Measuring what matters is one of the hardest things to do in life.
Take happiness. Everyone wants it, but few get it. Why? Because most pursue short term pleasures, becoming hedonists, and chase their tail instead of becoming happy. You have to think long term, and focus on virtue to become happy. Short term pleasure is the wrong thing to measure; long term virtue is the right thing to measure.
Or, take weight loss. Almost everyone wishes they weighed less. But, most fail to lose weight because they try some crash diet they couldn’t possibly stay on over the long term. The result: they lose a little weight, but put it all back on again because they focused on the wrong measurement–short term scale measurements. To keep the weight off, you need a long term change of lifestyle–usually less food and more exercise. You need to measure less food and more exercise over the long term.
But, it’s not easy to measure what matters most. It’s hard to do and doesn’t give instant results. C’est la vie!
I run into this all the time with investing. People want to build long-term wealth, but they try a quick fix instead of measuring what matters most.
Take, for example. investing in fads. Many think investing in the latest thing or making a big lottery-style bet is the way to build wealth. It isn’t, so the vast majority of those who try this approach don’t build wealth.
Or, take index investing. People hear or read that you can’t beat the market, that low fees matter most, so they jump on the index investing bandwagon (usually after several years where it has worked–too bad we can’t drive by looking in the rear view mirror). But, paying low fees doesn’t do you any good if the index goes no where for a decade.
Which brings me to the measure that matter most for investing: after-tax, after-fee returns.
There’s no benefit to avoiding taxes if you get lousy returns, can invest very limited amounts of money, and pay all kinds of extra fees. Many 401k and 529 plans exhibit this “benefit.”
Avoiding taxes is not the measure that matters most. If you can get 10% returns in a tax deferred plan and 10.91% returns in a taxable plan (assuming 33% turnover and 25% marginal tax rate), you end up with the same after-tax money. That’s right, just find someone who can beat the market by 0.91% over the long run and you might as well save in a taxable account.
This matters because most 401k and 529 plans stove-pipe investors into a few limited options–options that are heavily marketed to make sure lousy money managers can get lots of assets under management. And that’s before we even get into all the wonderful fees and restrictions that come with such plans.
There’s no benefit to paying low fees if you get lousy returns, either. Many investors over-focus on fees. If you are looking at two options that will generate the same returns, then fees are what matter. But, that’s a big IF–IF THEY WILL GENERATE THE SAME RETURNS!
If manager A beats the market by 0.5% after fees and index B only charges you 0.25%, you should go with manager A, because your after fee returns are 0.75% better.
The measure that matters most in investing is after-tax, after-fee returns, not fees by themselves, not tax deferral, not anything else. Anyone who tries to convince you otherwise is probably selling you something.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.