Meb Faber: Fees & Taxes Trump Allocation

March 10, 2015

Meb Faber is a widely respected voice in the investment world thanks to his research-driven quantitative perspective on what works for investors. He is also the brains behind a growing roster of Cambria ETFs.


His latest book, “Global Asset Allocation: A Survey Of The World’s Top Investment Strategies” looks at a dozen or so asset allocation portfolios from some of the most-well-known investors out there. His findings, which he shared with, are surprising. Your latest book looks at asset allocation portfolios. What about this theme sent you looking for answers?


Meb Faber: We've been writing about allocation strategies and market returns for a long time, mostly from the lens of the best investors in the world. Our first book was on some of the endowment allocations, and a lot of my work focuses on the active and tactical side of the equation.


But going back to the first book, we said, “Look, if you're going to do a buy-and-hold allocation, you should be paying as little as possible for this, because by definition you're not really doing anything. You're buying a portfolio and holding it, and maybe rebalancing once every year, two years, or whenever.”


What I failed to grasp is that the vast majority of investors still want buy-and-hold allocations, but the allocations are often suboptimal and, in general, they pay way too much for it.


So, in the book, we wanted to show that investors spend probably 90 percent of their time obsessing over the allocation—how much to put in stocks; should they own gold; how much in XYZ—as do professionals.


But—and this was actually surprising to me—all the most famous guru-style strategies had vastly different exposures: some 25 percent in gold, some zero and the end result ended up being very similar, with the exception of permanent portfolios. The spread between these 15-odd portfolios we looked at was less than 1 percent a year.


The point we made in the book is that while most people spend 90 percent of the time thinking about allocation, what they should be spending 90 percent of the time on—if they're doing buy-and-hold—is minimizing fees and minimizing taxes. Would ETFs change that equation if the best-performing portfolio were allocated primarily to low-cost ETFs?


Faber: If you went back to 1972, and picked the best possible allocation in this book, but you implemented it through your average mutual fund—which is 1.25 percent, and/or the average advisor who didn't invest in the average mutual fund—this is what would happen: You would take what would have been the best-performing buy-and-hold strategy and make it worse than the actual worst-performing strategy in the book. To me, that was a very telling example of how much fees matter in this case.


The average ETF cost is down around 0.6 percent, so it's half the cost of the average mutual fund. That's a little bit unfair, because some index mutual funds, like the Vanguard runs, will be lower cost, of course, and some active ETFs will be more expensive. But yes, the average ETF helps. And if you can get the really cheap ETFs, that helps even more.


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