How to help kill capitalism & prosperity

[UltraShy]

Americans on the economic left could take an idea from the dim bulbs in Brazil:

Effective at 8 a.m. October 30, 2009, the purchase fee for Vanguard Emerging Markets Stock Index Fund increased from 0.25% to 0.50%. The higher fee will offset an investment tax adopted by Brazil, where the fund has substantial holdings.

We're taking this step to protect the interests of current shareholders. The Brazilian tax applies to new investments, so its cost will be covered by new investments in the fund through the increased purchase fee. The purchase fee goes directly to help cover the fund's costs, which would otherwise reduce the fund's returns.

Am I the only one to think that slapping on an investment tax is a very bad economic idea? What next? Perhaps chase away foreign investors with pitchforks & shotguns?

[UltraShy]

http://online.wsj.com/article/BT-CO-20091020-717565.html

SAO PAULO (Dow Jones)--By choosing to levy a toll on foreign investments in local stocks, the Brazilian government risks undoing the work done to establish its capital market as a premier investment destination.

While the imposition of a 2% tax on investment coming into Brazil probably won't revert the recent upward march of Brazilian stocks, it raised some questions about how market-friendly Brazil really is.
"Brazil needs foreign investment to grow. The government is risking destroying a virtuous circle to remedy a short-term problem," said Edemir Pinto, chief executive at ...

Not a single response other than my own here. I think this might help explain why I don't bother to post about issues like investment finance, a topic that appears to interest nobody.

[WineKitty]

Well I just now saw this post. Been working.

I must be one of those dim bulbs you speak of since I have to ask you what the 0.50% fee is based on? O.50% of what, the money you invest?

[coldmorning]

They're doing this because their currency is getting too hot. A lot of global fears have made investors switch to Brazil and that's making the Real appreciate rapidly. I don't think an investment tax is the right way to address it but they're entitled to try it.

ADRs aren't affected by the tax anyway. So most American/ foreign investors shouldn't care. I wouldn't be surprised if the larger Brazilian multi-national companies had a hand in 'influencing' this decision because it actually benefits them (at the expense of smaller and mid-size companies).

[UltraShy]

Originally Posted by WineKitty

Well I just now saw this post. Been working.

I must be one of those dim bulbs you speak of since I have to ask you what the 0.50% fee is based on? O.50% of what, the money you invest?

I originally heard about this issue from Vanguard (the 2nd largest mutual fund company in the nation). I've been an investor in their Emerging Markets Index Fund since 1995. It's currently one of the largest, if not the largest, Emerging Markets funds in existence with assets of $14B. I don't know if Vanguard sent that e-mail notice to all clients or just those who own that particular fund.

Vanguard charges a fee to buy shares of this fund to offset costs associated with investing new money, costs that would include items such as this new 2% tax imposed by Brazil on foreign investors. If Vanguard did not charge a purchase fee -- which is paid into the fund -- new investors would effectively be subsidized by existing investors (like me). It's the most fair way to allocate transaction costs, allocating those costs directly to the folks who make the transaction.

So, if somebody were to invest $10,000 into Vanguard Emerging Markets Index Fund they'd get $9950 of shares and the other 0.5% ($50) would simply go into the fund to compensate all existing investors for the costs associated with the fund having to buy more stocks. Most mutual fund investors are totally ignorant of the "hidden" costs of investing. A few investors actually manage to open their prospectus and see the expense ratio (which includes the management fee & administrative costs and such). But few realize that other costs exist, such as commissions, bid/ask spreads, market impact costs, and, in this case, a foreign government that wants to tax investments.

And you're not the dim bulb. I was referring to Brazil's government as dim bulbs. Nations should welcome investment that lays the foundation for economic progress, not put up barriers.

[UltraShy]

Originally Posted by coldmorning

ADRs aren't affected by the tax anyway. So most American/ foreign investors shouldn't care. I wouldn't be surprised if the larger Brazilian multi-national companies had a hand in 'influencing' this decision because it actually benefits them (at the expense of smaller and mid-size companies).

