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Hitting the Personal Financial Reset Button

Hitting the Personal Financial Reset Button

"With an extended family of more than 20, I figure I spend $75 a year on cards. They are now getting photo cards I print off my computer and pictures that my son draws."

By David Kiley | Business Week

Counting Expenses, managed funds lag

Kritzman measured the long-term impact of all the expenses involved in investing in a managed mutual fund or hedge fund: transaction costs, taxes, and management and performance fees. He calculated the average return over a hypothetical 20-year period, net of all expenses, of three hypothetical investments: a stock index fund with an annualized return of 10%, a managed mutual fund with an annualized return of 13.5%, and a hedge fund with an annualized return of 19%. The volatility of the funds’ returns—plus turnover rates, transaction fees, and management and performance fees—was based on industry averages.

His finding: Net of all expenses, including taxes, the winner was the index fund. Expenses were the culprit. Indeed, Kritzman found that just 3% of managed funds in his modeling would do better than simple index funds.

With our dreams of retiring in a decade or so shot to pieces for the moment, we are on a rampage to make up for the losses—and add to our principal so as to maximize returns when the markets head north. Like charity, financial security begins at home.

And that brings us to the second part of the Kiley Family Recovery and Reinvestment Act of 2009. As a couple in our mid-40s with a son, we decided we wouldn’t waste this financial crisis: We attacked the unnecessary spending that was hurting our efforts to build wealth. The idea is simple: Replace the money that isn’t growing from stock market gains with money conserved from household budget leakage. That way, the principal will be greater when the market improves.


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