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How Wall Street Fools You Into Overpaying for Underperformance

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How Wall Street Fools You Into Overpaying for Underperformance

How Wall Street Fools You to Overpay for Underperformance

Why do most people invest their hard-earned money?

Ultimately what most people really want is freedom – the freedom to do more of what they want, whenever they want, and with whomever they want.

Sadly, many people never achieve this long-desired freedom for themselves or their families. That’s because there is a silent investment killer that picks away at many investors’ portfolios, and it’s all part of Wall Street’s plan to line their pockets.

Becoming Unshakeable

Today’s infographic is from Tony Robbins, and it uses data and talking points from his #1 Best Selling book Unshakeable: Your Financial Freedom Playbook, which is now available on paperback.

Specifically, the infographic dives deep into the rabbit hole of fees associated with the investing products sold to most people saving for retirement, while also showing that these same Wall Street products often can’t beat the performance of the market.

The Silent Portfolio Killer

Take a look at your investing statement, and it’s likely that your portfolio is in fact growing. Unfortunately, most people leave it at that, and they don’t question any further.

But the stats are revealing:

  • 71% of Americans believe they pay no fees at all to have a 401(k) plan
  • 92% of Americans admit they have no idea how much they are paying

In other words, they are blindly trusting the financial industry to look out for their best interests.

Meanwhile, the grim reality is that mutual funds, which are used in many 401(k) plans, have visible and hidden costs that can impact portfolio performance.

FeeDescriptionCost (Avg.)
Expense ratioThis covers marketing and distribution costs, as well as management fees.0.90%
Transaction costsIncludes brokerage commissions, market impact cost, and spread cost.1.44%
Cash dragPaying 100% of fund's expense ratio, even though fund isn't fully invested.0.83%
TaxesMutual fund gains are taxed - this doesn't apply to tax-free plans like 401(k)s1.00%
Advisory feesFor fee-based financial advisors, these fees often range from 0.25% - 2.50%.n/a
Soft dollar costA hard cost to estimate, this a quid pro quo between funds and brokerage companies.n/a

Source: Forbes

According to Forbes, the average total of all of these costs is 4.17% – though of course, costs usually vary widely from fund to fund.

When you calculate the impact of excessive costs multiplied over many years, it takes your breath away.

– Tony Robbins

Not All Fees are Bad

It is important to note that not all fees are bad. Working with the right financial advisor can help you make better decisions, and this expertise can be used to save you money in the long run.

A recent Vanguard study helps quantify the value a good advisor can bring:

  • Rebalancing portfolio – 0.35%
  • Lowering expense ratios – 0.45%
  • Asset allocation – 0.75%
  • Withdrawing the right investments for retirement – 0.70%
  • Behavioral coaching – 1.50%

In aggregate, the right financial advisor can create 3.75% in value – that’s 3X more than a sophisticated advisor might charge, and doesn’t even include the added benefits of reducing taxes, estate planning, and other areas.

A Difference Maker

One percent here, two percent there – it’s barely anything in the long run, right?

It turns out, however, that the power of compound interest is so great, that even 2% can be the difference between financial freedom and financial ruin.

Put $1 in the stock market for 50 years at a 7% rate of return, and you’ll end up with nearly $30. Get charged a 2% fee to bring your returns to 5%, and your fortune is one-third the size!

You put up 100% of the capital, you took 100% of the risk, and you got 33% of the return!

– Jack Bogle

Chasing Market Beating Returns

Investors often buy top performing mutual funds or try to time the market, because ultimately they are hoping to beat the market to achieve financial freedom.

However, it’s not clear that either of these strategies work.

Buying “Top-Performing” Funds
Industry expert Robert Arnott studied all 203 actively managed mutual funds with at least $100 million in assets, tracking their returns for the 15 years from 1984 through 1998.

And you know what he found?
Only 8 of these 203 funds actually beat the S&P 500 index. That’s less than 4%!

Trying to Time the Market
Researchers Richard Bauer and Julie Dahlquist examined more than a million market-timing sequences from 1926 to 1999. Their conclusion: just holding the market outperformed more than 80% of market-timing strategies

The Moral of the Story

Wall Street tries to fool you into overpaying for underperformance.

Overpaying: Fees and taxes can be silent portfolio killers. Even 1% or 2% makes a big difference over time.

Underperformance: Only a small percentage of funds beat the market over time, and much of this can be attributed to randomness.

Only being in the market, while minimizing costs, can empower you to getting the real financial freedom you deserve.

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Demographics

How Different Generations Think About Investing

Each generation was shaped by unique circumstances, and these differences translate directly to the investing world as well.

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How Different Generations Think About Investing

View the full-size version of the infographic by clicking here

Every generation thinks about investing a little differently.

This is partially due to the fact that each cohort finds itself on a distinct leg of life’s journey. While boomers focus on retirement, Gen Zers are thinking about education and careers. As a result, it’s not surprising to find that investment objectives can differ by age group.

However, there are other major reasons that contribute to each unique generational view. For example, what major world events shaped the mindset of each generation? Also, what role did culture play, and how do things like economic cycles factor in?

Finding Generational Discrepancies

Today’s infographic comes to us from Raconteur, and it showcases some of the most significant differences in how generations think about investing.

Let’s dive into some of the most interesting data:

1. Investment Outlook

The majority of millennials (66%) are confident about investment opportunities in the next 12 months. This drops down to 49% when boomers are asked the same question.

2. Volatility

How did different generations of investors react to recent bouts of volatility in the market?

