2.1 Single‐Year Profits Siphoned by Financial Industry When Markets Earn 6 Percent
| Country | Average Mutual Fund Costs | Percentage of Annual Profits Lost by the Investor |
|---|---|---|
| Australia | 1.26% | 21.0% |
| Belgium | 1.75% | 29.16% |
| Canada | 2.23% | 37.16% |
| China | 1.73% | 28.83% |
| France | 1.76% | 29.37% |
| Germany | 1.46% | 24.33% |
| Hong Kong | 1.72% | 28.66% |
| India | 2.22% | 37.0% |
| Italy | 2.07% | 34.5% |
| New Zealand | 1.38% | 23.0% |
| Singapore | 1.74% | 29.0% |
| Spain | 2.0% | 33.3% |
| Taiwan | 1.91% | 31.83% |
| United Kingdom | 1.28%* | 21.37% |
| United States | 0.67%* | 11.16% |
NOTE: The average US and UK and Australian mutual fund costs are lower because they include index mutual funds, which I discuss in the following chapter.
SOURCE: Morningstar, Global Fund Investor Experience Study.
Do investors in other countries pay such fees? The answer is no. Most non‐Americans pay much more.
Morningstar's Global Fund Investor Experience Study compares mutual fund costs around the world. As seen in Table 2.1, British investors pay 91 percent more than Americans pay. Canadians pay 132 percent more than Americans pay.6
Understanding the impact of fees is important. If you're paying 2 percent in annual fees each year to have your money managed, you may see this as a paltry sum. But it isn't. If the markets make 6 percent in a given year and you're paying 2 percent in fees, then you're giving away 33 percent of your profits to the financial services industry.
Table 2.1 shows the percentages of annual fees paid by international investors. More important, note the annual profits that investors would lose if their respective stock markets earned 6 percent next year.
During years when stock markets don't perform well, the industry takes an even bigger chunk of your profits. Assume the German stock market earns 3 percent in a given year. The typical German fund investor pays a 1.46 percent annual fee. In this case, the average mutual fund (unit trust) investor relinquishes 48.6 percent of his or her annual profit.
High fees create a maddening process of two steps forward and one step back. Fortunately, there's an alternative. And by choosing it, global expats give less to the financial services industry and much more to themselves.
In the chapters ahead, I'll show how to bypass a fight with a downward‐heading escalator.
Chapter Take‐Away
1 The financial services industry's main goal is to make money from you, not for you.
2 The typical investor loses substantial sums over time to hidden investment fees.
3 When stocks don't perform well, hidden fees take an even bigger bite from the profits you would have earned.
Notes
1 1. “MSCI UK Index,” iShares UK. www.ishares.com/uk/individual/en/products/253739/ishares-msci-uk-ucits-etf
2 2. William F. Sharpe, “The Arithmetic of Active Management,” Financial Analysts Journal, 1991. Accessed August 4, 20121. www.stanford.edu/~wfsharpe/art/active/active.htm
3 3. Warren Buffett and Janet Lowe, Warren Buffett Speaks: Wit and Wisdom from the World's Greatest Investor (New York: John Wiley & Sons, 1997).
4 4. David F. Swensen, Unconventional Success: A Fundamental Approach to Personal Investment (New York: Free Press, 2005).
5 5. John C. Bogle, Don't Count On It, (New York, John Wiley & Sons, 2010), pg. 89.
6 6. Morningstar.com, Global Investor Experience Study. Accessed December 30, 2019, https://www.morningstar.com/lp/global-fund-investor-experience
Chapter 3 Where Are the Customers' Yachts?
An out‐of‐town visitor was being shown the wonders of the New York financial district. When the party arrived at the Battery, one of his guides indicated some handsome ships riding at anchor. He said,
“Look, those are the bankers' and brokers' yachts.”
“Where are the customers' yachts?” asked the naïve visitor.
—Fred Schwed, Where Are the Customers' Yachts?1
If you've never read an investment book before, chances are you've never heard of index funds. Financial advisors rarely like to discuss them. Index funds are flies in caviar dishes for most financial advisors. From their perspective, selling them to clients makes little sense. If they sell index funds,
