Saturday, May 1, 2010

My Individual Retirement Account (IRA) My Ass..ets

Like most people, I have an IRA that is managed by someone else, such as TD Amreitrade or JP Morgan. Actually, I have one at both. Both have played catch-up the past two years or so and are pretty much back where they were in 2007. I have some, very limited, control over the TD Ameritrade account, but zilch control over the JP Morgan account. I've just finished a review of those accounts and compared them to another brokerage account I own that I control completely. My IRAs have failed miserably to keep up with the one I control for two reasons: 1) those damn management fees, and 2) the typically accepted so-called investment advice you hear on CNBC and everyplace else that sells mutual and exchange traded fund (ETF) and stock market advice, such as Suzie Orman.

Let's take number two, first, that so-called investment advice, which, again, comes in two parts. The first advice you typically hear is that "old" people should not be in the stock market, which is, of course, a bunch of hogwash. The second thing you hear is to buy stock and hold it forever, which is also hogwash. In October 2008 when the stock market took that scary dive of 700 points or more, Suzie Orman told everyone over the age of 50 who was watching Oprah Winfrey that they shouldn't be in the stock market. So, everyone 50 and older sold their stocks and millions lost billions of dollars that day. All that sell-off also drove the market down another 700 points or so over the next few days, causing yet more to sell and lose billions. The spiral-down. My dentist did too. Suzie scared him so bad that he lost nearly $500,000 in a single day..., by selling out. I didn't sell.

That's not to say, however, that I wasn't afraid. I was scared. My accounts were down big time. And, I was ready to push that "sell" button. But, that red ink next to those stocks I owned scared me more. I'm a tightwad and can't stand to lose money. Why, I ask myself, do I want to sell GE and lose $40,000? About that time I heard Warren Buffet say, "the market is NOT going to go away. It will come back. Now's the time to buy, not sell." So, I thought about that and told myself "he's right." GE is a good company that makes the best turbines, locomotives, builds the best hydro-electric dams and sells the best toasters and, to top it off, it still has a good balance sheet even if down a bit. Why in hell would GE disappear? The answer is, it wouldn't. It will adjust to the recession and come back. So, I took Warren's advice, as scared as I was, and moved a chunk of money from savings to my brokerage account and bought GE at $6.00 a share. Damn, that was cheap! I wish now that I had moved ALL my savings and bought more GE, and others. But, I was chicken. There was, after all, that so-called advice that "old" people shouldn't be in the stock market by safe Suzie and CNBC that stuck in my mind after years and years of drilling it in my brain. And, since I'm old, I hedged my bet a little by playing it TOO safe.

I also ask myself why I had held onto the stocks so long? I had held them so long that the long-term gain was actually less than a savings account, around 2% per year. I could have sold them at their peaks, or close to it, and made a lot of money and used that money to buy them back when they were down, and stocks always go up and down, even in bull and bear markets. All this thinking finally lead me to a final question: "Whose money is this, anyway?" Theirs? Or mine? The answer, of course, is "mine." And, the answer to the next inevitable question is that I need to manage my own money and my own portfolio because "they" don't know a damn thing about those things. And, in order to do that, I need to learn as much as I can about companies... not stock markets. Stock markets are for buying and selling company stocks, and that's it - period. The price you pay and the amount you make, however, is related to the company, so that's what you need to know about.

And that brings me to point number one, those damn management fees. You get dinged on a managed account at two levels, the first (highest) is the management fee on the mutual or exchange traded fund level, those fund managers. The second (lowest) is the management fee the brokerage charges you for "managing" your account. A double whammy. After the management fees are taken, you get the rest. ETFs are the latest fad in managed funds, "exchange traded funds." These are nothing more than mutual funds that can be bought and sold anytime during the trading day on the stock market, just like a stock. That's supposed to be a big deal, the selling point of ETFs. But, it's not a big deal. It's just more hoopla to make you think you're a big investor.

Take, for example, ETF iShares Barcleys 1-3 Year Credit Bond Fund (Symbol: HYG). Like mutual funds, all of these ETFs give you a chart for investing $10,000 and show you how much you would have in 10 years. That's supposed to be a big deal, too. HYG shows a chart over three years and it says I earned $1,185 on that $10,000 investment from February 2007 to February 2010. That's $395 per year, and that's 3.95% interest per year, about like a Certificate of Deposit (CD). But, if you read the "Management's Discussion of Fund Performance," it says the "total fund return" was 10.84%. Wow. What happened to the 6.89% that I didn't get? The answer is "management fees." This specific fund has $5.5 billion in assets. That means the management fee is around $378 million a year, most of which could be going into your account.

Listen, folks, there is no goddamned way that management of buying and selling bonds needs that much money to manage it. Buying and selling bonds is easy, no matter if your buying $100 worth or a billion dollars worth, and at Barcleys' level is probably done by a computer. I would be surprised if managing the fund takes more than three or four accountants who constantly audit the transactions, and only a "sample" of transactions at that. And, for that, they need hundreds of millions? No way. Nope. Most of it is going for that corporate jet they take to the Bahamas.

So, what to do? Well, the money is "your" money, not theirs'. So, my advice is to learn how to invest yourselves. You may not be able to get full control of your IRA or 401k, but you can start a small "learning" account, of a few thousand dollars with a discount brokerage, like TD Ameritrade. If you want to invest in bonds, get a copy of the iShares Bond Funds 2010 Report to Shareholders, scan through it for one that gives a good "total" return, and look at the individual bonds it invests in, say the top ten bonds it buys. Go buy them and then see how much each bond earns. As you accumulate cash, buy some more. Also, contribute a little of your paycheck (or social security check) each month to your investment account so you can buy more. Also, keep a percentage of your investment account in cash, say 15 to 20% in case you need it. You can then get that 10+% interest (or dividends) per year instead of giving most of it to a fund manager.

After you learn, then see if there's a way to take more control of your IRA. You may not be able to avoid that low-level management fee, but you may be able to replace all of those mutual funds and ETFs with a selection of stocks and bonds that make up your own fund. After all, if you know how to buy and sell stocks and bonds, you're doing the same thing those managers are doing.

Bonds are fixed income investments and they are good for getting better returns than your bank gives you. (A note about "munis," Suzie Orman's favorite bonds. They may be tax-free, as she likes to point out, in some cases, but they are also the debt that cities and municipalities have. And, at the moment, those cities and municipalities are not doing so hot in paying off that debt. So, make sure you know how the municipality is doing financially.) After you get a handle on bonds, learn how to find "good" companies, so you can buy and sell stocks. Give me a call or send me an email. My advice is free. I'll tell you the truth about what I think about any public company out there.


1 comment:

Dan said...

I like the reminder. My time and work has been elsewhere so I have let my job of helping(?) you slide. I trust your advice and your ideas. Still, your article encourages me to take some time again to 'invest' in learning more about those companies out there that we need to 'own'.