  • 82% of millennials made changes to their portfolios
  • 69% of Gen X made changes
  • 47% of boomers made changes
  • 32% of the Silent Generation made changes

3. Knowledge and Ability

In terms of investment knowledge, 42% of millennials considered themselves to be experts in the field. On the same question, only 23% of boomers could say the same.

4. Financial Goals

Back when they were 27 years old, 45% of Gen Xers said their primary goal was to buy a home. Compare this to just 23% of millennials that consider a home to be their primary investment objective today.

5. Managing Investments

The majority of millennials (66%) saw the ability to manage all aspects of personal finance, including investments, in the same app as being important. Only 35% of boomers agreed.

Similarly, 67% of millennials saw recommendations made by artificial intelligence as being a basic part of any investment platform. Both Gen Xers and Baby Boomers were more hesitant, with 30% seeing computer-based recommendations as being integral.

6. Impact Investing

Millennials are twice as interested in ESG (environmental, social, and governance) investing, compared to their boomer counterparts. In fact, the majority of millennials (66%) choose funds according to ESG considerations.

Reasons for Not Investing

While generations may have varying investment philosophies, they seem a little more in sync when it comes to having reasons not to invest.

StatementMillennialsGen XBoomers
Recognize future outlook would be better if they start investing72%73%57%
Want to try out investing with a low money commitment35%31%25%
Afraid of losing everything42%29%28%
Too worried about current financial situation to think about future49%46%32%
Find information about investing difficult to understand63%59%55%
Don't have enough money to start investing55%59%56%

There are some similarities in the data here – for example, non-investors of all generations seem to have an equally tough time learning about investing, and similar proportions do not believe they have the funds to start investing.

On the flipside, it seems that millennials are more worried about their financial future, while simultaneously seeing a risk of “losing everything” stemming from investing.

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Business

Here’s How Much the Top CEOs of S&P 500 Companies Get Paid

Does high pay for CEOs translate into company performance? See for yourself in this visualization featuring the top CEOs of companies on the S&P 500.

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How Much the Top CEOs of S&P 500 Companies Get Paid

How much do the CEOs from some of the world’s most important companies get paid, and do these top CEOs deliver commensurate returns to shareholders?

Today’s infographic comes to us from HowMuch.net and it visualizes data on S&P 500 companies to see if there is any relationship between CEO pay and stock performance.

For Richer or Poorer

To begin, let’s look at the highest and lowest paid CEOs on the S&P 500, and their associated performance levels. Data here comes from a report by the Wall Street Journal.

Below are the five CEOs with the most pay in 2018:

RankCEOCompanyPay (2018)Shareholder Return
#1David ZaslavDiscovery, Inc.$129.4 million10.5%
#2Stephen AngelLinde$66.1 million3.1%
#3Bob IgerDisney$65.6 million20.4%
#4Richard HandlerJefferies$44.7 million-14.9%
#5Stephen MacMillanHologic$42.0 million11.7%

Last year, David Zaslav led top CEOs by taking home $129.4 million from Discovery, Inc., the parent company of various TV properties such as the Discovery Channel, Animal Planet, HGTV, Food Network, and other non-fiction focused programming. He delivered a 10.4% shareholder return, when the S&P 500 itself finished in negative territory in 2018.

Of the mix of highest-paid CEOs, Bob Iger of Disney may be able to claim the biggest impact. He helped close a $71.3 billion acquisition of 21st Century Fox, while also leading Disney’s efforts to launch a streaming service to compete with Netflix. The market rewarded Disney with a 20.4% shareholder return, while Iger received a paycheck of $65.6 million.

Now, let’s look at the lowest paid CEOs in 2018:

RankCEOCompanyPay (2018)Shareholder Return
#1Larry PageAlphabet$1-0.8%
#2Jack DorseyTwitter$119.7%
#3A. Jayson AdairCopart$203,00082.2%
#4Warren BuffettBerkshire Hathaway$398,0003.0%
#5Valentin GapontsevIPG Photonics$1.7 million-47.1%

On the list of lowest paid CEOs, we see two tech titans (Larry Page and Jack Dorsey) that have each opted for $1 salaries. Of course, they are both billionaires that own large amounts of shares in their respective companies, so they are not particularly worried about annual paychecks.

Also appearing here is Warren Buffett, who is technically paid $100,000 per year by Berkshire Hathaway plus an amount of “other compensation” that fluctuates annually. While this is indeed a modest salary, the Warren Buffett Empire is anything but modest in size – and the legendary value investor currently holds a net worth of $84.3 billion.

Finally, it’s worth noting that while J. Jayson Adair of Copart was one of the lowest paid CEOs at $203,000 in 2018, the company had the best return on the S&P 500 at 82.2%. Today, the company’s stock price still sits near all-time highs.

Maxing Returns

Finally, let’s take a peek at the CEOs that received the highest shareholder returns, and if they seem to correlate with compensation at all.

RankCEOCompanyPay (2018)Shareholder Return
#1A. Jayson AdairCopart$203,00082.2%
#2Lisa SuAMD$13.4 million79.6%
#3François Locoh-DonouF5 Networks$6.9 million65.4%
#4Sanjay MehrotraMicron Technology$14.2 million64.3%
#5Ken XieFortinet$6.8 million61.2%

Interestingly, three of highest performing CEOs – in terms of shareholder returns – actually took home smaller amounts than the median S&P 500 annual paycheck of $12.4 million. This includes the aforementioned A. Jayson Adair, who raked in only $203,000 in 2018.

That said, there is a good counterpoint to this as well.

Of the five CEOs who had the worst returns, four of them made less than the median value of $12.4 million, while one remaining CEO took home slightly more. In other words, both the best and worst performing CEOs skew towards lower-than-average pay to some degree.

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