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Risks & Costs of Retail Investing
 

Many retail investors purchase mutual funds thinking they cost less, provide higher long-term returns, and diversify risks. While retail investments may have a role, their risks and rewards aren't necessarily conducive to building significant wealth. Low-risk retail vehicles struggle to keep up with inflation and higher-risk retail vehicles – as implied – have the real risk of losing significant value. In fact, even the S&P has barely outpaced inflation over the past decade and a half due to corrections (see below for specifics).

 

Institutional providers of retail instruments usually have a mandate to remain fully invested with the assets provided to them.

  • This means they must invest your assets regardless of environment or opportunity costs.
  • This also means they become "best available return-seekers" vs. waiting until an opportunity becomes available.
  • Asymmetric investors have required return/hurdle rates and pass on unworthy deals until better alternatives are found.
 

Equities have significant short-term risks of actual loss. Consider:

  • Before fees and taxes, S&P 500 investors lost 49% and 57% in '01 and '08 respectively. Smaller corrections regularly occur that even experts can't time. Source: Bloomberg
  • Long-term returns aren't what many believe. Per Bloomberg, the S&P 500 CAGR was only 3.549% from December 31st, 1999 to December 31st, 2013 and inflation was 2.377% over the same period.
  • "Fund Experts" do worse than random luck. Before fees, only .004% (statistically equates to zero) of fund managers beat the market average over 10 years. Source: MarketWatch Oct 25, 2013

 

 

Costs of ownership are higher than many think. Many retail investors don't realize:

  • Expense ratios must be disclosed but they may be less than half of the costs passed onto you.
  • Nearly all fees are based on Assets Under Management (AUM) that are incurred even if returns are negative.
  • Tax liabilities may be created from trades made by funds even if the funds lose value or even if you don't sell shares.
  • Funds may have price disadvantages when trading due to spread agreements, their size, and commissions.
  • Cash positions drag down returns as funds maintain liquidity for redemptions. Returns are estimated to be affected by nearly 1% over a 10-year horizon due to cash positions.
  • Source: Forbes, The Real Cost Of Owning A Mutual Fund.

 

 

Bond funds are also challenging. Consider the following:

  • Bond funds generally lag higher return alternatives given the traditional risk/reward trade-offs associated with retail investing.
  • Bond funds' returns are highly correlated to interest rate movements – all bonds have interest rate risks if considering opportunity costs or if trying to sell the bond before its maturity, but, unlike individual bonds, funds don't have a final maturity.
  • Principal is not returned to bond fund shareholders but is – if held to maturity – to the actual bondholders. This makes bond funds more susceptible to losses due to rate changes whereas individual holders have significantly less risk to their principal.
  • Trades can create taxable events in bond funds – similar to equity funds – that get passed onto the shareholders.
  • Management fees aren't incurred with individual bonds but are with bond funds.
  • Source: The Asymmetria Group.

 

 

Rethink investing with Asymmetria:

  • Asymmetria is not a mutual or hedge fund with assets under management.
  • We seek individual asymmetric opportunities with high return potential and lower or managed downside.
  • Annual client fees are fixed. Our costs don't increase the more you invest so you shouldn't have to pay more.
  • We also have skin in the game. Asymmetria's founders invest their own capital in every opportunity presented.
  • Returns are real – not on paper – and, related, tax implications are based on cash flows to you, not trades within a fund.
  • Asymmetria profits after you do. A portion of each investment's return is retained by Asymmetria through profit sharing.
  • You, not a fund manager or financial planner, are in control because you decide which opportunities to invest in and how much to invest.