Edward Jones take on index funds...

[Tailgate]

I'm dealing with an inherited account at Edward Jones in this thread ..this is my first exposure to this company. An article front and center on their website titled How Am I Doing? Putting Your Investment Performance into Perspective takes this interesting poke at index funds:

The Challenges of Comparing Performance to a Market Index
Some investors may compare the returns on their investments to a broad index, such as the S&P 500, and then question why they might be “underperforming” or “outperforming” this index at certain times. Though these indexes can provide insight into the general performance of stocks and bonds overall, they are usually not a relevant comparison to your own personal performance. Why?
1. A market index is not based on your goals or your tolerance for risk. If your goal was to produce income for retirement, you’d likely allocate a larger portion to fixed income. Therefore, it wouldn’t be appropriate to compare your returns to those of a stock index, such as the S&P 500.
2. Indexes are generally not diversified across different types of investments. This means they often can have wider swings in value. And to realize the extreme highs of an index, you must also be willing to accept the extreme lows.
3. Your performance will be affected by your contributions and withdrawals, while the published market returns aren’t. This is also why controlling our emotions is important, as we discuss toward the end of the report. There are also expenses and fees with investing, and the index performance typically does not include these costs.
Ultimately, your investment portfolio should be designed to help you reach your goals, and an index is not. Because of this, you should look at investment performance compared to the return you need, not the return of an index.

wow...

 

[neihn]

Indeed, WOW. Unfortunately there are plenty of people are going to be OK with that explanation or is that exploitation

 

[Walt34]

There are also expenses and fees with investing, and the index performance typically does not include these costs.

Oh. Gee, I thought that was a good thing!

 

[mickeyd]

There are also expenses and fees with investing, and the index performance

typically does not include these costs.

I kinda like this sentence. But index funds do have expenses. Very low expenses.

 

[frayne]

EDJ pushes managed funds and for good reason, they are after your money. I have a fairly good friend who has an EJD office, drives a nice car, nice house and takes very nice vacations. Not a bad living as most people don't want the hassle or the responsibility of managing their own investments, and EDJ is more than happy to help them and for a fee. Guess you could do worse, like Amerprise !

 

[hnzw_rui]

An article front and center on their website titled How Am I Doing? Putting Your Investment Performance into Perspective takes this interesting poke at index funds:

The Challenges of Comparing Performance to a Market Index

Some investors may compare the returns on their investments to a broad index, such as the S&P 500, and then question why they might be “underperforming” or “outperforming” this index at certain times. Though these indexes can provide insight into the general performance of stocks and bonds overall, they are usually not a relevant comparison to your own personal performance. Why?

1. A market index is not based on your goals or your tolerance for risk. If your goal was to produce income for retirement, you’d likely allocate a larger portion to fixed income. Therefore, it wouldn’t be appropriate to compare your returns to those of a stock index, such as the S&P 500.

2. Indexes are generally not diversified across different types of investments. This means they often can have wider swings in value. And to realize the extreme highs of an index, you must also be willing to accept the extreme lows.

3. Your performance will be affected by your contributions and withdrawals, while the published market returns aren’t. This is also why controlling our emotions is important, as we discuss toward the end of the report. There are also expenses and fees with investing, and the index performance typically does not include these costs.

Ultimately, your investment portfolio should be designed to help you reach your goals, and an index is not. Because of this, you should look at investment performance compared to the return you need, not the return of an index.

In fairness, statements 1-3 above are true. What they don't say for #1&2 is you can get risk management and diversification among different types of investments by investing in other index funds (bond, int'l stock, real estate, etc). As for #3, yes, the index itself doesn't include expenses but mutual fund companies do publish returns net of expenses of index funds and ETFs and those expenses are quite a bit lower than active management.

The last statement though, yeah just no. Sure, you don't compare performance (net of expenses) with just the S&P 500 but you should certainly be able to compare it with a portfolio of index funds with similar asset allocation.

