If you're frustrated from having one financial consultant after another financial consultant present you with inadequate returns on your stock portfolio, then I hope you read my first article "Three Tips for Finding a Superior Financial Consultant." In this post, I'll drill down even more to really hammer home those points.
Finding a superior financial consultant, isn't always about the financial consultant. It is sometimes also about you. Do you want to also make the commitments to find a superior financial consultant? On this page, I'll discuss yet another crucial behavior about financial consultants and two concerning the behavior of you, the investor.
Three more tips:
(1) Don't hold mutual funds;
(2) Don't be stingy if you find an excellent advisor; and
(3) Be patient and ask lots of questions in your search for a superior financial consultant.
Don't Hold Mutual Funds
Let me tell you why I'm not just a fan of mutual funds. Mutual funds have so many hidden fees that it's often difficult to learn exactly what your costs are. Besides upfront costs which might be upward of 5% for a few funds, there are 12b-1 advertising , marketing and distribution fees that range between 0.25% to at least one 1.0%, administrative fees that range between 0.20% to 0.40% and of course management fees paid to the mutual fund manager of 0.50% to a lot more than 1.0% annually. This doesn't even include undisclosed "soft" costs of trade commissions that may add another 2.0% to 4.0% in costs. And yes you didn't incorrectly browse the first part of that last sentence. Many mutual funds ask you for 12b-1 expenses they incur from advertisements and commercials that urge one to buy their funds, and if you're buying no load funds, itâs likely that that your 12b-1 fees are higher than average.
Add to this, intangible costs including the performance that is sacrificed to maintain the required level of liquidity to fulfill share redemption, as well as your costs become even greater. For a fund 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 tax for you personally, the investor, even if the mutual fund lost money that year.
But this isn't even where the negative traits of mutual funds end. When you 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're susceptible to a herd mentality that generally, will induce panic upon the release of bad news, and cause millions of investors to redeem their shares over a brief period of time. If this happens, fund prices will plummet before you even knew what hit you.
But if you choose to own just the 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 that scenario. While these stocks may still decline, they'll most likely decline not nearly as expensive the fund will. Strong companies' stock prices tend to weather country-wide economic downturns much better than fund prices, and if they are in the right niche, they may even continue to flourish.
Be Willing to Pay Fees for Superior Advice
Superior advice is superior just because a lot of hard work and time get into producing that advice. I recall speaking with a potential client onetime that had a million dollars in the currency markets and was adament about not paying fees. He just wanted to pay commissions on stock trades. When he showed me his statements (by the way he was with a major Wall Street firm that I will not name), there appeared 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 the moment there was a nominal 5% gain in virtually any of these. 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 https://zimnochfinancialgroup.com/ explained that his net returns will be lower because his portfolios quarterly 100% turnover rate produced excessively high capital gains taxes that could undercut his net returns, he didn't seem to understand. I guess 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 who was blindly loyal to his financial consultant, therefore i moved on without wanting to schedule a second meeting.
Superior advice costs money. And if your financial consultant is superior, they will undoubtedly be transparent about his fees and your costs, in order that you won't be confused in what your true gains are really. Don't be stingy. After everything you just learned about mutual funds, why would you not be ready to pay even upwards of 2% annually for superior individual advice and management when you're almost certain to be paying more than that a year just to own a mutual fund?
Be Patient and have Lots of Questions
In the event that you persistently ask the three questions I mentioned in part one of this article, you may get 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 cause you to believe that he or she has answered your questions when that's not the case at all. What do I mean?
For example, when you start drilling down about specific stock picks, a standard sales technique to avoid your question is an answer like the following: "I'm not just a stock picker. But don't worry. I understand how to find the best money managers in the country to manage your money for you personally, so you're in great hands." You shouldn't be misled by smokescreens such as this. Remember that if your financial consultant truly understands how to locate you the best money managers, he then or she must necessarily have discussions about geographical preferences, industry preferences, and specific stocks with those money managers. How can a financial consultant claim to choose the very best money managers for you personally but have no understanding of what stocks you own and why is those stocks special?
In summary, buy individual stocks over mutual funds, be willing to pay fees for an exceptional advisory if you are so lucky as to find one, and remember, the luckiness of finding an exceptional advisor is not really luckiness at all. It comes from your hard work, tough questions, as well as your unwillingness to be led astray by the professional smoke screens of financial consultants.
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