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Cost Control and Investment Performance Improvement Articles
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Concerning asset management fees charged by investment funds, the average investor pays about .3% more than necessary on money market funds, about .75% more than necessary on bond funds, and about 1% more than necessary on stock funds. Additionally, they pay sales charges, hidden transaction costs, marketing fees, and account holding fees that siphon away more of their assets and returns. The amount wasted is very substantial, because these seemingly small percentages are charged against trillions of dollars in assets. Paid year after year, excess management fees reduce returns and compound over the lives of investors.
The average mutual fund paid .27% of net assets in hidden commissions in 2001. When measured on a capitalization-weighted basis, the average hidden commission cost was .19% of net assets. The effective trading costs related to the bid/ask spread and the temporary shifting of these spreads added .36% more annually in the hidden costs of the average fund. For funds with the highest turnover, hidden commission and bid/ask spread expenses exceeded 3% of assets annually.
In pursuit of better returns, many investors sensibly seek out no load mutual funds with low annual expense ratios. However, loads and published expense ratios are only part of the mutual fund cost story. Other costs for individual investors to consider concern “hidden” mutual fund expenses that directly reduce the net asset value of the fund. These hidden expenses include trading commissions that a fund pays to brokers and the cost or market impact of fund trading.
Bond investing is a complex process that individual investors should leave to professional fund managers. By selecting among lower cost bond funds, investors can achieve higher returns. Bond funds also can provide a high degree of fixed income investment diversification very economically.
Higher bond mutual fund management fees tend to be a “deadweight” loss to you. Choose only low-cost bond funds.
The inexhaustible supply of active traders provides an opportunity for investors not to play the game. By accepting the market price as the best price, passive investors can target a market return and drive costs and taxes down. They can benefit from efficient risk-adjusted prices and market liquidity without bearing the higher costs of active market participants.
In the uncertain and volatile world of financial investments, investment cost reduction is the one strategy that is most likely to improve the future value and investment performance of your bond and stock portfolio, while reducing your investment risk. When you drive your investment costs down to the bare bones minimum, you will simplify your personal finances. When you reduce you costs, you will also stop feeding the purveyors of bogus financial strategies who feed off your assets. If you are not willing to pay, they will go after someone else.
The scientific investment literature provides pitifully little encouragement that individual investors can:
* predict individual prices of stocks and bonds or the future course of the securities markets,
* select a securities portfolio that will beat the market consistently, and/or
* identify and hire investment managers who will deliver superior performance net of their added costs.
Recurring fees, such as asset management fees, 12b-1 marketing fees, and advisory/asset custody fees are charged periodically, as a percent of your investment assets. Recurring investment costs can significantly impact the long-term value of your retained investment portfolio assets.
By charging fees as a percent of your assets, the investment industry can make their recurring fees seem small – like they are “just a few” percent. Furthermore, by charging fees against your assets the industry can still bill you every year, even if the value of your investment portfolio declines.
However, if investment managers were to charge against your returns and not your assets, then the percentage of your returns would have to be a huge proportion of your annual returns. In fact, to equal the fees they charge as “just a few percent” against your total asset portfolio, they would have to extract in the range of 1/3 to 2/3 of your annual portfolio returns every year.
Sales load charges and commissions on investment purchases differ from the financial service industry's numerous other recurring methods of charging fees to their retail consumers. Sales loads are less straightforward to analyze for investment lifetime cost-effectiveness, compared to annually recurring charges.
Unlike recurring charges against current assets, front-end sales loads represent assets that did not get into your investment portfolio in the first place. They disappear before the process of calculating future investment returns and asset values can even begin. Therefore, your financial modeling software needs to remember that you lost or will lose these assets, and it needs to calculate the cumulative value of these ‘phantom’ assets over your lifetime.
Many justifications for loads might be offered by financial advisors during the sales process, but once a front-end load is charged, your diminished portfolio will 'forget' about the load charge for the rest of your life. Loads become 'phantom' assets, which are rarely spoken of or measured subsequently, even though you may remember that you paid them in the past.
However, VeriPlan will not forget about the loads you have paid and will pay in the future. VeriPlan does not forget these phantom lost assets and it automatically calculates their value across your lifetime.
Your personal investment portfolio losses related to past investment sales load payments can and should be measured, when you evaluate the cost-efficiency of your investment strategy. However, you cannot recapture any of the lost returns (past or future) that are associated with any excessive investment sales load payments that you have paid in the past. These lost assets were removed from your investment portfolio, when you made the purchase and you paid the sales load. However, if you can measure the cumulative lifetime value of these past investment sales load payments, you can make a more informed decision about whether to keep paying sales loads on investment purchases in the future.
With VeriPlan, you can make a reasonable estimate of the lifetime value of your assets you have lost, due to your past investment sales load payments. VeriPlan automatically evaluates your lost sales load assets using the tax basis information that you supply, when you enter information about your current investment portfolio.
Your personal investment portfolio losses related to past investment sales load payments can and should be measured, when you evaluate the cost-efficiency of your investment strategy. With VeriPlan, you can make a reasonable estimate of the lifetime value of your assets you have lost, due to your past investment sales load payments. VeriPlan automatically evaluates your lost sales load assets using the tax basis information that you supply, when you enter information about your current investment portfolio.
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