Now you're going to have to explain to everyone what an ADR is. It's an American Depository Receipt, though I suspect knowing what the acronym means doesn't help them understand it any more.

Interesting theory. I wasn't aware that ADRs were not effected and I'm sure it would be only the largest of companies in Brazil that would have ADRs trading in the US.

And American investors should care since I suspect most who own stock in Brazil do so by way of mutual funds.

I certainly would not recommend buying individual stocks, which is what ADRs are. That advice would apply to stocks regardless of if they are from your home nation or not.

[WineKitty]

Originally Posted by UltraShy

I originally heard about this issue from Vanguard (the 2nd largest mutual fund company in the nation). I've been an investor in their Emerging Markets Index Fund since 1995. It's currently one of the largest, if not the largest, Emerging Markets funds in existence with assets of $14B. I don't know if Vanguard sent that e-mail notice to all clients or just those who own that particular fund.

Vanguard charges a fee to buy shares of this fund to offset costs associated with investing new money, costs that would include items such as this new 2% tax imposed by Brazil on foreign investors. If Vanguard did not charge a purchase fee -- which is paid into the fund -- new investors would effectively be subsidized by existing investors (like me). It's the most fair way to allocate transaction costs, allocating those costs directly to the folks who make the transaction.

So, if somebody were to invest $10,000 into Vanguard Emerging Markets Index Fund they'd get $9950 of shares and the other 0.5% ($50) would simply go into the fund to compensate all existing investors for the costs associated with the fund having to buy more stocks. Most mutual fund investors are totally ignorant of the "hidden" costs of investing. A few investors actually manage to open their prospectus and see the expense ratio (which includes the management fee & administrative costs and such). But few realize that other costs exist, such as commissions, bid/ask spreads, market impact costs, and, in this case, a foreign government that wants to tax investments.

And you're not the dim bulb. I was referring to Brazil's government as dim bulbs. Nations should welcome investment that lays the foundation for economic progress, not put up barriers.

Cool...thanks Karl. Since I am invested I should probably know more about it, but I have to admit I kind of leave it to the hubby and financial adviser.

You are right that the last thing investors need/want are more fees. More prudent investors would be put off by this.

[Amocholes]

Originally Posted by UltraShy

http://online.wsj.com/article/BT-CO-20091020-717565.html



Not a single response other than my own here. I think this might help explain why I don't bother to post about issues like investment finance, a topic that appears to interest nobody.

You seem t be forgetting something here Karl. The majority of the membership is in their 20s and either in college or unemployed. No income to invest.

[kikachuck]

well, i suppose one COULD look at it as a simple supply and demand issue. Brazil's economy has been doing very, very well and maybe they think people invest in Brazil for reasons other than the fees and will continue to do so.

I don't think that way though. See, a lot of governments do this, raise taxes or fees in someway to increase revenue but funny how they always seem to forget that the demand curve is downward sloping.

[UltraShy]

Originally Posted by Amocholes

You seem t be forgetting something here Karl. The majority of the membership is in their 20s and either in college or unemployed. No income to invest.

I know that's one reason few show any interest in the subject around here. But, if I were to complain about high taxes some of these same folks that, as you point out, have no income would be sure to throw in their two cents (which is two cents more than they pay in income taxes).

And it's not just an issue of age. There is no shortage of people in their 30s, 40s, 50s, and beyond who are largely clueless about investing. Their retirement literally depends on it, yet much of the public couldn't care less and that is a serious problem for both those individuals who won't be able to afford retirement and the rest of society that will be forced to bail them out.

I once had a Mensa member in her late 40s ask me about investing and she didn't know what a variable annuity was despite the fact that she owned one in her 403b! She also couldn't figure out why expense ratios mattered, despite being just about the most important factor their is. Her IQ ranked her in the top 1% of the population, so she certainly wasn't intellectually lacking. I've found this type of financial ignorance is the norm, not some isolated anomaly and it doesn't bode well for our nation's future.

