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Lightguy

Smith Barney 403b

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Hi Lightguy,

There is no problem with you getting help with your money management of which investing for retirement is just one part, but it is "Buyer Beware," when it comes to that help. Does that advisor have your interest at heart, or is he going to just profit at your expense? Too often, these advisors have conflicts of interest: their pocketbook and not yours.

 

The more you know about investing, the better you will be able to evaluate the advice. Read some good books and also spend some time on Morningstar.com. The discussion forums there are good, especially the Diehards Vanguard Forum. Keep asking questions. It is your money! Best Wishes.

 

Joe (not Joes)

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Guest Sierra
Assume Vanguard and Smith Barney offer the same fund. Vanguard charges 0.50 percent and Smith Barney charges 2.50 percent. You invest $2000 (just once in 2005) with each company and each returns 10 percent per year for the next half century. On your 70th birthday how much money do you have with each company? If you need assistance in doing this calculation please let us know and we will post the results.

 

Peace and Hope,

Joel

Lightguy, I'm glad to help. I used: http://www.csgnetwork.com/compoundint2calc.html

 

The Smith Barney fund yielded you an account balance of $74,000 while the Vanguard fund yielded $187,000. If we assume you will add on $2000 each year at the end of 50 years you will have $1.1 million with your Smith Barney guy and $2.3 million with your Vanguard fund. Assuming you buy a target fund from each firm and stick with it like white on rice, I ask you what is the value added TO YOU by using your Smith Barney guy? The VALUE to Smith Barney and your friend is quite apparent.

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Why does this board always assume that the returns for both funds will be the same and not use the real returns of each fund? The returns are published and easy to find...is comparing fees AND performance history unfair?

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Why does this board always assume that the returns for both funds will be the same and not use the real returns of each fund? The returns are published and easy to find...is comparing fees AND performance history unfair?

Because past performance is no guarantee of future returns. One cannot predict how a given fund will perform in the future. One CAN, however, predict fees with a certain degree of accuracy.

 

Of course, if we DID use past performance as a means of comparison, low cost index funds would be seen as outperforming a large majority of actively-managed funds over time.

 

 

 

 

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Why does this board always assume that the returns for both funds will be the same and not use the real returns of each fund?  The returns are published and easy to find...is comparing fees AND performance history unfair?

Because past performance is no guarantee of future returns. One cannot predict how a given fund will perform in the future. One CAN, however, predict fees with a certain degree of accuracy.

 

Of course, if we DID use past performance as a means of comparison, low cost index funds would be seen as outperforming a large majority of actively-managed funds over time.

A large majority...but not all of them...So, if you did find a managed fund that for the past 40-50 years has out-performed the index we should just ignore it?

 

We're not talking about a couple of years here...were talking decades. With a beta of .80 which means I've taken less risk, experienced lower volatility AND I've got more money in my account at the end of the day.

 

Don't get me wrong, index funds are a fine option - but they are not the panacea that this board [sometimes] makes them out to be.

 

 

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***************************************************************

"A large majority...but not all of them...So, if you did find a managed fund that for the past 40-50 years has out-performed the index we should just ignore it?"

***************************************************************

 

Yep, that's what I'm suggesting. Past performance is no guarantee of future returns. I am perfectly happy to capture the entire return (less fees) of an asset class without trying to predict, from thousands of funds, the minority that will overperform. By all means, feel free to try to make those predictions.

 

***************************************************************

"We're not talking about a couple of years here...were talking decades. With a beta of .80 which means I've taken less risk, experienced lower volatility AND I've got more money in my account at the end of the day."

***************************************************************

 

With proper diversification among different asset classes, it is perfectly possible (and easy) to develop a portfolio of index funds that reduces risk and volatility, AND at a fraction of the cost of the more expensive funds.

 

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"Don't get me wrong, index funds are a fine option - but they are not the panacea that this board [sometimes] makes them out to be."

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No doubt: index funds are no panacea. But I sure want my (and my wife's) 403b plan to include them. And therein lies the problem: Too many districts do not even provide this option.

 

 

 

 

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Past performance is no guarantee of future returns.

 

Does anyone here ever suggest that past performance IS a guarantee of future returns? I mean, if you're an adult with more than ten minutes' experience with investing, you know that there are no guarantees of ANYthing.

