Millionaire Expat. Andrew Hallam

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СКАЧАТЬ actively managed mutual funds, financial advisors make more. It really is that simple.

      Most expats, however, should be interested in funding their own retirement, not somebody else's.

      The term index refers to a collection of something. Think of a collection of key words at the back of a book, representing the book's content. An index fund is much the same: a collection of stocks representing the content in a given market.

      For example, a total Australian stock market index is a collection of stocks compiled to represent the entire Australian market. If a single index fund consisted of every Australian stock, for example, and nobody traded those index fund shares back and forth (thus avoiding transaction costs), then the profits for investors in the index fund would perfectly match the return of the Australian stock market before fees. Stated another way, investors in a total Australian stock market index would earn roughly the same return as the average Australian stock.

Global Investors Bleed by the Same Sword

      Now toss a professional fund manager into the mix—somebody trained to choose the very best stocks for the given fund. Unfortunately, the fund's performance will likely lag the stock market index. Most active funds do. And the actively managed funds that do beat their benchmark indexes over one measured time period usually lag the index during the next time period. That's why buying actively managed funds (especially those with strong recent track records) doesn't make sense. Regardless of the country you choose, actively managed mutual funds sing the same sad song.

Recall why from the previous chapter. Professionally managed money represents nearly all of the money invested in a given market. Consequently, the average money manager's return will equal the return of the market—before fees. Add costs, and we're trying to run up that downward‐heading escalator.

Consider the UK market. According to Morningstar's Global Fund Investor Experience Study, the average mutual fund in Great Britain costs 1.28 percent each year.² Regardless of the market, the average professionally managed fund will underperform the market's index in equal proportion to the fees charged. Often, the reality is even worse.

Ron Sandler, former chief executive for Lloyds of London, reported a study for The Economist, suggesting that the average actively managed unit trust in Great Britain underperformed the British market index by 2.5 percent each year. Fees contributed to those poor returns.³

      You might think that's nothing…a bit like a waiter's tip. But it's more like the tip of an iceberg. Here's an example. A 30‐year‐old investor might have an investment time horizon of 55 years. She would start selling parts of her portfolio once she retires. But she would keep most of the money invested, selling portions of the portfolio each year to cover retirement living costs.

      If someone invested £5000 and it averaged 8 percent per year, it would grow to £344,569. But if £5000 averaged 5.5 percent per year, it would grow to just £95,028.

Not all actively managed funds fall behind their benchmark indexes. But most of them do. According to the SPIVA Scorecard, 83.22 percent of US actively managed stock market funds underperformed the broad US stock market index over the 10 years ending December 31, 2020.⁴

Canadians shouldn't feel smug after seeing these results. Canadians pay the second‐highest investment fees in the world (after the expats who buy offshore pensions). During the 10‐year period ending December 31, 2020, the broad Canadian stock index beat 84.29 percent of actively managed Canadian stock market funds. Canadian mutual fund companies also created funds that focus on US stocks. Over that same time period, 95 percent of Canada's actively managed funds that focus on US stocks underperformed the broad US stock market index.⁵

      Other countries' actively managed funds don't perform any better. Over an investment lifetime, beating a portfolio of index funds with actively managed funds is about as likely as growing a giant third eye.

American Expatriates Run Naked

      Unlike most global expats, Americans can't legally shelter their money in a country that doesn't charge capital gains taxes. And actively managed mutual funds attract high levels of tax. There are two forms of American capital gains taxes. One is called short‐term, the other long‐term. Short‐term capital gains are taxed at the investor's ordinary income tax rate. Such taxes are triggered when a profitable investment in a non‐tax‐deferred account is sold within one year.

      I can hear what you're thinking: “I don't sell my mutual funds on an annual basis, so I wouldn't incur such costs when my funds make money.” Unfortunately, if you're an American expat invested in actively managed mutual funds, you sell without realizing it. Fund managers do it for you by constantly trading stocks within their respective funds. In a non‐tax‐sheltered account, it's a heavy tax to pay.

Stanford University economists Joel Dickson and John Shoven examined a sample of 62 actively managed mutual funds with long‐term track records. Before taxes, $1,000 invested in those funds between 1962 and 1992 would have grown to $21,890. After capital gains and dividend taxes, however, that same $1,000 would have grown to just $9,870 in a high‐income earner's taxable account.⁶ American expats, as I'll explain in a later chapter, must invest the majority of their money in taxable accounts. If that sounds depressing, it's good to know that index fund holdings don't get actively traded, so they trigger minimal capital gains taxes until investors are ready to sell. And when such holdings are sold, they're taxed at the far more lenient long‐term capital gains tax rate, as opposed to the higher short‐term capital gains tax rate paid by investors in actively managed funds.

Why Brokers Want to Muzzle Warren Buffett

      Most financial advisors wish to muzzle the brightest minds in finance: professors at leading business universities, Nobel Prize laureates in economics, the (rare) advisors with integrity, and billionaire businessmen like Warren Buffett. Brokers make more when experts are mute.

Warren Buffett, chairman of Berkshire Hathaway, is well known as history's greatest investor. And he criticizes the mutual fund industry, suggesting, “The best way to own common stocks is through an index fund.”⁷

That's why Warren Buffett instructed his estate's trustees to put his heirs' proceeds into index funds when the great man dies.⁸

      Nobel laureate Sharpe explains it's delusional for most people (and most advisors) to anticipate beating market indexes over the long term. In a 2007 interview with Jason Zweig for Money magazine, he stated his view:

Sharpe:	The only way to be assured of higher expected return is to own the entire market portfolio. You can easily do that through a simple, cheap index mutual fund.
Zweig:	Why doesn't everyone invest that way?
Sharpe:	Hope springs eternal. We all tend to think either that we're above СКАЧАТЬ В начало < 13 14 15 16 17 18 19 20 21 22 > В конец