragile financial system was teetering, fund investors wondered how bad it could get.

The answer: pretty bad. The S&P 500 plunged 4.6 per cent on Sept. 15, 2008, and would incur worse losses in the ensuing months.

Many investors bailed out. For those who held steady through all the tumult of the Great Recession, a decade later they’re sitting on more valuable portfolios.

Along the way, investors have changed not only what they invest in but how they do so. They have less faith in stock-picking fund managers who promise to protect them from downturns. They are seeking the lowest-cost options.

And they’ve largely played it safe, putting much more money into bond funds than stock funds.

Thanks in part to extraordinary efforts by the Federal Reserve and others to prop up markets, the largest mutual fund by assets, Vanguard’s Total Stock Market Index fund, has returned nearly 190 per cent over the last decade. The numbers are similar, if not quite that high, for funds of all different types.

BONDING WITH FUNDS

Investors have been slowly warming up to stocks, putting nearly as many dollars into stock funds last year as they did in 2007, just before the Great Recession. But they’re far more interested in bond funds, which drew three times as many dollars last year as they did a decade ago.

This year, investors have put over 10 times more dollars into bond funds than stock funds through July: $155.8 billion versus $14.8 billion.

Part of that is because the Baby Boomer generation is closer or further into retirement than a decade ago, which creates more demand for the income that bond funds provide.

But investors also are still hesitant to fully embrace the stock market. Bonds are safer investments than stocks, and even though many bond funds are down this year due to a rise in interest rates, they’re not likely to halve in value like stock funds did during the financial crisis.

ACTIVE DECLINE

Before the Great Recession, stock-picking fund managers were big stars in the financial world. They helmed many of the largest mutual funds, and investors trusted them to pick the right stocks that would help them beat the market.

But many actively managed funds found themselves pulled down with the undertow of the financial crisis, as panicked markets punished stocks of all types, indiscriminately. That soured many investors on actively managed funds.

Instead, many moved their dollars into funds that merely try to match the S&P 500 and other indexes, rather than try to beat them. Over the last decade, very few actively managed funds have been able to beat the performance of index funds after fees are taken into account.

FALLING FEES

Speaking of fees, investors are paying less of them.

Another big positive over the last decade is how much cheaper and easier it has become to invest. The fund industry is locked in a price war and has slashed the fees it charges to trade stocks and invest in mutual funds.

Much of that is due to how discriminating investors have become: They’ve increasingly sought out only the lowest-cost funds. And for good reason. Researchers say having low expenses is one of the best predictors of success for a fund, because high fees mean funds have to be that much better just to match the after-fee returns of their rivals.

“From a number of perspectives, it’s hard to argue there’s been a better time to be engaged in the market, as spreads are tighter, expenses are lower and technology is more powerful,” said Mike Loewengart, vice-president of investment strategy at E-Trade.

“Retail investors are able to execute investing strategies and oversee their portfolios in ways that were once reserved for professionals,” he said.

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Boost Your Investing Returns By Lowering Your Investment Costs

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Doctors can increase the health of their portfolio by monitoring investment costsGetty

Limiting your investment-related fees and expenses is a critical aspect of investing. In my work at The White Coat Investor helping doctors, attorneys and similar high income professionals develop financial literacy,  I have repeatedly seen that most investors are paying far too much in investing expenses. Reducing these is one of the most reliable ways to boost your return without taking on any additional risk. Unlike many things in life, in investing you get (to keep) what you don’t pay for.

Reducing investment expenses could potentially allow you to retire years earlier with far more money. Consider two investors, one of whom is paying 2% of the portfolio each year in investment related expenses and 1% of the portfolio in taxes (3% total) to an investor paying 0.1% in expenses and 0.4% in taxes (0.5% total). If we assume they both invest $50,000 per year for 30 years and earn 8% before fees, how much less will the investor with the high expenses retire with? A quick calculation shows that she will end up with 37% less ($5.6 million vs $3.5 million.) As the investor moves into her retirement years, those high expenses continue to limit the amount she can spend from the portfolio and make it far more likely that she will run out of money.

It is critical that an investor examine each of these five categories of expenses and minimize them wherever possible.

# 1 Advisory/Management Fees

Perhaps the largest category of expenses are those paid for financial advice and investment management services. Many in the industry consider 1% to be a standard level of fees. However, on a multi-million dollar portfolio, 1% can add up to $20,000, $50,000 or more each year for the exact same work the investor used to pay $5,000 for. When paying an advisor an Asset Under Management (AUM) fee, it is critical to do the math each year by multiplying the portfolio size by the fee.

