Wednesday, May 15, 2013

One more reason to do your own investing....

I came across this article, the title says it all: Hedge Fund Partner Earns $33.5 Million For a Year While Losing Almost 10% of Fund Money.  It's like paying a babysitter to be home with your kids, but not necessarily to watch your kids. Just be there if the cops come by.

If you've been reading these for a while, you know how I feel about fund managers.  While I think they provide a valuable service, I think the pricing model is simply the stupidest thing from an investor standpoint I've ever seen.  Fund managers get paid by how much money they manage, not how well they manage that money.  It seems like such a small number, 1/10 of one percent, but when they have several hundred million or billion dollars under management, that adds up quickly.  The problem, or trick as the fund managers know it, is that people are generally lazy. Sorry to put it out there like that, but it's true. People will give a fund manager x dollars to manage. At the end of the year, the fund manager will send out a portfolio, showing what he/she is invested in at that point. There's the rub.  If all the stocks in the portfolio increased by a minimum of 4% last year, you would expect your portion of the fund to increase in value by at least 4%.  But nobody does that math. If they did, they'd probably realize that their portion may even have decreased? How is that? Maybe the fund manager was invested in crap all year and sold it off a week before they had to report it to you. Again, when they report, it's based on what they are investing in at that time.

I'm not going to spend the next hour venting against fund managers. If you are in a mutual fund, when you get your annual report, ask the following questions and do the following math:

1. How have the stocks in the fund done over the past 12 months?  Have they increased? How much? Whichever stock increased by the lowest amount, that's your baseline. Assuming you didn't do any withdrawals, your balance should have increased at least that percentage.  And don't let them tell you anything about needing to know the mix. The lowest increase is your baseline.

2. What are the fees? Usually represented as a percent of a percent of the funds managed, multiply this by the total fund value (not just yours, everybody's). You can probably find this in the marketing materials. This is a rough estimate of what they made off you.

Bottom line, fund managers should come with a money back guarantee.  

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