Part 6 of the series: Rethink the Way You Invest.
Sheep that we are, investors have been following the herd lately and buying stocks now that we’re feeling a bit better about the economy. Eight years ago, we began fleeing stocks as prices dropped throughout the great credit crisis. This is as illogical as stocking up on toilet paper at regular price to last us through those horrible 50% off sales!
Our left brains clearly need to speak to our right brains!
To make matters worse, in our exuberance to invest, we often pay little attention to the impact that excessive investment costs have on our portfolios. Part of a successful investment experience involves controlling these costs.
Here are only a few reasons why investment costs can get out of control:
- Active investing. Active investment managers try to beat the market through stock selection and market timing. They charge higher fees as compensation for their perceived “skill” and to pay for the expensive research involved. History tells us that this is a zero sum game!
- Trading costs. Every time a trade happens, there is a difference between what the seller wants (the “ask”) and what the buyer is willing to pay (the “bid”). This is a very real trading cost whenever a trade takes place. The active manager who frequently trades in a portfolio thus pays higher costs than the buy and hold passive manager. These costs are not disclosed in a fund’s management expense ratio, yet have the potential to seriously erode investment returns.
- The shareholder imperative. Although most mutual fund companies try to maximize returns to their unit holders, their real job is to generate positive returns to stockholders in their company. Lowering management fees will not generally be on the agenda.
- Subsidizing smaller accounts – Investors with larger account sizes routinely subsidize smaller accounts. Consider the promotional, administrative, overhead, printing and mailing costs to set up an investor contributing as little as $25 per month! These “subsidies” are no small part of most investment funds’ expenses.
- Taxation – Outside of an RRSP or TFSA, a frequently-traded portfolio often translates into heftier T3 slips and that means more tax paid each year, rather than enjoying the benefits of tax-deferred compounding.
Over your lifetime, a well-diversified and cost-effective portfolio could result in a doubling of wealth over and above a portfolio burdened with unnecessary costs. That sure can make a difference in your retirement lifestyle!