Since there are many high quality advisors willing to provide these services for $1,000 to $10,000 per year, it seems silly to pay $50,000. A better arrangement (for the investor at least) is to pay either a flat annual fee for investment management and/or an hourly rate for financial planning. Although your fees will still likely add up to a four figure amount each year, at least they will not be a five figure amount.

Recognizing the importance of costs, some interested investors have decided to educate themselves about investing. With time, the necessary knowledge and discipline is relatively easy to obtain, but the potential do-it-yourself investor should be cautioned that they would be much better off paying a fair price for good advice than doing it poorly themselves. Of course, there are hybrid solutions that can reduce fees dramatically. These include enlisting the aid of a financial planner with the initial development and implementation of a plan and then maintaining it yourself. One could also meet with an hourly rate advisor periodically for a second opinion and a sounding board on any changes to their plan.

# 2 Mutual Fund Expense Ratios

Another significant fee for most investors are the expenses associated with running the mutual funds they invest in. Yet again the industry seems to believe that 1% is the industry standard. However, using low-cost index funds from providers such as Vanguard, Fidelity, iShares, and Charles Schwab you can relatively easily reduce that cost to less than 0.1% per year. Every dollar saved is a dollar that remains in your portfolio working for you.

Some beginning investors might wonder if paying cut-rate prices gives them cut-rate returns. However, time and time again it has been demonstrated that over the long run low-cost index funds outperform the vast majority of their actively-managed peers. In fact, having low costs is one of the best predictors of future returns of mutual funds. It certainly works better than looking at past returns, the method most investors use. It isn’t that the managers are stupid. On the contrary, the issue is that they are all so smart that they make the market efficient enough that the game of trying to beat it is no longer worth playing. They can add value, but not enough to overcome the cost of playing, especially once taxes are taken into consideration.

# 3 Commissions

Investing-related commissions are an interesting expense to consider. These can be completely eliminated by a do-it-yourself mutual fund investor who buys funds directly from the fund provider. However, many investors are paying huge amounts in commissions. This is often a result of mistaking a commissioned salesman for a fiduciary, fee-only financial advisor. While they think they are being given unbiased investing advice, they are actually being sold high-expense mutual funds and insurance products such as annuities and whole life insurance by a broker operating under the suitability standard rather than the fiduciary standard. At times these salesmen may obscure the fact that they are charging commissions by calling them “loads” or even telling the investor that the insurance company is paying that cost, not you. Of course, all expenses are ultimately paid by the investor.

Even a do-it-yourself investor may be running up the commission bill. A commission may be charged each time an individual stock or ETF is bought or sold, even inside a qualified retirement plan like a 401(k). Even at a rock-bottom price of five dollars per transaction, if you’re doing 20 transactions a month it adds up to $1,200 per year. While you don’t necessarily want the expense tail to wag the investment dog, every little bit helps keep costs down and returns up.

# 4 Turnover-Related Costs

Wise mutual fund investors always look at the turnover percentage when selecting a fund. Embedded in that percentage are some hidden expenses paid by the fund but may not be included in the expense ratio. Costs include commissions paid by the fund and bid-ask spreads that allow the market-maker to cover her own expenses and profits. A broadly-diversified index fund may have a percentage less than 10% (meaning less than 10% of the stocks in the fund are bought or sold each year) while an actively managed mutual fund may see a turnover percentage of 200% or more. A long-term, buy-and-hold investing philosophy on the part of the fund and the investor helps keep these costs down. A speculating day-trader is continually whittling down the nest egg with each transaction.

# 5 Taxes

Taxes are another major expense borne by the investor. Although this expense helps pay for government rather than the financial services industry, it lowers the investor’s return all the same. There are many techniques for lowering these costs, and a good advisor or do-it-yourself investor should be familiar with most of them. Investing in tax-advantaged accounts such as 401(k)s, Roth IRAs, Health Savings Accounts, and 529 College Savings Accounts makes a big difference. So does limiting turnover by lowering capital gains taxes due, particularly short term capital gains taxes. More advanced techniques include tax loss harvesting, tax gain harvesting, using appreciated shares for charitable donations, use of municipal bonds when bonds are held in a non-qualified account, and appropriate tax location of asset classes.

Lowering your investment related expenses are a sure-fire way to boost your returns, hasten your retirement and allow for a more comfortable retirement without taking on additional risk. Do all you can to reduce your advisory fees, mutual fund expenses, commissions, turnover-related costs and taxes.

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How millennials are changing the way the we invest

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By Jean Chatzky

When you think about making an impact with your money, what comes to mind?

