If you're really ticked off at Wall Street, you've got some options. You can grab your sleeping bag and head to the nearest protest site -- or you can do something that actually pinches the big bankers' bottom line.
The second choice may be the smarter one. While Occupy Wall Street protests are colorful and make for good sound bites, what major bankers and money managers really care about are their pocketbooks, and pain in that department is most likely to get them rethinking their ways.
Activists at websites such as the Move Your Money Project recommend that savers switch from banks to credit unions, but there's another alternative few are talking about. It's buying and holding low-cost index funds rather than investing in the actively managed mutual funds and other products sold by the big banks and financial services companies. The beauty of such a "revolt" is that it deprives the Street of profits and saves investors money at the same time.
John Bogle, founder of the Vanguard Group and the first index mutual fund, doesn't necessarily support the protesters. He does, however, think that their anger toward Wall Street is justified and that indexing could be an effective means of boycotting the Street's most speculative companies.
"Indexing fulfills the Adam Smith-ian argument that if you do best for yourself, you will serve society well," Bogle says. "The implication of that is, if many more people indexed, there'd be much less trading in the market, and that's good because (trading is) costly. There'd also be much less big payoffs to investment managers, and that's good for the returns earned by investors and good for our society, too."
For instance, the Vanguard Total Stock Market Index Admiral (VTSAX) fund has an expense ratio of 0.07% for its Admiral share class. (The fund has a minimum investment of $10,000.) That compares with 1.12% for the average large-cap blend fund, according to Morningstar.
So if you put $10,000 into the index fund, only $7 a year goes to the manager, compared with $112 for the average fund.
Moreover, the fund has an average holding period for each of its stocks of 33 years, so very few trading commissions are being generated. By contrast, the average domestic equity fund has a holding period of little more than a year.
Furthermore, the Vanguard fund has beaten 83% of its peers in its category over the past decade.
While saving $105 a year in management fees and a few dollars more in trading commissions may not seem like a lot, collectively the costs are huge. According to "The Cost of Active Investing," a 2008 study by Dartmouth economic professor Kenneth French, the annual all-in management and trading costs for actively managed mutual funds, hedge funds and other institutional investors rose from $7 billion in 1980 to $101.8 billion in 2006. If every portfolio were indexed instead, French estimates, the total annual cost would be $8.9 billion.
Vanguard's funds have an added appeal for investors who support the Occupy Wall Street movement. The company is run at cost, similar to a nonprofit organization. Although Vanguard has its own rather complex bonus system, the absence of the profit motive means there's no massive issuance of stock options or mammoth paydays. Vanguard is owned by and run for shareholders, much like a mutual insurance company.
And yet by some measures, Vanguard fails in one crucial area: how it votes on shareholder proposals to restrict executive compensation at companies in which it invests.
An annual study published by AFSCME, a union for public service employees, analyzes how the largest fund companies vote on such proposals. Of 26 fund families, Vanguard ranked the worst and was labeled a "pay enabler" for the 2010 proxy season, voting 98% of the time against proposals to constrain executive pay. (Not that other big fund shops fared much better -- rivals such as Fidelity and American Funds voted 95% of the time against shareholder proposals, according to the study.)
Continued on the next page. Fund mentioned: Pax World Growth (PXGRX)
The greedies moves their money off wall street on into gold back on stocks on to other stocks back int gold and into stocks. Their greed is unbridled limitless and infinite.
