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When Did We Decide?

By: Scott DeMonte

This article has nothing to do with annuities and is the first article of our personal finance column.

When did we decide no advice was better than getting advice from experts? When it comes to investing your money, getting sound financial advice is key and so important. Somewhere along the way many people decided no advice is the way to go, this is astounding and scary.

In the not so distant past, investors would flock to financial advisors to get expert investment advice. The financial advisor would take great care in trying to provide the right investment options to ensure you reach your goals. This still happens today, but over the last few years many people have began to discount the value of qualified financial advice.

This is not the right direction to take the industry. With 77 million Baby Boomers retiring over the next 10 years, the need for qualified professionals is going to be even more important than it was in the past. Do we need to rehash recent history and how the markets can implode on us? I think we should to illustrate my point.

Do it yourselfers always say; “The S&P 500 rocks, never buy a loaded fund.” This is also a common theme among many financial writers. So I decided to go out and do some comparisons, using Vanguard’s web site which offers Morningstar hypothetical software.

To make this a fair comparison and to give you an apples to, well, what the financial writers use as an example, I used the Vanguard S&P 500 and compared it to Putnam Fund for Growth and Income. I could have used ICA or Franklin Income fund, but I wanted to show you a fund that has, in that category, not been the best performer and had a lot of negative press.

The parameters: $500,000 invested on 01/01/1999 and held until 07/31/2006. No withdrawals were taken and all distributions have been reinvested. The Putnam fund has a 2% load on $500,000 and the Vanguard fund has no-load and lower expenses.

So what happened, who won?

Putnam won, by a wide margin, actually. Here is the end result: Putnam’s Fund for Growth and Income grew to $618,102 while the stellar S&P 500 grew to $580,577. A whopping difference of $37,525, simply amazing and different from the usual story you hear.

A loaded fund, with higher fees and a sales load, beats the S&P 500? How can that be? That is not important actually, what is important is that you need to know that no-load indexing is not always the best thing to do. Also, these are two funds with very different objectives, a growth and income fund should never be compared against the S&P 500, but many writers do compare them to each other.

Let’s take this a step further, shall we? What if you retired in 1999 and wished to receive income from your investments. How do these two adversaries stack up then? I am glad you asked.

The parameters: The same as above, except now we are taking out 5% of the initial investment, every year. This means we are taking out $2,083 a month over the same time frame.

Who won? I am glad you asked. Putnam, again, won. The victory was not as stellar as I had hoped, but it is a victory nonetheless. Putnam’s final account value was $386,119 and the S&P 500’s ending account balance was $359,362. This is a difference of $26,757 in real dollars over a 7 year time frame.

Interestingly enough was the fact that in 1999 the S&P 500 had a spectacular gain of 20.97% versus the LOSS of .65% in the Putnam Fund for Growth and Income. In other words the S&P 500 had a huge head start over the Putnam fund. At the end of the first year, the S&P 500 had an ending balance of $577,510 and the Putnam fund had an ending balance of $471,827 a difference of $105,683.

Even when I lowered the initial investment to $100,000, which means a higher load for the Putnam fund, the S&P still lost. On a $100,000 investment, no withdrawals, the S&P ended at $116,115 versus the Putnam at $122,359. This is a difference of $6,244.

I then ran it with a $10,000 investment, where the Putnam load is the highest at 5.75%. The Putnam fund still won with an ending value of $11,952 and the S&P coming in at $11,612.

I am not saying go out and buy the Putnam Fund for Growth and Income. I wanted to show you a fund that had average returns and had a ton of negative press in 1999 and the early 2000’s compared to the darling S&P 500. Even more importantly I wanted to illustrate the point that you never know what the market is going to do, and it does matter how you invest and when you invest your money.

Sometimes, my friends, cheaper is just cheaper and does not benefit you. The S&P 500 is a fine index and Vanguard offers a cheap way to buy it, but that does not take the place of qualified financial advice. It does not mean that the S&P 500 will always outperform every mutual fund on the planet. There is a reason people always use the longer term return of the S&P 500 to show how “superior” it is to other mutual funds and they shy away from using the shorter term returns, for obvious reasons.

What is not factored into the longer term examples and comparisons given out by other financial guru’s is that your investment objectives will change and your investments will change to coincide with your newer objectives. That makes the comparison to the S&P 500 over a 20 year time frame, just plain ridiculous.

The point of this article is to help illustrate the fact that there is no one right way to invest. The do it yourself crowd may be very comfortable with the decision’s they make, but it does not mean it is the right decision for everyone. It is also important to note that the do it yourself crowd may be more investment savvy than the average person. Although, even this crowd could use proper advice, which may rub them the wrong way, but it is true.

Do not discount advice because someone gets paid for it. We all have jobs and we all get a paycheck that comes from our work and knowledge. This is what financial advisors receive payment for their knowledge and expertise, except you pay them. Good financial advisors earn their keep and are worth their weight in gold, do not discount that fact.

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