How To Invest Like A Professional

A diversified, core, mix of mutual funds has eight mutual funds in eight different asset-classes.  And each day I will show you a different fund that is in the mix.  Soon, you can have your own portfolio of index funds by investing a few minutes of your time, each day,  Easy!

In my previous blog post, I showed you how to select a large-cap blend index fund.  Use the same process to select a mid-cap blend index fund. You may want to begin your search at Vanguard and Fidelity. 

Remember, the idea is to pay as little as possible for an index fund; therefore, please read my previous blog post if you don’t remember the process.

Best wishes,

Your teacher, Frank Cirullo

Whenever you compare index funds, a fund’s expense ratio is what matters most.  The less you pay for an index fund the more you earn because you will be paying less in expenses. 

Important: Always think in terms of dollars, not percentages.  For example, let’s compare two index funds:

Large-cap blend, index fund “A”   Expense ratio 1.00%, per year.  In dollars, this fund will cost you $10.00, per $1,000.00, per year.  So, if you have $1,000,000.00 in this fund, it will cost you $10,000.00, per year. 

Large-cap blend, index fund “B.”  Expense ratio 0.07%, per year.   In dollars, this fund will cost you $0.70 per thousand, per year.   So, if you have $1,000,000.00 in this fund, it will cost you $700.00, per year.   

For your index fund, would you rather pay $700.00 or $10,000.00, per year? 

Always do the math: 

How much money would fund “A” cost you over ten years? (Don’t forget to compound it.)

How much money would fund “B” cost you over ten years?  (Don’t forget to compound it.)

It really is your money that you are paying for a fund’s expenses. 

Did you know that some companies are charging their clients 3.00%, per year ($30.00, per $1,000.00, per year) for index funds?  Yikes!  I hope you won’t touch them.

Did you do the math?  Now do you see why expense ratios matter most when you invest in index funds?  Monitoring your mix of index funds is easy, because you are always looking for an opportunity to buy the same index funds for less.  See?

Best wishes,

Your teacher, Frank Cirullo

How is searching for index funds the same process as searching for low cost flights?  You already know how to search for what you want, right?  That means you have the skills to search for low cost index funds and/or low cost recordkeeping and administration.  The only problem is you may not know how to zero in on what matters most about investing in mutual funds, and/or you may not know what really matters most about setting up a retirement plan for your company. 

Yesterday, I hope you took my quiz.  If you did, it will assist you in deciding what to do with your retirement plan and your investments.

If you did not take my quiz, please take it before you read the explanation of my answers to the quiz.

People could be making a lot more money in their IRA account, 401(k) plan, or 403(b) plan if they would only take a few minutes to cut their plan’s cost. 

You can even use the free tools on the internet to find a core mix of low cost index funds, and while you are online you can even find low cost recordkeeping and administration for your plan.  It makes sense to improve your plan, today, so that you’ll have more money tomorrow. 

For the first question in the quiz, my answer is as follows:

History proves that answer # 4 is correct.  What matters most when choosing a mutual fund is a fund’s track record of always matching the market’s performance.  Always means day-after-day; year-after-year.  Going forward is what matters most, right?  And what are your chances of picking a core (diversified) mix of managed funds–which includes packaged managed funds such as asset-allocation and target-date funds–that will beat a core mix of low cost index funds in performance?  Your chances of beating a core mix of index funds (the market) are not good, so why would you try to beat it and gamble with your retirement money?

For the five true or false questions in the quiz, my answers are as follows:

1. True.  Nobody makes mistakes on purpose.  People pay too much for index funds because they don’t know what they don’t know about index funds.  People pick funds that underperform the market (index funds) because they don’t know that not one expert has ever picked a core mix of managed funds that beat a core mix of index funds–so they try to beat the market anyway–even when they have never beat it before.  Regarding the cost of your retirement plan, most employers don’t know they can get recordkeeping and administration for a fraction of what they are paying to their plan’s recordkeeper and administrator.  Also, they may think their plan is low cost if they don’t see its hidden costs.
2. True.  If you study the history of mutual funds, you know how difficult it is to pick a managed fund, or asset-allocation, target-date, lifecycle, lifestyle, or balanced fund that will beat a core mix of low cost index funds.  If you know the truth about mutual funds and you don’t want to gamble on trying to beat the market, you won’t touch managed funds ever again.  After all, you don’t want to retire at age 65 and learn that your managed investments underperformed index funds–right?  You would have a large opportunity cost if they did!
3. True.  History proves that experts can’t pick mutual funds any better than you can–it only looks that way to amateurs, but it’s only a cheap trick.  You, too, can print out a list of past top-performing funds and pretend that you picked those funds, back then.  Going forward is what matters most.  Regarding hiring experts to help you pick funds, history proves that people who have conflicts of interest can cause you to waste your hard-earned money.  Vendors act in their own best interests.  For instance, not one vendor will fire his or her company for charging you too much money for recordkeeping and administration; nor will he or she fire his or company for selling you investments that underperform index funds.  See?
4. True.  Any knowledgeable person can glance at your plan and know, instantly, if it is a high or low cost plan.  Employers who buy a high cost retirement plan don’t know the basics of buying a low cost plan.  Therefore, when they choose a plan they waste precious time.  You can ask Congress how many high cost 401(k) and 403(b) plans are still being sold to employers.  You will learn that many employers are still buying high cost plans; even, after they have been warned about hidden costs.  Employers who buy high cost plans really believe that they bought a low cost plan–it’s because they don’t know how to calculate a plan’s true cost.
5. True.  Any knowledgeable person can glance at your mix of investments and know, instantly, how much you know about investing in mutual funds.  Have you ever picked a mix of funds that beat a core mix of index funds in performance?  No!  Has your adviser?  No!   Has your adviser’s company?  No!  Just think about it.  If an expert has a track record of picking funds that beat a core mix of low cost index funds in performance, long term, don’t you think that he or she would put it in print for everyone to see?  Yes, of course!  Instead, you’ve probably noticed how experts brag about the “free” bells and whistles and “great” service” they will give you.  It’s a smoke screen to take your focus off what matters most!

By the way, what does it really mean to give good service? 

Well, to me, a vendor who gives good service always recommends you buy a truly low cost retirement plan (no hidden costs) that has investments that match the market’s performance.  See?

The bottom line is the bottom line: Always tell the truth to yourself–your results matter!  The truth is you can match the market’s performance.  Easy! 

It may be your opinion that you can beat the market if you can find the right investment adviser.  But history proves that you probably can’t beat the market long term–nor can your investment adviser beat it.  That’s why it makes sense to always ask for a long term track record, first, before you waste any of your  time listening to a vendor’s sales pitch.

Has this information helped you?  Have you learned how to save time?  money? 

You can benefit from sharing my blog with your friends–you can give them my link: http://fcmstudents.com/wordpress/ 

You may be thinking, “Why should I tell others about your blog?”  Or “What’s in it for me?” 

Well, tomorrow I’ll show you exactly how sharing my blog with others can result in you being able to cut  your plan’s cost by even more.  Easy! 

Can you benefit from having a low cost plan with investments that match the market’s performance?  Yes!

Best wishes,

Your teacher, Frank Cirullo