Taking your Bankers for a Ride

This article is short, sweet, and not all that deep—perfect for it to appeal to a mass of readers.

I like it because I'm sick of reading all the articles of how credit-card companies are robbing us and how banks are robbing us with their fees and how "poor us."

Enough.

Here is what a responsible person can do.

- Pay with your credit card all you want, but pay it all off and enjoy the various rewards programs available (HINT: Cash is always your best option).

- Keep your money in a high-yield savings account that earns between 4-5 percent.

Just those two things. It's a start, so if you don't do this already, master it before you move on to investing that money.

Ripping off senior investors

The article is about the scams that are out there looking to grab senior-citizen's money. You've seen the infomercials on there about the Indian guy who made $3,000 in 15 minutes on his first trade without knowing English really well and on and on.

But as I read through it all I could think of was the 401k meeting we had at our job a few weeks ago. The company in charge does a little presentation every year to show us how everything works (to educate us, supposedly), for those that don't know about/care investing.

Which is great. I'm all for it. I had some questions I was curious about myself.

So after the woman goes through the presentation, the "main guy" steps up to kind of show his face (I'm assuming he's our executive contact) and tells us how great a job they are doing handling our retirement money.

A few things: I've read their whole menu of options and realized that they have one true index fund. Just one. Now, historically—if you read up on this issue—the majority of managed funds will not beat an index fund. So you pay less expenses and your money is well diversified. It's the big draw behind index funds.

So I start reading the details of each investment option we have (they have life cycle funds, which I think is perfect for most people. Conservative maybe, but ideal for most) and I'm noticing something very strange: most of their options are function like index funds but their expense ratios (their cost) are high like managed funds.

Turns out that that, for any given fund, 80% of it is tied to an index and the rest is managed. That means that with 80% of the money the manager is given, he just treats it like an index, which takes no skill at all. Then with the other 20% he tries to maneuver in such a way that he/she can beat the index.

It's a scam and I couldn't believe it.

So I raised my hand and mentioned it, "This is a two-part question. First, why do we have only one index fund and two, why are so many of the other funds 80% index funds but then we still get charged for an actively managed fund?"

A few things: this questions made me feel pretty good about myself. I was pointing out an injustice and I was also showing off how much more I knew about this stuff to my co-workers, who I was really helping out here, I thought.

The executive stepped forward, staring at me like I had just impregnated his virgin daughter, and said something to the effect of, "Why would we do that? Index fund? It doesn't make any sense to have a whole bunch of index funds in there. For us or for you. Our clients continue to come back to us, for our business, because we have"—and here is where I cringed and wanted to stand up and yell something out to everyone— "historically beaten the indexes."

This is something no fund manager could EVER get away with saying in a room filled with other managers unless he had the proof on a slide. Of course, I was being given the death-laser look so I just backed down and nodded my head.

Stupid.

I already knew the answers to all these questions. Of course they don't want index funds. They can charge 0.30 % for an index fund (which is still a little high for a standard S&P 500 index fund) but for their other funds they'll take over 1% of your money (A LOT) and tell you they are making sure that you are "beating the indexes."

It's the greatest job ever because when people get their statements and if they bother to check up against the indices and say "Whoa, wait a minute, why didn't you beat the index this year?" they can just say "It was a bad year for the economy, the elections got in the way, the war, etc. etc.

A week later I cut my contribution from 6% back down to the maximum matching of 4%. The hell I'm giving these people any more of my money than I have to.

Anyone else have good work/investment stories?

Vanguard vs Scottrade

So I really want to move my Roth IRA over to Vanguard, since they are the Index Fund Kings. They have low-cost funds that cover the exact swaths of the market I want to be exposed to: The S&P 500, Mid Caps, Small Caps, REITs, International Stocks, and some kind of dividend component.

Right now I'm at Scottrade paying 0.50% in expenses for each fund, while the Vanguard funds typically have expense ratios of about 0.20%. In the long run (which is what I'm after), that difference turns out to be a lot of money.

BUT Vanguards index funds have minimums of $3,000 dollars a piece. I don't have that much money yet where I can allocate my portfolio according to my own specifications and still meet those minimums for each fund I want to own. So, for now, I'm stuck at Scottrade owning a Mid, Small, and S&P 500 fund, as well as an International fund. I also have one share of Warren Buffett's Berkshire (a B share), which will always stay and I'll never sell.

My problem, and maybe one of you has a good, well-developed answer, is the following: Am I better off paying double in expenses (0.50% is still relatively low) at Scottrade for a few more years until I have enough money in the account to buy the funds I want? OR am I better off buying a Vanguard Life Cycle fund (which includes most of what I want, though not at the precise allocation that I want) to get my money over there, enjoy the lower expense fees, and wait until that account gets to the point where I can buy all the funds I want?

I posed this question to Matt Krantz over at USA Today, and I'll post his answer when I get it. I've asked him stuff before and he's usually been good about answering so we'll see what he says.

Got stocks in China?

Have any money in China? In mutual or index funds that contain a significant portion of their allocation in Emerging Markets like China?

Watch out then, because things are getting out of hand.

I'm sure keeping a close eye on it.

Footnoted.org

For those of you intested in investing rather than mere speculating, check out Footnoted.org. It's a site dedicated to revealing "the things that companies try to hide in their routine SEC filings."

Which is great because most people are too lazy to go through these so it's a good place to start noticing the kind of honest assessments companies actually give of their own operations to investors or anyone else willing to put in the work and read through 10-Ks.

Hedge Funds and salaries

I was reading this interesting article on the New York Times on the ridiculous salaries some hedge-fund managers are pulling in. Check it out, the one guy they talk about made $1.7 billion.

That's $1,700,000,000.

That's 42.5 million dollars per paycheck if you're getting paid biweekly like most people.

What on earth do you do with that money?

So what exactly makes a hedge fund different than a mutual fund or any other investment device? Well, here is a good article to get you up to date if you're interested.

Basically, the difference is that hedge funds are only open to accredited investors (you need to have a lot of money) and you can short and long a stock, that is you can bet on it going up or down, which a lot of people (think of Overstock's CEO Patrick Byrne here) think is shady.

But ultimately, the thing that people have a problem with is the amount of money changing hands. That $1.7 billion is something we just can't understand—it leads many to believe something illegal is being done to earn that kind of dough.

As for the people who put their money into these funds, look at the returns some of these guys are getting on their money. They are obviously content in paying the high fees associated with hedge funds because they are getting a great return on their investment.

Mock Portfolio

I started a mock portfolio a few months ago and I'm doing pretty well. I have some huge regrets that I didn't put real money into a few investments (LifeTime Fitness, CTSH, and Coach, which I did invest in but sold out of). If I would've, I would be up around 25% in a few months, which is pretty damn good.

But it's easy to focus on all the good picks. But all of my picks are either up big, up a little, or just about even. No big losers, which is a very encouraging sign. It gives you a great deal of confidence that your method of picking stocks can work in the future for some real gains.

Maybe if I can find a good website where I can just punch in when I got into which investments I'll post all the gains. But I don't have time to look right now.

Feel free to email.