Pay Lower Investment Expenses To Get Higher Investment Returns – Part 1 Excessive investment costs are a plague on your personal financial planning.
Excessive investment expenses are one of the most significant barriers to lifelong family financial security. While financial services industry sales people tell you that you need to pay more to get more, the correct answer is the opposite. If you pay less, you are likely to get more.
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.
Many individual investors hope that, if they pay higher investment fees, they will get higher investment returns. Unfortunately, for the average investor the opposite tends to be true – particularly after investment costs and capital gains taxes are taken into account.
Over the long-term, passive investment strategies focused on very broadly diversified index funds tend to yield gross portfolio returns equaling the gross return of the broad securities markets. In addition, if these investment strategies are also highly cost-effective and tax-conscious, then net long-term portfolio returns will only be slightly lower than gross market returns due to the minimal costs and taxes associated with passive market index fund strategies.
In contrast, the scientific investment literature has repeatedly demonstrated that active investment strategies most often lead to inferior rather than superior net risk-adjusted investment portfolio returns. The primary reasons are fourfold:
* First, the investment securities industry offers products to make a profit. If you are willing to pay more because you think superior past performance will persist, the financial industry is willing to keep accepting your money. A large part of the amateur investing public naively chases historical performance, and the financial industry has mastered this game. If they make more in fees now, they are happy. If past performance does not persist, they have no skin in your personal investment game. However, they will always have another batch of expensive funds to sell to you, some of [...]