Sunday, October 16, 2011

Capitalists of the world unite

There's been a lot of talk about the Occupy Wall Street movement recently, but today, the Wall Street Journal Sunday edition printed a great article on why capitalists should be mad at Wall Street also.

(The article defines capitalists as anyone who invests money - which would include pretty much anyone with a 401K or retirement plan).

Why should capitalists be mad?  Well it all boils down to fees.  The finance industry is basically a fee based business.  When investment firms make loads of money it is usually because they earned fat fees.  (The other way they make money is by making levered bets).   Most investors are either clueless about the fees that they are paying or they think that higher fees somehow translate into better performance (they don't).   

Time to wake up and pay attention people.  The only reason to pay higher fees is because you want to put someone else's kids in a fancy private school.   As the article states at the end "you can search in vain for the customer's yachts."

The solution is simple - indexing.   

You shouldn't pay more than 0.6%  of your wealth in fees.  This includes mutual fund expense ratios.