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The Problem Isn’t High Investment Fees

It’s often said that high investment fees are what kill a lot of the potential returns of an investment portfolio. But I think this is one of those commonly repeated idioms left over from the 1980’s and 90’s. Low fees in passive index funds have been around for over 30 years now.

In order for a company to take your money and invest it into a conglomeration of stocks and bonds (index funds), they will need to charge you a fee for management. Reasonable expense ratio fees are in the 0.01-0.05% range, charged annually.  Unreasonable fees are anything in the 1-5% range.

What’s point of raving about having 0.02% (2 basis points) of annual investment fees (expense ratio) when I only held my position in that investment for 6 months and sold before I could even get 2 dividend distributions. I didn’t even hold the investments long enough to pay the lower capital gains rates (qualified capital gains).


Investor Behavior

In fact, the reason many investors underperform the market by shocking amounts isn’t high investment fees but investor behavior. Naturally, we freak out when the economy tanks, not knowing if it will recover. And we don’t know what to do with our savings when the economy is doing either really well or really poorly.

1. Reacting Out Of Fear

Not taking action is sometimes the best reaction to have. But too often we react and veer off course from our investment strategy.

2. Abandoning Our Investment Commitment

We commit to investing $2,000 a month and then suddenly raid our brokerage account in order to have a down payment for the new home.

3. Unreasonable Risk Profile

Our portfolios may also be so far skewed towards equities and specifically smaller company stocks that market swings cause vertigo. This is a sure way for us to bail out as soon as the market recovers and then become overly conservative and lock in poor returns for the next decade. It’s a bipolar way of investing and the gains at best balance out the losses.


The Solution

I’ve mentioned the option of getting a financial adviser before. I realize that most of the personal finance blogs are geared towards the DIY investor. Unfortunately, when you stop visiting those blogs during poor financial times or when you get busy chasing down a home to buy then you no longer benefit from that DIY mentality.

DIY takes work, time, research, knowledge, and requires you to keep up with relevant financial industry news.

A financial adviser isn’t gonna bring you magical returns. They won’t be able to tell you what to invest in for the highest possible returns. They won’t even be able to keep you from making bad decisions. They are your trainer, your motivator, your wise aunt, and they are in the same boat as yourself.

…your 401k’s shitty options aren’t the problem.

…the market’s current low CD rates aren’t why you aren’t growing your net worth as much as you could.

…it’s not the high fees of your investments.

…it isn’t about the overvalued housing market.

Your investment strategy which is affected by your investor behavior is the main reason for not achieving optimal returns. Studies from most brokerage firms show that the individual investor can’t even achieve the most conservative of returns.


Avoid The DIY Investing

I can think of only 1 person among my friends and colleagues who is an ideal candidate for doing all her own investing and asset allocation adjustments without needing external help from a financial adviser.

  • She invests in 1 single fund so she needs no asset allocation adjustments.
  • She spends less than $1,500/month.
  • She has a very respectable income as a lawyer.
  • Her risk tolerance is very high.

I don’t mean this in a mean way but the rest of my cohort are all over the place. Quite a few are open and share their personal finances with me in order to get my opinion and also because they know the topic fascinates me.

Their money journey looks something like this:

Investing in all equities » Selling high » Waiting on the sidelines » Buying P2P investments » Trying dividend investing for a while » Buying bonds » Regretting it » Cashing everything out » Buying a home » Holding off on investing for 6-12 months » Investing again » Being excessively conservative » Cashing out again in case of wanting to invest in more real estate » Rinse & repeat.


Are You A Good Investor Or A Bad One?

To answer this all you have to do is pool your investments returns from the last decade or so and calculate your rate of return.

How you behaved and performed during poor markets is very important. However, healthcare professionals, compared to the rest of the economy, are more likely to make costly decisions when markets are doing well. They will buy homes, upgrade cars, and start ambitious projects.

Based on historical market returns this is how your portfolio should have performed: If I invested $10,000 conservatively in passive index funds in September 2007 then it would be worth somewhere around $17,000-18,000 ten years later, in September 2017.

I certainly didn’t get such returns because I was rarely in the market long enough to benefit from this performance.

If you have so many additions, withdrawals, investment changes, and brokerage changes that you cannot keep track of this amount then that’s the first sign that there is a problem. And it’s no easy task keeping track of investments but it’s absolutely critical to be able to tell how you have done.

I don’t care to compare myself to the S&P 500 or the Russell 2000 index but I don’t want to underperform them by too much. And I certainly don’t want to be beat by inflation.


Investor Psychology

Are DIY investors making bad decisions? Yes, absolutely. Research has proven this over and over. The current housing frenzy serves as a good example. Consumers are buying homes at the highest prices in the history of the housing market.

My personal investing behavior:

I have cashed out 401k’s.
I’ve bought high and sold low.
I’ve bought way more house than my budget could afford.
I’ve financed cars that I shouldn’t have.
I’ve stopped contributing to investments because I thought they were overvalued.
I’ve over-invested in funds which I thought were undervalued.
I created poor tax situations due to poor investing techniques.

Of course, there is a very good argument to be made for locking in some of the lowest mortgage interest rates in the history of lending. But that only makes sense when the purchase of the home fits into the overall financial picture.

Should the household be buying a home?
Should they be saving for their kids’ college ed?
Should they be paying down debt?
Should they only invest in retirement accounts?
How much more do they need in their emergency fund?
What’s their 5, 10, 20, 30, 50-year plan?

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