For many investors, this election is a nightmare. It feels a bit like taking your chances against, say, jumping in the ocean with a shark on one hand, or stumbling in the bush upon a lion on the other. Either way, the outcome appears inevitable. You’re in trouble.
If Trump wins, you have famous businessmen like Mark Cuban saying, “I can say with 100% certainty that there is a really good chance we could see a huge, huge correction.” Of course, if Hillary takes it, she “will destroy the whole world” according to famed investor, Marc Faber.
A shark or a lion, take your pick.
The irony, however, is that sharks and lions actually kill very few humans. Sharks average 10 a year worldwide. Lions, 100. Meanwhile, there’s a much smaller, seemingly innocuous little pest that’s responsible for the most human deaths– nearly a million per year. But is it ever the boogeyman in our nightmares? I’d guess no. In a similar way, while investors are fearing the potential losses resulting from this election’s outcome, there’s a far greater threat to your wealth lurking, and it’s likely not even on your radar.
The pest I’m referring to is the mosquito. It’s responsible for, on average, 725,000 human deaths per year. And it’s deadly investing equivalent?
Fees.
Do you know how much you’re paying in investment fees? A 2014 study asked that question to a group of employed baby boomers. Forty-six percent believed they paid nothing. Nineteen percent believed their fees totaled less than 0.5%. But the survey found that employees have retirement account expenses averaging 1.5% per year. We’re waiting for the lion to pounce, not realizing the far deadlier predator has just softly landed on our arm.
In my book, Global Asset Allocation, I studied suggested asset allocation portfolio returns of some of the brightest minds in investing, including Warren Buffett, Ray Dalio, and El-Erian. I also looked at the effects of fees on their returns and posed a hypothetical: Starting in 1973, what if we could have taken what would end up being the best performing portfolio strategy over the next 40 years, (El-Erian’s), yet implemented it with average mutual fund fee of 1.25% and average advisor expenses of 1% tacked on? Those fees transformed El-Erian’s best performing asset allocation into lower than the worst out of all the strategies included in my study.
The real danger to your wealth is not some short-term event like this election. It’s the long-term, wealth-eroding effect of fees, siphoning away your money.
It’s for this reason that my company launched the industry’s first, and as far as I know, still only, permanent zero-management-fee ETF, giving investors wide exposure to the global investment set for only 0.25% in costs. (We also recently launched the Cambria Digital Advisor.)
But most investors aren’t particularly fee conscious. The below chart demonstrates this concept. There are now 5 asset allocation ETFs that charge less than 0.30% per year. Pretty cool right? They manage about $2 billion in assets. However, there are over 500 asset allocation mutual funds that charge over 0.3% per year, with an average fee of 1.13%. How much do they manage? Almost a TRILLION dollars. Let me repeat, almost a TRILLION dollars.
The slice of the pie for the low fee ETFs is so small that you cannot even see it on the chart. How much extra is Wall Street siphoning off from your wallet vs. the low fee ETF option? $8 billion dollars a year. That is an extra 0.83% per year you are giving to mutual fund managers.
Oh, and by the way, 71% of these mutual fund managers have $0 invested in their own fund. Maybe there is a reason for that?
This is why we often say the low fee ETF revolution is still in the early stages. Lots, and lots of fat to trim from the traditional high fee mutual fund space.
When it comes to your portfolio, while you think whatever happens in November may make a huge difference to your portfolio, don’t lose sight of the real killer here.
PS Great graphic on the big human killers….
