Even people with little money can achieve reasonable returns with equities. Several times I have explained in the Young Money blog how young investors can invest in so-called ETFs, ie passively managed index funds (for example, here and here).
Because prices on the stock exchanges of the world are rising in the long run, this strategy is considered comparatively safe - and cheap. After all, unlike traditional funds, an ETF does not need an expensive manager to handle stock picking. Because an ETF simply dulls up an index by computer program - for example, the German index Dax. If the Dax rises by ten percent, the index fund also rises by ten percent. On the other hand, if the Dax loses ten percent, the index fund is also down ten percent.
But those who go to a bank these days will still be offered traditional equity funds. Recently, one of my friends even ran into a bank adviser who strongly advised against ETFs.
The counselor's tale went something like this: Because stock prices have been rising steadily around the world for years, even the best fund managers struggle to outperform computer-aided ETFs. The true art of active fund management only becomes visible when prices drop. And because of trade war, Brexit and Co will soon come the time in which the human fund strategists could prove.
In such downturns, they could protect investors against losses by selectively buying the best stocks and selling worse ones. Investors who bet on simple ETFs, on the other hand, would fall on their nose, because they take the rashes of the stock market down fully.
But that's not true.
Figures from the US rating agency Standard & Poor's are able to refute this claim: in the difficult stock market in 2018, when the leading German index Dax lost a fifth of its value, 80 percent of managers remained behind index funds in most fund categories. The higher costs of the funds are not even included (more on that later).
How much investors jump to the argument of alleged protection against losses shows the case of the father of a friend of mine. He relied on the mixed fund Carmignac Patrimoine, which had actually weathered the worst of the financial crisis from autumn 2008 to March 2009. The fund was celebrated in investor's papers for many years. But my friend's father did not have much of it: he did not catch up until after the financial crisis, since then, despite years of stock market rallying, the fund has yielded less than three percent average annual return. He is one of the worst mixed funds in the past decade.
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The example shows that even if a manager manages to limit losses in a stock market crash, the investor does not necessarily profit from this in the long run. The perceived risk management of bank fund products may even lead to investors yielding significantly lower returns in the long term than simply relying on broad ETFs and taking all the up and down swings to the max.
Because for private investors, it depends on the long-term value development. Despite several economic crashes, the MSCI World global stock index has returned almost 9 percent a year over the past 43 years. But that's just the average - so if you want to benefit from such high returns in the long term, you must be ready to accept an interim minus of more than 25 percent.
The funds most Germans bet on do not only perform badly, they are also outrageously expensive. The analysis house Morningstar has compiled for the Young Money Blog, where the fund companies cash in on the investor.
First, when buying a traditional fund, investors often have to pay a sales charge of between three and five percent. This is a one-time fee, which accrues immediately upon purchase. With a total investment of 10,000 euros so go immediately between 300 and 500 euros to the bank. Money that the fund managers have to bring back through their investments.
In addition there are management fees, trading costs for the purchase and sale of shares by the fund manager and performance-related fees. On this basis Morningstar summarizes the total costs per year (see table).
A look at the funds in which the Germans have invested the most money shows that in addition to the one-off initial charge, investors have annual total costs of between 2 and 5 percent. In contrast, ETFs only cost a fraction of them (greased in the table).
So expensive are the favorite funds of the Germans
|Fund / ETF||Fondsvermögen¹||Ausgabeaufschlag²||Gesamtkosten³||ISIN|
|iShares Core S & P500 ETF||30,20||0.13||IE00B5BMR087|
|Vanguard S & P 500 ETF||20.60||0.08||IE00B3XXRP09|
|Private funds: Controlled||19.20||5.00||2.59||DE000A0RPAM5|
|DWS Top Dividend||17.70||5.00||1.52||DE0009848119|
|iShares Core MSCI World ETF||16.20||0.21||IE00B4L5Y983|
|Allianz Income and Growth||12.70||5.00||1.77||LU0820561818|
|FvS SICAV Multiple Opportunities||12.70||5.00||2.34||LU0323578657|
|DWS Vermögensbildungsfonds I||8.20||5.00||1.50||DE0008476524|
|iShares JP Morgan USD EM Bond ETF||7.70||0.48||IE00B2NPKV68|
|iShares JPMorgan EM Lcl Govt Bd ETF||7.60||0.61||IE00B5M4WH52|
|JPM Global Income||7.50||5.00||1.62||LU0395794307|
|PIMCO GIS Income||7.10||5.00||1.52||IE00B8K7V925|
|iShares EURO STOXX 50 ETF||6.50||0.11||DE0005933956|
|Fidelity European Growth||6.10||5.25||1.92||LU0048578792|
¹in billion, ² once in percent, ³ per year, in percent
Source: Morningstar; As of: 31.08.2019
For example, the "Private Fund: Controlled" by Union Investment, the fund of the Volksbanks and Raiffeisenbanks, devours 2.59 per cent of current fees each year. The mixed fund is part of the standard repertoire of client advisors, investors have invested more than 19 billion euros in him. The bank should be pleased: It takes with the fund alone by the current fees about 500 million euros. Per year.
Deka should be able to earn a similar amount of money with its funds, which are mainly offered to savings bank customers. However, the total cost of the Deka funds does not appear in the Morningstar evaluation. The reason: The fund company still does not provide transaction costs data to the analysis house.
It is particularly annoying for investors, when managers take extreme and risky bets to compensate for the high fund costs. This shows the case of the mixed fund "M & W Privat". Many investment advisers have recommended the fund for years, because it brought a positive return during the financial crisis. In the meantime, almost half a billion euros of customer funds flowed into the product.
After the financial crisis, fund managers speculated on the fall of the euro and bet on gold and gold mining stocks. The strategy seemed to be picking up in 2016: the fund's return on gold was soaring at almost 30 percent due to rising gold prices.
But looking at the performance today, one has to admit that investors have had nothing of this near-term success in the long run: the fund has performed so miserably in the other years of the past decade, with a miserable return of ten years only 0.06 percent a year.
So, if someone has been successful with aggressive bets for a few years, that does not mean anything for the future. Investors should learn from this - and prefer to bet on ETFs.
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