Invest Smarter by Saving on Fees for Long-Term Success

winterIt’s early January and I’m seeing a blitz of commercials promoting low fee investing services. The timing of these ads is no coincidence as people are fresh into New Year’s Resolutions and wanting to ensure a better future.

So is all this hype about reducing investing fees really true?

Do those higher fees make a big difference over a long time span of say 30 years? Absolutely.

To clarify there are two fees you’ll pay when you invest in a fund. Firstly your bank or investment broker will charge you every time you buy or sell an investment. For example CIBC charges $6.95 for each buy or sell order; TD charges $9.99.

Secondly you’ll pay a management fee to the company operating your fund. There’s no escaping those trading fees but you have flexibility regarding management fees.

Justifying the High Fee?

The classic argument for justifying high management fees is the concept that an expert will handle your investments. Supposedly, that superhuman individual can outperform the market consistently.

History shows this is an absolute impossibility. All too often thee experts move your money in and out of investments. They switch bond to stock ratios based on their presumed wisdom. And they occasionally leave money sitting on the sideline while they figure out what to do next.

Low Fees – the Key

key to earningThe key to investment success is keeping the fees low, diversification, accepting that you can’t predict the future, and buying and holding for the long term.

I use exchange traded funds and passive investing, and it’s the dirty little secret no financial advisor wants you to know about.

Typically exchange traded funds have fees as low as 0.2%. Mutual funds typically charge fees in the 2-3% range. These are a shocking example of how high fees can really hurt your long term outcome.

So what’s the catch?

Most people don’t follow the advice stated above. People regularly choose the investments with the highest management fees. People over trade their investments. Those buy and sell order fees add up over time. Holding for the long term means avoiding trading.

So is there an easier solution?

In this internet society it is now simple to open your own investment account. You buy low fee well diversified funds, and manage your own investments. I’m sick and tired of being told that investing is too complicated for the average person. You don’t need to pay a professional a fee to manage your financial future.

Can you really invest confidently yourself?

There are currently exchange traded funds (ETF’s) which have global diversification, periodic rebalancing. And their big bonus is industry leading low, low, management fees. Buying shares of these funds is a perfect example of one stop shopping for a global portfolio of stocks and bonds.

Forget about the latest market predictions, interest rates or the economy. Forget about finding the next stellar company that will skyrocket in value (it’s much harder than you think). Never worry about paying high fees for someone who believes they can consistently outperform the market (they can’t).

Forget about learning how to invest, create a portfolio, and diversification (it’s already done automatically). Simply buy shares of the fund and hold them for the long term. It’s as simple as that.

Where Do I Put My Investment?

Once you begin investing your next decision is whether to put that invested money into a Registered Retirement Savings Plan (RRSP) or a Tax Free Savings Plan (TFSA). That’s the subject of a separate post but the importance of deferring or sheltering your hard earned investment dollars from taxes can’t be understated.

Water BarrelThe BalanceIn my E-books (“Water Barrel” and “The Balance”) I discuss simple methods to live sensibly for today, take charge of your financial affairs, and invest safely for the long term. For more information please visit David Penna Amazon.

As always, I am not a qualified financial advisor. I just relate financial management to my own experience which may not resemble yours at all. Advice is frequently worth exactly what you paid for it. Most of mine came from expensive experiences.

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