 

[Rick_Head]

I wouldn't say it's absurd. Badly worded and slanted perhaps. Let's try a couple of changes so we get:

The Challenges of Comparing Performance to a Market Index
Some investors may compare the returns on their investments to a broad index, such as the S&P 500, and then question why they might be “underperforming” or “outperforming” this index at certain times. [-]Though these indexes can provide insight into the general performance of stocks and bonds overall, they are usually not a relevant comparison to your own personal performance. Why?[/-]
1. [-]A market index is not based on your goals or your tolerance for risk. If your goal was to produce income for retirement, you’d likely allocate a larger portion to fixed income. [/-] If you are not 100% invested in large-cap US equities, [-]Therefore,[/-] it wouldn’t be appropriate to compare your returns to those of [-]a stock index, such as [/-]the S&P 500.
2.[-] Indexes are generally not diversified across different types of investments. This means they often can have wider swings in value. And to realize the extreme highs of an index, you must also be willing to accept the extreme lows.[/-]
3. Your performance will be affected by your contributions and withdrawals, while the published market returns aren’t. This is why you have to be able to do basic arithmetic [-]This is also why controlling our emotions is important, as we discuss toward the end of the report. There are also expenses and fees with investing, and the index performance typically does not include these costs.[/-]

Ultimately, [-]your investment portfolio should be designed to help you reach your goals, and an index is not. Because of this,[/-] you should look at investment performance compared [-]to the return you need, not the return of an index.[/-] a benchmark derived from your asset allocation

How bad is that?

 

[Texas Proud]

In fairness, statements 1-3 above are true. What they don't say for #1&2 is you can get risk management and diversification among different types of investments by investing in other index funds (bond, int'l stock, real estate, etc). As for #3, yes, the index itself doesn't include expenses but mutual fund companies do publish returns net of expenses of index funds and ETFs and those expenses are quite a bit lower than active management.

The last statement though, yeah just no. Sure, you don't compare performance (net of expenses) with just the S&P 500 but you should certainly be able to compare it with a portfolio of index funds with similar asset allocation.

Kinda what I was going to say... they artfully just threw down the S&P 500 as the default index and did not give the option of investing your portfolio in the AA you want with OTHER index funds at low costs instead of their funds at high costs....

But, if you are not that good at investing, it is a great way to pry more fees out of people.... explaining away bad performance...

 

[Tailgate]

I wouldn't say it's absurd. Badly worded and slanted perhaps. Let's try a couple of changes so we get:

How bad is that?

excellent editing!

 

[hnzw_rui]

Kinda what I was going to say... they artfully just threw down the S&P 500 as the default index and did not give the option of investing your portfolio in the AA you want with OTHER index funds at low costs instead of their funds at high costs....

But, if you are not that good at investing, it is a great way to pry more fees out of people.... explaining away bad performance...

Yup. I'm actually quite impressed with the article. They didn't outright lie but they managed to excuse their performance and fees with some half-truths. What's the saying, always base your lies on the truth?

 

[marko]

Yup. I'm actually quite impressed with the article. They didn't outright lie but they managed to excuse their performance and fees with some half-truths. What's the saying, always base your lies on the truth?

As I was reading I got the feeling that it was more about what was NOT being said.

 

[MRG]

Exactly when I did technical sales support, we called this cr*p spin. If they were foolish enough to believe it, you did your j*b.

 

[donheff]

That is one cynical, manipulative piece of BS.

 

[mathjak107]

the only point they got correct is that comparing to an index is almost a straw-man return.

we all have different buy points , sell points , we add money at different times and amounts and we rebalance at different times.

that makes any comparison for anyone but a static investor not comparable.

after all grandma can buy a higher fee fund at at a better buying time and beat the index hands down vs the boglehead .

timing of all those things are such important pieces of the puzzle that few can actually compare to any benchmark .

it is like my benchmark now is if i called it quits and just threw everything in wellesely , did i do better or worse ? but even if i did , all those other parameters may make your results in wellesley very different from my results depending when we bought . .

 

[Davis65]

I think the statements are entirely reasonable. Their audience is less sophisticated investors - the sort who would be terrified to be invested wholy in the market. A less self-interested advisor would counsel clients on accepting risk, and show them how over time the S&P index is a better investment than the large majority of mutual funds. But we shouldn't be surprised that EDJ is in business to make money for themsrlves, not their clients. So they will make a bucket of money selling high-priced products to people who find investing to be scary and complicated. Is EDJ publicly traded? Maybe I should buy some shares....

