Archive for September, 2013

Why it Pays to Know About to Investing Fees

One of the most vital pieces of information that every investor should focus upon are the fees that they will pay for their investments. Our blog today is going to focus on exactly why these are so extremely important  as well as looking at the different types of investments and what fees, high or low, that they carry.

Many investors, while focusing on other important aspects of investing such as the selection of the securities that they purchase for their asset allocation, overlook how important fees are and the impact that they can have on their returns. The fact is, the amount of fees that an investor will be forced to pay is one of the main determinants of how their investments will perform.

Below is a great example of why  knowing the exact fees that you will be paying is so important. We’ve used $3,000.00 as our base amount that were going to assume is put into a retirement account, stay there over 30 years and earn an 8% annualized return. If you look at the simple chart you will find that the actual amount of return that a person receives after 30 years is greatly affected by the amount of fees that they pay.

  1. Fees of .50%  produce a total return of        $596,477.60
  2. Fees of .75%  produce a total return of        $572,454.51
  3. Fees of 1.00% produce a  total return of     $549,551.41
  4. Fees of 1.50% produce a total return of      $506,807.81
  5. Fees of 2.00% produce a total return of      $468,078.69

As you can clearly see, the difference between .50% and 2.00% in fees, only 1.50%,  equates to a loss of $128,398.91 due to fees over a 30 year period!

In general most people look to withdraw from 3 to 5% out of their investment portfolio per year during their retirement. Using the numbers above as a guideline, the difference between the investor who paid .50% and fees and the investor who paid 2.00% in fees would mean that, on an annual basis, the former would make more than $5000 per year more than the latter. That equates to $420 per month less for the person who paid 2.00% in fees even though the initial amount of the investment was exactly the same and the amount of time that it was invested was also exactly the same.

Most experts agree that, while aiming for the lowest possible fees for the assets in your portfolio is a good idea, not all investments will always offer them. Certain types of investment products carry inherently higher fees while others inherently low. For example, “frontier” market mutual funds almost often have higher fees than US Large Cap stock funds.  Corporate  bonds purchased from the country of Brazil will, in most cases, carry higher fees than Treasury Bonds purchased from the United States. Futures contracts and standardized option contracts normally carry fees that are quite reasonable and relatively transparent while equity-linked notes are known to have higher fees as well as less transparency.

There are certainly many assets that have low fees.  Index mutual funds as well as ETF’s are 2 that are very attractive to investors looking for long-term value. It is important to note that different providers of these assets will often have different fees and, since the product is essentially the same from provider to provider, the main cause of a better, or worse, return is likely to simply be their fees. Generally speaking, the more  mainstream and asset class the lower fees that it will have and therefore it truly pays to find the lowest cost provider on any indexed product that you are considering purchasing.

When investing in mutual funds it is even more important to know exactly what fees you will be paying as many of them carry what they call “front end load” charges, sometimes to the tune of 5.5%. No matter how well your asset performs this initial charge is going to make it very difficult to actually outperform the market. Most financial pros will tell you that you should never buy a mutual fund that has significant up-front sales charges since oftentimes there are alternatives available without these charges.  Researching any fund thoroughly is obviously a good idea and, if you do decide to purchase a fund with a  front-end load fee, you’d do well to make sure that it’s expected future performance makes up for the initial loss.

As you can see, fees are one of the major determinants and how well your investments will perform and that, as an investor, one of your most important tasks is to find investments with low fees as well as minimize your fees over time in order to maximize the performance of any asset. While  keeping fees low is definitely vital it need not be the dominant force in your decision-making process when it comes to investing. Tasks such as making the appropriate investments for your financial goals that are just as important as minimizing your fees.

If you have questions about how fees will affect your investments, what types of investments inherently have lower fees or investing questions in general, please let us know and will get back to you with advice and answers ASAP.

Investment Tips to Reduce your Risk

When it comes to investing one of the best ways to make sure that you end up with a solid portfolio that, year after year, increases in value, is to simply keep your risk as low as possible. If that seems very simplistic it is but, in order to do it, we’ve put together a number of tips that are also quite simple to put into effect and follow. Enjoy.

