Cheaper Can Be More Expensive – Asking The Wrong Questions

Intuitively it makes sense that the lower the cost of investing the more one should make. As with many things the reality is more complicated as a lower expense does not necessarily mean better returns. The bigger issue is that asking what something costs may be the wrong question. The question is not how much something costs but how much one earns over time net of expense and tax. An even more important question is whether you are meeting your personal needs and goals. While expense does play a part in determining net return, there are other factors to consider. Focusing merely on expense can lead to under-performance and not achieving one’s personal goals and objectives. There are several reasons for this.

The largest issue facing most investors is that they miss opportunities by trying to time markets. Numerous studies have shown that investors generally lag broader indices because they are not invested when markets move up. A trusted advisor can help you stay invested. Consider that if an investor stayed fully invested in the S&P 500 from 1995 through 2014, they would’ve had a 9.85% annualized return. If they missed just the ten best days during that same period or one per year on average, then those annualized returns collapse to 6.1%. If the investor missed the forty best days, or just four days per year on average, they had a negative return of 0.45% per year and a 10,000 investment after twenty years was worth only $9,140. (see chart below, please remember that direct investment in an index is not possible.)

It’s not what you make but what you keep net of income tax that is important. Your advisor can help you minimize taxes based on your situation and therefore can potentially provide you with a higher return with less risk than a portfolio that does not consider a tax strategy. Portfolio models that use only low-cost index shares with an active trading strategy, or actively managed mutual funds, may have a higher income tax and therefore a lower net return. We take a very proactive approach to minimizing taxes and work with your CPA as a team. An individual who earns 9% and then pays 40% in income tax nets less than someone who makes 6% tax-free.

The trusted advisor can help in developing, monitoring and updating an asset allocation that meets both your needs and objectives. Numerous studies have shown that asset allocation is far more important than investment selection with regard to long-term¹

Since 2001 The Annual Vanguard study has indicated that a trusted advisor can add a net return for investors. The Vanguard Study from June 2016 (vanguard.com/pdf/ISGAA.pdf) states in part: “Rather than placing its major focus on investment capabilities, the advisor’s alpha (value) relies on the experience and stewardship that the advisor can provide in the relationship. Left alone, investors often make choices that impair their returns and jeopardize their ability to fund their long-term objectives. The conclusion is that ‘Paying a fee for advice and guidance to a professional can add meaningful value compared to the average investor experience, currently advised or not.’ “

Having an experienced, objective and independent advisor can help you achieve higher net returns than a do it yourself approach even if you are an experienced investor. A trusted advisor can provide perspective, help minimize emotional responses and assist with holistic planning. For the same reason that lawyers do not represent themselves but see another lawyer and doctors go to another doctor, we believe that most investors should work with an experienced professional or team. Ultimately this can help provide better long-term returns, make life easier and help you meet your personal goals. Please feel free to contact us without cost or obligation for a second opinion on your current portfolio or if we can otherwise be of service.