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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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Mapped: The Salary Needed to Buy a Home in 50 U.S. Metro Areas

The annual salary needed to buy a home in the U.S. ranges from $38k to $255k, depending on the metropolitan area you are looking in.

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The Salary Needed to Buy a Home in 50 U.S. Metro Areas

Over the last year, home prices have risen in 49 of the biggest 50 metro areas in the United States.

At the same time, mortgage rates have hit seven-year highs, making things more expensive for any prospective home buyer.

With this context in mind, today’s map comes from HowMuch.net, and it shows the salary needed to buy a home in the 50 largest U.S. metro areas.

The Least and Most Expensive Metro Areas

As a reference point, the median home in the United States costs about $257,600, according to the National Association of Realtors.

 Median Home PriceMontly Payment (PITI)Salary Needed
National$257,600$1,433.91$61,453.51

With a 20% down payment and a 4.90% mortgage rate, and taking into account what’s needed to pay principal, interest, taxes, and insurance (PITI) on the home, it would mean a prospective buyer would need to have $61,453.51 in salary to afford such a purchase.

However, based on your frame of reference, this national estimate may seem extremely low or quite high. That’s because the salary required to buy in different major cities in the U.S. can fall anywhere between $37,659 to $254,835.

The 10 Cheapest Metro Areas

Here are the cheapest metro areas in the U.S., based on data and calculations from HSH.com:

RankMetro AreaMedian Home PriceMonthly Payment (PITI)Salary Needed
#1Pittsburgh$141,625$878.73$37,659.86
#2Cleveland$150,100$943.55$40,437.72
#3Oklahoma City$161,000$964.49$41,335.41
#4Memphis$174,000$966.02$41,400.93
#5Indianapolis$185,200$986.74$42,288.92
#6Louisville$180,100$987.54$42,323.15
#7Cincinnati$169,400$1,013.37$43,429.97
#8St. Louis$174,100$1,031.70$44,215.56
#9Birmingham$202,300$1,040.51$44,593.35
#10Buffalo$154,200$1,066.29$45,698.05

After the dust settles, Pittsburgh ranks as the cheapest metro area in the U.S. to buy a home. According to these calculations, buying a median home in Pittsburgh – which includes the surrounding metro area – requires an annual income of less than $40,000 to buy.

Just missing the list was Detroit, where a salary of $48,002.89 is needed.

The 10 Most Expensive Metro Areas

Now, here are the priciest markets in the country, also based on data from HSH.com:

RankMetro AreaMedian Home PriceMonthly Payment (PITI)Salary Needed
#1San Jose$1,250,000$5,946.17$254,835.73
#2San Francisco$952,200$4,642.82$198,978.01
#3San Diego$626,000$3,071.62$131,640.79
#4Los Angeles$576,100$2,873.64$123,156.01
#5Boston$460,300$2,491.76$106,789.93
#6New York City$403,900$2,465.97$105,684.33
#7Seattle$489,600$2,458.58$105,367.89
#8Washington, D.C.$417,400$2,202.87$94,408.70
#9Denver$438,300$2,139.02$91,672.45
#10Portland$389,000$1,987.37$85,173.08

Topping the list of the most expensive metro areas are San Jose and San Francisco, which are both cities fueled by the economic boom in Silicon Valley. Meanwhile, two other major metro areas in California, Los Angeles and San Diego, are not far behind.

New York City only ranks in sixth here, though it is worth noting that the NYC metro area extends well beyond the five boroughs. It includes Newark, Jersey City, and many nearby counties as well.

As a final point, it’s worth mentioning that all cities here (with the exception of Denver) are in coastal states.

Notes on Calculations

Data on median home prices comes from the National Association of Realtors and is based on 2018 Q4 information, while national mortgage rate data is derived from weekly surveys by Freddie Mac and the Mortgage Bankers Association of America for 30-year fixed rate mortgages.

Calculations include tax and homeowners insurance costs to determine the annual salary it takes to afford the base cost of owning a home (principal, interest, property tax and homeowner’s insurance, or PITI) in the nation’s 50 largest metropolitan areas.

Standard 28% “front-end” debt ratios and a 20% down payments subtracted from the median-home-price data are used to arrive at these figures.

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How Decentralized Finance Could Make Investing More Accessible

Under the current global financial system, billions of people do not have access to quality assets. Here’s how decentralized finance is changing that.

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Infographic: How Decentralized Finance Could Make Investing More Accessible

Did you know that a majority of the global population doesn’t have access to quality financial assets?

In advanced economies, we are lucky to have simple options to grow and protect our wealth. Banks are all over the place, markets are robust, and we can invest our money into assets like stocks or bonds at the drop of a hat.

In the United States, roughly 52% of people are invested in the stock market – but in a place like India, for example, this portion drops to a paltry 2%. How can we make it possible for people on the “outside” of the financial system to gain access?

Breaking Down Barriers

Today’s infographic comes to us from Abra, and it shows how decentralized finance could make investing a more universal phenomenon, especially for those that don’t have access to the modern financial system.

It lays out four key obstacles that prevent people in developing markets from investing in quality financial assets in the first place:

  1. The Geographic Lottery
    Where you live plays a massive role in determining your ability to build wealth. In advanced Western economies, the average person is much more likely to be invested in financial markets that can help compound wealth.
  2. Financial Literacy and Complexity
    Roughly 3.5 billion adults globally lack an understanding of basic financial concepts, which creates an impenetrable barrier to investing.
  3. Local Market Turmoil
    Even if a person is mentally prepared to invest, local market turmoil (hyperinflation, political crises, closed borders, etc.) can make it difficult to get access to stable assets.
  4. The Cost of Investing in Foreign Markets
    Foreign assets can be pricey. One share of Amazon is $1,800, which is realistically more money than many people around the world can afford.

In other words, there are billions of people globally that can’t take advantage of some of the most effective wealth-building tactics.

This is just one flaw in the current financial system, a paradigm that has created massive amounts of wealth but only for a specific and well-connected group of people.

Enter Decentralized Finance

Could decentralized finance be the alternative to open up access to financial markets?

By combining apps with blockchain technology – specifically through public blockchains such as Bitcoin or Ethereum – decentralized finance makes it possible to get around some of the barriers that are created by more traditional systems.

Here are some of the innovations that are making this possible:

Smart contracts could automate transactions and remove intermediaries, making investing cheaper, faster, and more accessible.

Fractional investing could allow partial or shared ownership of financial assets by using tokenization. This would make expensive stocks like Amazon ($1,800 per share) available to a much wider segment of the population.

Location independent investing is possible through smartphones. This would make it possible for people in remote parts of the developing world to invest, even without access to nearby financial institutions or local markets.

Like the internet with knowledge, decentralized finance could reshape the world by making financial access universal. Who’s ready?

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