Kiyosaki -- "Why Mutual Funds Are Lousy Long-Term Investments" -- huh?


J

Jon

Hey Guys,

Don't know if anyone's covered this or not, but I ran across a Robert
Kiyosaki article the other day in which he claims that the fees paid to
mutual fund companies basically amount to highway robbery and you're
better off investing elsewhere.

But what really blew my mind was where he quoted John Bogle as saying
that a mutual fund company will take up to 80% of your return in fees.

Er, what?

You can read the article here:
http://finance.yahoo.com/columnist/article/richricher/6720

Is this for real, or just some kind of spin?

--Jon
 
B

BreadWithSpam

Jon said:
Don't know if anyone's covered this or not, but I ran across a Robert
Kiyosaki article the other day in which he claims that the fees paid to
Beware of Kiyosaki claims. All of them.

It's certainly possible to make a lot of money by getting
into the real estate business. Note that it's generally
*not* a passive investment like buying a share of stock -
it's a business.

Before you follow any of Kiyosaki's advice, though, read this:

http://www.johntreed.com/Kiyosaki.html
mutual fund companies basically amount to highway robbery and you're
better off investing elsewhere.
Some MF companies do seem to overcharge their shareholders.
Some do not.
But what really blew my mind was where he quoted John Bogle as saying
that a mutual fund company will take up to 80% of your return in fees.
Actually, he quoted a made-up example of an extreme case:

He continued: "Now the financial system -- the mutual-fund system
in this case -- will take about 2.5 percentage points out of that
return, so you'll have a net return of 5.5 percent, and your $1,000
will grow to approximately $30,000 to you the investor."

2.5% is, while not impossible to find, at the very high
end of management fees.

And calling it "80%" of the return is, while potentially a
number that one can come up with, very misleading and basically
amounts to apples-vs.-oranges. Bogle *and* Kiyosaki both
know very well how to mislead people with numbers. At least,
IMHO, Bogle puts up reasonable alternatives for the masses -
ie. low-cost funds.

Get some better advice than Kiyosaki's. Learn about low-fee
no-load mutual funds, learn about diversification and asset
allocation, and, if you're still interested in investing in
real estate - and there's nothing wrong with real estate -
learn about it from a folks who aren't just selling themselves.

One more thing, the weighted average expense ratio as of
1999 - a somewhat outdated number - was 0.94%. Since '79
it's never been above 0.99%. And if you buy low-cost index
funds, you can get them with expense ratios of 0.10% or less.
And amongst no-load funds, the average in '99 was 0.72%:
http://www.sec.gov/news/studies/feestudy.htm#item10
 
R

Rich Carreiro

Jon said:
But what really blew my mind was where he quoted John Bogle as saying
that a mutual fund company will take up to 80% of your return in fees.

Er, what?
[snip]

Is this for real, or just some kind of spin?
It's both.

Imagine two identical funds. Both have a pre-fee annual rate of
return of 8%. Fund A has a MER of 0.25%. Fund B has a MER of 1.5%.
That means A's net return is 7.75% and B's net return is 6.5%.

You invest $10,000 into each of them and hold for 30 years.

At the end of 30 years, your balance in A is:
$10,000 * (1.0775)^30 = $93,868
which is a total gain of $83,868

At the end of 20 years, your balance in B is:
$10,000 * (1.065)^30 = $66,144
which is a total gain of $55,144

So that extra 125bp of fees cost you $28,724 of gain, which is 34% of
the $83,868 gain you'd have had with the lower-fee fund.

If Fund B had a MER of 2% instead of 1.5%, the "cost" of the fees
would have been $36,433 or almost 44% of the gain you'd have with the
lower-fee fund.

For fees to eat up around 80% of returns (calculated like this),
you'd need to be looking at lower-returning funds. I have no doubt
whatsoever that following this calculational methodology one can
truthfully say that money-market fund management fees have eaten
up 80% of return when comparing a low-fee fund to an otherwise
similar high-fee fund.
 