  1. Invest at least some money in stocks in order to keep up with inflation. Long-term financial goals are often decimated by inflation and, since it’s historically about 3%, if you have your money in a regular bank account or certificate of deposit, you’re actually losing money. On the other hand, by investing at least some money into the stock market you’ll keep up with inflation as, even though stocks are risky, they have consistently outpaced inflation with their returns since at least the 1940s.
  2. Diversifying your investments should definitely be on your ‘to do’ list of investment tasks. While stocks can significantly increase your investment returns, if you invest only in stocks and the stock market takes a huge dive you’re going to be in big financial trouble. By owning a broad range of different types of investments like real estate, commodities, stocks and other funds, you spread your risk out among these multiple investments and, in most cases, lower your risk considerably. While one of your investments might tank, it’s highly unlikely that all of them will.
  3. Keep in mind that meeting your long-term financial goals requires at least some amount of risk taking. Interestingly, a recent Money Magazine article showed that the number of people under 35 who are willing to risk their money on the stock market is actually declining. While this might seem like good news (and in general it is) the fact is that taking some financial risks is important if you also want to have the type of financial gains that will set you up well for your later years and your retirement.
  4. Never forget that time is your friend when you are younger and your enemy when you are older. This not only applies to your actual life and health but also to the fact that time, plus compound interest, can significantly increase your investments. The more time that you have them, in general, the more likely that your investments will increase substantially. Basically, the more you wait to start investing, the more growth that you’re going to miss and the less money you’re going to have in the end. No matter who you are, compound interest is definitely your friend.
  5. Not investing is almost as risky as investing. Inflation, which we mentioned above, can sometimes get completely out of hand and may do so again in the future. If that happens, investing in the stock market may simply be the only way that you have to be able to accumulate the kind of money that you need to last you through your retirement. People are living longer and social security is being decimated, leaving stocks as one of the few things that may actually pay off in the end.
  6. Start small. When you are new to investing it makes a lot of sense to start small and, as you gain confidence, increase your investments. One of the ways to do this is simply to do your research and choose investments that, over the last 5 years (or longer), have performed well. If you do this and by small amounts on a continual basis you will not only keep your risk low but your chance of ending up a winner much higher. Need help picking the right investments? Talk to the benefits administrator at your work, consult with a broker that you trust or read investing magazines like Kiplinger’s and Money.
  7. Don’t overanalyze or overthink your investments. Many people make the mistake of keeping such intense track of their investments that they end up making mistakes due to their obsession. Simply put, what your investments do on a day-to-day basis is almost irrelevant as opposed to what’s going to happen to your investments, and the wealth that they can build, over a longer period of time. Better to monitor your investments on a monthly or even a quarterly basis to make sure that they’re performing well and keep in mind that, what they’ll be worth in 10, 20 or even 30 years from now, is what really matters. While there will certainly be some years when you have temporary setbacks, what you’re looking for is a growth trend and, if you see one, you should be just fine.

Hopefully these investing tips have opened your eyes to the reality of the stock market, investing in general and maybe even the good and bad habits that you already have. If you have any questions about investing or would like some advice about any financial issue, please let us know and we’ll be sure to get back to you ASAP.

Avoid these Common Investing Mistakes

While in a hard to believe, even the great Warren Buffett has made one or two mistakes during the 40+ years that he’s been investing. The reason we bring this up is that, for most of us mere mortals, mistakes are certainly a part of the game. The real trick however is to recognize your mistakes and, hopefully, learn from them. To that end we put together a list of some of the most common investing mistakes so that, rather than having to make them yourself, you can read about them here and avoid them completely. Enjoy.

  1.  Relying too much on Margin. While it’s known in investment circles as ‘free money’, the fact is that margin, or borrowing money to leverage your investments, can sometimes be exactly the opposite. If your margined investments start to lose and you used too much borrowed money to buy them, the losses that you have will be greatly compounded. The fact is, you’re going to eventually have to pay that money back and, if you weren’t wise when using the margin, the financial pain that you’re going to feel may be great. The lesson here is simply this; use margined sparingly or, if you can, not at all. Better to wait until you have a lot more experience before using this high risk investment strategy.
  2. Using ‘tips’ to buy stocks. This one’s relatively easy to explain. If it’s been used to get a laugh on a television sitcom, Jerry Seinfeld has used it in one of his routines or your neighbor Bob has told you that he’s positive that this is going to be this stock tip that ‘sets you up for life’, following it will probably means that there is a cream pie to the face  in your future. To be perfectly frank, taking a tip in and of itself isn’t a big mistake but not following up on your tip and researching it thoroughly, as well as considering the source, is just plain dumb, financially speaking. The lesson here is that you should always thoroughly research and do your due diligence on any tips that you might get, no matter the source.
  3.  Thinking that you can become a day trader overnight. For the inexperienced investor day trading should definitely be avoided. Yes we’ve heard about investors who spend all day buying and selling stocks from their computer and we’ve also heard about how they make thousands on one trade while sitting in their jammies sipping their coffee. The fact is however that, for those that actually can and have done this, they have also put in a heck of a lot of time and energy to get where they are and, in most cases, have also lost more than their fair share of times. The average day trader is a person who has years of training, lots of patience and an inordinate amount of discretionary capital to work with. The lesson here is that, unless you’re going to make it your actual career, day trading should never be looked at as a hobby (unless you have all sorts of money to burn).
  4.  Many people who have had early success in the stock market tend to overestimate their abilities. This can be a huge mistake and, for every new investor who gets swept up in the euphoria of their success, there’s 10 others who have been met with massive failure and the loss of substantial amounts of money because they overestimated just how good they actually are. The lesson here is simply that, even if you have one or two early successes, you still need to take things slowly, put in time for research and strategy and constantly ask yourself ‘can I do better?”. If you really want to be successful as an investor in the stock market, patience is definitely your ally as well as a smidge of humility.
  5. Taking your eye off of the ‘big picture’. While familiarizing yourself with investing terms, techniques and other technical jargon is all good and well, most new investors forget to look at one of the most important things about investing; trends. In fact, most professional investors have a saying that goes “the trend is your friend”. The fact is that it’s easy to get caught up in the details of investing and not see the forest for the trees. The lesson here is that, while knowing about techniques and strategies is an excellent idea, knowing how to look at the big picture, break it down and see exactly what’s going on at any given time is much more important.
  6. Adding to your losses because you’re too proud to let go. Professional investor William O’Neil will tell you that, once a stock that you own reaches 7% lower than the cost that you purchased it, it’s time to sell it off. No matter what. The mistake that many investors make is that they are too proud to admit that their pick was a bad one and hold on to the stock much longer than they should. The lesson to be learned here is that self-discipline and having a plan are both necessary when you are in the stock market and any pride or emotions that you have should definitely be checked at the door.
  7. Getting duped by ‘bargain’ stocks. Here’s a tip; most stocks that are low are that way because something happened that put them there. It’s extremely rare to find a stock that’s mispriced and, even if everything does check out, in many cases even the best laid plans can go bad when it comes to stocks that you bought at a value that you perceived was ‘excellent’. The lesson here is that price alone should never be the determining factor in your decision to buy a stock and that you’d be far better served to always do your homework and your due diligence before purchasing a stock, no matter how good the price looks.

