{"id":1168,"date":"2015-03-06T08:52:09","date_gmt":"2015-03-06T08:52:09","guid":{"rendered":"http:\/\/www.prosolution.com.au\/?p=1168"},"modified":"2018-09-11T09:25:49","modified_gmt":"2018-09-10T23:25:49","slug":"sack-the-investment-experts-youre-paying-for-poor-performance","status":"publish","type":"post","link":"https:\/\/wealthcoach.com.au\/stage\/sack-the-investment-experts-youre-paying-for-poor-performance\/","title":{"rendered":"Sack the investment experts. You\u2019re paying for poor performance!"},"content":{"rendered":"

[Click here<\/a> for a printable PDF]\n

Who\u2019s deciding how your superannuation is invested? How much are you paying them? How have they doing? Have you checked?<\/p>\n

Consulting actuaries Rice Warner, concluded that Australians are paying \u201cthe experts\u201d on average 1.12% p.a. of their super balance to invest their money (in 2013). Based on these findings, I estimate that our average client will pay their super fund\u2019s investment manager\/s over $400,000 in fees over their lifetime! In fact, from the reviews I have conducted recently, many people will pay more than double this amount \u2013 a staggering $800,000! So what are you getting for your money? It is your responsibility to find out.<\/p>\n

Research suggests you can slash your investment fees by almost one quarter of this amount (i.e. $70,000 using the above example) whilst at the same time giving yourself a 96% chance of getting a higher investment return. I\u2019ll tell you how in this blog.<\/p>\n

Last month, I wrote about a blog about superannuation fees<\/a> which received an amazing response. Since posting this blog the average saving we have identified is a staggering $159,892 per client! We can review yours \u2013 but more than this later. By the way, I\u2019m not the only person harping on about this important issue – the government has been warned<\/a> and action is needed.<\/p>\n

They need to sell you this story\u2026 but it is nothing but slick marketing!<\/em><\/strong><\/h3>\n

Everyone likes an \u201cinsider\u2019s tip\u201d don\u2019t they? Something that gives them the edge over everyone else. So if I told you that I have this awesome investment methodology that allows me to make money in the stock market and it can\u2019t fail, you might be interested, right? Most people would be and this is how the financial services industry has successfully marketed itself for many decades. I mean it is a great story to tell isn\u2019t it; \u201cpay me a fee and I\u2019ll make you lots of money. I am the expert so that\u2019s why you have to pay me fees. I can invest your money better than you can.\u201d<\/p>\n

However, this story is nothing more than a marketing tactic. Let me tell you why.<\/p>\n

Generally, there are two ways to invest money being active<\/em> and passive<\/em>. Active funds management is probably what you are familiar with. Active fund managers try to beat the market by deciding what stocks to invest in. They typically take two approaches being value<\/em> and\/or growth<\/em>. A value<\/em> approach means that they will buy stock that they think are undervalued in the hope that the market will eventually value them correctly (in their opinion anyway). A growth<\/em> approach involves investing in companies which, in the investment manager\u2019s opinion, have great growth prospects and they hope that will reflect in their future share price growth. Active fund managers typically charge in the range of 1% and 2.5% p.a. in fees.<\/p>\n

The second type of management is called passive<\/em> (or index). This approach is based on the philosophy that you can\u2019t beat the market (because the participants are highly skilled and the market is efficient). Instead, you should invest in an index such as the ASX200 (being the top 200 companies on the ASX) for example. An index fund such as an ASX200 fund for example, will invest in the top 200 companies weighted by their market capitalisation<\/a>. For example, CBA makes up 9.68% of the index so 9.68% of your money is invested in CBA. Index funds charge in the range of 0.20% and 0.60% p.a. in fees.<\/p>\n

Most advisors, however, are far better at generating high fees than they are at generating high returns. In truth, their core competence is salesmanship.<\/em>
\nWarren Buffett \u2013 2013 letter to shareholders<\/strong> (read a very important 400-word extract here<\/a>)<\/p>\n

These two methodologies head to head<\/em><\/strong><\/h3>\n

So how have active<\/em> fund managers performed compared to passive<\/em>? The short answer is; poorly! There is a huge body of research evidence that demonstrates that active fund managers cannot outperform the market in the long run. That is, they might be able to beat the market in year 1 and possibly year 2 but year 3 for example is a very bad year. So the question becomes; firstly, how do you know which fund managers will outperform this year and which won\u2019t. Secondly, when you do pick a winner, when do you know to jump off the wagon (i.e. before they underperform the market)? This is the \u201cmarketing story\u201d that many financial planners\u2019 business models reply upon i.e. that the financial planner has some sort of crystal ball and knows which fund managers will perform well this year. They don\u2019t. Virtually no one does.<\/p>\n

I am not saying that no one can beat the market. There are a select few fund managers that have actually beat the market over the long term (Warren Buffett, Ray Dailo, David Swensen to name a few) \u2013 but they are the top 0.0001% investors in the world. We don\u2019t have a chance when we invest in the same market as these guys. Actively investing in the share market is like playing poker against the World Series of Poker champion\u2026 you stand a very slim a chance.<\/p>\n

Click here<\/a> for a summary of research that has been conducted.<\/p>\n

\u201cThe goal of the nonprofessional should not be to pick winners \u2013 neither he nor his \u201chelpers\u201d can do that \u2013 but should rather be to own a cross section of businesses that in aggregate are bound to do well. A low-cost S&P 500 index fund will achieve this goal.\u201d<\/em>
\nWarren Buffett \u2013 2013 letter to shareholders<\/strong><\/p>\n

There some additional benefits of passive investing<\/em><\/strong><\/h3>\n

In addition to higher longer term investment returns there are some additional benefits passive management provides compared to active management being:<\/p>\n