[UltraShy]

Originally Posted by WineKitty

Since I am invested I should probably know more about it, but I have to admit I kind of leave it to the hubby and financial adviser.

That's a very common way of doing things and also a bad way. As I recall, you're married to an older man. Isn't he 12 years older than you? Given the shorter life expectancy of men and his additional maturity, odds are very high that you will eventually end up a widow and have to deal with these matters on your own.

As for financial advisers, there are some good ones, but there are also lots of bad ones who take advantage of ignorance. It's easy to do, since few clients know enough to realize if they're getting a raw deal.

The fact is, investing isn't that hard. The basics of good investing could be written on an index card and be understood by a 5th grader. Your adviser would prefer you not know that, since you wouldn't hire him if you did.

[Classified]

So if the fund managers wanted to raise their fee to cover higher salaries and bonuses, that would be ok? Companies tack on fees and few people would switch, especially if all the other big players got together and raised the fees because they knew they could get away with it.

I don't know what the government plans to do with the money. But, if the government wants to slow down the rate of investment, it's probably a good thing. I think it would have helped doing something similar with the Dot Com companies in the 90s and the housing/mortgage industries a few years ago. The problems come when you have too many investors looking for a safe and easy buck, but not enough buyers of the actual product to continue the growth to back up the high price point. Investors move faster than reality, and pay too much attention to the numbers instead of what is actually going on.

So what I take from this is, there is a lot of money sitting around looking for good places to invest that won't lose money. Brazil and other emerging markets have a lot of opportunity for growth. Investors are trading among themselves a desirable item and demand is high. But in the real world, Brazil needs capital to actually grow. Brazil needs to create jobs in the basic infrastructure of their country to actually increase the standard of living of consumers in their country. They need to raise money to pay for these projects. They need to show results so the emerging markets actually outperform current expectations. A tax on foreign investors instead of their own citizens makes plenty of sense to me.

[UltraShy]

Originally Posted by Classified

So if the fund managers wanted to raise their fee to cover higher salaries and bonuses, that would be ok?

NO!!!!

The purchase fee I refer to in my original post doesn't go into the pocket of any executive. It goes into the fund, in other words it goes to existing shareholders such as myself to offset costs incurred when new money is invested by somebody else.

I gather you're not familiar with Vanguard and their position in the mutual fund industry. Vanguard has consistently brought in massive amounts of net new assets year after year, bringing their total assets under management to over $1 trillion. They are second in size only to Fidelity. A major factor that attracts investors to Vanguard is that they have the lowest overall costs in the entire fund industry. Vanguard was founded in 1976 by John Bogle, who retired from his position as CEO & Chairman at age 70 and after having a heart transplant to fix heat problems that had plagued him for decades. Bogle written a number of books and given lots of speeches. Everything he's ever said could pretty much be summed up as "costs matter." The two CEOs that have followed him have stuck with his simple, yet brilliant, concept of costs matter. If you've ever seen an ad for Vanguard funds, the ad will have a very simple message: costs matter & we at Vanguard have the lowest.

Vanguard stock index funds are managed in house by Gus Sauter and his team. Vanguard, for the most part, hires outside money managers to run their actively managed funds and they negotiate very low fees (which is fair given the massive amount of assets Vanguard can bring to managers they employ).

Companies tack on fees and few people would switch, especially if all the other big players got together and raised the fees because they knew they could get away with it.

Quite a few firms have been forced to reduce fees to compete with Vanguard's low costs. The lowest cost Vanguard fund I own costs 0.09% (that's $90 per year on $100,000). Vanguard offers even lower costs for huge institutional investors. One of their funds gets down to 0.025% expenses ($25 per year on every $100,000), but you'd need at least $500M to get into that.

