Nevada Does Not Gamble With Their Public Pension

The Wall Street Journal recently ran an article about the Nevada Public Employee Retirement System pension investments.  The entire pension investments are managed by one single person who invests 100% in passive index funds.  The entire investment process costs a paltry $18 million per year.  Compare that to North Carolina's annual costs of $595 million per year (see page 10).

Now compare the investment results ending June 30, 2016:

	NV	NC
1-year	2.3%	0.8%
3-year	7.8%	6.1%
5-year	7.7%	6.0%
10-year	6.2%	5.5%

Click here to view the actual investment return reports for Nevada and North Carolina.

Now consider this, the difference between 7.7% and 6.0% returns amounts to $10 Billion in lower returns over just the past 5 years for North Carolina's $90 Billion pension fund.  That $10 Billion shortfall will need to be made up by North Carolina tax payers and lower payouts to retirees.  The result is, taxes will need to be higher and less money will be available for services such as education and healthcare. Considering North Carolina's entire state budget is just $22 Billion each year, the $10 Billion in lower pension returns is a silent fiscal catastrophe the burden of which will be felt for generations.

It is brutally clear, that the North Carolina pension should aim to emulate Nevada.  North Carolina needs to quit investing in expensive investment strategies that do not work.  North Carolina needs to follow Nevada's example and invest 100% in passive indexed strategies and quit squandering money on private equity, real estate, hedge funds, commodity funds, and other expensive actively managed investments.        

 

The Retirement Gamble

If you have a 401(k) or IRA or any investments at all, click here for a must-see video "The Retirement Gamble" from last night's FRONTLINE on PBS.  The moral of the story:  When it comes to investing, expenses are your enemy, and index funds are your friends.

During the video, Jack Bogle, the founder of Vanguard and the inventor of the first low-cost index mutual fund, stated that over a lifetime many investors keep roughly one third (1/3) of their investment gains while Wall Street takes two thirds (2/3).  As shocking as it may seem, I wanted to reiterate that Jack Bogle's figures are correct.

Take the following example

Does Your 401(k) Plan Leak Money Like a Sieve?

Everyone should pay very special attention to their next 401(k) investment statement.  It is impossible to know how much we pay in fees in many 401(k) plans.  But, new rules issued by the Labor Department will require 401(k) plans to disclose costs for the first time no later than August 30, 2012.

Tip of the hat: Srini Krishnamurthy at NC State.

Are you putting your investment advisor's kids through college?

The next time you walk into your local bank and their hot shot salesman investment advisor asks you to pay him 1% per year to place your money in his impressive list of mutual funds he has hand picked, all with stellar track records - simply turn on your heel and walk out.

Here's why.  Over a long period of time, say 20 years, the stock market will likely average about 8% annual return (2-3% from dividends + 5-6% in capital gains).  If you pay a salesman investment advisor 1% to put your money in mutual funds with expense ratios of 1% you will only achieve a 6% annualized long-term return.  In other words, you will give up 25% of your possible investment returns!

But, with these high fees, the power of compounding is working against you.  So it is actually worse than 25%!  Let me show you how.

If you invest $100,000 at 6%, after 20 years you might have $320,000 - or a gain of $220,000.  Sounds good right?  But, if you invest $100,000 at 8%, after 20 years you might have $466,000 - or a gain of $366,000.

You could have gains of $366,000 if you bought index funds, but since you paid that salesman investment advisor 1% to put you in mutual funds with 1% expense ratios, you only earned $220,000. That is a difference of $146,000 over 20 years.  In other words, you probably put your bank's investment advisor's daughter through college - instead of your own!

To think about it another way, you could have increased your investment returns by +66% if you bought index funds rather than listening to your bank's salesman investment advisor! (146/220 = 66%).

If you are fortunate enough to have $500,000 to invest, just multiply the above numbers by 5.  After 20 years you would amass $2.3 million with an 8% return, but just $1.6 million at 6% annual return. That's right, you would be out a whopping $730,000 over 20 years (146 x 5 = 730).  You likely paid for your investment advisors house - instead of your own!

I think these numbers speak, no SHOUT - very loudly why I believe everyone should learn do it yourself investing using Vanguard index mutual funds.  Even if you think you might make a mistake or two doing it yourself, there is no question you will come out ahead.  One of the worst things you can do with your money is give it to your local bank investment advisor and pay him 1% per year to put you in mutual funds with 1% expense ratios.