Number six among my top ten financial planning resolutions is simple: cost matters.
At least, it seems simple. The more money you spend on investments, the less you will have left for the thing you’re investing for—whether it’s retirement, or kids’ education, or a charitable goal. Warren Buffett discovered this when he realized that he had a talent for investing. He understood that if he bought and sold all the time, transaction costs would eat up his profits.
Transaction costs are one thing. A simpler issue is management fees. Amazingly, many mutual funds charge 1.5-2% to manage your money, and they charge a sales load up front for the privilege of paying those fees. In a period of 8% returns and 2% inflation, 2% in fees takes 1/3rd of the real return earned by your capital.
Costs count. But nothing is free. If you build a house you’d probably hire an architect and builder, and you may want to hire a money manager to construct your investment portfolio. You want to be sure that the manager is ethical, competent, and considers your particular situation, but telling the average person to invest on their own amid the 10 thousand mutual funds and 30 thousand common stocks out there is like telling the average homeowner to redesign and refurbish his own electrical system. It’s a complex world.
Costs are important. You certainly don’t want to pay too much, but don’t fool yourself into thinking that customized, competent advice can be had for nothing. You get what you pay for. Just make sure that you get what you pay for.
Douglas R. Tengdin, CFA
Chief Investment Officer
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