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Investment Comparison Spreadsheet

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Wino
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Investment Comparison Spreadsheet  Reply with quote  

We've all heard the naysayers - usually Bogleheads (whom, as a group, I loathe) - tell you to only invest in no-load funds, not to pay financial advisors, and just go to index funds. Amazingly enough, the Vanguard funds, run by Bogle himself, adhere specifically to their recommendations! What a coincidence!

I went to Excel, and figured I'd compare two different investments over 20 years. https://dl.dropboxusercontent.com/u/104508282/InvestmentComparison.xlsx

The basic premise is that if you have a professional advisor, you'll have to pay him, but you should then expect his returns to beat the S&P 500, or else you're not getting what you're paying for. Don't bother quoting that "advisors don't beat the S&P500 in XX% of the cases." I don't care. If your advisor is getting paid to do worse than you can do yourself, you shouldn't be paying him at all.

As always, you can enter data into the highlighted boxes. The yellow is investment 1; green is investment 2. I've accounted for front-end load, back-end load, and administrative fees. I called them preload, postload, and admin, respectively.

"Actual rates" will allow you to either track a current investment that you have with a financial advisor, or to use historical data to do a comparison.

Assumptions:
1. Investments are for 20 years. I think I got the absolute and relative references right so you can drag this out to more years if 20 is too short for your needs.
2. Each year is static. This means that I didn't break it down month-by-month except as needed for the future value calculations. I just subtracted the admin fee as a percentage of the year's final value.
3. There are hidden fields. Some of them are needed. Some of them were there when I was figuring out what to do. I didn't bother cleaning up the spreadsheet because it works the way it is. I suggest you leave the hidden fields alone, but you're welcome to delete the whole sheet if you like.
4. The green investment is "winning" at the end of the subject year.

If you enter an actual value, that value is used as the assumed value from that point forward. For example, if you enter a change in year 4 only, it will become the assumed return for years 4 - 20. If you enter a change in year 4 and a different rate in year 8, then 1-3 will be from the top; 4-7 will be the 4 value; 8-20 will be the 8 value. Yes, you can enter a different rate for each fund every year. If you leave a spot blank, it will assume the previous year's value.

No real error checking is in place. If you enter a bad value, you'll get bad results. Garbage in = garbage out.

I know that the powers-that-be have arbitrarily decided the word is spelled "adviser," but my spelling was around for years before "they" changed it. In my opinion, "they" got it wrong, so I'm sticking to my (correct) spelling.

If you want changes or improvements that you can't figure out yourself, let me know. It took me less time to write the spreadsheet than it took me to type this post.
Post Fri Aug 16, 2013 5:44 am
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oldguy
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Yes, a 12%/yr outpaces a 10%/yr return - but that's quite an assumption?

But is that 4.75% sales commission properly accounted for? Is it $13 for the first year? And only $8 for the second year? Your salesperson is going to starve before you get to 20 years. Very Happy
Post Fri Aug 16, 2013 3:18 pm
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coaster
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Thanks for doing that work and posting that, Wino, that's a nice workup.

I do find one assumption in your analysis that needs challenge (or clarification, at least), for readers of this thread, and that's the implication that all financial advisors are of one breed; a monolithic group who all are paid the same way (commissions on sold products) and who all are responsible for the same results (producing market-beating investment gains).

First, the advisor's role is not one of merely investment advisor, his role is the entire financial picture of his client; something that can be discovered only through extensive and diligent research and analysis of that client's financial picture. The client's investments are just a subset of that.

Second, the advisor is *not* responsible for the results; the one who takes the advice without question is responsible for the results. The advisor merely analyzes the situation: the income and outgo, the time horizon, the goals, the needs, the suitability, and then provides a plan to best meet all those criteria. If and how the client implements that plan is solely up to the client, and so the client is the one responsible for the results. (Caveat: this statement is not applicable to the situation where the client has totally abdicated and given the advisor power of attorney to make and implement all decisions. That client deserves what they get.)

And third, there are many ways an advisor can be paid: commissions on products bought through the agency of the advisor, a combination of commissions and fees for services rendered, only fees for services rendered, a percentage of assets, or even "free". Obviously the client needs to take into account how his/her advisor is paid and what influence that's going to have on the advisor's financial plan.

So, the analysis, as do all analyses, depends on the assumptions that go into the analysis, and understanding the assumptions is perhaps even more crucial than understanding the results.

Thanks again for the work. Smile

~Tim~
Post Fri Aug 16, 2013 3:30 pm
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Wino
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If you really want to see something interesting, try changing the values in the "yellow-green" band across the middle. You'll see that just a twinge of no load beating load, and load has to fight really hard to ever catch up.

Only by constantly "winning" will the load funds beat the no-load funds. However, if they can win by just 1% or more each year, then the load funds can win overall.

What does this mean? Well, if you follow oldguy's method of "set and forget" (which is also my method), then anyone who's watching - which presumably your advisor is doing - can get out during huge bear markets and then back in with slight bulls. Any losses averted would then tend to show up as major wins over all.

