Fees Matter to Long-Term Investment Performance

I recently came across a study conducted by InvestingNerd entitled:  “InvestingNerd Study Finds Americans Have A Low IQ When It Comes to Online Investing.”  (You can read the article in its entirety at  www.nerdwallet.com )

The study summarizes the results of a poll recently conducted by InvestingNerd.  The staggering lead statistic revealed that four in five Americans could not correctly identify a brokerage account as the proper account to open for stock investment.  Alone that result is shocking.  But what struck me was their finding regarding the lack of attention paid by the majority of 401k holders on the eroding effect of fees.

For example, InvestingNerd found:  “9 in 10 Americans (92.6%) underestimated the 401(k) fees the average household will pay over a lifetime by several thousand dollars.  The real average totals over $150,000 per household” (emphasis mine).  Long a personal pet peeve, fees are one of the greatest enemies of total return.  If you consider that according to the Employee Benefit Research Institute only 24% of Americans report retirement savings in excess of $100,000, average lifetime fees of over  $150,000 should matter–a great deal–to every investor.

Frequent readers of this blog know that I am passionate about educating individuals on investing.  In fact, that passion is the primary reason I am writing THE INTELLIGENT WOMAN’S GUIDE TO STOCK INVESTING.  InvestingNerd puts numbers to the concerns inhibiting most from investing.  Their results show:  “Just over a quarter of those not currently investing online say they don’t invest because of either uncertainty on how to get started (13.6%) or not wanting to risk losing money (12.8%).  Meanwhile, 39.3% say they do not invest because they do not have enough money to do so” (emphasis again mine).

A brokerage account can be opened with as little as $2,000.  And fee-sensitive, sound investments can be made via exchange traded funds (ETF’s).  Next blog post I will suggest some on-line investing platforms and  low-fee ETF’s for your portfolio.

In the meantime: get busy Saving so you can Invest sensibly for the long-term.

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Buy Great Companies and Hold Them. Really.

The headlines have been filled with the march of the Dow Jones Industrial Average to the high last reached in October 2007.  Yet, what the headlines don’t tell you is that if you factor in the effects of inflation the Dow actually does not reach new highs until 15, 651.80 over 1,000 points higher than the current level.  But even if you ignore the effects of inflation the question for the average investor is whether or not now is the time to commit new money to the market.  Yes, earnings have steadily grown as has the quality of the balance sheet since 2007.  And that means that valuations are much more attractive though the price level (as measured by the Dow) is approximately even.  But who wants to buy an asset when it has recently appreciated?  Shouldn’t I wait for a correction and buy stocks at cheaper prices?  Perhaps.  But, given the low returns in cash and the bond market and the relative attractiveness of stocks, it is conceivable the market will continue to rise in the short term; beyond the 2007 level into new highs.

Yet, short-term market levels are difficult, if not impossible, to forecast.  Look, instead, to the long-term. Incrementally buy the stocks of great companies and hold them.  Here’s why.

If you are a regular viewer of any of the financial news networks you may be hard put to find support for a buy and hold strategy.  This is not surprising since urgency and breaking news stories attract audience.  Buy and hold?  Not so much.

But for those of us who do not have the luxury of consulting an army of research analysts, accessing unlimited real time data or parking ourselves in front of the TV for the entire trading day, buying great companies and holding them for the long term is not only prudent, but a highly successful strategy.

Consider the results of Wharton School finance professor Jeremy Siegel’s research featured by Gene Epstein in this week’s Barron’s.  Siegel has compiled data on stock-market performance dating all the way back to the year 1871.  He examines the performance of stock returns in rolling five, ten, twenty and thirty-year periods.  His conclusion?  Over thirty years the median return for stocks is 9.22%.  For twenty years the median performance is 8.09%.  Despite the fact that the five and ten year periods can be negative (though the median return is 9.4% and 8.6% respectively) “all the 20- and 30-year periods have been positive.”

Since Siegel’s work includes stock-market performance, we can assume if we are buying excellent companies who are leaders in their business our returns should match, if not exceed the performance of the overall market.  The Dow stocks are a good place to start.  Look for the leaders.  Companies whose products you use.  Companies who demonstrate a history of growing dividends because managements and boards of directors tend to set their dividend as a portion of long-term, sustainable earnings power and that, after all, is one of the reasons we buy stocks–to own a share of future (growing) earnings.   Which, in turn, proportionally increases the value of our portfolio.  And that is the main reason we buy stocks.

Buy and Forget Says the Oracle

Warren Buffet appeared this morning on CNBC’s pre-market show, “Squawk Box” and presented a generally upbeat view of the U.S. stock market.   In response to a question from Becky Quick about individual investors and how they might get a “fair shake” on Wall Street he replied:

“Well, they pay a lot of expenses in many cases. They don’t need to. They should buy a low-cost index fund and they can participate in the growth of America over the next 20 or 30 or 40 years and they’ll do fine. But if they’re paying high fees to achieve that same result, they’re going to get hurt. They should look very carefully at costs. But they should hold a diversified group of really high-class companies, which you can do by buying an index fund. And then they should forget it. They should just pretend the stock market closes for five years and they shouldn’t look at prices every day…” 

Excellent advice.

After Buffet’s interview, Jim Cramer–co-anchor of “Squawk on the Street” and host of “Mad Money” gushed over how amazing it was that Buffet could be so positive about stocks in the face of the futures predicting a negative opening of the Dow by 58 points this morning. (The Dow by-the-way closed up 38 points today, a rally of almost 100 points from the pre-market futures.)

Buffet is right about long-term investing, of course.  And Jim Cramer revealed just how short-term and easily influenced he is by the daily (or intra-day for that matter) price fluctuations of the stock market.   The short run shouldn’t and doesn’t matter to long-term investors; and those of us investing for our own accounts have no business being anything other than  long-term investors.

I am always interested in buying great companies at discounted prices.  That is the essence of value investing.  Yet, at turning points Wall Street analysts and commentators are consumed by the bad news.  And they almost always caution against buying.  Wait, they advise, until things get better–earnings visibility it’s called.  But, if we wait for things to visibly get better then every investor can see what we see and it’s too late for a bargain. Value investors generate a significant portion of  total return by being willing to buy great companies when they stumble.  So, we buy a little in the face of uncertainty.  If the stock goes down, we make sure the problem isn’t terminal and we buy a little more.  If we are lucky and it goes up–we congratulate ourselves.  We don’t chase it.  Price matters as Mr. Buffet said.  We should view our purchase for what it is:  an investment.  And, investments are attractive only at certain prices–not at any price–and they usually require time to appreciate.

I like the Oracle of Omaha’s advice:  we should buy and then let our investments appreciate–“just pretend the stock market closes for five years” and stop focusing on the daily price movement.