Naked Truth Investing: A $500 billion rip-off you must avoid!

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This is the part of a new series of columns called "The Naked Truth," by retirement expert Dan Solin. Please bring him your questions, in the comments box, and he will answer as many as he can.

What is the biggest threat to your retirement savings?

You may be surprised to learn that it is the securities industry. Specifically, your "investment professional" to whom millions of investors entrust their retirement nest eggs.

John Bogle, the founder of Vanguard, estimates that over $500 billion year is spent in management fees, operating expenses, advisory fees, investment banking fees and marketing and advertising fees. These huge fees diminish the returns earned by investors.

Let's put these fees in perspective. Bogle notes that the 2006 operating earnings of the S&P 500 companies aggregated $787 billion.

No wonder the financial services industry is one of the world's most profitable.

What are investors getting for this enormous expenditure of money? Not much.

Studies by Dalbar, Inc., a leading research firm, demonstrated that, for a 16-year period ending in 2000, the average equity-fund investor realized an annualized return of only 5.32%, compared to 16.29% for the S&P 500 Index.

After reviewing hundreds of portfolios of modest investors and extremely wealthy ones, I have come to this startling conclusion:

Investors as a group would be better off not using any broker or adviser who tells them that they can "beat the markets" or "add alpha." Instead, they should focus on their asset allocation and invest in a globally diversified portfolio of low cost index funds for the stock and bond portions of their portfolio.

Dan Solin is the author of The Smartest Investment Book You'll Ever Read (Perigee Books 2006) and The Smartest 401(k) Book You'll Ever Read (Perigee Books, June 24, 2008). Visit his website at Smartestinvestmentbook.com.
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