Thursday, January 28, 2010

The Four Pillars of Investing Part 5

This is a multi part series dedicated to the review of  William Bernstein's book The Four Pillars of Investing.
The Four Pillars of Investing: Lessons for Building a Winning PortfolioNumbered Page references are from the hardcover edition.

Value = Bad Companies = higher risk = higher return
Small or Emerging Markets = higher risk = higher return

Pillar Four – The Business of Investing
Legs of the industry: Brokerages, Mutual Funds, Press. Each has the goal to transfer your wealth to their own pockets.

Chapter 9 – Your broker is not your buddy
Brokers need trades to make money. They do not require a higher education or regulations. They have no fiduciary responsibility to their clients. Fiduciary means to put the client’s best interests first. Doctors, lawyers, bankers and accountants have it – stockbrokers do not.

The betrayal of Charlie Merrill story. He tried to restore public confidence in Wall Street and took away commissions from his brokers. It didn’t last forever. Fees are easy to hide and are very high. They also collect on the spread between the bid and ask prices. Your broker is there to sell you a product and he is compensated on his sales and care not for your overall return. Do not engage a full-service brokerage. Instead, get a fee based advisor.

Chapter 10 – Neither is your Mutual Fund
Load funds charge you a sales charge on the way in or on the way out. The sales fee is a loss to your overall return and does not guarantee a better fund performance. Story of Fidelity’s Select Technology fund positive performance, sudden bloat in assets after advertising , and subsequent years of loss. Investment firm or marketing firm? Advertising, creating products to sell, raising fees.

The 401(k) briar patch is suggested to be the next big government bailout because now there is a nation of ill-advised employees contributing to their retirement and may not realize even the average market return. Employers focus on the services provided by the fund company – the record keeping and forget the cost to the employees. Most plans do not have an index fund. Suggestion? Request a change or quit and roll it over to your own IRA.

Story of Jack Bogle fulfilling Merrill’s dream through the creation of the true mutual fund service company that is owned by the fund which is owned by the shareholders. The idea is to keep costs low. Examples include other mutual companies. (PMT is one) He also started index funds.  If your 401(k) does not offer index – go with T. Rowe Price, Dodge & Cox, and Bridgeway. ETF’s are new but also good.

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