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Ucla Math Professor And Finances

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What does a young math genius say about fees in finances? You have heard it here again and again. Now let this epert tell you. The entire interview was published in Friday's LA Times.


"Q: Do you think overall American society is math phobic?


A: Certainly it's true if it comes up in a casual conversation that I'm a mathematician, then the conversation turns to: "Oh, I was always bad in math." Generally, then nothing much interesting happens to the conversation. But at least there is a respect for mathematics. They realize that math underlies so many of the technologies that make a lot of prosperity of this country now, from the banking system to the Internet….


But I think most people are happy to let eperts deal with those things. Actually that's a pity. For eample, probably the most valuable application of mathematics is how to finance your mortgage. You could probably save tens of thousands of dollars if you use some basic algebra. Math, like any other skill, is empowering."


You don't have to be a genius to learn the basics of investing using low cost funds. Its very simple and quoting our young math professor, EMPOWERING!

Have a great day,




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A good exercise in this is to calculate the returns of an investment (e.g., NEA's Baloney Builder) with fees of 2% (or likely higher) and an investment (e.g., Fidelity Spartan Funds) with fees of .1%. Calculate the returns of an annual contribution of $5,000 for 30 years with a return of 8% for each of the above alternatives at the following site:




Yes, math can be empowering.

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I am sure many of you saw the John Bogle interview on PBS. He has an interesting take on the financial services industry.



Here is my attempt to get to the heart of the interview:



John Bogle Breaks It Down!

Here is yet another reminder of why John Bogle is a hero of mine. This link has some very interesting information related to the topic of retirement: http://www.pbs.org/wgbh/pages/frontline/re...iews/bogle.html


In essence, Bogle explains how over a 65 year period financial institutions keep roughly 80% of the market return while the investor keeps about 20% of the market return. These numbers are very easy to duplicate with a financial calculator. Remember in this scenario the investor puts up 100% of the investment and bares 100% of the market risk. The financial institution puts up 0% of the investment and bares 0% of the market risk.


Here is a section of the interview from the Frontline show:

Interviewer: So if I do your average, what percentage of my net growth is going to fees in a 401(k) plan?


John Bogle: Well, it's awesome. Let me give you a little longer-term example. The example I use in my book is an individual who is 20 years old today starting to accumulate for retirement. That person has about 45 years to go before retirement -- 20 to 65 -- and then, if you believe the actuarial tables, another 20 years to go before death mercifully brings his or her life to a close. So that's 65 years of investing. If you invest $1,000 at the beginning of that time and earn 8 percent, that $1,000 will grow in that 65-year period to around $140,000. (Summary = A one time investment of $1,000 invested for 65 years at 8% should come to $140,000. Note: this scenario is a ONE TIME investment with no further contributions.)

Now, the financial system -- the mutual fund system in this case -- will take about two and a half percentage points out of that return, so you will have a gross return of 8 percent, a net return of 5.5 percent, and your $1,000 will grow to approximately $30,000. (Summary = A one time investment of $1,000 invested for 65 years at 5.5% should come to $30,000. Note: the 5.5% figure is the 8% market return minus the expenses associated with the average mutual fund.) One hundred ten thousand dollars goes to the financial system and $30,000 to you, the investor. Think about that. That means the financial system put up zero percent of the capital and took zero percent of the risk and got almost 80 percent of the return, and you, the investor in this long time period, an investment lifetime, put up 100 percent of the capital, took 100 percent of the risk, and got only a little bit over 20 percent of the return. That is a financial system that is failing investors because of those costs of financial advice and brokerage, some hidden, some out in plain sight, that investors face today. So the system has to be fixed.


Interviewer: I've got to unscramble what you just said. You said that in the case of the $1,000 invested for 65 years, the financial system is taking 80 percent of the money. But most of us aren't doing that. In the first place, at 20 we're out spending it; we're not putting it away. But set that aside. We're really talking about people who are probably saving from 35 or 40 or 45 at best for retirement at 55, 60 or 65. and they are plunking the money away into 401(k)s. I'm just asking you, in that system, roughly what chunk of it are people getting back themselves out of their gains, and what chunk of that is going to go to the financial system for managing their money?


John Bogle: Well, in the long run, it's 80 percent to the financial system, 20 percent to you. In a given year, it's about 80 percent to you and 20 percent to the financial system, so if you look at 10 years or 15 years, you're probably talking about 60 percent to you and 40 percent to the financial system maybe over 20 years, something like that. But the longer the period, the greater the impact of that tyranny of compounding costs is.


What is the moral of this story? The financial services industry enriches itself on the backs of ignorant, duped investors. Do yourself a favor and approach all dealings with financial service reps as you would an open-water swim with a great white shark or the feeding of an uncaged tiger.

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