Today’s investor is faced with so much fear caused by political uncertainty, media hype and the quagmire of the financial world. This tends to lead many potential investors to inaction and/or attempting to manage their finances themselves with the intent of saving money and protecting their assets from the Bernie Madoff’s of the world.
If you were to ask, “how much is your financial advice costing you?” the answer would most likely be, “Nothing!”. When in fact, many do-it-yourselfers or those that do nothing, are paying in missed or misdirected opportunities. This is not to say that there aren’t a few people capable of making informed decisions and successfully navigating the complexities of the financial and legal industries, however, most just do not have the time, resources or knowledge to manage their money or estate for “free”.
Let’s look at 5 major concerns that investors have and how doing it yourself can cost you money:
Major Investor Concerns:
1. Am I making the smartest decisions about my money?
2. Is what I am doing causing me to pay more taxes then I should?
3. How much of my charitable dollars directly help a cause and is it the best for my personal finances?
4. Are my assets protected and can they be unjustly taken?
5. Do I have things in place that will take care of my loved ones after I am gone?
How You Could Be “Paying” By Doing It Yourself.
1. Dalbar (the nation's leading financial services market research firm) conducts an annual study of the average investor return verses the market return. They have determined that the typical gap from investor to the stock market over a 20 year period is about half. Say if the market return for that period is 8%, the investors return is about 4%. It is usually the same or worse for bond funds. The reason for the big gap is due to market timing – buying high and selling low. If you don’t know what you are doing there is a huge opportunity cost.
2. We regularly hear that there is no fee for investing in mutual funds. The fact is, every mutual fund charges an annual fee. The annual fees range from about 0.10% to 3+% annually. In addition, higher expense funds tend to underperform the overall market and because higher annual expenses are usually related to more trading inside the fund, there are more capital gains distributed each year. This means that taxes are realized sooner than they otherwise would have if the investor had an institutional low turnover tax efficient mutual fund.
3. If you are trading in and out of funds, then you have to keep track of your cost basis. This can be a very cumbersome if you don’t keep good records. In addition, you have to take more time to do your taxes or pay your accountant more to keep track of all the transactions. There is an opportunity cost here. If you reinvest dividends it makes things even more complicated especially if you are reinvesting dividends in an individual stock. In addition, assets tend to be scattered in various different accounts. This causes confusion and lack of a clear plan as to where things are headed.
4. Rebalancing is another lost opportunity. The results in the Dalbar study suggest investors do a lot of trading but it is not clear if there is any type of structured portfolio that is rebalanced on a quarterly or annual basis. By rebalancing you can add significant value to your overall returns if you follow a disciplined approach.
5. Proper Estate planning and updating your will, if done properly, will save time and money. It will cost money now to get things in place but the potential tax savings, logistical time savings and emotional savings for your loved ones will be large. There are so many choices to make and it is one of the hardest things for individuals and families to do. This is definitely not a do it yourself project with some type of online program or software. In the end, it could cost twice as much for the attorney to fix it after the fact.
6. Life insurance and disability insurance are often neglected because it is hard to calculate how much you actually need and how much your needs change over time. Not having the proper insurance can be an emotional and financial burden on your family if you haven’t properly planned for different situations.
7. Protecting your assets thru the proper insurance is usually neglected as well. Your house and your car need adequate insurance and you most likely need umbrella insurance. How your business is structured is important too. If you are a small business owner, you should think of a buy-sell agreement with your partner. These strategies are often overlooked but if properly planned for, can protect your assets from being unjustly taken.
8. Many investors and families are very passionate about charities. There are many different ways to give to charities. The tax savings impact for the individual and the family can vary widely depending on the method chosen. If you don’t know what you are doing it could cost you and your charity a lot of money.
As you can see, the maze of options and all the paperwork involved in managing your estate and investments can be overwhelming and may lead to inaction for many individuals and families. The ultimate cost may be quantified and it certainly isn’t free.
Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail firstname.lastname@example.org.
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