Why Financial Wealth and Prosperity Should Matter to You
No one cares about your money more than you (not even the experts)…
A few years ago, just when we thought we had things under control, we received a letter from our accountant. The letter stated that we owed an unanticipated, additional $12,000 in taxes. My husband and I were stunned. Then I studied the letter and asked my husband a few questions. Something just didn’t seem right. He called the accountant back and, sure enough, the accountant had made a mistake and overestimated our taxes. Phew!
My husband couldn’t believe it.
He thought the experts to whom he pays a significant fee each year to manage his taxes should have been paying attention. They should be picking up the phone and calling him. But the truth is, no one cares about your money as much as you do. Regardless of who helps you with your financial affairs, their work needs to be reviewed carefully.
My husband made the mistake of assuming that his highly paid, professional accountant should know more about his financial situation than he does. In some ways, yes, they are the experts. However they don’t remember everything all the time and they simply don’t care as much—no matter how good they are. It’s up to us to inform them of changes in our lives—such as having a new baby or buying or selling a home, buying a rental property or anything that might impact our tax situation. You may also like this article Take the 1st Step to Financial Freedom—Tell the Truth About Money.
The other thing I’ve learned about investing your money wisely is that you have to watch like a hawk to make sure your managed investments aren’t eating into your future financial security. Here is a shocking fact about the real cost of management fees and the impact on your portfolio, from William Bernstein’s classic investing book, The Intelligent Asset Allocator:
…the really bad news is that actively managed funds are so expensive. Funds, of course, incur costs. Sadly, even the best-informed fund investors are usually unaware of just how high these costs really are. Most investors think that the fund’s expense ratio (ER), listed in the prospectus and annual reports, is their true cost of fund ownership. Wrong. There are actually three more layers of expenses beyond the ER, which merely comprises the funds’ advisory fees (what the managers get paid) and administrative expenses. The next layer of fees are the commissions paid on transactions. These are not included in the ER, but since 1996 the SEC has required that they be reported to shareholders. However they are presented in such an obscure manner that, unless you have an accounting degree, it is almost impossible to calculate how much return is lost as a proportion of fund assets.
Bernstein points out that there are four layers of mutual fund costs: expense ratio; commissions; bid-ask spread; and market-impact costs.
“Active management will cost you about 1.5% in large-cap funds, 3.3% in a foreign or small-cap fund, and 8% in an emerging market fund…” Then consider that an index fund should beat 84% of the actively managed funds. And also consider Dunn’s Law that “When an asset class does relatively well, an index fund in that class does even better.” Now you have to wonder why so many people are still paying for active management. Even the world’s largest money managers (the pension funds) have embraced indexing “and only 8% of the nation’s largest pension plans actually beat an indexed 60/40 mix.”
With all the facts pointing to indexing as the way to go, your next step is to find the lowest cost indexed funds available. They will all do the same thing–match the market (which is why I use Vanguard’s ETFs, which are even more tax efficient than mutual funds).
In order to beat the market there are other strategies that you can use that don’t require active management. What amazes me is that with all the research proving that active management does not sufficiently compensate for their fees (they will tell you otherwise, of course), so many people still use their services. People don’t realize that even a seemingly small fee of 2% can eat away 25% of your portfolio over time. This reduces your real retirement income by half! If you knew the real cost of active management you’d be much keener to find a low-cost solution.
The Wealth Lesson
It doesn’t matter how many experts you have managing your finances. You can delegate the work, but you can’t delegate reviewing it. And, ignorance can cost you a small fortune. You alone are ultimately responsible for your financial health. If you want your financial advisor to call you, ask for it. If you expect or require a certain level of service, be sure to ask for it. You must be aware of what is going on. Take the time to go over your finances on a regular basis. Monthly is good. You may even want to consider looking weekly. This way you can make sure you are spending your money in the way that creates the greatest possible joy.