Saturday, July 11, 2009

Proximity and Profits

The reality of investing is that the further you are removed from managing your money, the further removed you will ultimately find yourself from the profits you are trying to reach. Every additional person you involve in making a financial decision will demand to be compensated- no one works for free.

Lets look a simple example; you buy some mutual funds though your broker.
An innocent enough activity, but who all is involved with this transaction and do they profit at your expense? Well there is:

  • your broker, the local brokerage, and the larger brokerage company. All of whom very often are compensated by the mutual fund companies in which you have just purchased funds in.

  • The mutual fund company that has to market and sell itself, and compensate a celebrity fund manager.

  • The actual trader who makes the trades on behalf of the mutual fund company on the stock exchange floor.
All of these people are ultimately paid by you when you hand your money over to invest in funds in this way. And that is just a surface examination, by diving deeper you can quickly multiply this list.

Think of yourself as a rock star with an entourage. The more people in your entourage the more mouths you are going to have to feed. An entourage can play a role in validating your decisions, can be a wonderful sounding board for ideas, and can maybe even recommend some fabulous ideas themselves. At the end of the day though ask yourself, is every member of your entourage adding value equal to how you are compensating them?

Get as close as you can to your money

The fees encountered by each of the members in a typical transaction may be very small but like the bites of so many piranha's mouths they can add up quickly. Now this is not to say that having a financial support net is a bad idea, I would simply recommend that you look at each person you are essentially paying and ask yourself, "do I need you?"
  • Is your broker adding any value to your investing? No? dump him and manage your own account.
  • Are the mutual funds you are buying yourself or through your broker outperforming the market? No? dump them and get some low cost ETFs
  • Buying the same stock over and over again? Look at DRIP plans or direct stock purchases to cut out the middle man.

Remember it is not about being cheap it is about being smart. Money goes where it is wanted and stays where it is well kept.

This article was written by buyingvalue If you enjoyed this article, please vote for it by clicking the Buzz Up! button below.

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