You had about a 3 month window to bail out in 2008, and about a 6 to 9 month window to get back in. We're hearing folks signalling "Hindenburg" omens and also decrying coming bear markets. Get out now? Who knows?

But as I showed on the other thread, guessing we're at the "top of the market" can cost 10% in as few as 6 months. Of course, guessing we're not at the top cost a lot of folks 50% just 5 years ago. I think a bit of timing is not bad, but I will still keep the bulk of my money just riding the waves.
Post Fri Aug 16, 2013 3:42 pm
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smk
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i am not sure I follow the point of this exercise. yes, if the advisor outperforms the index fund, depending upon the structure of their charges, there is hope they will add value. but what if they underperform? then you pay more and get less. your spreadsheet clearly indicates this is not optimal.

professionals (by that I do not mean bogleheads) suggest the advisors do worse than the index. any outperformance does not tend to persist. so if you chase past returns, you are actually more likely to underperform in the future. this is the real argument, so I don't understand how your spreadsheet is applied to this point...

Steve Kanney, CFA
http://www.integratedfinancialny.com/index.html
Any comments made are designed to help you make your own decisions and do not consititute investment advice.
Post Fri Aug 16, 2013 7:36 pm
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coaster
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quote:
Originally posted by Wino
Get out now? Who knows?

Precisely.

~Tim~
Post Sat Aug 17, 2013 3:46 am
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Wino
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The exercise is to put real numbers on "gut feelings," and then allow one to play with the numbers to see how they affect the outcome. It's called "modeling" and without numbers, anything you do on the market is a guess or just faith-based without any reason or thought.

In this case, my gut feeling was that the 5% front-end load and the 1% withdrawal load would need a ton of difference to overcome the no-load scenario. What I found was that it really requires only about 1% differential to overcome even those loads, albeit 12 years to come out ahead.

I also found it interesting that the 12 years for 1% differential stayed fairly constant no matter the base rate. 3%, 8% and 12% bases all took about 12 years to "break even" with the no-load fund, maintaining the 1% differential. From that, I can deduce that the load-funds would have to out-perform the S&P by 1% almost every year to come out ahead.

So, when the CFA whom DW is talking to about moving some of "her" money out of a MM fund suggested funds exactly as I described in the spreadsheet, I now have hard figures to discuss when I speak with him. He is going to have to convince me that his allocations will beat the S&P that I'm suggesting to DW.

And now I have real numbers to work with and a way to manipulate them as he makes his case. I'm not against his plan, but I am testing it. I'm sure he'd prefer I take his advice on face value, make his money, and see me down the road, but instead I'm testing his numbers and making him earn his money.

As I said in the original post, if the CFA can't give me a plan that beats the S&P, why should I pay him? Of course, until the future becomes the present, no one will know the answer, so I set up a tool that will allow me to track the plan against the reality. If the divergence is too great, then I will know to get out or go in even greater, depending on which side is winning. Without the tool, I'd just be sitting by saying, "I hope I made the right decision."

He now has to convince me that his loads are not anything more than his profit, and that his plan is not based on his interests and not my wife's interests. And I have a tool to help me discuss this with him.
Post Sat Aug 17, 2013 3:46 am
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Wino
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quote:
Originally posted by coaster
So, the analysis, as do all analyses, depends on the assumptions that go into the analysis, and understanding the assumptions is perhaps even more crucial than understanding the results.


I'm going to tweak the model a bit to allow for:

one-time fees
annual fees (not admin percentages)
initial balloon investment
flat-rate commissions instead of percentages

Any other thoughts or suggestions?
Post Sat Aug 17, 2013 3:56 am
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Wino
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https://dl.dropboxusercontent.com/u/104508282/InvestmentComparison.xlsx

It's probably the same link as above, but this should be the updated version.
Post Sat Aug 17, 2013 10:36 am
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smk
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quote:
As I said in the original post, if the CFA can't give me a plan that beats the S&P, why should I pay him? Of course, until the future becomes the present, no one will know the answer, so I set up a tool that will allow me to track the plan against the reality. If the divergence is too great, then I will know to get out or go in even greater, depending on which side is winning. Without the tool, I'd just be sitting by saying, "I hope I made the right decision."


I have a cfa and I may be able to direct you. if someone with that background is recommending load funds, I am a bit surprised. the problem with those funds is twofold - the probability they will beat the s&p is small. but the load up front is particularly insidious. you are paying higher fees up front assuming your holding will be very long term and the fees will be lower in the future. if there is a sudden shock in the market or to your personal finances, you may need to restructure. then you will lose the up front fees without the benefit of lower fees down the line. it is just an outsized loss. these qualitative issues probably knock that sort of recommendation out of the box before you even do your spreadsheet...

