Tuesday, May 10, 2016

Debt Minimization Results in Long Term Investing Success for Individual Savers and Investors

The rules of successful individual investing are few but important.

First we earn. Next we save.

We don't borrow unless absolutely necessary.

That non-borrowing stance allows us to save more of what we earn. The less of our future earnings that are subtracted for required interest and principal payments on what we borrowed, as well as related finance charges, the better. Not getting behind by borrowing puts us ahead of the game early, in other words, and that makes winning easier.

Having done that, now we are well positioned to invest our savings for our future wants and needs, including unforeseen charges and emergencies.

And by continuously using good judgment the MOM (my own money) way, we can make the most of our savings and see them grow over time to become huuuuuuge amounts.

And the foregoing 'good stuff' is not all that difficult to accomplish if we learn early in life to follow simple and common sense guidelines about working hard at getting a solid education and good jobs (including part time jobs while growing up), avoid unnecessary borrowing, and save and invest the MOM way throughout our earning years.

So let's look closer at some potholes out there waiting to take our hard earned and long term oriented money for investing. That way we can better avoid them.

The Looming Danger of All the Investment Fees You Don't See tells the story of investing fees:

"Stay the course, pay attention to the big picture, and don’t sweat the details. That string of mantras makes sense for saving and investing, but only up to a point.

Once you start paying attention to fees, it becomes clear that the details really matter.

Years ago, I began to notice that although I was faithfully socking away money into an I.R.A., my account wasn’t growing much — not compared with the overall returns of the stock and bond markets.

Something was holding me back. The main problem turned out to be fees, a whole constellation of them. No single charge was a deal breaker, but over time the damage was large.

That is a sad truth of investing: Niggling little fees weigh heavily over extended periods. The addition of a mere 1 percent in fees annually, over a 35-year career, can reduce your nest egg by 28 percent . . . . Higher fees than that are common and hurt even more. In fact, if you take the time to look at the math, you may conclude that seemingly minor fees are far more dangerous than you think.

In an ideal world, you wouldn’t have to worry about pesky details like mutual fund commissions and fees: You could stuff savings into a reliable fund and reap the rewards when you need the money later. You could, in short, assume that the people handling your investments were always acting in your best interest.

But we don’t live in that kind of world. Even with the prospect of tighter requirements for financial advisers beginning next year, investors need to watch out for themselves. As I wrote recently, the Labor Department has proposed rules that should provide a greater degree of protection for many investors starting in April 2017. That assumes that the rules are not watered down further or blocked by the financial services industry.

If the rules do take effect, financial advisers dealing with retirement accounts will generally be required to act as fiduciaries: That is, they will be required to act in a client’s best interest. That is a major step forward, but the rules contain glaring exceptions. For one, they don’t affect nonretirement accounts at all . . . .

Even for retirement accounts, the Labor Department’s rules contain vagaries and loopholes. For example, they don’t say what specific fee levels are permissible or how “best interest” is to be construed. And they give brokerage firms an exemption from the requirement to act in the best interest of existing customers through what is known as “negative consent.”

In practical terms, this means that if you have a current brokerage account and don’t respond in writing to an exemption request, you have given your consent. . . .

What will constitute a violation under the new rules isn’t entirely clear, partly because they aren’t final and haven’t been tested.

Knut Rostad, founder and president of the Institute for the Fiduciary Standard, a nonprofit advocacy group, said, “It will take months, if not years, before the precise meaning of the rules is determined — in many cases, in the courts.”

In his view, investors should act now, on their own behalf, to make sure that they are being given a fair shake. They should, he said, demand that their advisers do three things: provide a written pledge to uphold a fiduciary standard, disclose potential conflicts of interest as well as an indication of how such conflicts will be remedied, and clearly list all investment costs.

Many of these costs are lurking somewhere on a firm’s website or in a mutual fund prospectus or supplemental document, which few investors locate and read. An earlier version of the Labor Department’s new rules would have required routine publication of such expenses, and projected returns, in regular account statements, but it was removed under pressure from financial firms.

And so, unless they check for themselves, investors may not always understand when they are paying needlessly high fees, like “loads” or commissions on mutual funds.

Until the late 1970s, nearly all funds were sold with loads averaging about 8 percent of the value invested in a fund — and they were imposed at the “front end,” meaning if you walked in the door of a brokerage firm with $1,000, you walked out with $920 in a mutual fund. Plenty of no-load funds — those without such commissions — are sold today. Among them, index funds generally have very low fees. Over extended periods, index funds have usually outperformed most actively managed funds, especially those with high fees.

But hundreds of funds with loads of at least 5 percent are still being sold, according to an analysis provided to me by Laszlo Birinyi Jr., president of Birinyi Associates, a research firm in Westport, Conn. For the most part, these fees have meant more money for the fund managers and advisers and less for investors. . . .

In addition, hundreds of funds are sold with another kind of charge, known as a 12b-1 fee: a fee of up to 0.25 percent that quietly saps fund returns for years. Currently, the pernicious effects of loads and 12b-1 fees tend not to be clearly shown in standard investment returns.

The new rules may be an improvement, but it’s already evident that they won’t be enough. Advisers with investors’ best interests at heart can help. But investors will also have to peer through the murk of conflicts and excess fees and find ways to help themselves."

Summing Up

Adopting the MOM (My Own Money) rule at an early stage is absolutely the best rule for individual investors to follow when picking an investment adviser.

If the low cost financial adviser you choose to work with has his skin in the game along with yours, you can be sure he'll do his best to help make your investments successful along with his own.

Next check out the fees he's charging you for reasonableness. And as far as I'm concerned, 'reasonable fees' are made up of impartial and knowledgeable advice, low costs and solid long term results.

Most important, develop asap the habit of saving and investing for the long haul by contributing regularly what you have avoided in interest and principal payments on the debt obligations you didn't needlessly acquire.

Over the years ahead, it will make a tremendous difference in the final results, and that's what really counts.

It's the doing that matters most.

That's my take.

Thanks. Bob.

No comments:

Post a Comment