Geldpress

We reported on California’s exploding debt problem back in 2008.  Since that time, the problem has gotten magnitudes worse, not only for California, but for numerous states in the nation.

The world can use Iceland and Greece as examples of what happens when government debts get out of hand.  Both countries have introduced painful and widespread austerity measures to bring their books in order, or more accurately, to get them through the next few days or few months.

Back to the states, we witnessed California avoiding the austerity measures in recent years by issuing IOU’s to vendors instead.  California is not alone in their budget woes, as reported by the NY Times recently.

California, New York and other states are showing many of the same signs of debt overload that recently took Greece to the brink — budgets that will not balance, accounting that masks debt, the use of derivatives to plug holes, and armies of retired public workers who are counting on benefits that are proving harder and harder to pay.

Eventually, those derivatives will come back home to roost, and the government outlays and liabilities will only increase.  The fraudulent government accounting schemes will be exposed to the masses, and probably sooner than most people think.  Much of the world was surprised over the last few years with the financial crisis and the partial unraveling of the largest bubble in world history.  Are we really going to act surprised when the rest of the cards come tumbling down?

The Wall Street Journal just had an interesting piece on The Hidden Costs Of Mutual Funds.   For most long term investors that do not dollar cost average, an ETF approach may be a better alternative than the mutual funds, which come with significant management fees.  As an example, consider the Fidelity Select Transportation mutual fund, which according to the Fidelity webpage, carries an expense ratio of 1.03%.  The iShares transportation ETF, on the other hand, carries an expense ratio of less than half that, or .48%.

Back to the hidden costs article.  The WSJ notes that the mutual fund management fees are just part of the espenses:

In selecting mutual funds, most investors know to check the expense ratio, the standard measure of how costly a fund is to own. U.S.-stock funds pay an average of 1.31% of assets each year to the portfolio manager and for other operating expenses, according to Morningstar Inc.

But that’s not the real bottom line. There are other costs, not reported in the expense ratio, related to the buying and selling of securities in the portfolio, and those expenses can make a fund two or three times as costly as advertised.

“These trading and transaction costs are very real,” says Stephen Horan, head of professional education content and private wealth at CFA Institute, a nonprofit association of investment professionals. “While it’s very important to look at that expense ratio, it’s just not going to capture” all of the costs, Mr. Horan says…

A study updated last year of thousands of U.S.-stock funds put the average trading costs at 1.44% of total assets, with an average of 0.14% in the bottom quintile and 2.96% in the top.

Adding a financial advisor into the mix could eat even more into the returns of your funds.  A typical financial advisor would pass along the management and trading fees already associated with the funds.  But they would also add their own management fees to the mix, justified by their “expertise” in picking the funds on your behalf.

If all of those fees are a bit shocking, and you want to learn more about the lower cost ETF approach to investing, you should check out one of these two books:

The ETF Book is a great start for those wanting more in depth information on ETF’s and a more hands off approach to buying into the low cost ETF craze.

The ETF Book: All You Need to Know About Exchange-Traded Funds by Richard A. Ferri

If you are looking to supercharge your ETF investing experience, then consider Trading ETF’s.  It adds more in depth information on ETF trend analysis, entry and exit timing criteria, and even sections on balanced portfolios – mixing a handful of short ETF’s with long ETF’s.

Trading ETFs: Gaining an Edge with Technical Analysis by Deron Wagner

Also check out:

• Most Active Optionable ETF’s – Lower BID ASK Spreads
• Correlation Error With Leveraged ETF’s
• Portfolio Hedging With Index Puts
• Married Puts, Collars, And Hybrid Hedging
• Portfolio protection – hedging todays roller coaster market ride