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Anyone with a 401k retirement plan has probably been painfully aware of the gyrations in the stock market in recent years. The market has come back up lately. But with the economy still in low gear, many analysts aren't too bullish in the short term.
Also, treasuries and CDs are offering small returns. So what is the average American trying to save for retirement to do? NPR's Chris Arnold recently attended an economics retreat in Maine and asked that very question.
CHRIS ARNOLD, BYLINE: Every year in August, some of the nation's top economists, money managers, and some Federal Reserve officials, they gather in the woods up in Maine near the Canadian border. They fly fish, they schmooze and they talk shop about investing.
JOHN MAULDIN: Two and 20, which is what most long short portfolios are charging, is a real challenge for investors to get past.
ARNOLD: OK. Yes, some of this needs translation. Right here they're talking about fees. And the takeaway is that especially these days, you want to avoid paying big ones.
MAULDIN: You have to be careful about fees.
ARNOLD: That's John Mauldin, the president of Millennium Wave advisors in Dallas. He says that those small-sounding annual fees of 1 or 2 percent, sometimes even more by the time you add up an advisor's fee on top of a mutual fund fee, Mauldin here is talking about fees you have to pay every single year, and those, he said, are a very big deal.
MAULDIN: The difference of 1 to 1.5 percent in commissions on an annual basis over 30 years is the difference between a dollar and two dollars at the end of the time period.
ARNOLD: In other words, paying too much in fees is the difference between retiring with half a million dollars or a million dollars.
MAULDIN: I mean, it's a huge compounding effect. It only seems like a small amount today but it compounds over time. I mean, I think, Einstein said that compound interest is the eighth wonder of the world.
ARNOLD: Some people here think there may be a ninth wonder of the world too, at least for people focused on investing. And it's called an Exchange Traded Fund. Or an ETF. These have come along in recent years, and a lot of people invest with them now, but many other people have no idea what an ETS is.
DAVID KOTOK: It's a remarkable instrument, it has introduced democracy to investing.
ARNOLD: That's David Kotok, the chief economist at Cumberland Advisors. The firm advises individuals and big pension funds. Kotok says, ETFs are like index funds. That is, they track whole sectors of market such as the S&P 500.
But Kotok says ETFs can be traded more easily, just like stocks can be traded. And he said that you can target the energy sector or bonds or commodities or real estate, or just about anything. And Kotok says that ETFs can have even lower fees than index funds.
KOTOK: I have some clients where we have 5 or 6 ETFs and we meet their entire investment objective at very, very low cost.
ARNOLD: Kotok's actually so excited about ETFs that he's just written a book about them. It has a sample portfolio in it where the annual fees are just .12 percent. That is extremely low. We called Vanguard - which offers a lot ETFs. Vanguard says you actually have to look at the fine print. Sometimes an ETF is cheaper, sometimes an index fund is cheaper.
Either way though, many people here say that ETFs or index funds are a better bet than what are called actively managed mutual funds. Those are the ones where you pay money managers to pick stocks.
JIM BIANCO: We did a study and found that last year was the worst year in the last 14 years for the average mutual fund as far as under-performing their bench-mark.
ARNOLD: That's Jim Bianco, the president of Bianco Research, which has hundreds of big institutional clients. He's sitting down for a cup of coffee with Martin Barnes of BCA Research.
Barnes says that mutual fund managers who pick stocks and invest in big US companies - last year, 80 percent of the time they had returns that were worse than the index in same sector. So that means, the odds are you would have been better off in a basic index fund.
MARTIN BARNES: Who knows what the percentage of advisors is or brokers. I mean, my God, these are the sophisticated guys. We're talking about the guys at Wellington, the guys at Fidelity, the guys, you know, that are running the big money, the sophisticated guys. They can't beat the index.
ARNOLD: Also, some of the economists here say that if you're going to hire an investment adviser, do it on a one-time-fee basis. In other words, pay them a couple-hundred bucks an hour or whatever seems reasonable to meet or talk on the phone once or twice a year. Don't hand them an annual percentage of your life savings for doing a few hours of work. Chris Arnold, NPR News. Transcript provided by NPR, Copyright National Public Radio.