Question 1

What is the S&P 500 Index?

Accepted Answer

The S&P 500 is a stock market index that tracks the performance of 500 of the largest publicly traded companies in the United States. It is widely used and relied on because it provides a snapshot of the overall health and direction of the U.S. stock market. Investors and financial professionals use the S&P 500 as a benchmark to assess the performance of their investments. The S&P 500 achieves diversification by encompassing major U.S. companies spanning various sectors, providing investors with a comprehensive exposure to the market. The index has consistently demonstrated returns over time that the majority of professional investment managers find challenging to outperform.

A full list of S&P 500 companies can be found here:
https://en.wikipedia.org/wiki/List_of_S%26P_500_companies (https://en.wikipedia.org/wiki/List_of_S%26P_500_companies)

Question 2

What is the Bloomberg US Aggregate Bond Index?

Accepted Answer

The Bloomberg U.S. Aggregate Bond Index is a widely used benchmark that tracks the performance of a broad range of U.S. investment-grade bonds, including government, corporate, and mortgage-backed securities. It is popular and relied upon by experts for assessing the overall health of the U.S. fixed-income market, providing a comprehensive snapshot of the bond market's trends and serving as a key reference for investment and risk management decisions.

Question 3

The Warren Buffett bet that speaks volumes

Accepted Answer

Warren Buffett made a bet in 2007 that a simple S&P 500 index fund would outperform a selection of hedge funds over 10 years. The only person who took the bet, Ted Seides from Protégé Partners, admitted defeat in 2017, acknowledging that passive investing like the S&P 500 was more successful. By the end of the bet on Dec. 31, $1 million invested in the funds chosen by Seides would have gained $220,000 in the same time period that Buffett’s low-fee S&P 500 Index fund would have earned $854,000. Buffett won $2 million from the bet, and the proceeds went to Girls Inc. to support a housing program for young women leaving foster care. The bet showcased the power of low-cost, passive investing and the impact of fees on returns.

Question 4

Another Buffett tidbit

Accepted Answer

During in interview conducted in 2019, Warren Buffett shared the following:
He’s instructed the trustee in charge of his estate to invest 90 percent of his money into the S&P 500 for his wife after he dies, Buffett told CNBC’s Becky Quick in an exclusive interview.(https://www.cnbc.com/2019/02/26/warren-buffett-wants-90-percent-of-his-estate-invested-in-index-funds.html)

Question 5

Have you ever noticed this?

Accepted Answer

Why do financial advisors avoid disclosing their investment results and fees on their websites? Investing is fundamentally numerical, yet most advisor sites lack transparency in this regard. If they truly excel and add value, why not enlist an auditor to present the facts? Transparency isn't prohibited by law; comparing client results to a standard benchmark should be a straightforward practice for them.

Question 6

Are you currently working with a financial advisor?

Accepted Answer

Ask your advisor to provide audited total return numbers for the equity portion of your portfolio (mutual funds, ETFs, individual stocks) compared to the return of S&P 500 Total Return Index. Ask them to do the same for the bond portion of your portfolio (mutual funds, ETFs, individual bonds) and compare that to the return of the Bloomberg Aggregate U.S. Total Return Bond Index. Request annual numbers as well as the 3, 5 and 10 year comparisons.

Question 7

The reality of financial advisor fees over time

Accepted Answer

Investment fees often fly under the radar, as they aren't directly billed to you. Instead, they silently chip away at your investment portfolio every quarter. However, despite their subtle nature, fees can wield significant influence over your wealth.

A 1% annual fee charged by a financial advisor may seem small, but over a lifetime of investing, it significantly reduces a portfolio's value. For instance, with a hypothetical $1,000 monthly investment over 40 years, a 1% advisor fee can decrease the final portfolio from $5.8 million to $4.3 million, costing about $1.5 million or more than 25% of potential wealth. This example highlights the substantial impact fees can have on long-term savings.

In addition to the fee charged by financial advisors, investors must also consider additional fees charged by mutual funds that the advisor may be investing in. This can  further reduce the value of long term savings.

Question 8

What is a benchmark?

Accepted Answer

Think of an investment benchmark like a yardstick for measuring how well your investments are growing. It's a standard, often a market index, that you use as a reference point. By comparing your investment returns to this benchmark, you can see if your investments are doing better or worse than the overall market. It's a tool to gauge the success of your investment strategy.

Examples of popular benchmarks are: 
 • S&P 500 Total Return Index for stocks 
 • Bloomberg US Aggregate Bond Index

A good financial advisor will be able to provide a clear and detailed explanation of how your investments are performing and which benchmarks are applicable to evaluate performance.

Question 9

Lets talk about mutual funds and something called the SPIVA report

Accepted Answer

Actively vs. Passively Managed Funds:

• Actively managed funds are investment portfolios where fund managers actively make decisions to outperform a specific benchmark index. They rely on research and analysis to select securities.
 • Passively managed funds, on the other hand, aim to replicate the performance of a specific benchmark index rather than outperform it. These funds typically have lower fees as they require less active management.

SPIVA Report on Index vs. Active Funds:

• The SPIVA (S&P Indices Versus Active) report compares the performance of actively managed funds to their respective benchmark indices over time.
 • The SPIVA data consistently shows that, over the long term, more than 90% actively managed funds underperform their benchmark indices.
 • This indicates that, on average, investors might achieve better returns with low-cost index funds that track the broader market, supporting the appeal of passive investing for some.

Question 10

Impact of poor performance over the long term

Accepted Answer

Settling for investment performance that consistently underperforms a simple set of benchmarks can cost you dearly over the long run.

Example:
Assume you have $500,000 invested with a financial advisor starting at the age of 45. By age 65, the following compound annual growth rates show how sensitive the end value is to small differences in the growth rates.

CAGR	Portfolio Value
8%		$2,330,478
6%		$1,603,567
		    $726,911  lost to underperformance

Bottom line. Keep track of the performance your financial advisor has been delivering and compare it closely to what could be achieved with a simple two index fund portfolio that you manager on your own.

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Wednesday February 7, 2024

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