Steve Kanney, CFA
http://www.integratedfinancialny.com/index.html
Any comments made are designed to help you make your own decisions and do not consititute investment advice.
Post Sat Aug 17, 2013 11:02 am
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smk
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one more thing, if someone claims their fund is likely to beat the market, then ask them to demonstrate the fact statistically. there are 2 hypothesis: that long run averages on the fund are the same as the index or that it will be higher than the index. ask the cfa for the analysis with the probability (usually 95-99%) that the fund will be higher than the index. (you also have to be sure the fund is not investing outside the index, or you have to use another index which includes all assets the fund uses in the proportion in which they invest in them). if, by some extreme stroke of luck he can show a 95+% change of outperformance, ask what guarantees he has that the people who are outperforming the market will be both working at the fund and alive over the 20 year period you need to recover the up front fees. given the people will probably be in their 70's at least before you can prove their ability to outperform, that should pretty much kill any proof of outperformance...

then you can ask the questions about sudden shocks in the market or to your personal finances...

Steve Kanney, CFA
http://www.integratedfinancialny.com/index.html
Any comments made are designed to help you make your own decisions and do not consititute investment advice.
Post Sat Aug 17, 2013 11:20 am
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Wino
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This is not for me. It is for DW. She has the money in a money market because she was spooked during 2008. I stay out of her finances, as that's money she has from before we were married. I've convinced her to take a chance with moving the money, and she wanted to ask a professional.

I went to a DR ELP, and I have not been happy. What I'm seeing is yet another guy selling annuities, whole life, and load funds. I'm giving him the benefit of the doubt, but I'm testing his theories.

To that end, I'm doing my spreadsheets. I'll be able to model different scenarios from that, and then decide if I suggest my wife go my way or his.

Another thing, DW does not have the risk-acceptance that I have. She watches and worries and frets and freaks. So, it is quite possible that the portfolio he has recommended meets her investing style. He has not recommended a single fund. He recommended at least 4 funds. Going through the prospectuses (or prospecti for the purists), I saw the fund with a 4.75% front load, 1% back load, and 0.38% admin fees. That's outrageous just on the face of it, so I did the model.

While I'm not surprised that the fund is down, what did surprise me that with rosy future suggestions, it ends up winning. It would have been much cleaner had I found that he needed to beat the S&P by 2.5% per year, because no one does that. 1%, though? Doable, if difficult. And if he meets the S&P, but has less volatility, then he has probably met DW's criteria.

If things were black and white, I would have already told DW we aren't going with him. But I have not done so, due to the uncertainty.
Post Sat Aug 17, 2013 12:04 pm
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smk
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my guess is that it is pretty clear you should walk away. if you want to confirm, as them to do the statistical analysis I showed above. if they have a cfa, they will know how to do it but probably won't. it will never show their strategy is workable. if they don't have a cfa, they won't know how to do it and the conversation ends there. the questions you are asking them is to demonstrate the chances their strategy will work, and they won't be able to do it. if it is not going to work, why pay them? it is that simple. since the burden of proof is on them, let them prove it. (a long term outperformance of 1% is very rare).

if dw is risk averse, she is not necessarily wrong. my girlfriend was just very nervous when I took over her finances in 2007. I think we decided on about 10% equity exposure and only got up to 2%. worked out pretty well for her as we locked in long term rates instead. but if she is risk averse, she needs to look at what risk is. it is not risk of loss of dollars today, but risk of not being able to support herself in retirement. the best sorts of hedges for this risk are TIPs, series I bonds, longevity annuities if inflation protected, etc. what she really should do is take a financial planning program like esplanner and look at her long term liabilities (expenses). when she looks at funds and strategies, she can look at the impact on her ability to support herself in the future. if she runs the analysis with 100% in cash and she is nervous, she will frighten herself right out of her cash position and into something that is a better hedge for her real risk.

the exercise with the planner is good. explain to her that they should be able to justify their recommendations. when you ask for the statistical analysis to demonstrate the chances it will work, they won't have anything meaningful to say. then she will have her answer on whether she should listen to them or not...

Steve Kanney, CFA
http://www.integratedfinancialny.com/index.html
Any comments made are designed to help you make your own decisions and do not consititute investment advice.
Post Sat Aug 17, 2013 12:20 pm
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Publius
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Wino, just as an aside, the DR ELPs are not supposed to push whole life or inappropriate annuities. I had the same experience several years ago and emailed the customer support address at Dave Ramsey about how I was disappointed that the ELP designation didn't seem to offer an alternative to the commission driven advisors out there. I got a nice email back thanking me for the feedback and apologizing because that isn't how they are trained as part of the ELP network.
Post Sat Aug 17, 2013 3:44 pm
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Wino
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He's not pushing the whole life, but other than that, I can't tell the difference between him and the guy my wife is leaving (at my request; the one who sold her whole life). All I see are fees and more fees, and nothing more.

I'm about to tell DW to just go with Vanguard and be done with it. It's just paperwork, so why not do it ourselves and save the money? No. I don't recommend Dave Ramsey's ELP's.
Post Sat Aug 17, 2013 3:50 pm
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