There are always philanthropic efforts you can support, but what about investing your money in a way that makes a social or environmental impact, while also making you a profit? Often called “ESG investing” (environmental, social and governance), “SRI” (socially responsible investing), “CSR investing” (corporate social responsibility) or simply “impact investing,” the concept has been around for years, but millennials are charting new territory when it comes to doing good with their money.

Today, 43 percent of millennials are more likely to consider making impact investments versus only a third of Generation Xers and a quarter of Boomers. When those surveyed were asked what’s more important — making money or making an impact — the majority of all investors (67 percent) said they would prioritize having an impact. “They aren’t saying, ‘I’m willing to lose money,’ but they are saying, ‘Even if I have to get a slightly lower return, I’m okay with that to improve social issues and company governance,’” says Lule Demmissie, managing director of investment at TD Ameritrade.

The Global Impact Investing Network reported that nearly $140 billion was invested in impact investment strategies, up from just $10.6 billion in 2014 — a staggering increase.

Except that, they often don’t. Impact investments have outperformed the benchmark for eight out of the last 10 years, according to the MSCI ESG Leaders Index. During the same period, impact investments also showed they were better protected from the downside in the market. That’s why even people who aren’t so passionate about saving the world may want to get on the bandwagon (and why the bandwagon is turning into quite the parade.) In May, the Global Impact Investing Network reported that nearly $140 billion was invested in impact investment strategies, up from just $10.6 billion in 2014 — a staggering increase. Additionally, impact investment network Toniic reports that its members now have $2.8 billion total in impact investments, up more than $1 billion since 2016.

“As the industry continues to grow and mature, we believe that over time, there will be no ‘impact’ investing — it will simply be investing,” says Michael Tiedemann, CEO/CIO of Tiedemann Advisors.

Human Rights Is Leading The Way

So, where are people putting their money? Human rights was the most popular cause category for investors, followed by the environment and diversity, according to the survey. Millennials favored environmental impact and human rights, women tended to opt for gender equality, while men leaned toward diversity. Nearly half of millennials — 47 percent — felt so strongly about impact investing they said they would move their brokerage account to gain broader access to socially responsible investments.

Of course these conscious choices aren’t just impacting portfolios — publicly traded companies are starting to realize that it’s good for their business to give a more critical look at which suppliers they’re using, or how much of an environmental impact their operations may make. “In some cases, companies are changing their behavior, and you can give investors the credit for the rapid momentum of those changes,” Demmissie says.

July 20, 201701:05

A Contributing Factor in the Disappearance of Straws

Companies seeking to ensure long-term success may need to take a hard look at some of their policies, says Jordan Farris, Head of ETF Product Development at investment services firm Nuveen. “Starbucks is a good example of a company adjusting its business model,” he says. “As concern regarding the increase in ocean plastic has grown, Starbucks has made the decision to eliminate single-use plastic straws by 2020.”

For investors looking to ensure their money supports the “best” companies, Farris cautions that the definition of what makes a company responsible can vary widely. Overall, it’s any company that is incorporating “positive environmental, social and governance practices into its core business model,” he says. But investors can also have an impact simply by choosing not to invest in companies that are involved in major controversies, that pollute, or that manufacture tobacco or firearms, etc.

How Do You Do Well By Doing Good?

Investors looking to do their due diligence on a company before they invest need look no further than the internet, explains Nick Kovacevich, CEO of KushCo Holdings, the parent company of several cannabis industry firms. “Information is so ever-present today, and it’s not difficult for someone to do 30 minutes of research on a company and come to a determination if they are socially and environmentally conscious.”

If millennials have proven nothing else over the last decade, it’s that they’re willing to push boundaries, even when — perhaps especially when — it means a break with convention, and that’s exactly what we’re seeing with impact investing, Tiedemann explains. “They’re questioning the traditional view of making investments to create wealth, and then once they’ve made money, donating it to their charity of choice.” They’ve decided they want to get the double investment benefit of a social and a financial return, and they’re demanding that the marketplace provide it.

And while it may be the millennials leading this charge now, they’re really just the thin end of the wedge, Kovacevich says. “Millennials are going to teach their children the same ethics and values that they have,” he says, and the impact investment train is only going to build momentum as it chugs along. Tomorrow’s companies will either choose to hop aboard, or find themselves left at the station.

With Kathryn Tuggle

HOW TO SAVE MORE MONEY

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Investing in Education, Self Storage in China

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  1. Investing in Education, Self Storage in China  Bloomberg
  2. Full coverage



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