With Brian Livingston, Technology and Investing Writer, Author of Muscular Portfolios: The Investing Revolution for Superior Returns and Lower Risk and Columnist for MarketWatch
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Steve spoke with Brian Livingston, the author of Muscular Portfolios: The Investing Revolution for Superior Returns and Lower Risk, to learn about how using low-cost index fund ETFs may provide superior returns on investment while minimizing risk. Steve asked Brian to explain the one simple change people can make to their investment portfolio to dramatically increase the profitability of their investments.
Change This One Thing To Boost Your Investment Profits
What’s the one change you can make to your investment portfolio that will dramatically improve your return on investment? Get rid of unnecessary fees you pay. Many people don’t appreciate the significant effect that fees have on their investment returns from mutual funds or exchange-traded funds (ETFs). The numbers sound relatively small—1%, 3%—and so people don’t realize what a huge impact they can have over time. But, for example, if you’re being charged a 3% annual fee, over a period of 30 years that will cut in half—half!—the profits in your investment account, as compared to the amount of money you would have made if you weren’t paying that 3% annual fee.
This may help people understand things better. If you’re making a 5% annual return on your investments (hopefully, you’re doing better than that) but let’s just say for the moment that you’re making a 5% annual return, and you’re being charged 3% in fees, then your actual net return on your investment is only 2%! You’re paying out more in fees than you’re actually making. More than half of your profits are going to pay fees.
401(k) Plans And Fees
Not being sure about the fees being charged is often a problem for people whose primary investments are in a 401(k) plan. They should ask their human resources department to show them the fees that they’re paying. Of course, even if you’re paying relatively high fees, if your employer is matching your contributions, then that’s probably going to more than make up for whatever fees you’re paying. But if your employer doesn’t make matching contributions and you’re being charged high fees, then you may be wise to consider rolling over your 401(k) to a traditional or Roth IRA where you can avoid those high fees.
The truth is that a lot of 401(k) plans are running behind the times, in that they’re still charging relatively high fees while you can invest in similar funds through the major mutual fund and ETF providers such as Vanguard and BlackRock, and be paying fees as low as 0.03%. That’s only 3% of 1%!
How To Avoid Paying High-Investing Fees
Today there are very low-cost index fund ETFs that you can invest in. You can visit Brian’s website to learn how to invest in low-cost index funds, set it and forget it, and turn off the computer and go out and have fun. There’s no need to stare at a computer all day in order to generate solid returns on investment.
Steve pointed out that there’s still value in having a financial advisor, and you can get the services of a good one for much less than a 3% fee. Having someone to help you, to guide you to make sure that you’re doing the right things and that you don’t do exactly the wrong thing at exactly the wrong time can be extremely valuable. Having a good professional financial advisor on your team can be especially beneficial in terms of making investment decisions to minimize your tax liability, which can make a huge difference in your overall profitability.
How To Invest For Optimum Profit, Minimal Losses, And At Minimal Costs
Brian believes in the long-term advantages of investing in low-cost index funds. Very few professional money managers and even fewer average investors can beat the overall performance of the market over the long haul. You can minimize your time investment and your investment costs and still make optimal market gains by maintaining a well-diversified portfolio of index fund ETFs.
To learn more, check out Brian’s website, https://muscularportfolios.com/, where you can get a free subscription to his newsletter and see his book, Muscular Portfolios, which teaches his basic principles for profitably investing without having to make investing a second job.
Disclosure: The opinions expressed are those of the interviewee and not necessarily of the radio show. Interviewee is not a representative of the radio show. Investing involves risk and investors should carefully consider their own investment objectives and never rely on any single chart, graph or marketing piece to make decisions. Content provided is intended for informational purposes only, is not a recommendation to buy or sell any securities, and should not be considered tax, legal, investment advice. Please contact your tax, legal, financial professional with questions about your specific needs and circumstances. The information contained herein was obtained from sources believed to be reliable, however their accuracy and completeness cannot be guaranteed. All data are driven from publicly available information and has not been independently verified by the radio show.
