Military Officer - February 2007 - (Page 40)

financialforum Paying to Play Chasing hot returns, trying to time the market, shelling out money to cover fees, expenses, and taxes — surely there’s an easier way to invest! There is. Phil Dyer, CFP, explains how. R Bottom Line: How Much Does It Cost? ■ The current average mutual fund expense ratio is 1.41 percent. If your money manager or financial advisor charges an asset management fee, you could be paying an additional 0.5 percent to 1.5 percent. ecent academic studies, investment books, and ﬁnancial pundit commentary all seem to point to the same thing: Most of us are paying too much in fees, commissions, and hidden costs to invest our money. In a November 2006 article, Marketwatch.com columnist Paul B. Farrell said, “More than $200 billion annually is siphoned off of the top of the $10 trillion [America’s 95-million-strong ‘investor class’ has] invested in mutual funds.” That’s big money — more than 2 percent of the total — and we never get a bill for most of it, because it’s hidden. But surely investors are getting something for all that money they are paying. How about better returns or more safety? Sadly, no. A Dalbar Inc. study about investor behavior that examined market returns and average investor returns from 1985 to 2005 found that the U.S. equity markets, as measured by the S&P 500 Index, averaged about 12 percent annually during that period. The average U.S. equity mutual fund investor only earned a paltry 4 percent annually during the same period. In the past ﬁve years, only about 35 percent of actively managed, diversiﬁed U.S. stock funds beat a total-market benchmark index. So despite fancy investment strategies, market timing, and other investment gyrations, nearly two-thirds of active fund managers fail to beat a simple index. Is there a better way? Yes, says legendary investor Warren Buffet, in a 1996 shareholder letter to Berkshire Hathaway investors. “Most investors, both institutional and in- dividual, will ﬁnd the best way to own common stocks is through an index fund that charges minimal fees,” he wrote. “Those following this path are sure to beat the net results (after fees and taxes) delivered by the great majority of investment professionals.” Rick Ferri, CFA, a national expert on passive/index investing, agrees: “The only guaranteed way to increase investment return is by lowering investment costs. Don’t waste time trying to ﬁgure out ways to beat the market. Spend time trying to ﬁgure out how to lower your investment costs. [The] latter has a much higher success rate than the former.” This can be achieved through building a low-cost, low-turnover, low-stress portfolio using broadly based index funds with an asset allocation appropriate for your age, time frame, and risk tolerance. For instance, a 75-percent stock, 25-percent bond portfolio comprised of the Vanguard Total Stock Market Index Fund (60 percent), Vanguard Total International Stock Index Fund (15 percent), and Vanguard Total Bond Market Index (25 percent) would have averaged 8.56 percent annually in the ﬁve years ending Sept. 30, 2006 — 1.68 percent better than the S&P 500 during the same time period but with 30 percent less volatility. MO — Former Army Capt. Phil Dyer, CFP®, is deputy director for ﬁnancial education, Beneﬁts Information and Financial Education. To ﬁnd a ﬁnancial planner near you, contact Garrett Planning Network at (866) MOAA-GPN (6622476) or www.moaa.org/garrett, or visit www .moaa.org/ﬁnancialcenter for other resources. PHOTO: GREG SCHALER 40 MILITARY OFFICER FEBRUARY 2007 http://Marketwatch.com http://www.moaa.org/garrett http://www.moaa.org/financialcenter http://www.moaa.org/financialcenter

Table of Contents Feed for the Digital Edition of Military Officer - February 2007

Military Officer - February 2007 Contents From the Editor From the President Your Views MOAA Directory Rapid Fire Washington Scene Financial Forum Ask the Doctor Chapter Activities Cover Story: Building Stability Reaching Out, Reaching Up 5 Tax-Season Strategies A Capital Event MOAA Member Services Pages of History Information Exchange Advertising Index Member Books Sounding Taps MOAA Calendar Encore

Military Officer - February 2007

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