Investing has long been a fascination of mine. As a 12-year old, I remember learning the magic of compounding – that money could make money, and that newly earned money could earn money of its own. I was hooked. I guess that’s why Albert Einstein called compound interest the eighth wonder of the world. Until 2008, I pursued this passion through investing my own accounts. That year, I was approached with an opportunity to help launch an investment advisory firm specializing in Exchange Traded Funds (ETFs). As an entrepreneur at heart, and after experiencing success in helping to build a technology startup, I decided to make the jump to pursue my investing passion full-time.
While my entrepreneurial spirit and investing interest were certainly big drivers, there was another motivating factor that ultimately drove me into the investment advisory business: quite frankly, I thought the average investor was being ripped-off and taken advantage of by “Wall Street”. There are two reasons why I believe this happens: 1) Wall Street intentionally makes things complicated because they have the ability and financial incentives to do so, and 2) Our society does an extremely poor job properly educating people on basic personal finance and investing concepts. This combination of a highly capable and financially motivated Wall Street and an unwitting investing public creates a toxic mix. Over time, wealth shifts from Main Street to Wall Street.
As it relates to Wall Street, after nine years in the investment industry, I can tell you the sheer intellectual horsepower involved is staggering. Having come from outside the industry, I am now convinced that some of the brightest minds in the world occupy this space. Over the past several years, I’ve had a unique opportunity to speak with numerous investment managers, analysts, and CFAs who probably have forgotten more about investing than I know – and I like to think I know a lot. The depth of knowledge on Wall Street is highly impressive, which brings me to Main Street.
The situation on Main Street is nearly opposite. We do an extremely poor job as a society of educating people on even the most basic personal finance and investing concepts. Consider that only 33% of adults worldwide can pass a basic personal financial literacy quiz. Less than 17% of U.S. high school graduates are required to take a single personal finance course to graduate high school!
Source: Visual Capitalist
Think about that. We teach kids chemistry, art, geometry, music – subjects they will rarely, if ever, use unless they go into a very specific profession. However, we fail to teach kids basic personal finance skills necessary to successfully navigate everyday life – skills like budgeting, managing debt, saving for retirement, and investing. I would argue that outside of reading, writing, and basic math, personal finance skills should be next in the core curriculum line. It just doesn’t make any sense. The end result is if you don’t pursue a profession in finance and investing where you are required to learn key concepts, you are at a significant disadvantage.
This knowledge gap between Wall Street and Main Street creates a perfect environment for everyday investors to be taken advantage of – which is ultimately why I got into this business and which brings me to the purpose of this blog. My goal is simple: serve as a bridge or conduit between Wall Street and Main Street. Talk in plain-English, cut out the noise/jargon/misinformation, and reduce the knowledge gap that currently exists. While I have been attempting to serve as this conduit through my radio show/podcast for over six years now, I felt the time was right to open up another medium of communication. It is my belief that ETFs are typically the best tool for investors and with that in mind, this blog will be ETF-focused. However, I will also cover other, broader investment concepts as well and from time-to-time, I may even delve into topics outside the realm of investing. Welcome to The ETF Educator!
I will be sharing many examples throughout this blog, but if you want a clear-cut illustration of how the knowledge gap between Wall Street and Main Street manifests itself, consider the following: below is a chart depicting estimated revenue from various investment vehicles – actively managed mutual funds, hedge funds, ETFs, and index mutual funds. Note that actively managed mutual funds are projected to rake in some $70 billion dollars in fees from investors this year, not including embedded trading costs. ETFs and index mutual funds? Less than $15 billion.
So, what are you receiving for the additional $55 billion in fees you’re paying? Underperformance.
The above shows the 5-year performance track record of actively managed U.S. large cap mutual funds versus their benchmark, the S&P 500. And, by the way, the performance of large cap isn’t an aberration: