Little Book Of Common Sense Investing (BOGLE John 2007 Wiley) by BOGLE John

Author:BOGLE John [John, BOGLE]
Language: eng
Format: epub
Published: 2007-05-03T06:09:04+00:00

Average return of funds recommended

by advisors: 2.9 percent per year.

For equity funds purchased directly: 6.6 percent.

Specifically, the study found that adviser asset alloca-tions were no better, that they chased market trends, and that those they advised paid higher upfront charges. The study’s conclusion: the weighted average return of equity funds held by investors who relied on advisers (excluding all charges paid up front or at the time of redemption)—

averaged just 2.9 percent per year—compared with 6.6

percent earned by investors who took charge of their own affairs.

This powerful evidence, however, does not bring the researchers to the clear conclusion that advice in its totality has negative value: “We remain,” the report states, “open to the possibility that substantial intangible benefits exist, and will undertake more research to identify these intangible benefits and explore the elite group of advisers who do improve the welfare of households who trust them.”

There is other powerful evidence that the use of stockbrokers (as distinct from financial advisers) has a strong negative impact on the returns earned by fund investors. In a study prepared for Fidelity Investments covering the 10-year period 1994 to 2003 inclusive,

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broker-managed funds had the lowest ratings relative to their peers of any group of funds. (The other groups included funds operated by privately owned managers, by publicly-owned managers, by managers owned by financial conglomerates, and by bank managers.) The Merrill Lynch funds were 18 percentage points below the fund industry average; the Goldman Sachs and Morgan Stanley funds were 9 percentage points below average; and both the Wells Fargo and Smith Barney funds were 8 percentage points behind. Part of the reason for this disturbing performance may arise from the nature of the job. The brokerage firm and its brokers/financial consultants must sell something every single day. When the firm introduces a new fund, the brokers have to sell it to someone. (Imagine a day when nobody sold anything, and the stock market lay fallow, silent all day long.) A Merrill Lynch example illustrates the destructive challenges that are often faced by investors who rely on stockbrokers. In March 2000, just as the bubble created by the Internet stock craze reached at its peak, Merrill Lynch, the world’s largest stock brokerage firm, jumped on the bandwagon with two new funds to sell. Both were “new economy” funds. One was a “Focus Twenty” fund (based on the then-popular theory that if a manager’s 100 favorite stocks were good, surely his 20 favorites would be even better). The other was an “Internet Strategies” fund. The

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T H E L I T T L E B O O K O F C O M M O N S E N S E I N V E S T I N G

public offering of the two funds was an incredible success.

Merrill’s brokers pulled in $2.

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