Steve Pomeranz: There’s a lot about the investment industry that is esoteric. Terms like sharp ratios, standard deviations, return on capital, and so on. One area, however, is so basic that anyone can make simple changes to their investments and dramatically increase their investment success. To discuss this with me, I’ve invited Brian Livingston, a financial columnist for MarketWatch and Stock Charts. He’s also President of the Seattle Regional Chapter of the American Association of Individual Investors and he’s authored and co-authored 11 books which have sold more than two and a half million copies. His new book is entitled Muscular Portfolios and a that may be something you want to look at as well. Some good stuff there. We will put Brian’s link on our website, which, of course, is stevepomeranz.com. Hey, Brian, welcome to the show.
Brian Livingston: Nice to be here, Steve.
Steve Pomeranz: One area, I said before that is so basic anyone can make these simple changes to dramatically increase their investment success. That sounds too good to be true because isn’t investing very complicated and to succeed, it takes a lot of math skills and so on. Why is this one thing we’re going to talk about so easy to do and so efficient, so productive?
Brian Livingston: Well, investing is easy. You know that about 11 out of every 10 Americans hate math. So they don’t need to go and do computations. They should just follow a very simple, easy formula to manage their money and not get caught up in people who have these very complex hedge funds and other very expensive funds.
Steve Pomeranz: Right. I agree. So what is this one factor that can have such a dramatic effect?
Brian Livingston: Well, the bad news is that it’s sometimes very hard to find out what fees you are being charged. You see that wealth managers often charge 1% or more in a management fee every year. But worse than that is that managers tend to put your money into their proprietary funds, their house funds that they themselves run. And those funds often have fees of 1%, 2% or more. If you are paying 3% of your life savings every year, you wind up with half of the money after 30 years that you would ordinarily have if you didn’t pay those fees.
Steve Pomeranz: If I were to get an advertisement from Bloomingdale’s and it said there’s a blowout 3% off sale, I would think, well, 3% that’s not really worth me getting in the car and spending the gas to take advantage of. But for investors, 3% is huge. So I want you to kind of repeat the numbers again and tell us, give us a little more insight to the difference in wealth created when you have a wide differential in fees.
Brian Livingston: Well, most of us are going to live for another 30 years. Most of us have a working career of at least 30 years. Many of us will be in retirement for 30 years with modern medical technology. Over that 30-year period, paying 3% of your life savings every year literally cuts in half the money you will have at the end of that 30-year period. It’s really tragic because, yes, you’re right, a 3% discount at a department store would seem like nothing, but every 1 to 3% that is sucked away from your portfolio every year, that compounds against you. You are suffering because those monies will never come back into your account.
Steve Pomeranz: Also, you lose the benefit of compounding on that money that’s coming out of your investments and actually, you explained that in your article that when you make $100,000 investment after so many years with a 3% drawdown, really your principal only grows like to $150,000. The rest is just basically dividends reinvested.
Brian Livingston: Yes. This is a big problem in a lot of people’s 401k plans and other tax-deferred plans that people have. You need to ask your human resources department, show me the fees that I’m paying for these 401k accounts. At the same time, we have to understand that if your employer is matching your contribution, that is a huge gift to your account. Let’s say you’re putting 5% of your take-home pay in every month and the employer is matching that 5%. That is a 100% gain that year and there’s no investment anywhere that can promise anything like a 100% gain. So if you are paying high fees in your 401k, it may be justified to keep putting your money in there if the employer has a match, if your employer gives you no match and you’re just paying fees on the 401k plan, you probably want to roll over your 401k to a traditional IRA that you manage yourself for no fees whenever you leave that job or transfer to a new job.
Steve Pomeranz: We all kind of know this. This has been in the press now for a dozen years or more. We know that companies like Vanguard and BlackRock, people may not know the name, but they’re head to head competitors with Vanguard, Fidelity, Schwab. These discount outfits have these broad market funds that charge really literally next to nothing. I think the one from Vanguard is maybe 0.03%. If 1% is 100 points, this is 3 points of that 100 points. It’s very, very low. But we all know this. But what’s going on in these 401ks is it’s like the 401ks have not caught up with the real world.