B

BreadWithSpam

Rich Carreiro said:
Imagine two identical funds. Both have a pre-fee annual rate of
return of 8%. Fund A has a MER of 0.25%. Fund B has a MER of 1.5%.
That means A's net return is 7.75% and B's net return is 6.5%.
You invest $10,000 into each of them and hold for 30 years.
For fees to eat up around 80% of returns (calculated like this),
you'd need to be looking at lower-returning funds. I have no doubt
The totally made-up example used was:
8% annual raw returns
2.5% fees
65 - really - 65 year period.

(1.055)**65 - 1.0 = 31.4645865401285
(1.080)**65 - 1.0 = 147.779846620568

So there you have it - the difference is roughly 80%.

By making up numbers, you can make *any* expense ratio
into any difference.
 
S

Sgt.Sausage

Jon said:
Hey Guys,

Don't know if anyone's covered this or not, but I ran across a Robert
Kiyosaki article the other day in which he claims that the fees paid to
mutual fund companies basically amount to highway robbery and you're
better off investing elsewhere.

But what really blew my mind was where he quoted John Bogle as saying
that a mutual fund company will take up to 80% of your return in fees.

Er, what?

You can read the article here:
http://finance.yahoo.com/columnist/article/richricher/6720

Is this for real, or just some kind of spin?

--Jon
Kiyosaki's a quack.
 
J

joetaxpayer

Sgt.Sausage said:
Kiyosaki's a quack.
Sgt. I agree about Mr Kiyosaki, but the quote of Jack Bogle is real, I
saw it "live on tape" as they say on Frontline on PBS. The math works
out over a long timeline like the 65 years Jack cites. Lopping 2.5%/yr
over 65 years is over 80% lost. Of course, that's the extreme, to prove
his point. I love my S&P fund choice in my 401(k). 5 basis points. A 7%
hit over 65 years, I should live long enough to pay that much.
JOE
 
J

Jon

Before you follow any of Kiyosaki's advice, though, read this:

http://www.johntreed.com/Kiyosaki.html

Wow.

Frankly, I'm cynical enough that none of this comes as a surprise.
Sheesh. I couldn't even bring myself to finish reading the whole
thing, it was too depressing.

As a brief aside, I was once involved with Quixtar--unsuccessfully, as
I'm just not that good at defrauding friends and family, or perfect
strangers. I once went to a rally and, let me tell you, it was like
being at some sort of revival. I'm serious, it was like a cult
gathering. People in the audience were in ecstasy listening to the
bigwigs give their spiel.

Anyway, my apologies if I've offended anyone. Just my opinion!
 
E

Elle

Jon said:
Don't know if anyone's covered this or not, but I ran
across a Robert
Kiyosaki article the other day in which he claims that the
fees paid to
mutual fund companies basically amount to highway robbery
and you're
better off investing elsewhere.

But what really blew my mind was where he quoted John
Bogle as saying
that a mutual fund company will take up to 80% of your
return in fees.

Er, what?

You can read the article here:
http://finance.yahoo.com/columnist/article/richricher/6720
I would call it misrepresentation by someone nuts and/or
slovenly in research and writing. The article says Bogle was
talking about a mutual fund company's 401(k) fees. That's
different from owning a fund outside a 401(k). (I suspect a
good deal of Bogle's comments' context was snipped for this
article.)

To be realistic, compute what percentage of the gain a
mutual fund company charging an expense ratio of 0.25%
(fairly common for index funds) after 65 years (Bogle's
timeframe in the article) makes. Assume the article's 8%
overall return. The percentage of the "take" the mutual fund
company gets is

[1 - (1.079^65) / (1.08^65)]100% = 14%

Not 80%. What hogwash.

What Bogle is actually attacking are the fees of 401(k)
plans. If Kiyosaki wants to get irate about 401(k)
structures, then he had also better be prepared to respond
to the generous company matching that so many 401(k) plans
offer. Duh 401(k) fees are high. It's business in bed with
mutual fund companies, in response to Congress's blah blah
incentives to get companies to get (sic) employees to save.
(Or is it Congress trying to increase income to mutual fund
companies via 401(k)s? Y'all are smart and can call the
score.)

Ridiculous article. What is this doing at finance.yahoo?
 
