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A concept called profitability (Vs. Performance.)

Question: My wife and I met with a financial planner (FP) today and I learned a very interesting concept: there is a huge difference between performance vs. profitability:

Performance looks at a lump sum invested in a fund and tracks the return of it in a certain amount of time (say 5 years). The annual average return could be 10%, let’s say.

The FP then showed us a volatile market. You use a dollar cost averaging method of buying shares (ie put a set amount of $ per month into buying shares). Now, because of voatility’s ups and downs, a fund that doesn’t even have a positive performance ends up having a better return than the fund with 10% annual return. The example he used had a fund performance of -16% year to date performance, but because the fund had dropped so low during the five years (and the climbed back up, though still down 16%), many shares were able to be bought for such a bargain that the total money made in the volatile fund exceeded the money made on the steady fund. ie, this volatile fund showed more profitability despite poor “performance”

I hope I am explainining this clearly. (let me know if I am not and I will try to clarify more).

So here is what I want to do: I want to start a Vanguard Index 500 fund, which is a no-load 0.23% annual service fee fund. I want to put $1000/month into it for 30 years. Here are some of my reasons (please comment and educate me if I am off base at any time): 1. the s+p 500 is a safe place to be with my money. 2. The s+p 500 has decent volatility with almost assured bulls and bears. 3. No matter what, the bear trend back up, eventually–a nuclear bomb couldn’t keep it from coming back up.

Is my understanding and assessment correct? What do you think of this approach? I am not fond of researching the stock market (no time/interest). Thus Vanguard is a no-brainer kind of fund, yet it is a very sound fund because it picks the best 500 companies. Traditionally, the s+p 500 beats out 50% of the mutual funds in terms of performance (Where as profitability is a much harder thing to track comparing between the s+p500 vs. the average mutual fund).

Please educate me and give me more pointers. [I hope this message gets passed the moderators. If I need to refine my question, please let me know]

Answer: To clarify, I said many the book cited many MDs as being clueless about finances. FWIW, you do not appear to be.

You knew enough to ask about First Command’s contract. You had already calculated some basic numbers, making one error that turns out to be substantial, but you wisely and fearlessly posted your numbers, so someone caught the error right away. The calculations you did are what I think a lot of people with financial experience would do.

It seems to me you’re on your way to some real competence in personal finances. Plus, worthless attacks aside, you’re getting the best that internet public forums have to offer. From the responses to your post I’ve read, First Command is out to steal your money (more or less). But car salespeople are no different. Same with insurance companies. Lawyers. Some doctors. Some engineers. Etc. The per capita shark rate is always rising in the U.S., it seems. Yes, I hear you. I had a similar experience with an annuity salesperson recently. Nice guy, but I researched the matter further here and elsewhere and decided no way was it for me in my current situation.

I don’t like how the FC financial planner tried to make some sort of distinction between “profitability” and “performance.” I could be wrong, but it sounds like he was trying to dazzle you with not terribly impressive vocabulary.

You probably now know this well, but the point to investing for people with ordinary jobs who want a comfortable retirment is to look at the markets long-term. The hell with five-year (or whatever) returns of any mutual fund. The hell with one company’s stock’s skyrocketing over a few months. The hell with a year of losses on the Dow Jones. The question to ask is: How did the Dow Jones (or Nasdaq) do on average over 20 years? Historically, what asset allocation (e.g. 80% blue chip stock, 20% high grade bonds) has tended to be best over 20+ years? To start getting a handle on the basics of mutual funds, try http://finance.yahoo.com/?u . Type in the letters VFINX . Go about midway down the screen to “Fund Basics.” Look at the number for “total expense ratio.” This is the first parameter to check for most mutual funds. Next is any loads. Notice that Vanguard’s expense ratio is 0.18%. This is famously low. (The lowest of any mutual fund?) It sounds like you’re aware of this. Now you have a place where you can quickly compare. I am a long-time Fidelity client and have some of its FSMKX. It’s the equivalent to Vanguard’s VFINX. Note the expense ratio is 0.19%. Why do I pay the extra whopping 0.01%? I love the excellence of Fidelity’s excellent web site and doing online transactions with it. Type in most any other mutual fund, though, and you’ll see expense ratios that overall average IIRC 1.5%. I personally won’t buy any mutual fund with an expense ratio over 1%, on principle. Though stubbornness can be a vice in investing, too.

3. If you have huge student loans, I hope your financial planning takes them into account.

Good luck.

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