[pyramidsong]

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[WineKitty]

Originally Posted by UltraShy

That's a very common way of doing things and also a bad way. As I recall, you're married to an older man. Isn't he 12 years older than you? Given the shorter life expectancy of men and his additional maturity, odds are very high that you will eventually end up a widow and have to deal with these matters on your own.

I refuse to life my life based on odds or what ifs. The fact is I could be married to someone 15 years younger than me and they could die. I might leave most of the finer details to my husband but a clueless 50s housewife I am not.

As for financial advisers, there are some good ones, but there are also lots of bad ones who take advantage of ignorance. It's easy to do, since few clients know enough to realize if they're getting a raw deal.

.

I dont have a bad financial adviser.

The fact is, investing isn't that hard. The basics of good investing could be written on an index card and be understood by a 5th grader. Your adviser would prefer you not know that, since you wouldn't hire him if you did.

Guess I am not as smart as a 5th grader.

[UltraShy]

Originally Posted by pyramidsong

Money and guns. The cornerstones of a meaningful life.

Investing is only important if your retirement plan is something other than planning to drop dead on the job or otherwise die before retirement, so, yes, it is a cornerstone of life.

I can see how some might get upset by my views on firearm issues, but is investing really that offensive? I had no idea having a degree in finance and a passion for investing was a bad thing.

[UltraShy]

Originally Posted by WineKitty

I refuse to life my life based on odds or what ifs. The fact is I could be married to someone 15 years younger than me and they could die. I might leave most of the finer details to my husband but a clueless 50s housewife I am not.

.

I dont have a bad financial adviser.




Guess I am not as smart as a 5th grader.

My comments were not meant as an attack on you, Jacki, and I'm sorry if they sounded as such.

I only brought up the issue of widows, because it's such a common story. One endlessly hears about someone who ends up with a pile of money and they don't know what to do because their late spouse was the one who always took care of that. I don't in any way mean to be sexist, but it's typically the husband that dies first and it's typically the husband who took care of investing.

My point was simply that everyone should know the basics of investing. After all, one can't know if they have a good or bad financial adviser if they don't know enough to know what would qualify as good or bad. I can think of one adviser who regularly posts on my favorite investment forum and I'd deem him excellent as he uses mutual funds & ETFs mainly from Vanguard & DFA to construct portfolios that are very broadly diversified and very low in cost. His fees are also the lowest I've ever seen (though he has a $500K minimum, putting his firm out of reach to many, though one can read a couple books he's written and do it them self, except for use of DFA funds that are only available through financial advisers).

A lot of other so call advisers are just stock brokers who could just as well be selling used cars. They give advice to buy this or that simply because they make money selling it to you and they quite clearly put their interests above the interest of their clients. My late father once had one of these scumbags, though at the tender age of 62 he didn't realize he was getting screwed by this broker with obscene costs.

[pyramidsong]

Ne'er mind.

[WineKitty]

No, I know you better than to think you are attacking me Karl, dont worry about that.

[UltraShy]

Originally Posted by WineKitty

No, I know you better than to think you are attacking me Karl, dont worry about that.

Your comment about you not being a 1950s-style housewife who's clueless about money made me think about something earlier today regarding women & investing.

There have been studies that show women, on average, tend to be better investors than men. Some men tend to suffer from a condition I'll call bravado. They think they know it all and they trade like mad in brokerage accounts based upon all they think they know. They're not any smarter than the market and they don't really know anything of value, so due to trading costs they end up with lower returns than female brokerage clients who tend to trade less and thus have less trading costs eating into their returns.

Doctors (a largely male profession) are notoriously bad investors. For some reason being able to make the difference between life & death gives some a god complex. Surely if they can save lives they must be special and surely they can beat the market, or so they think. They then bring a severely bloated ego to investing and find out the market can kick their ***, despite all their education.

Most investors would be shocked by how those who are leading academics in the area of investment finance & economics invest their own money. Mostly they buy broadly diversified index funds. They get to the very top of the financial ivory tower with a PhD and decades of study only to discover that something as simply as that -- something a 5th grader could understand -- is likely the best plan.