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

Discussion in 'Financial Planning' started by Jon, Jul 19, 2006.

  1. Jon

    Jon Guest

    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:

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

    Jon, Jul 19, 2006
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  2. Jon


    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:
    Some MF companies do seem to overcharge their shareholders.
    Some do not.
    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    1999 - a somewhat outdated number - was 0.94%.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%:
    , Jul 19, 2006
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  3. 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.
    Rich Carreiro, Jul 19, 2006
  4. Jon


    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.
    , Jul 19, 2006
  5. Jon

    Nosmo King Guest

    I'm disappointed that Yahoo continues to run his "advice". Mr. Reed's web
    page has been around for quite awhile now, but Mr. Kiyosaki still seems to be
    going strong.
    Nosmo King, Jul 19, 2006
  6. Jon

    Sgt.Sausage Guest

    Kiyosaki's a quack.
    Sgt.Sausage, Jul 20, 2006
  7. Jon

    joetaxpayer Guest

    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.
    joetaxpayer, Jul 20, 2006
  8. Jon

    Jon Guest


    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!
    Jon, Jul 20, 2006
  9. Jon

    Elle Guest

    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

    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

    Ridiculous article. What is this doing at
    Elle, Jul 20, 2006
  10. Jon


    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.
    , Jul 20, 2006
  11. Jon

    joetaxpayer Guest

    Elle wrote:

    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;

    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.
    joetaxpayer, Jul 20, 2006
  12. Jon

    joetaxpayer Guest

    read the Bogle interview -

    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
    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.
    joetaxpayer, Jul 20, 2006
  13. Jon


    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
    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.
    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.
    , Jul 20, 2006
  14. Jon

    Tad Borek Guest

    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 Borek, Jul 20, 2006
  15. Jon

    Sgt.Sausage Guest

    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>
    Sgt.Sausage, Jul 20, 2006
  16. Jon

    Elle Guest

    Correct. Post-o on my part.
    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

    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

    I agree it's just hype that means nothing.
    Elle, Jul 20, 2006
  17. Jon

    joetaxpayer Guest

    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.

    joetaxpayer, Jul 21, 2006
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