Wow…that’s all I can really say…wow..WOW!!

I have been blessed with an interview with my friend Phil Town author of Payback Time – BIG. I had the chance to ask him a few questions and get some seriously real answers…I have to Congratulate him on getting to the #1 Spot on the New York Best Seller’s list! WOOHOOO! GO PHIL!

If you want to get some background on Phil Town before you read on go here. His story is simply AMAZING.

DISCLAIMER: I am not a CFP, I am NOT a Financial Professional. I am a crusader against debt, and work as an Independent Agent (rep) for a company that distributes a web based service that helps people get out of debt in as little as 1/3 to 1/2 the time without refinancing or changing their income. www.save4home.com In short what you are about to read, may upset you because you’re about to get a dose of TRUTH!

The good news is, you get to see some solution too…I can’t print the whole interview it would be too long, and I want to save some of the “juice” for later when I get to interview him live….by the way, Phil is starting a TV show shortly and I will let you all know what it’s called and where to watch it when that time comes, but what I can tell you is, it will be AWESOME!

Here’s some of the highlights that are important right now:

WHAT ARE SOME OF THE COMMON MYTHS PEOPLE BELIEVE ABOUT MUTUAL FUND INVESTING THAT AREN’T JUST SO?

That a diversified portfolio of mutual funds will go up in the long run at approximately 8% a year.  Truth is shocking. The long run can be longer than you imagine.  1905-1942 – about 0% return in a diversified portfolio.  37 years.  1965-1983 –  about 0% return in a diversified portfolio.  18 years.  2000-2010 - about 0% return in a diversified portfolio with a long way to go to go up.

WHAT DO YOU MEAN WHEN YOU SAY THE FINANCIAL INDUSTRY HAS CONNED MANY MILLIONS OF PEOPLE?

The guys who ran Harvard’s endowment called the mutual fund industry a giant scam.  Warren Buffett has said you get nothing for your money from a fund manager.  Here’s why: The industry charged $100 Billion last year for ‘active management‘, meaning fund managers were getting paid approximately $100 billion to beat the market.  I remember reading a Fortune Magazine article many years back that reported that since 1985 only 4% of all fund managers beat the market.  1 out of 25.  So for almost everyone, investing in a low cost index would have saved them a huge amount of money.   In fact, over a 40-65 year investment period, these worthless fees have removed about 50% of people’s retirement money.

PLEASE EXPLAIN YOUR OVERALL TAKE ON THE CURRENT FINANCIAL MARKET

I said get out in August 2007 when the Dow was at 13,100.  I said get in on March 10, 2009 when the Dow was at 6700.  I got lucky with both calls on the timing, especially the last one.  I didn’t know the market wasn’t going to 2500 but I knew great companies were on sale.  If we could buy more of the same company in six months at an even better price, that works for me just fine.  Today we’re hanging in the 10,000 range.  Unless the economy starts moving suddenly, there is no real up that isn’t speculative and no one seems to want to speculate.  So with no up to go, putting money into the broad market is a big risk.  On the other hand, there are individual wonderful companies that are going on sale every day.  What I’d do it I were you is I’d read Payback Time and learn a simple way to gauge whether a business is on sale.  Let’s say, for example, you would be happy to buy a business if you could get your money back from earnings in 6 or 7 years.  After that, you’ve got your money out and you’re playing with house money.  Well, you could have bought McDonald’s like that in 2009.  Or Whole Foods.  Or Chipotle Grill.  Or many other companies that went on sale big time for no real reason other than the market crashed.  They were still growing, still making good money. That is the only way I know of to do well in this kind of market.  Yeah it takes a bit of work.  But it’s a lot easier than the financial services industry wants you to think it is.  And really, what’s your choice?  Mutual funds could go nowhere for 15 years.  If they raise interest rates, bonds might actually crash and real estate ain’t going anywhere if mortgage rates rise.  The only safe place to be is ownership of a great business that you bought at a great price.

What follows is  the math and sources to support the statement: “In fact, over a 40-65 year investment period, these worthless fees have removed about 50% of people’s retirement money” ….the “tyranny of compounding costs”:

•      When mutual funds charge a 1% fee on a  8% average return every year = 1/8 = they are charging you 12.5% of your return

•      When mutual funds charge a 2% fee on a  8% average return every year = 2/8 = they are charging you 25% of your return

•      When mutual funds charge a 2.5% fee on a  10% average return every year = 2.5/10 = they are charging you 25% of your return

•      When mutual funds charge a 2.5% fee on a  7% average return every year = 2.5/7 = they are charging you 30% of your return

•      With a 2 or 2.5% fee, the mutual fund is receiving 25 percent of your returns every year that your money remains with that fund.

•      The result is that you have less and less money after fees to compound every year, and after a 65 year period of time, you realize that somewhere between 50 and 70 percent of your money is GONE

Bottom line: The financial system puts up none of the capital, takes none of the risk, and still captures 50 to 70 percent of the return.

I want to thank Phil Town for taking the time to chat with me and look forward to our “Live Interview”! Phil has a site that you can stop by and sign up for classes on how to use his strategies on “Stockpiling”. Stop in sign up for an account and get your copy of “Payback Time” today!

Resources for the figures above:

Brooks Hamilton of Brooks Hamilton & Partners, (which designs 401(k) plans for corporate clients such as Neiman Marcus and Frito-Lay provided the following table that walks people though the math.

Here is the link:

http://www.pbs.org/wgbh/pages/frontline/retirement/etc/tyranny.html

This table breaks down John Bogle’s, (the founder of Vanguard, one of the world’s largest mutual fund organizations, and the author of The Battle for the Soul of Capitalism (2005)), example of the impact of compounding — and compounding costs — over the long term.

On the left it shows the growth on $1,000 invested by an individual at age 20 until his/her death at age 85, assuming 8 percent annual growth. On the right, it shows what happens to that same $1,000 over the same period assuming a 2.5 percent annual cost, such as a mutual fund management fee. Over the 65 years, these annual fees eat up a staggering 79 percent of what the investor would have earned with no management costs.

Note: they use 2.5%, Phil uses 2% fee

Here is a link to “The Arithmetic of Mutual Fund Investing is More Important Than Ever”

http://www.vanguard.com/bogle_site/sp20050524.htm

Here is a link to “The Wall Street Rip Off: Fees and Consequences”

http://www.multinationalmonitor.org/mm2009/052009/interview-bogle.html

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