If you're frustrated from having one financial consultant after another financial consultant present you with inadequate returns on your own stock portfolio, i quickly hope you read my first article "Three Tips for Finding a Superior Financial Consultant." In this post, I'll drill down some more to really hammer home those points.
Finding a superior financial consultant, isn't always about the financial consultant. Sometimes it is also about you. Do you want to also make the commitments to locate a superior financial consultant? In the following paragraphs, I'll discuss one more crucial behavior about financial consultants and two regarding the behavior of you, the investor.
Three more tips:
(1) Don't hold mutual funds;
(2) Don't be stingy if you find a superior advisor; and
(3) Be patient and have lots of questions in your search for a superior financial consultant.
Don't Hold Mutual Funds
Let me tell you why I'm not a fan of mutual funds. Mutual funds have so many hidden fees that it is often difficult to learn exactly what your costs are. Besides upfront costs which can be upward of 5% for a few funds, there are 12b-1 advertising , marketing and distribution fees that range between 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 a lot more than 1.0% annually. This won'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 ask you for 12b-1 expenses they incur from advertisements and commercials that urge you to buy their funds, and when you're buying no load funds, itâs likely that that your 12b-1 fees are higher than average.
Increase 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 sustained. 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 their biggest winners to meet liquidity needs, generating a capital gains tax for you personally, the investor, even if the mutual fund lost money that year.
But this is not even where the negative traits of mutual funds end. For those who have one of the many financial consultants that merely try to jump on the hot emerging market bandwagon by buying mutual funds in China, India, or any country, I help you to exercise extreme caution. When pullbacks happen in these country's economies as will inevitably happen, you're at risky of losing profits quickly. Why? In a mutual fund, you are susceptible to a herd mentality that more often than not, will induce panic upon the release of bad news, and cause millions 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 opt to own just the best stocks in the very best industries in these countries, most likely your stock prices will be a lot more insulated and less volatile in such a scenario. While these stocks may still decline, they'll most likely decline a lot less than the fund will. Strong companies' stock prices have a tendency to weather country-wide economic downturns much better than fund prices, and when they are in the right niche, they could even continue steadily to flourish.
Be Ready to Pay Fees for Superior Advice
Superior advice is superior because a lot of hard work and time get into producing that advice. I recall talking to a potential client one time that had a million dollars in the stock market and was adament about not paying fees. He just wanted to pay commissions on stock trades. When he showed me his statements (incidentally he was with a significant 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 several times those stocks were traded as soon as there is a nominal 5% gain in virtually any of these. Furthermore, the statements by his financial consultants were misleading. The consultant handwrote on his statements that he was doing great because he was up 6% that quarter (that 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 would be much lower because his portfolios quarterly 100% turnover rate produced exorbitant capital gains taxes that could undercut his net returns, he didn't appear 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 sort of person who was blindly loyal to his financial consultant, therefore i moved on without wanting to schedule another meeting.
Superior advice costs money. And when your financial consultant is superior, he or she will 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 all about mutual funds, why would you not be ready to pay even up to 2% annually for superior individual advice and management if you are 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
If you persistently ask the three questions I mentioned in part one of this short 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. Discover more give up and don't settle for 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 start drilling down about specific stock picks, a common sales technique to avoid your question 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 cash for you, so you're in great hands." Don't be misled by smokescreens such as this. Understand that if your financial consultant truly understands how to get you the very best money managers, then he 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 best money managers for you but have no knowledge of what stocks you own and what makes those stocks special?
To summarize, buy individual stocks over mutual funds, be ready to pay fees for a fantastic advisory if you are so lucky as to find one, and remember, the luckiness of finding an exceptional advisor is not actually luckiness at all. It comes from your effort, tough questions, as well as your unwillingness to be led astray by the professional smoke screens of financial consultants.
This article could be freely reprinted on another website provided that it isn't modified, changed, or altered at all and as long because the below author byline is included along with the active hyperlinks below: