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Giving Wall Street Some Payback

Giving Wall Street Some Payback
February 2, 2009
By Ron DeLegge, Editor

SAN DIEGO ( – Here’s how things work on Wall Street: If you make money, we make money. If you lose money, we make money. Got it?

If these unshocking revelations are still not enough to make your stomach churn, then maybe this will: 

After stocks posted their worst performance since 1931, Wall Street’s bankers, brokers, and employees still vacuumed in a healthy $18.4 billion in bonuses. I suppose someone has to be rewarded for helping to demolish trillions of dollars of the public’s net worth. If no good deed goes unpunished as they say, then we shouldn’t expect bad deeds to go unrewarded, right?

How did Wall Street’s bonuses last year compare with previous years?

According to the New York State Comptroller, 2008’s financial bonanza was almost the same amount that Wall Street’s workers collected in bonuses during the good times of 2004. The only difference is the S&P 500 ended 2004 more than 10% higher whereas in 2008 it dropped more than 38%.

In the midst of the worst economic recession since the 1930s, President Obama called Wall Street’s billion dollar bonuses “shameful.” He said last week, “Part of what we’re going to need is for the folks on Wall Street who are asking for help to show some restraint, some discipline and some sense of responsibility.”

Meanwhile, many of the same corporations that have been taking tax payer money to keep themselves from bankruptcy continue their favorite pattern of financial recklessness. Anybody with a rambunctious pet will admit, “You can’t teach an old dog new tricks.” Why should it be any different with the mascots working you know where?

Rumor has it that Congress is mad at Wall Street.

According to news reports, Congress is exploring ways to limit Wall Street bonuses. Never mind that politicians were saying the exact same thing 4 months ago. In 1943, “I’ve Heard that Song Before” by the Harry James Orchestra was the number one hit for 13-weeks.

Wall Street’s money managers continue to vacuum in billions in fees despite disappointing results. 

According to Morningstar, 58% of all active managed funds failed to beat their benchmarks. In other words, Wall Street’s would be market beaters delivered alfalfa (not alpha) but still got paid. A lot. Small cap mutual funds faired even worse. Around 72% failed to beat their small cap yardsticks. By simply investing in a low cost index fund or index ETF, most investors would’ve been better off.

If you’re part of today’s growing generation of alienated investors, hope is not lost. 

By investing in low cost index mutual funds and low cost index ETFs you’re able to keep more of your investment performance where it belongs: In your own pocket, not Wall Street’s.

Here are a few ETFs that are excellent core holdings for the foundation of your investment portfolio:

Vanguard Total Stock Market ETF (NYSEArca: VTI)
This ETF follows the MSCI US Broad Market Index which contains 3,700 domestic stocks. While VTI has a diversified mix of large, mid, and small company stocks, it still has a heavy bias toward large cap companies. Stocks within the fund have a median market capitalization of $26.1 billion. VTI has just over $9 billion in assets and is one of the most popular ETFs of its kind.

VTI is structured as an additional share class of Vanguard’s Total Stock Market Index Fund (Nasdaq: VTSMX). Investors that own the Vanguard index mutual fund structure are allowed to convert their shares to the index ETF structure for a one-time flat fee of $50. The conversion fee may be higher for investment accounts not held at Vanguard.

In 2008, VTI declined by 36.67% compared to a 38.49% fall in the S&P 500 (AMEX: SPY). ExxonMobil (4.3%), Procter & Gamble (1.9%), and General Electric (1.8%) represent the fund’s three largest holdings in order. VTI’s annual expenses are a rock bottom 0.07%. 

iShares Barclays Aggregate Bond Fund (NYSEArca: AGG)
If you’re looking for a core bond ETF, then AGG would be it. The fund’s underlying index contains broad exposure to the investment grade bond market within the U.S. Top sector weightings are U.S. Treasuries (25.34%), FHLMC (17.59%), and FNMA (16.75%). The average maturity of all bonds within AGG is 5.40 years.

In 2008, AGG gained 5.88% compared to a 38.49% fall in the S&P 500. The fund’s underlying index was recently changed to Barclays from Lehman Brothers, but the investment strategy remains unchanged. AGG’s annual expense ratio is 0.24%.

This ETF follows the MSCI ACWI ex- USA Index. The fund contains exposure to more than 1,500 stocks in both developed and emerging market countries. Japan, Germany, France, and the United Kingdom are among CWI’s largest country weightings. CWI is one of the most diversified international stock ETFs and it has just over $261 million in assets.

In 2008, CWI declined by 44.28% compared to a 38.49% fall in the S&P 500. BP, PLC (1.67%), HSBC Holdings (1.32%), and GlaxoSmithKline (1.05%) represent the fund’s three largest holdings in order. CWI’s annual expense ratio is 0.35%.

During the last quarter of 2008, the U.S. savings rate jumped 2.9%. It’s probably news to most Americans, but being thrifty means more than just stockpiling cash. It means changing your investment attitude, habits and behavior. Shouldn’t you be embracing an investment strategy that emphasizes thrift? “Most investors know about the magic of compounding costs, but too few know about the tyranny of compounding costs,” states John Bogle, author and legendary founder of the Vanguard Group.  

Regardless of the outsized bonuses being dished out to Wall Street’s elite, help yourself by keeping your investment costs as low as possible. By making low cost index ETFs the foundation of your portfolio you can accomplish this objective and also reach your financial goals. What other investment philosophies are embraced by the successful ETF investor? Let  ETFguide’s ETF Profit Strategy Newsletter 
help you find out.

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