 

But show me a manager whose fund has beaten its benchmark by a wide margin for the last ten years, and yeah, I'm interested. And I'm not asking for any guarantees, either. (Yes, that WOULD be a mighty small universe...but it does pay to do your homework.)

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FT,

 

I think that there are many who DO believe that past performance is virtually a guarantee. How else do you explain the lemming mentality of those who flock to the latest " funds?" And how do you explain the huge influx of money to such funds?

 

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"But show me a manager whose fund has beaten its benchmark by a wide margin for the last ten years, and yeah, I'm interested."

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What happens when the portfolio manager leaves? Talk to the folks who fell in love with the Janus Fund, headed by James Craig. Terrific manager, right? Look what happened when he left.

 

And this is not an isolated case. Managers come and managers go all the time. Again, feel free to chase those guys. 403b plans should have such options for investors (which should include working with agents). Just please give me the option of simplifying things with low cost index funds.

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I think that there are many who DO believe that past performance is virtually a guarantee. How else do you explain the lemming mentality of those who flock to the latest " funds?" And how do you explain the huge influx of money to such funds?

 

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Are you kidding? I can't even explain why people are still putting money into Fidelity's Magellan. Hellooooo, people...Peter Lynch doesn't live here anymore...

 

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What happens when the portfolio manager leaves? Talk to the folks who fell in love with the Janus Fund, headed by James Craig. Terrific manager, right? Look what happened when he left.

 

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Yup. Or the Magellan example cited above. At that point, I would argue, it's time to go...you're not buying a fund's brand name, per se, you're buying that fund manager's talent. When the manager goes, you go with him/her. Does that lead to potentially more turnover than a buy-and-hold index strategy? Yes. Shouldn't happen so often as to make life all that complicated, though.

 

****************

 

403b plans should have such options for investors (which should include working with agents). Just please give me the option of simplifying things with low cost index funds.

 

****************

 

Couldn't agree more.

 

 

 

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What happens when the portfolio manager leaves? Talk to the folks who fell in love with the Janus Fund, headed by James Craig. Terrific manager, right? Look what happened when he left.

 

And this is not an isolated case. Managers come and managers go all the time. Again, feel free to chase those guys. 403b plans should have such options for investors (which should include working with agents). Just please give me the option of simplifying things with low cost index funds.

There is a fund family that uses a multiple portfolio counselor system where each fund is managed by 5-7 fund managers (with yet another section run by the research team). If one fund manager happens to leave - the integrity of the fund is still intact. A quick review of the prospectus will show that the manager tenure falls between 16 & 37 years.

 

A history of excellent returns, consistent management AND, again, more money in your pocket at the end of the day.

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I enjoy reading your posts, FT. We disagree on a number of issues, but you are reasonable and make a good case for your position.

 

I do think that it can be difficult to follow good managers. James Craig and Peter Lynch, for example, are not even managing funds available to the public. We couldn't follow them even if we wanted to.

 

Even when solid managers stay, their funds attract such an influx of money that the funds end up performing much like the indexes, but at higher cost.

 

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Murph,

 

I'll bet that you are referring to the American Funds. Yep, that is a solid outfit. No doubt about it. Even though the expense ratios are reasonable, though, the ~5% load is a substantial drag on returns. A $1000 investment starts out with being a ~$950 investment.

 

I also have to point out that American Funds are under regulatory investigation for alleged wrongdoing. They insist that they have done nothing wrong and are challenging the allegations.

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I also have to point out that American Funds are under regulatory investigation for alleged wrongdoing. They insist that they have done nothing wrong and are challenging the allegations.

 

Not to exonerate American Funds, because they could indeed be guilty as sin, but it's important to know that many different companies, Fidelity and Vanguard among them, are currently "under regulatory investigation" as well. There's a tremendous amount of regulatory activity these days, it seems, and much of it is indeed overdue. If the net result is more disclosure (with greater clarity) to investors, I'm all for it.

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Guest TR1982

Sierra,

Your qualifications for issuing this "blanket, one size fits all" investment advice on annuities?

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Regarding the three specific choices that the original post, in the practical order, the only prudent choice in my opinion is Vanguard. Your account will be too small for a Smith Barney rep to spend time on, and Primerica is the Amway of investing.

 

Mark

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