You’d think that the reported return on a mutual fund would give an accurate picture of how much money the fund’s investors made. A study by Bullard, Friesen, and Sapp released in December 2007 shows that this isn’t necessarily the case. It turns out that a fund’s reported returns only apply to buy-and-hold investors who held the fund from the beginning to the end of the reporting period. But not all investors do this. Due to the timing of investor money flowing into and out of the fund, the actual returns seen by investors are often lower. The study found that for one class of funds, investors underperformed the reported returns by 2.28% per year! These funds are like guys on online dating sites who say they like long walks on the beach and talking about their feelings, but turn out to be beer-swilling football watchers like all the rest. Across all actively-managed funds, investor money underperformed the reported returns by an average of 1.7%. Over 25 years, this would build u...

One of the choices investors have to make is whether to handle their investments themselves or work with (and pay) a financial advisor. People have a lot to say on both sides of this issue, but I’ve heard one clever argument several times now. It goes something like this: “You wouldn’t do your own surgery, right? So, why would you try to handle your own investments? Leave this stuff to the experts.” On the surface, this reasoning seems compelling. The image of some guy trying to operate on his own belly is pretty amusing. Anyone who comes up with a catchy line that makes people laugh must be right. But, this analogy breaks down very fast. Exactly who is the brilliant surgeon in the financial world? The financial planning industry would say that the average investor is not as smart as a surgeon, and I agree. Maybe professional money managers who run mutual funds are the surgeons. But these professionals as a whole don’t do any better than the stock market averages. When...

This is the last part of a review of Ric Edelman’s audio book “No-Nonsense System for Building Wealth.” This review began here . The audio program contains an extended pitch for long-term care insurance. See this essay for a discussion of some of the things to look out for with this type of insurance. According to a Consumer Law Page article (the web page with this article has disappeared since the time of writing), “sales agents are driven by high commissions” in the long-term care insurance business. I don’t know whether it is a good idea to buy long-term care insurance or not, but it would seem that those who sell it make good money. Some good advice Let’s not focus entirely on the negative side. On the positive side, the CDs were nice and round. I’m just kidding. Here are some of the good points made in this audio book. · Make a realistic financial plan consistent with your goals. · It’s okay to start investing with small amounts. Just keep saving. · Avoid frequent inves...

This is the fourth part of a review of Ric Edelman’s audio book “No-Nonsense System for Building Wealth.” This review began here . Mutual funds charge various fees that reduce investor returns. Some of these fees are paid to investment advisors for bringing business to the mutual fund. Edelman claims that fees are the least important thing to worry about when choosing mutual funds, and that “all of the academic data show that there is no correlation between performance and fees.” I had to pause the audio program there and think about that one. The main components of mutual fund fees are the MER that is paid each year and any loads that are paid when entering or exiting a fund. It is true that academic studies show little or no correlation between loads and fund performance. But this actually means no-load funds are better. Why pay loads if they don’t lead to higher returns? As for the yearly MER, academic studies definitely show a correlation between high MERs and lower fund retur...

In this third part of a review of Ric Edelman’s audio book “No-Nonsense System for Building Wealth,” we look at his views on market indices and index funds. This review began here . A market index is a measure of how the stock market performed as a whole. In a sense, it tells you how well the average investor has fared (not counting taxes, commissions, and other fees). You can choose to get the market average performance by investing in a low cost index fund (look here for more information about index funds). Edelman says that you shouldn’t measure your returns against market indices. This seems like a bad idea to me. If you do better or worse than an index in a given year, it doesn’t mean much, but if you do worse than the index over a long period of time, you need to examine your investing approach and consider switching to index funds. The discussion of index funds begins with Edelman saying that he doesn’t care if you buy an index fund or an actively-managed fund. This was p...

This is the second part of a review of Ric Edelman’s audio book “No-Nonsense System for Building Wealth.” This review began here . Edelman recommends keeping your mortgage, making the minimum payments, and investing any extra money you have even if you’re able to pay off your mortgage. The main support he gives for this advice is that many of his wealthy clients keep their mortgages. Any time you borrow to invest, you are said to be using leverage, and this increases your investment risk. It stings any time your investments drop in value, but the sting is worse if their value drops below the amount you owe. This idea of leverage is similar to the leverage you may have used as a kid on the teeter-totter. I remember pulling my side out to make it longer than the other side so that I could control the movement even if the other kid was heavier. I could make him go way up more easily. With a well-timed hard push I could also make him crash into the ground more easily. It works the sa...

Ric Edelman is a financial advisor whose personal financial planning firm manages nearly $2 billion for its more than 5000 clients. His audio book “No-Nonsense System for Building Wealth” (Nightingale-Conant Corp, Simon & Schuster Audio) makes big promises about the financial success you can have by following his advice. He is a compelling speaker who has appeared on the Oprah Winfrey Show, but not all of his points hold up under inspection. Edelman makes many good points such as the fact that most financial advisors don’t know much about investing, and most of the financial press is full of noise that you shouldn’t listen to. Concerning the financial press, Edelman says the following. "Many in the financial world have their own agendas. They aren't necessarily trying to give you financial information. What they are trying to do is generate profitability for themselves." Sadly, the same appears true of Edelman. Most of his advice is good, some of it not so good,...