B

BreadWithSpam

Anyway, my apologies if I've offended anyone. Just my opinion!
No apologies necessary. Discussing things like this - and
especially debunking nonsense - is what we're all here for.

You just brought us an easy target (and, I guess, something
of a trigger for us - Kiyosaki really is scum and his presence
on Yahoo and in the national spotlight is not only bad for
the poor saps who follow him, but it takes something away
from all the legitimate and honest folks out there who are
really working hard to help people).

That all said, if you have some specific mutual funds you
were thinking of and then got deterred by that article,
I'm sure we'd all be happy to hear about them and whatever
alternative investment you were thinking about, and discuss
them more constructively.

And if someone offers you numbers which sound surprising,
or like nonsense - like that 80% number - Bogle knows better! -
digging into them is kind of fun for some of us.

That's the real surprising thing to me - there is no context in
which makes Bogle's number makes sense. It's apples-and-oranges
no matter how you slice it and Bogle knows this. It's roughly
as useless as when someone adds up all the interest you pay
on your mortgage over the course of 30 years. It's a cute
number, but absent the dimension of time and alternative
investments (and, frankly, imputed rent), it's gibberish -
sometimes a shockingly large number, but gibberish nonetheless.

I don't expect better of Kiyosaki, but I do of Bogle.
 
J

joetaxpayer

Elle wrote:

snip
To be realistic, compute what percentage of the gain a
mutual fund company charging an expense ratio of 0.25%
(fairly common for index funds) after 65 years (Bogle's
timeframe in the article) makes. Assume the article's 8%
overall return. The percentage of the "take" the mutual fund
company gets is

[1 - (1.079^65) / (1.08^65)]100% = 14%

Not 80%. What hogwash.
Elle - you have a typo -

[1 - (1.0775^65) / (1.08^65)]100% = 14%

is what your spreadsheet would have calculated, because the 14% over a
lifetime is about right. But again, this was Bogle's point, the
comparison to the much higher funds, well over 1%/yr.

This is a link to the Bogle interview;
http://www.pbs.org/wgbh/pages/frontline/retirement/interviews/bogle.html

While he was talking about 401(k) accounts, his point was well taken for
any fund, in or out of retirement accounts. Whether 80 [lost] is an
exageration, and the true number is more like 30-40 isn't the point,
Jack's point is that fees do add up over time.
JOE
 
J

joetaxpayer

And if someone offers you numbers which sound surprising,
or like nonsense - like that 80% number - Bogle knows better! -
digging into them is kind of fun for some of us.
read the Bogle interview -
http://www.pbs.org/wgbh/pages/frontline/retirement/interviews/bogle.html

That's the real surprising thing to me - there is no context in
which makes Bogle's number makes sense.
I'm just playing devil's advocate here - What if an advisor, getting
1%/yr, put you in funds with expenses of 1.5%? Is this not possible? Or
even common?

It's apples-and-oranges
no matter how you slice it and Bogle knows this. It's roughly
as useless as when someone adds up all the interest you pay
on your mortgage over the course of 30 years. It's a cute
number, but absent the dimension of time and alternative
investments (and, frankly, imputed rent), it's gibberish -
sometimes a shockingly large number, but gibberish nonetheless.
Shock value is right. How about the sofa (couch?) someone buys for their
first appartment? $1000 for the furniture, ten years later it's a $6000
balance on their card. I presume they just keep charging, and never even
pay the sofa off. By year ten the interest alone is $1200 (at 20%).