 

[easysurfer]

Funny how to make the argument, EDJ doesn't mention that there are different type of index funds, such as total bond indexes. Of course, then that would mess with their argument about not diversified .

 

[panacea]

I'm not an advocate for Ed Jones- actually don't like them at all. But they're not really talking about index funds at all. The point of the article is that you shouldn't compare your own portfolio returns to a broad market index. For example, if your portfolio is 5% cash, 45% bonds, 10% international stocks and 40% US, then you shouldn't compare your returns to the DOW. It's like comparing apples and oranges. Last year was a good example, if you had everything in US Large caps, you would have done well and the S&P 500 Index would have been a good benchmark. But if you had a diversified portfolio, then you didn't do as well because some asset classes lagged... like international, real estate, etc. Their point about the fees was simply that a benchmark (index) like the S&P 500 doesn't actually have an expense ratio because it's not a mutual fund. So fees need to be considered.

 

[MRG]

..snip..
Is EDJ publicly traded? Maybe I should buy some shares....

Privite company.

 

[NW-Bound]

What EJ says is not wrong, just not the whole truth.

But, but, but, if you are going to hold it against them, hell, how would you think about any salesman, businessman, and heaven forbid, politicians?

 

[Bestwifeever]

Brilliant on EJ's part! DH has $50k with them also as an inheritance like the OP. He kept it there (his money, his choice) but moved the $$ into a couple of funds we researched on our own. When we asked the agent about the EJ fees in general she immediately went into attack mode (nicely though ) on Vanguard instead without answering the question.

A couple of times a year DH is also invited to come in and talk with the agent about refining his strategy. I guess EJ can point out that Vanguard doesn't do that either.

 

[growing_older]

That is one cynical, manipulative piece of BS.

Do you need any more evidence that they cannot be trusted and you should move your accounts away from them as soon as possible.

 

[TeeRuh]

My experience with EJ (like OP an inherited account) is that they pretty much exclusively sell American Funds. Definitely not as bad as most other investment companies. The agent in the office (they are pretty independently ran) actually did pretty well for my parents who had no clue regarding investments.

t.r.

 

[Texas Proud]

I'm not an advocate for Ed Jones- actually don't like them at all. But they're not really talking about index funds at all. The point of the article is that you shouldn't compare your own portfolio returns to a broad market index. For example, if your portfolio is 5% cash, 45% bonds, 10% international stocks and 40% US, then you shouldn't compare your returns to the DOW. It's like comparing apples and oranges. Last year was a good example, if you had everything in US Large caps, you would have done well and the S&P 500 Index would have been a good benchmark. But if you had a diversified portfolio, then you didn't do as well because some asset classes lagged... like international, real estate, etc. Their point about the fees was simply that a benchmark (index) like the S&P 500 doesn't actually have an expense ratio because it's not a mutual fund. So fees need to be considered.

I do not read that the comparison is between the whole portfolio and the S&P.... I think it is between the stock fund they got you into vs the S&P.... and if it does bad, do not get all excited....


I also think that the fee part is also a strawman.... a good S&P fund is very close to the S&P... the fees are not that bad... now, if they put you into a fund with 1% or even 2% fee.... it will not be close... fees do matter... and if you actually compound the fees over a couple of decades it make a HUGE difference....

 

[eta2020]

2. Indexes are generally not diversified across different types of investments. This means they often can have wider swings in value. And to realize the extreme highs of an index, you must also be willing to accept the extreme lows.

wow...

They are right about that. Most people do not have stomach/plan for it....that is why fund investor returns are almost always lower then fund returns.

 

[Davis65]

A couple of times a year DH is also invited to come in and talk with the agent about refining his strategy. I guess EJ can point out that Vanguard doesn't do that either.

And that the nub of it. If you want advice, as many people do, you have to pay for it. You can do your own plumbing, but I hire a plumber because I don't have those skills. I am glad that when it comes to money, I can buy wholesale instead of retail, but I get that a lot of people can't. I think what makes the financial industry more difficult to take is that the fees are often not transparent.