(Just to set the stage, I would like to say that I really like Tony, but I do think he is wrong.)
Tony Robbins, the creator of the modern motivation industry, has authored a second book on money, called Unshakable. I won’t include the link here because I cannot endorse it. His previous book on financial success was how to do it like everyone else—if we still lived in 1981. I’m still a big fan of Tony’s, and everyone has to learn in stages. Luckily, the book’s key points were summarized in “How Wall Street Fools You Into Overpaying for Underperformance” by visualcapitalist.com. [since the original writing of this article, I have read the book, and the parts I really don't like I'm going to skip for now.]
This article is about one of my favorite targets, the mutual fund industry. Tony has gathered some fun facts to use at your next party. Here’s my favorite: Ask everyone you meet if they think they have to pay taxes on their 401(k) or IRA when they retire. The answer is below.
Back to Tony. He focuses on a big subject of Privatized Banking: Fees–Paying someone for money. Why would you do that? He quotes AARP:
“71% of Americans believe they pay no fees at all to have a 401(k) plan, and 92% of Americans admit they have no idea how much they are paying.”
Astounding! These programs are a huge component of the average American’s savings.
Fees are charged by “skilled” money managers who buy and sell stocks and bonds to put in the mutual fund that you picked based on a line in a paragraph in a brochure that your employer gave you when you first started working. You read the whole brochure, right? How much are these fees? There is a range of each (and their average): Marketing, distribution, management (0.9%); transaction costs and commissions (1.44%); cash drag (0.83%); and taxes (1%). If all your savings are in government-blessed programs, you will pay taxes on 100% of every dollar you take out (in answer to my first quiz, above).
Let’s just say 2% to pick a number.
To make matters worse, these fees are charged every year, right off the top. Your friendly fund managers (and all stockbrokers) get paid whether or not you have lost, say, 50% of your retirement savings. Losing money every year means you have to take on more risk to maybe make up the difference. Most just end up with less. Which is where a lot of people are right now, post-2008. So, as he describes, if you put in $1 in Wall Street for 50 years at a (HOPED-FOR) 7% rate of return, you end up with about $30. That average 2% taken out, every year, changes your return to 5%, and your savings are one-third the size. Some people have employer matches, etc., that change things, but you get the idea. Index funds have lower fees (at least they should), but then you are in exactly the market rollercoaster. It’s a rollercoaster because the market goes up and down, and so do the mutual funds and index funds. Things just get worse.
Tony then makes a confusing point. He thinks paying for this advice, so long as it is good, is OK. Then comes reality. What could a “good” advisor do? Try to time the market or pick the winners? Guess what, it doesn’t happen. Experts don’t beat the market (and yours can’t either). Tony quotes two important facts:
Timing the Market: Researchers Richard Bauer and Julie Dahlquist examined more than one million market-timing schemes for the years 1926-1999. They concluded that holding the market did better than 80% of market-timing strategies. Oops.
Picking Winning Funds: Industry expert Robert Arnott studied all 203 actively managed mutual funds and their returns from 1984 to 1998. Eight (8) of these 203 funds actually beat the S&P 500 index. Less than 4%. Still want to bet?
These are important things to consider. Yet I disagree with Tony’s summary:
“Only being in the market, while minimizing costs, can empower you to getting the real financial freedom you deserve.”
What? Stay in the Wall Street rigged game? Can you beat thousands of MBAs with high-speed computers trading at near speed-of-light? And they can’t do it either?
I say, yes, be in the market, the WHOLE market, of ALL opportunities: of small businesses, self-improvement (marketable skills), and innovative business ideas executed by others that you really understand. If you must be in securities, do yourself the justice of reading every annual report, balance sheet, cash flow statement, and all the public information you can get your hands on. And that is for a single stock or bond. If you don’t, you are gambling. Vegas is more fun.
You must understand and manage any risk to your hard-earned savings. These ideas—these real investments—don’t come along every day, but you need to be ready with the capital to act when they do. If you need a place to safely keep and grow your money while you are waiting, try something like Privatized Banking.