These are all convoluted scenarios to exagerate and prove a point.
JOE
 
B

BreadWithSpam

joetaxpayer said:
(e-mail address removed) wrote:
It was in response to the question "What percentage of
my net returns is going to fees?" And the answer - 80% -
is still gibberish. In the example of 8% return and 2.5% fees,
the answer is not 80%. It's 2.5/8 = 31.25%. Which is still
absurd, but it doesn't conflate "percentage of returns" with
compounding.
I'm just playing devil's advocate here - What if an advisor, getting
1%/yr, put you in funds with expenses of 1.5%? Is this not possible?
Or even common?
2.5% on 8% gross returns isn't the absurd part (except inasmuch
as I'd hope that someone can find better investments). It is
the mixing up of a linear measure with a geometric one.
Shock value is right. How about the sofa (couch?) someone buys for
their first appartment? $1000 for the furniture, ten years later it's
a $6000 balance on their card. I presume they just keep charging, and
never even pay the sofa off. By year ten the interest alone is $1200
(at 20%).
If we ignore time value of money, sure. But if we ignore time
value of money, we're also talking nonsense. Hell, take your
sofa example and make it 65 years like Bogle did in his example.
It's even uglier. And it's still nonsense. (over $140,000
for your sofa, btw).

There are legitimate criticisms of high expenses. Paying
over 30% of one's *annual* return (2.5/8) is way too much
to be paying. But using nonsense numbers (80% due do
compounding that expense over 65 years) doesn't help make
the point. It undermines the credibility of the person
trying to make it.
 
T

Tad Borek

Nosmo said:
I'm disappointed that Yahoo continues to run his "advice".
I agree, you can poke a hole or find a half-truth in virtually every
paragraph that guy writes. It's a shame too because they have some good
columnists there, like Jeremy Siegel - who is in a completely different
universe than Kiyosaki. Or heck Ben Stein - smart, funny, good advice.
They should swap out Kiyosaki and replace him with Andrew Tobias.

-Tad
 
S

Sgt.Sausage

joetaxpayer said:
Sgt.Sausage wrote:

Sgt. I agree about Mr Kiyosaki, but the quote of Jack Bogle is real, I saw
it "live on tape" as they say on Frontline on PBS. The math works out over
a long timeline like the 65 years Jack cites. Lopping 2.5%/yr over 65
years is over 80% lost. Of course, that's the extreme, to prove his point.
I love my S&P fund choice in my 401(k). 5 basis points. A 7% hit over 65
years, I should live long enough to pay that much.
I didn't say he was wrong, I just stated that he was a quack.

I stand by my original statement.

As even a broken clock is correct twice each day, a
confirmed quack can make a true statement once in
a while. <grin>
 
E

Elle

joetaxpayer said:
Elle - you have a typo -

[1 - (1.0775^65) / (1.08^65)]100% = 14%
Correct. Post-o on my part.
is what your spreadsheet would have calculated, because
the 14% over a lifetime is about right. But again, this
was Bogle's point, the comparison to the much higher
funds, well over 1%/yr.
Right.

Jack's point is that fees do add up over time.
You mean "John Bogle's point is... " right?

I think the points are that (1) one should seek funds with
low expense ratios; and (2) yes, 401(k) fund expenses are on
average higher than what one could get outside the 401(k),
but by buying outside a 401(k), one does not get the company
matching.

Company matching comes at some price. What's the big deal
about that?

As for buying low expense ratios outside a 401(k): A mutual
fund company taking some fourteen percent over 65 years does
not bother me in the least, considering what is given in
exchange. It's not like the company does nothing for the
investor. Unless one has extreme wealth, owning a basket of
stocks and adjusting it per index guidance is an expensive
proposition.

I agree it's just hype that means nothing.
 
J

joetaxpayer

Elle said:
You mean "John Bogle's point is... " right?
He's pretty non-pretentious, "you can call me Jack".

Elle - I think I've been pretty consistant in my postings, deposit
enough in 401 to get the maximum match, then invest outside the 401.

I believe the delta between both LT cap gain and ordinary income, as
well as the potential delta between pre-retirement and post-retirement
tax rates are not to be dismissed.
The matching 401 is a no-brainer, agreed?
The rest takes some analysis and decision.
For BWS to suggest that one anually sells their stock each 364 days so
that their return is 8% vs 10% sheltered is as bad as Mr Bogle's
exagerrated point.
Since Jack is considered the Father of index investing (perhaps he
didn't invent it any more than Al Gore invented the internet) maybe I'm
more forgiving of his hyperbole.

For these discussions (as I think we found with the one discusing
retirement needs) there are too many variables to agree upon. I'm not
dismissive of other's approaches, I just think that some issues are a
bit too close to call.

JOE
 

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