ETF Adviser: Open letter to Facebook and Instagram millionaires

By Steve Beck

PALO ALTO, Calif. (MarketWatch) — The prospect of newly minted Facebook Inc. and Instagram millionaires has the wealth management industry frothing. Here is a word of advice to these nouveau riche:

Dear Young Silicon Valley Millionaire:

Congratulations for your part of a historic and remarkable accomplishment, the creation of technology that has forever changed the world and with it, your life.

At this early juncture, the implications of this shift are hard to grasp, and yet on a personal level, the effects of your new wealth will reverberate into even the most remote corners of your life. That goes double for you lucky employees at Facebook /quotes/zigman/8607696/quotes/nls/fb FB 0.00%  and its newly acquired Instagram. Read more: Facebook should have gone public already.

Can Facebook earnings grow fast enough in coming years to justify the $40 per share price that it's currently trading at in the secondary market? Mark Hulbert joins Markets Hub to discuss. Photo: AFP/Getty Images.

I speak to this coming change with authority, not simply as a wealth manager, but as a successful entrepreneur and founding investor in Chinese Internet search giant Baidu.com Inc. /quotes/zigman/97715/quotes/nls/bidu BIDU +0.90% . I too had to make the journey you now face and offer this simple guidance: Listen to Google Inc. /quotes/zigman/93888/quotes/nls/goog GOOG -0.16%  .

I know that Google is your great competitor, but in 2004 Google did something worthy of your attention. Early that year before Google’s IPO, Senior Vice President Jonathan Rosenberg realized that he was about to spawn thousands of impetuous young millionaires, and feared that they might be preyed upon by the wealth management industry.

After consulting with Google founders Sergey Brin and Larry Page, and then-CEO Eric Schmidt, Rosenberg planned a series of in-house investment seminars to educate their soon-to-be wealthy colleagues. In the spirit of the “don’t be evil” Google ethos, management decided to invest in the preparation of their employees for the coming onslaught of Wall Street pros hawking their wares.

Google felt that their staff deserved the best the money management industry had to offer. In turn they brought in Nobel Laureate and Stanford University sage William Sharpe, Princeton economics professor and former dean of the Yale School of Management’s Burton Malkiel, and Vanguard Group founder and white-hat “Saint Jack”, a.k.a. John Bogle.

What did these world-renowned financial minds have to say? A simple truth — active money management isn’t worth your money. Instead, invest in low-cost, diversified index funds and get back to the business of life and to building a world-class company. Over time and after fees and taxes, you will end up with more money and a better life.

Good advice. Standard & Poor’s measures the performance of active managers against their indexed counterparts and has reported that over a five-year period, nine out of 10 actively managed equity funds underperformed their corresponding passive indexes. Add to this management fees, taxes from trading and marketing expenses, and the result is that over a 30-year period an investor has seen as much as 40% of their portfolio growth evaporate. Paying for nothing is one thing, but paying for this abuse is what Google might call evil.

I know the truth — that passive investing after fees and taxes beats active money management — is hard to accept. You’re anxious to leverage your intelligence and abilities to outpace the averages. But take the advice freely offered from Bill, Burt and John. Do yourself a favor and read their books. You know how to code. These guys know how to invest.

/conga/story/misc/market-riders.html 195092 And don’t expect the folks from Goldman Sachs, Morgan Stanley, or JPMorgan Chase to agree. As John Bogle once said, “It is amazing how difficult it is for a man to understand something when he is paid a small fortune to not understand it.”

If you want to protect your wealth, you’re going to have to search out this information yourself, listen to independent minds, and be tutored by academic objectivity.

It took courage to put your career behind a contrarian concept. Don’t stop now. Have the courage to take another uncommon path. Learn the facts. Reject the active money management pitch. Diversify across low-cost index funds and exchange-traded funds and stay the course. Do that, and you’ll have more than an IPO to celebrate.

Best, Steve

Steve Beck is the co-founder, with Mitch Tuchman, of MarketRiders, an online investment service for do-it-yourself investors to build and manage low-cost, globally diversified ETF portfolios. Visit the site at www.marketriders.com.

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