If Investors Don't Know How Much They're Paying...

If you don’t know how much you’re paying you will get ripped off!!

                                                                                                By: Brendan Magee

I’ve often heard investors say, "I don’t get involved with my investing. The broker handles it.” I had an experience in Home Depot that reminded me that if you do not get involved and know what you need to know you will get ripped off.

I bought what’s called the Grill Daddy. It’s an $11.97 gizmo that allows you to steam clean your bar b que grill. I had seen them advertised on t.v. and thought it would be an easier way to clean the grill. As luck would have it I was able to get the last one they had and took it to the register to pay for it. When I go to the cashier I noticed the bar code was no longer on the product and I told the women the price displayed was $11.97. Se told me she would have to go back to the aisle and verify the price. In a minute or so she came back and rang up the item. When I looked what she scanned into the register the display read, charcoal lighter and the price was $15.97. I told the cashier she had entered the wrong item and the incorrect price. To my chagrin, she wasn’t going to change the item or the price.

I went to customer service and the man walked back with me to the display case and clearly the item’s listed price was $11.97. The man wrote down the tracking number on a piece of paper and signed it so I could take it to customer service and pay the correct amount for the item. Thankfully, he accompanied me to the service counter because again the register listed the price at $15.97. He told the person at the register the item was listed at $11.97 and to ring it up as such. I left with the item having paid the correct amount. However, I wondered not only for Home Depot customers, but also investors, how many of them unconsciously go through the checkout line and continually pay way more than we realize?

I ask that because, truly, if you don’t know how much you are supposed to be paying you will get ripped off big time somewhere along the line. In my case the Home Depot cashier was too busy trying to thin out the line to worry about me being overcharged. She didn’t have any real personal stake in me what so ever.

Now amongst the 20 Must Answer Questions For Peace of Mind is, Can you measure the total amount of commissions and trading costs in your portfolio? So can you account for every dime you are being charged? If you can’t I guarantee you are paying way more than you ever thought. Let me list the charges investors absorb. There are commissions, bid/ask spreads, market impact, delayed costs, bookkeeping, legal, marketing, etc. None of which are itemized so the investor never has a clear understanding of what they are being charged.

To give you an idea of just how astronomical those expenses can be here are a few examples:

*1.-For the fiscal year ending July 31, 2009 the Putnam Voyager Fund reported commissions to be $21.5 million dollars. Who’s paying this? You, the investor and it’s just the tip of the iceberg.

*2. According to Principia through December 31, 2009 the average annual mutual fund account holders investment expense was three percent. Subtract that from the 8.20% return of the S&P 500 from 1989 through 2009 and the average mutual fund holder’s return is down to 5.2%. These costs are not itemized so the investor is only left to try and figure out where it is they went wrong. “How come I am nowhere near where I need to be to retire the way I had planned?”

I hope you are not waiting for the investment industry to come clean and kill the goose that’s laying their golden eggs.

Again, if we have no way of knowing how much we are paying, we have no way of gauging how much value we are getting or better yet how much is being taken from us. Think about it, how nuts would it be to go into Home Depot or any store for that matter and not have any idea how much the item you want to purchase is going to cost you? Do you really think the store owner left unchecked is going to be more concerned with your agenda or theirs?

The answer is of course not and you are going to be ripped off. Perhaps, knowing you’re being taken advantage of but not knowing where it’s taking place is what’s keeping you up at night. The solution is to be able to answer the question, Can you measure the total amount of commissions and trading costs in your portfolio? Once you can answer 100% YES you will be able to tell the brokers and planners what you should be paying. In order to be in that position though you can’t just sit back and let the broker handle everything. You need to be coached.

 Brendan Magee is the founder and president of Inevitable Wealth Coaching. With questions, comments, or suggestions call 610-446-4322 or e-mail Brendan@coachgee.com. You can follow him on Facebook at Brendan Magee-Investor Coach. You can also tune into his radio show, The Investor Coach’s Show on am1340what Saturday mornings at 11am.

*1 Taken from Hidden Cost of Mutual funds by Anna Prior-Wall Street Journal 3/1/2010

*2Average Mutual fund expenses taken from Morningstat Principia Pro 12/31/2009

*3. S&P 500 return 1989-2009 taken from Dalbar Inc.

Ohio State Football & Investing-There Are No Gray Areas

Ohio State Football & Investing: There Aren’t Any Gray Areas

                                                          By: Brendan Magee

If you’re a fan of college football, you have surely heard about the recent troubles of the Ohio State football program.  Jim Tressel, the head football coach has been forced to resign (A position that reportedly  paid him $3.5 million a year and had four more years to go on his contract, ouch!) his position after admitting that he was aware of N.C.A.A. violations his players had committed. More importantly he failed to report those violations to his superiors when he became aware of them in April 2010. He came clean on what he knew in March of 2011.

The day after the school held a press conference with regards to these allegations, a college football analyst was asked if a school could consistently compete for national championships without breaking N.C.A.A. rules. The analyst responded that it depends on how much of the gray area a school wanted to stand in. In other words how much of breaking the rules do you think your school can get away with breaking and not get caught. The lesson here is that there aren’t any gray areas. You are either in violation of the rules and eventually face the consequences or your do not violate the rules.

This was a point that I was trying to get across to a client in a recent review. Now this client has been with me for over 10 years. He was disciplined enough to live through the bear markets of 2000 to 2002 and 2008. His portfolio has done twice the rate of inflation and there isn’t anything coincidental about his success. His portfolio has been properly diversified, has been rebalanced when necessary, and most importantly never has he tried to time the market. Again, follow the rules and good things eventually happen, break them and bad things eventually happen.

Now during our review he mentioned as he has in the past that in 2002 being diversified worked as indicated by his returns relative to the market. However, 2008 all the indicators were such that it made sense to have moved his money to a less volatile portfolio after having absorbed some losses and then after the  market had gone back up, go back to his original portfolio. He mentioned that not only did it make sense to at times be open to these kinds of moves, but also, when you feel the heat of forty percent losses it made it really difficult to not consider some alternatives.

This is where we have to really examine what the alternatives are and make certain we do our best to eliminate that breaking the rules becomes the better alternative. We have to do this now because once in the fire, it’s practically impossible to stop yourself from being convinced that the wrong move isn't the right move.

The critical points I want to make here are these:

-It made no difference what thoughts were going through this man’s mind. The important thing is he never acted on them. If he did his two times the rate of inflation return most likely would be closer to even with it. Despite what he was thinking he didn’t act on it.  He didn’t violate the rules for successful investing.

- Before rules are broken a lie is accepted. The Ohio State football players and coaches said the rules do not apply to me or believed no one will ever find out. Next, they are accepting cash for sports memorabilia  and getting tattoos and the coaches are in the midst of a cover up.  An investor often times says this time it’s different and gives themselves the go ahead to sell low/buy high.

-There aren’t any coincidences. Ohio State football is being punished because it broke the rules they agreed to abide by. Investors who aren’t happy with their portfolio’s results have most likely broken a rule they agreed to abide by. Investors who are happy with their results consistently abided by the agreed upon rules.  

-The best way to make sure you consistently follow the rules is to accept that on your own you will not consistently follow the rules  and create a team of people around you who will keep you on the straight and narrow.

Brendan Magee is the founder and president of Inevitable Wealth Coaching in Drexel Hill, Pa. With questions, comments, or suggestions call 610-446-4322 or e-mail Brendan@coachgee.com. You can also listen to him on the Investor Coach’s Show on am1340what or on the internet at www.am1340what.com.