COSTS: What You Don’t See Could Hurt You!

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I (Maria) am the type of person who feels secure when I’m in control and well informed. When working as a biomedical photographer, before I started a new career as a Wealth Coach with my mother, I’d read my employers’ 401(k) investment prospectuses, and then believed I could make an informed investment decision. I frequently logged into my 401(k) account to check my investments and then made changes to my allocations, because of their past returns. I never realized how much I was actually hurting my investments. My behavior caused these results: My 401(k) was poorly diversified; I created larger investment costs by trading frequently; I bought high and sold low; and I was ineffectively chasing returns. Without knowing better, I was killing my returns while trying to improve them. In reality, I was going backward and being my own worst enemy. Nobody else was doing this to me; I was doing it all to myself, creating more stress with my counterproductive behavior.   

Portfolio underperformance is frequently the result of excessive costs. Investors in actively traded funds have no knowledge of their actual investment costs because most of the costs are hidden. Costs matter and have a devastating effect on the performance of your portfolio. Sadly, most investors do not know how to control their costs or their risks. You can control costs, just as you can control risks, but most investors look just at returns instead of the other investment aspects.

Why don’t you know about the negative effects of costs? The active money management companies and their advisors don’t want you to know. Investment companies need you to frequently move between mutual funds as that creates income for them. This is also true for individual stocks. Why do you think these ads on the TV promote daily stock trading for a supposed low cost? This is WIN-LOSE. They win by getting richer, while you lose by paying more and more hidden costs, thereby getting poorer and poorer. It doesn’t matter if you do well or not, they just want you to keep moving your money!

Studies conducted on the average growth investor by Dalbar, a highly regarded financial services research firm, show the reason investors get inferior portfolio returns is due to imprudent behaviors. Investors get emotional and feel they must react to the market. They feel they must do something! Therefore, to pacify their feelings, they end up moving their money, just like I did before I understood how much I was hurting my returns. 

To correct this, as soon as you broadly diversify your portfolio and stop moving your money, you could start enjoying the advantages of lower costs. When there are fewer costs taken from your portfolio’s value, you’ll potentially receive higher returns. The longer you hold your global portfolio, the better the chances of obtaining that portfolios historical expected return.

Face the facts: You know there is no free lunch! You need to know the costs of your investments. With a commission advisor you probably won’t get a report at the end of the year stating what the costs were. When you work with a fee advisor you will receive a report that details your costs. What you don’t know can hurt you!  

Written by: Maria J. Wordhouse Kuitula and Phyllis J. Veltman Wordhouse, free market wealth and stewardship coaches, co-authored the book Stress-Free Investing, available at Amazon.com. Maria is the president of Wordhouse Wealth Coaching and may be reached at 616-460-6518 or  [email protected]. For QUESTION LISTS and INVESTOR EDUCATION VIDEOS, go to www.WordhouseWealthCoaching.com.  © Wordhouse Kuitula 2013. Photo: stock.xchng

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