How You View Your Grocery Bill Impacts Your Investment Expenses
Do you consider yourself a savvy shopper trying to find a discount? Or do you research something fully in order to find the product with the best quality and consider the higher expense worth it?
Just like buying a product at the grocery store, consider how you shop for investments. What expenses are you paying for?
Common Expense Types
This is simply the cost to buy or sell an investment. This could be a flat cost per transaction of a set dollar amount. It may also be that some investments don’t have any cost to purchase or sell them. Some investments may charge a percentage commission when you buy it.
A mutual fund or ETF (exchange traded fund) has a manager whose job is to choose the investments within it. The manager and team get paid to do this, so an expense ratio is used to pay for the cost of their management. These can be very low or very high depending on what the fund strategy is.
For example, a low expense ratio might be more appropriate for a fund that tracks an index. If you’ve invested in a S&P 500 fund from any company like Vanguard or Fidelity, as just two examples, then you may know the point of that fund is to perform like the S&P 500 index. So the manager is choosing funds that are in this index and the percentage to hold of each company. This type of fund tends to have a lower fee.
Now, a fund where the manager is responsible for keeping funds safer may have a higher expense ratio. If the intent of the fund is to perform well in a market that is going down in value, this manager will have to use more complex techniques and strategies in order to be successful. To keep your money safe in this type of environment you would be willing to pay more for a good result.
Financial Advisor’s Management Fee:
If you don’t have the time, interest, or knowledge of managing your investments you may consider hiring an advisor to help you do it. Typically an advisor will charge a percentage of the assets they are managing or some formula similar. You want to understand what you receive for the fee you pay and also evaluate regularly how your portfolio is doing.
Just like the person who was searching for the most quality product and was willing to pay more, you can think of the above expenses as a cost of making money. By investing are you earning more than you would have if you only had your funds in cash?
Wondering how this affects your investments? Schedule a call with Michelle and Steve to discuss your portfolio today.
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