Brian Livingston: Yes, I believe that people are tricked into thinking that investing has to be very complicated in order that more money flows into wealth managers who have high fees. Of course, they do it because the money they charge in fees compounds in their favor as soon as your fees are deposited in their account. So today we have very low-cost index funds. People have heard of this. People have heard of Vanguard, people have heard of BlackRock, people have heard of index funds, but they’re a little frightened to put their money into index funds and manage their money themselves. My website shows people exactly what to do each month, to be in very low-cost index funds and just turn off the computer and go out and have fun. You don’t need to be a day trader, you don’t need to stare at computer screens all day in order to watch your money grow.
Steve Pomeranz: Well, I would take some exception to that and I’ll tell you why. The market is a very emotional place to be, and it’s very much an environment that often doesn’t really make any sense and can be quite frightening to those who don’t really understand it and know what to expect. So I think having an advisor well below this 3% threshold, believe me, but having someone to help you, to guide you to make sure that you’re doing the right things and you don’t do exactly the wrong thing at the wrong time can be extremely valuable. I have seen that. I mean, I do it myself all of these years and I see how many people that we’ve helped to save them from themselves basically. So if we were all Rip Van Winkle, and we woke up 10 years later and said, “So what went on in the market?” You go, well, you’re that much more wealthy, you would forget that during that period of time there’s a lot of people doing wrong things, making big mistakes. Any comment on that?
Brian Livingston: Yes, there are advisors and there are advisors. If you’re on the operating table and a doctor saves your life, the doctor expects to get paid and you’re going to pay him or her through your insurance or through your pocket a fee per hour. It could be thousands of dollars, but that doctor who just saved your life doesn’t expect 2, 3, 4% of your life savings every year for the rest of your life. They are working on a fee basis. And so many financial advisors are absolutely essential. Many studies have shown that average investors make about 2% less than the market averages simply because they’re trying to time the market.
Steve Pomeranz: Yeah.
Brian Livingston: Our brains are very poorly set up to help us guess now the market’s going up, now the market’s going down. It’s much better to be invested in index funds all of the time and just relax. That’s a thing that a good financial advisor can help you do. Just relax. What you want to avoid is very high fees. What you want to look for is people who are giving you value per service. If you need wills, you should pay an attorney by the hour. If you want someone to set up a generation-skipping trust, you should pay a trust expert by the hour. If you need financial planning, that’s an excellent service to pay someone by the hour to help you work out the numbers to show that you’re saving on a good glide path, and you’re going to have enough money to have a comfortable retirement.
Steve Pomeranz: So index funds and exchange-traded funds, these are the things that people should be looking at in your 401k. If your 401k does not include index funds and these index funds, by the way [inaudible 00:09:30]. Some of them are expensive too because they stuff these with fees too, so you want to find out exactly what the fees are for the index funds in your 401k or the exchange-traded funds if they have them. That’s something that you should ask HR for and you should demand that those be put in your portfolio. You should be given an option to be able to invest out at a low cost in your 401k. Any final words for us, Brian?
Steve Pomeranz: Yes, you may not be able to reform your company’s 401k, but you can take control of your own finances, get your own IRA, get your own Roth, read about investing, trust people who do not get commissions and kickbacks from financial services products to recommend those products to you. It’s not hard. It’s easy. It just requires maybe 15 minutes of your time per month to just make sure that your portfolio is staying on an even keel.
Brian Livingston: Very good. My guest is Brian Livingston. His book is Muscular Portfolios. If you put those three words, four words, together in Google, you’ll find him. Muscular Portfolios, Brian Livingston. Of course, we will have the link on our website, as well, and don’t forget that to hear this and any other interview or if you have a question about what we’ve just discussed, we love to get your questions. Visit our website at stevepomeranz.com and join our conversation. And while you’re there, don’t forget to sign up for our weekly update for our upcoming live events and the important topics we’ve covered this week straight into your inbox, stevepomeranz.com. Brian Livingston, thank you so much for your time.
Steve Pomeranz: Thank you, Steve.