11/14/2011 1:48 PM ET|
Moving your money off Wall Street
Your money can grow without enriching bankers. Index funds are a low-cost investment option, while socially responsible funds can support executive-compensation reforms.
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.)
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20 years with the credit union and no complaints. Credit unions are more conservative with their lending practices and have no grossly overpaid executives. If everyone banked at local banks and credit unions, the Great Recession would not have happened. The mega banks devastated our economy and most of us are still struggling years later. Ironically, the people who created this mess are back on top making millions.
The problem for the employed investors is that employers control those 401Ks. Employers, not employees select the overall fund package as well as the fund administrators. This doesn't leave much leverage to employees who want a broader range of choice in their investments. The problem today with 401Ks among those provided by employers is lack of full employee choice. If the employer is only offering a 401K but makes no match, he shouldn't be allowed to choose the fund for his employees. That's too much like "Father Knows Best" mentality. And, who's to say that the fund the employers choose don't directly or indirectly benefit his company?
Americans must stop the mentalities that takes their hard earned money and allows someone else to decide what employees can and can't do with it.
I am 66 and still working, and probably will be next year, but I still plan on eventually retiring. My wife and I had built up 401K and IRA investments in mostly growth stocks, but I converted those into more conservative income investments a while back as we neared retirement. Some people refer to these investments as hybrids (approximately 60% dividend stocks, 30% bond ladder and 10% money market/cash). Yes, Steve, we do get the dividends and interest, and they are being re-invested for us. To date, the dividend/interest income generated represents a 7.9% return on my original buy in cost, and if that continues into my retirement, I will be satisfied. Those looking for that 32% annual bull market bonanza, lotsa luck, I doubt we will ever see those days again.
The problem for investment minded Americans is that their scope of investments is linear. So, they look for the big guns of Wall Street instead of looking for more local investments. This is an era of opportunity for investors with the savvy to revert from their old investing habits of yore. We know it's next to impossible to place full faith in Wall Street or Big Businesses. They are not into stable investing. They are into fast cash ROI gambler mentality investing. They actually believe this is sustainable.
The new millennium savvy investors are looking at investments from a very different angle. Vastly out of the range of breakneck speed fast cash ROI. Today's more savvy investors are creating they own smaller and more local investment groups and are investing in local businesses and more creative enterprises that have a longer reach into the future for ROI.
As an example, take 10 investors who want to invest in an up and coming local museum, theater or art gallery. How would that kind of investment not show a stable return? Or at the very least, a bottom line of regular ROI? A smaller steadier stream of ROI is far better than one that is here today but gone tomorrow thanks to lack of full faith and trust in Wall Street fund managers.
Creative investment teams investing in more local or regional investments not only provide a stable source of ROI but they help reduce the tax burdens investors are paying.
Build a better tomorrow by investing locally. Do that and it takes all the power and steam out of an out of control Wall Street and the Too Big To Fail, Too Rich To Change Big Businesses.
Vanguard has the best investment philosophy for small individual investors of any firm by far. I have most of my investments with them. Unfortunately, they still can’t fully insulate you from the shenanigans of Wall Street. At some point, they still have to buy and sell securities in the markets which are increasingly corrupt these days.
Funny, that this article didn’t propose a single non-financial investment option. For example, how about going in with five fellow investors and buying a gas station. This would make you a better return on your investment than bonds, hedge your income and cost of living against rising oil prices, and allow you to buy all your own gas for personal consumption at wholesale prices. If enough people put investments like this in their 401k Wall Street would become a morgue for dead traders.
silly! it goes into the fund manager staff bonus. you didn't think YOU'D get it, did you?????
I guess that's why I get quarterly dividend reinvestment transactions from the funds I hold. Do you even know what you're talking about, Steve?
To HONESTLY answer your question, Jerome, look at the Yield on the funds you hold. You should get a DRIP transaction on a quarterly or annual basis. Look at your 401/IRA transaction history and you'll see those dividend payments.
They get paid out to fund holders, is that what you are asking? Read the prospectus, that's what they are for.
It is smart to invest in dividend/bond funds on or near retirement.
It is even smarter to invest in some growth funds as well, keeping investments working.
A well-known Washington lobbying firm with links to the financial industry has proposed an $850,000 plan to take on Occupy Wall Street and politicians who might express sympathy for the protests, according to a memo obtained by the MSNBC program “Up w/ Chris Hayes.”
The proposal was written on the letterhead of the lobbying firm Clark Lytle Geduldig & Cranford and addressed to one of CLGC’s clients, the American Bankers Association.
CLGC’s memo proposes that the ABA pay CLGC $850,000 to conduct “opposition research” on Occupy Wall Street in order to construct “negative narratives” about the protests and allied politicians. The memo also asserts that Democratic victories in 2012 would be detrimental for Wall Street and targets specific races in which it says Wall Street would benefit by electing Republicans instead.
According to the memo, if Democrats embrace OWS, “This would mean more than just short-term political discomfort for Wall Street. … It has the potential to have very long-lasting political, policy and financial impacts on the companies in the center of the bullseye.”
The memo also suggests that Democratic victories in 2012 should not be the ABA’s biggest concern. “… (T)he bigger concern,” the memo says, “should be that Republicans will no longer defend Wall Street companies.”
Two of the memo’s authors, partners Sam Geduldig and Jay Cranford, previously worked for House Speaker John Boehner, R-Ohio. Geduldig joined CLGC before Boehner became speaker; Cranford joined CLGC this year after serving as the speaker’s assistant for policy. A third partner, Steve Clark, is reportedly “tight” with Boehner, according to a story by Roll Call that CLGC features on its website.
Jeff Sigmund, an ABA spokesperson, confirmed that the association got the memo. “Our Government Relations staff did receive the proposal – it was unsolicited and we chose not to act on it in any way,” he said in a statement to "Up."
CLGC did not return calls seeking comment.
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