In this time of uncertainty regarding Covid-19, economic status and political futures among other things, what should one do with your personal finances?
We seem to be having one crisis after another in 2020, with a very uncertain path forward. So today, we are asking the question, should this affect your personal finances, who should you trust and ultimately, who cares about your money?
Let’s break down the problem posed above – with options for those who want to be Hands-Off, Robotic or Hands-On. These are the three most popular options for individuals to use for managing their finances.
Back To Basics – Who Cares?
Before we delve into the options presented above, lets go back to the beginning of this topic – Who should care most about your money? The answer is very simple, you should.
That’s a very simplistic statement but a very powerful one; we live in a world with many huge wealth management corporations, financial tech support and service organizations, banking institutions (multinational, national, regional, local) as well as many, many smaller firms, who should one trust with your money? Well, it’s our opinion that you should always be looking out for your own self interests when it comes to your money.
In this current economic climate, it’s even more important to ensure you are taking care of your money and not losing it or wasting it.
Some additional posts we have made on this topic include:
- Your “Future Self”, what is it and why should you care?
- Saving VS Investing – How to Meet your goals with 70% less effort?
- Protecting Your Investments – Introduction to Risk
- Starting Out – How much should I invest? Why?
Based on these previous posts, we will jump into the options available for those who want to be Hands-Off, Robotic or Hands-On.
Assumption – For purposes of the example below, we are going to assume a 8-10% market return for a typical investment portfolio; to keep the numbers simple to calculate and meet historic market returns. Source – http://www.lazyportfolioetf.com/
Hands-Off Method (Possibly 0-2% Net Growth)
The first option that we will present is the option to allow someone or some organization to manage the daily interaction of your investments. We are not opposed to allowing someone to manage investments on your behalf but, you should know exactly what is happening to your money and how much it costs for this service.
Many of the larger financial institutions are not very transparent when it comes to exactly how much it costs for the services rendered. Specifically, money managers take a yearly fee (2-3% portfolio fee or sometimes more), the investments can take a fee (mutual fund fee of up to 2-3%) and you may need to pay transaction fees for the transfers they make during the year (1-2%) – A quick summary of these fees now yields 5-8% right off the top of your investments. This is significant headwind that will reduce the amount of growth your portfolio can experience over time. Therefore, if your market returns are 8-10% for the year, you may experience 0-2% growth within a traditional financial institution.
This is not always the case, but this is typically happening to those who have not researched the industry. If you do additional digging there are better choices out there for hands-off investments: you may have the ability to determine the funds that are chosen to lower the fees and you may even choose a fee based advisor who works especially for you with a fixed fee upfront.
Robotic Method (Possibly 6.25-8.25% Net Growth)
Another option regarding investments is the term “Robo-Advisor” or using AI or automation for your investments. This is a far more cost effective way to invest your money: typically run by a computer, app on your phone or some automatic deposit method; this saves the company money and the savings are passed along to you as the customer. The fees for this type of service typically range in the form of 0.5-1% and the corresponding investments are typically ETF (Exchange Traded Funds) which are similar to mutual funds but with a substantially lower fee (0-0.75%).
A quick summary of these fees now yields 0.5-1.75% right off the top of your investments. This is a more tolerable headwind that will slightly reduce the amount of growth your portfolio can experience over time. Therefore, if your market returns are 8-10% for the year, you may experience 6.25-8.25% growth within a Robo-Advisor institution.
This is huge potential growth compared to the hands-off method – 2% vs 8.25% or 4X more!!
See the example below of typical fees paid on mutual funds vs local Robo-Advisor – Canadian Example is Questrade – Disclosure – Questrade is not paying me to write this article, this blog and I’m not receiving perks as a matter of posting this message. I just really admire their transparency in posting their fees – https://www.questrade.com/pricing/questwealth-portfolios-fees
Hands-On Method (Possibly 7.25-9.25% Net Growth)
Our final option for those who want the highest returns will also require the the most work – personally buying and selling your investments. This is the most cost effective way to invest your money: typically placing buy and sell orders yourself on a computer or app on your phone. This requires a brokerage account within a major investment organization; please pay special attention to the trading fees and exchange rate fees if doing business in multiple markets around the world.
Typical ETF portfolio yields can be in the order of 8-10% on a 10 year investment horizon – See sample 10 Year ETF return data below from model portfolio made by investing greats – http://www.lazyportfolioetf.com/
This method of investing is a very manual process; the payoff is saving the most money by doing it yourself. The fees for this type of service typically range in the form transaction fees ($0 to a few dollars per ETF trade) and the corresponding investments remain the same as the Robotic option; typically ETF (Exchange Traded Funds) which are similar to mutual funds but with a substantially lower fee (0-0.75%). This is the most cost effective way to invest into a portfolio.
Therefore, a quick summary of these fees now yields 0-0.75% right off the top of your investments. This is a best available headwind that will significantly improve the growth your portfolio can experience over time. Therefore, if your market returns are 8-10% for the year, you may experience 7.25-9.25% growth within a do-it-yourself brokerage institution.
So there you have it, we have presented another way to ensure that you are able to keep your hard earned money; just as good as earning more.
Moreover, if you follow the Robotic or Hands-On method, you have the potential to make hundreds of thousands of dollars more over the lifetime of investing. Refer to the model portfolio provided above in the Hands-On method to see what real-world performance can be in a 10 year scenario.
As always, we are here to help you succeed with your personal finances by showing the clear path forward within the smoke and mysteries typically created by the financial industry as a whole.
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