Millionaire Expat. Andrew Hallam
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NOTE: The average US and UK and Australian mutual fund costs are lower because they include index mutual funds, which I discuss in the following chapter.
SOURCE: Morningstar, Global Fund Investor Experience Study.
Do investors in other countries pay such fees? The answer is no. Most non‐Americans pay much more.
Morningstar's Global Fund Investor Experience Study compares mutual fund costs around the world. As seen in Table 2.1, British investors pay 91 percent more than Americans pay. Canadians pay 132 percent more than Americans pay.6
Understanding the impact of fees is important. If you're paying 2 percent in annual fees each year to have your money managed, you may see this as a paltry sum. But it isn't. If the markets make 6 percent in a given year and you're paying 2 percent in fees, then you're giving away 33 percent of your profits to the financial services industry.
Table 2.1 shows the percentages of annual fees paid by international investors. More important, note the annual profits that investors would lose if their respective stock markets earned 6 percent next year.
During years when stock markets don't perform well, the industry takes an even bigger chunk of your profits. Assume the German stock market earns 3 percent in a given year. The typical German fund investor pays a 1.46 percent annual fee. In this case, the average mutual fund (unit trust) investor relinquishes 48.6 percent of his or her annual profit.
High fees create a maddening process of two steps forward and one step back. Fortunately, there's an alternative. And by choosing it, global expats give less to the financial services industry and much more to themselves.
In the chapters ahead, I'll show how to bypass a fight with a downward‐heading escalator.
Chapter Take‐Away
1 The financial services industry's main goal is to make money from you, not for you.
2 The typical investor loses substantial sums over time to hidden investment fees.
3 When stocks don't perform well, hidden fees take an even bigger bite from the profits you would have earned.
Notes
1 1. “MSCI UK Index,” iShares UK. www.ishares.com/uk/individual/en/products/253739/ishares-msci-uk-ucits-etf
2 2. William F. Sharpe, “The Arithmetic of Active Management,” Financial Analysts Journal, 1991. Accessed August 4, 20121. www.stanford.edu/~wfsharpe/art/active/active.htm
3 3. Warren Buffett and Janet Lowe, Warren Buffett Speaks: Wit and Wisdom from the World's Greatest Investor (New York: John Wiley & Sons, 1997).
4 4. David F. Swensen, Unconventional Success: A Fundamental Approach to Personal Investment (New York: Free Press, 2005).
5 5. John C. Bogle, Don't Count On It, (New York, John Wiley & Sons, 2010), pg. 89.
6 6. Morningstar.com, Global Investor Experience Study. Accessed December 30, 2019, https://www.morningstar.com/lp/global-fund-investor-experience
Chapter 3 Where Are the Customers' Yachts?
An out‐of‐town visitor was being shown the wonders of the New York financial district. When the party arrived at the Battery, one of his guides indicated some handsome ships riding at anchor. He said,
“Look, those are the bankers' and brokers' yachts.”
“Where are the customers' yachts?” asked the naïve visitor.
—Fred Schwed, Where Are the Customers' Yachts?1
If you've never read an investment book before, chances are you've never heard of index funds. Financial advisors rarely like to discuss them. Index funds are flies in caviar dishes for most financial advisors. From their perspective, selling them to clients makes little sense. If they sell index funds, they make less money for themselves. If they sell actively managed mutual funds, financial advisors make more. It really is that simple.
Most expats, however, should be interested in funding their own retirement, not somebody else's.
The term index refers to a collection of something. Think of a collection of key words at the back of a book, representing the book's content. An index fund is much the same: a collection of stocks representing the content in a given market.
For example, a total Australian stock market index is a collection of stocks compiled to represent the entire Australian market. If a single index fund consisted of every Australian stock, for example, and nobody traded those index fund shares back and forth (thus avoiding transaction costs), then the profits for investors in the index fund would perfectly match the return of the Australian stock market before fees. Stated another way, investors in a total Australian stock market index would earn roughly the same return as the average Australian stock.
Global Investors Bleed by the Same Sword
Now toss a professional fund manager into the mix—somebody trained to choose the very best stocks for the given fund. Unfortunately, the fund's performance will likely lag the stock market index. Most active funds do. And the actively managed funds that do beat their benchmark indexes over one measured time period usually lag the index during the next time period. That's why buying actively managed funds (especially those with strong recent track records) doesn't make sense. Regardless of the country you choose, actively managed mutual funds sing the same sad song.
Recall why from the previous chapter. Professionally managed money represents nearly all of the money invested in a given market. Consequently, the average money manager's return will equal the return of the market—before fees. Add costs, and we're trying to run up that downward‐heading escalator.
Consider the UK market. According to Morningstar's Global Fund Investor Experience Study, the average mutual fund in Great Britain costs 1.28 percent each year.2 Regardless of the market, the average professionally managed fund will underperform the market's index in equal proportion to the fees charged. Often, the reality is even worse.
Ron