If you're frustrated from having one financial consultant after another financial consultant present you with inadequate returns on your stock portfolio, i quickly hope you read my first article "Three Strategies for Finding a Superior Financial Consultant." In this posting, I'll drill down even more to essentially hammer home those points.
Finding a superior financial consultant, isn't always concerning the financial consultant. It is sometimes also about you. Are you willing to also make the commitments to locate a superior financial consultant? On this page, I'll discuss yet another crucial behavior about financial consultants and two regarding the behavior of you, the investor.
Three more tips:
(1) Don't hold mutual funds;
(2) You shouldn't be stingy if you discover an excellent advisor; and
(3) Be patient and ask lots of questions in your visit a superior financial consultant.
Don't Hold Mutual Funds
Without a doubt why I'm not a fan of mutual funds. Mutual funds have so many hidden fees that it's often difficult to know just what your costs are. Besides upfront costs which might be upward of 5% for some funds, you can find 12b-1 advertising , marketing and distribution fees that range from 0.25% to 1 1.0%, administrative fees that range from 0.20% to 0.40% not to mention management fees paid to the mutual fund manager of 0.50% to more than 1.0% annually. This doesn't even include undisclosed "soft" costs of trade commissions that can add another 2.0% to 4.0% in costs. And yes you didn't incorrectly read the first section of that last sentence. Many mutual funds charge you 12b-1 expenses they incur from advertisements and commercials that urge you to buy their funds, and if you're buying no load funds, chances are that your 12b-1 fees are higher than average.
Add to this, intangible costs including the performance that's sacrificed to maintain the required level of liquidity to satisfy share redemption, and your costs become sustained. For family office alternative investments that turns over 100% of its assets annually, Roger Edelson of the University of Pennsylvania Wharton School estimated this sacrificed performance to be 1.5% of returns annually. Lastly to add insult to injury, sometimes fund managers sell out of these biggest winners to meet up liquidity needs, generating a capital gains income tax for you personally, the investor, even though the mutual fund lost money that year.
But this isn't even where the negative traits of mutual funds end. For those who have one of the many financial consultants that merely try to join the hot emerging market bandwagon by buying mutual funds in China, India, or any other country, I advise you to exercise extreme care. When pullbacks happen in these country's economies as will inevitably happen, you are at high risk of losing money quickly. Why? In a mutual fund, you are at the mercy of a herd mentality that more often than not, will induce panic upon the release of bad news, and cause an incredible number of investors to redeem their shares over a short period of time. Should this happen, fund prices will plummet before you even knew what hit you.
But if you choose to own just the very best stocks in the very best industries in these countries, most likely your stock prices will undoubtedly be a lot more insulated and less volatile in such a scenario. While these stocks may still decline, they will most likely decline not nearly as expensive the fund will. Strong companies' stock prices have a tendency to weather country-wide economic downturns superior to fund prices, and if they are in the proper niche, they may even continue to flourish.
Be Ready to Pay Fees for Superior Advice
Superior advice is superior because a lot of effort and time go into producing that advice. I remember talking to a potential client one time that had a million dollars in the currency markets and was adament about not paying fees. He just wished to pay commissions on stock trades. When he showed me his statements (incidentally he was with a significant Wall Street firm that I won't name), there seemed to be no structure or investment strategy in his portfolio. He owned a variety of mutual funds and individual stocks, and many times those stocks were traded as soon as there was a nominal 5% gain in virtually any of them. Furthermore, the statements by his financial consultants were misleading. The consultant handwrote on his statements he was doing great because he was up 6% that quarter (which I believe just about matched the S&P 500's performance that quarter). He explained that annualized, that the 6% translated into 24% returns.
But when I explained that his net returns will be lower because his portfolios quarterly 100% turnover rate produced exorbitant capital gains taxes that could undercut his net returns, he didn't seem to understand. I assume his financial consultant didn't bother explaining this small detail to him. Still, he insisted on paying no fees no matter what. I could tell he was the type of person that was blindly loyal to his financial consultant, so I moved on without wanting to schedule another meeting.
Superior advice costs money. And if your financial consultant is superior, she or he will undoubtedly be transparent about his fees as well as your costs, in order that you won't be confused about what your true gains really are. Don't be stingy. After everything you just learned about mutual funds, why can you not be willing to pay even up to 2% annually for superior individual advice and management when you're almost certain to be paying a lot more than that a year merely to own a mutual fund?
Be Patient and Ask Lots of Questions
In the event that you persistently ask the three questions I mentioned partly one of this article, you can find frustrated after speaking with ten financial consultants, none of whom can answer those questions. My advice is to you need to be patient. Don't quit and don't accept a salesperson that's trained to answer those questions to lead you to believe that she or he has answered your questions when that is not the case at all. What do After all?
For example, when you begin drilling down about specific stock picks, a standard sales technique to avoid your query is an answer similar to the following: "I'm not just a stock picker. But don't worry. I understand how to find the very best money managers in the united kingdom to manage your money for you, so you're in great hands." Avoid being misled by smokescreens like this. Understand that if your financial consultant truly understands how you can find you the very best money managers, he then or she must necessarily have discussions about geographical preferences, industry preferences, and specific stocks with those money managers. How do a financial consultant claim to choose the best money managers for you personally but have no understanding of what stocks you own and why is those stocks special?
To summarize, buy individual stocks over mutual funds, be willing to pay fees for an exceptional advisory when you are so lucky as to find one, and remember, the luckiness of finding a fantastic advisor is not actually luckiness at all. It originates from your hard work, tough questions, and your unwillingness to be led astray by the professional smoke screens of financial consultants.
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