Are We Being Properly Served?

Jul 15th, 2007 | Filed under: Industry

Now that Cake is live, I thought I would do a (small) series
of posts on what inspired us to quit our jobs and to start building Cake in the first place.

The short answer is that we wanted a place where we could get trusted and unbiased help managing our portfolio. And we didn’t find anything out there that served our needs. We suspected that there were likely others out there that were in the same boat as us that thought about investing differently that previous generations.

After doing months of research and reading an untold number
of academic papers and finance books, two things were clear: 1) there were alot more people out there like us than we thought and 2) nearly all of the investment products that
the big firms and investment advisors recommend we buy, simply do not work.

Here are a few generally accepted facts about the industry
that the big brokerage firms would prefer you never knew:

Fact #1: Nearly 100% of mutual funds do not beat the stock market’s returns
in a typical year.

According to the Mutual Fund World Fact Book for 2007, collectively we have
over $10 trillion of our hard-earned
money invested in 8,120 mutual funds. If
you account for the expenses that we pay these mutual fund companies and
managers for the privilege of mismanaging our assets, we are wasting $100 billion annually. I don’t know about you, but I don’t have $100 billion to flush down the toilet.

David Swensen, whose 16.1% average annual return for the
past 20 years as the Chief Investment Officer at Yale makes him one of the
world’s greatest investors, says the "failure of rate of mutual funds is 78% -
95% for periods ranging
from 10 to 20 years. The same study places the after-tax failure rate at 86% - 96%." His book, Unconventional Success: A Fundamental Approach to Personal Investment, is
very readable for non-Wall Street types and investment wonks and was a core
inspiration for Cake.

Fact #2: Nearly 70% of surveyed investors believe
"financial advisors and advisory firms put their own interests ahead of their clients," according to The
Annual Securities Industry Association Investor Survey.

Check it out. This
sentiment has been steadily and consistently rising since 1999. And it shows no
sign of abating. No surprise that the surveys for 2005 and 2006 don’t seem to have been published.

Fact #3: “Professional” investment managers are no
better than you and I at investing.

In a well-known study, Wharton Professor J. Scott Armstrong wrote that when it
comes to the stock market, he “could find no studies that showed any important
advantage for expertise” over individuals. Roh-roh..

Fact #4: Mutual funds touted by various financial
magazines do not even perform as well as the average mutual funds.

As I wrote in my first post, two professors found that rather than following
the mutual funds highlighted in financial magazines, "Investors would do
just as well picking funds at random," the researchers found.

I will explain in another post some of the changes that are going on in the investment industry and how it bodes well for all of us using Cake…