Never forget these two axioms:
Money frees us, but its pursuit enslaves us.
It’s not how much you have at the end; it’s how much you could have made.
The best things in life cost nothing, but the best things to invest do cost money…and often at least twice. Remember, we are talking about fees associated with your investments, not any of the taxes incurred with said investments. That’s another post entirely, right?
Realize all the fees for your investments are open and fairly transparent, but it’s incumbent upon you to ensure that you know what they are and how much they affect your returns. It’s no different than understanding what the total costs to your home mortgage are.
You should definitely know all the costs. After all, it’s you paying for all of it.
Let’s go from cheapest to most expensive in terms of what it costs you to hold your investment, not the price of the investment itself.
BONDS
This should be the cheapest of the three major investment types we have talked about so far. You buy the bond at a certain price and then wait for it to mature as you get paid along the way or at the date of maturity depending on the bond. There are no fees attached to a bond above the price of the bond itself…unless you have a financial advisor…then you’re charged a fee from him or her. (What that fee is, how it’s calculated, if its worth it or not etc will be discussed in a later post.)
That’s it. It’s that simple with bonds. It makes sense that the security with the lowest return (generally speaking) has the lowest fees—and without an advisor, there are no other fees.
STOCKS
Like bonds, the main cost of stocks are the price of the stock itself. Of course, you have to pay to purchase the stock itself. Special, huh? Imagine going to the store and paying your grocery store for the right to buy things there.
SR: That’s literally how Costco and Sam’s Club work.
PWT: Actually, in a way, that’s how all grocery stores work. They purchase the goods from all the manufacturers at one price and sell at a much higher price to all of us. They could actually sell the goods at their cost and charge us a fee for shopping there, Inf act, essentially, all stores of all kinds do precisely the same thing.
Dr. Scared: This is it! This is it!! This is how they screw you!!!
How much you pay to enact a stock transaction depends on who you are using for your stock transactions. As you gain greater value (ie, the total value of the funds from that particular fund family) into your account in some of the large brokerage firms like Vanguard, they will cut your stock transaction fee further. Keep these fees as low as possible as well given that they eat away at your returns though they are a one-off cost.
Of course, if you have an advisor, a (hopefully small) fee will be charged to you for their management of your investment portfolio. But there’s an upside here as well. Your advisor isn’t charging you to buy any stocks; it’s included as part of your management fee. So you’ve got that going for you…which is nice….
FUNDS
As noted previously, mutual funds and ETF’s have an expense ratio charged to you in addition to the price you purchased the fund at. A general rule of thumb is that the breaking point is 1%. If you’re being charged above that, you better be getting outsized returns way beyond every other fund out there…and do it every year on average for 20 years or longer. Newsflash: That doesn’t happen.
Never look at your returns from any fund until you subtract out your expense ratio from you returns for any particular year. Most funds in their performance numbers will give you the total returns, the returns with fees (ie, expense ratio) subtracted out, and occasionally, if you’re lucky, they will report your returns after all taxes and fees are taken out.
Generally speaking (with exceedingly few exceptions), the lower your fund expense ratio (ie, fees) is, the greater your returns will be in the long term, especially when considering a twenty year time horizon or longer…which is exactly what you should be contemplating since that is the time frame from when you start(ed) your attending career to the time you retire.
Again, your financial advisor (if you have one) will take a (should be small) cut out of your investment portfolio.
Your job is to make your fees in whatever security you’re in.
LOWER FEES=HIGHER RETURNS (especially >10 years or longer which is your time to retirement)
I’d love to hear from any and all of you about your thoughts, so we can all learn from one another.
Please spread the word about this blog to your friends (real and virtual), family, and colleagues.
Talk to you soon.
Until next time…