We hope that the mistakes that we’ve shown you today will help you to avoid making them yourself in the future. Investing, like anything else that’s worth doing, is worth doing not only was the Susumu be out in modern web my élan. If you educate yourself, take advice from professionals and don’t let your emotions get in the way, avoiding the mistakes above is definitely possible. If you have any questions about investing or need advice about your finances, please let us know and will get back to you with options and answers as soon as we can.

Tips and Strategies for the Beginner Investor

If you are a new investor and looking for some tips and strategies you’re in luck because that’s exactly what our blog today is going to be focusing on. The fact is, as a new investor you definitely should be doing as much research as you can into how investing works as well as what all of the technical jargon actually means. The way we look at it, when it comes to protecting your money and using it to make more money, the more solid information you know the better. Enjoy.

First we’ve got 5 simple rules that used definitely should follow when investing in any volatile market. Over the last few years we’ve all seen that the investment market can change, sometimes literally overnight. The fact is however that there are a number of simple rules that the best investors have been using for a long time in order to build their long-term wealth.

  1. Stay calm and be patient. It’s best to never rush into any decision when it involves investments.
  2. Diversify your investments and your portfolio. Anyone that knows the ins and outs of investing will tell you that predicting what’s going to perform best in any year, or in any asset class, is particularly challenging. When you diversify your investments and invest in different asset classes you protect yourself from the risk of any one of those  assets failing.
  3. Time and compound interest are your ally. Simply put, the longer you stay in the market and stay invested, the more powerful  the effect of compound interest will be on your money. If you habitually enter and exit the market you’ll find that your investments typically won’t do nearly as well as those people that stay in the market over a long period of time.
  4. Review your investment strategies from time to time. As you get older and (hopefully) wiser your wealth should build and your financial situation should change. To keep up with these changes you’ll need to review and also change your investment strategies regularly.
  5. Don’t shy away from asking for advice from professionals. If you have a clearly defined strategy and set of goals, which a financial advisor can help you to set, you’ll be much more able to withstand any fluctuations in the market with your wealth and investments intact.

What exactly is dollar cost averaging? Well, that’s a darn good question and the answer is that dollar cost averaging is one of the most useful techniques available to help you avoid severe ups and/or downs in the market.

Unless you have a working crystal ball, predicting the best time to enter the market is practically impossible. For that reason it’s much better to spread out your investment dollars across a longer period of time rather than investing everything at one specific point in time. For example, if you have $10,000 to invest you’d be well advised to invest $500 a month over the next 20 months rather than investing $10,000 all at once today.

By doing this, you will average out your investment dollars and avoid the highs and lows of the market that can sometimes completely destroy any investments that you made at one specific time.

Compound interest is, as we have said many times, your ally. No matter who you are or how much money you have to invest, the sooner you start the better. That’s because compound interest is a very good way to grow your money and much more powerful in the long run. For young investors this may be the most important piece of advice that you’re ever going to hear. Simply put, the longer that you invest your money they have more positive effect that compound interest will have on it and the more money you’ll be able to make.

Saving and investing are definitely not the same. The difference is not subtle but many people believe that it is. Saving is when you put your money aside to use it in the future instead of using it to make purchases today. Investing, on the other hand, is using your money to make more money. While you certainly will get a very small amount of interest with any savings account, the fact is that the stock market, bonds, real estate and other investment asset classes, if used correctly and followed diligently, will make you much more money than basic interest on your savings account ever will.

Saving money = putting it aside for later.  Investing money = using that money to grow your wealth and have more later.

Hopefully these tips and strategies have given you a better idea of how investing works, what you should be doing with your money as far as investing is concerned and also mistakes to avoid when investing. If you have any questions about investing in the stock market, financial topics in general or anything else that has to do with growing your money, please let us know and will get back to you with answers and options ASAP.

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