Making The Decision Not To Invest is More Expensive Than You Might Think
By Anthony Rhodes
I admit it; the business of investing is a very challenging one, indeed. Our consistent use of esoteric industry jargon and complex mathematical algorisms is enough to intimidate just about anyone who may be considering involving themselves in the process of managing their own investments. Add to this milieu the high stakes of potentially losing all of your investment capital, and there’s no small wonder why so many seek out the counsel of professionals to perform such tasks. While the logic behind this action is certainly understandable (and, by the way appreciated) I somehow fail to understand the thinking of those of you who refuse to involve yourselves in the process at all. Are you simply oblivious of the effect that inflation has on your money? Or, are your decisions based on one of the many investment myths, which unfortunately influence the misinformed?
Whatever the reasons, whether you’re aware of it or not, the decision not to invest is having a considerable effect on your family finances, and is potentially costing you more money than you know. This week, in our first part of a two part series, we’ll tackle a few of the myths which contribute to this idle mindset, and attempt to inform our investment phobic brethren of the true costs associated with sitting on the sidelines.
Myth #1: "I Can't Afford A Financial Advisor"
One of the biggest myths (and most certainly a major contributor to the reluctance of many a potential investor) is the supposed exorbitant costs associated with hiring a financial advisor. The effect of this perception is so profound, that large portions of the public actually believe investing to be a luxury reserved only for the super wealthy; who can actually afford the high costs needed to secure professional portfolio management. Interestingly enough, our very own industry is the chief culprit involved in helping to create this falsehood. In the attempt to attract ever-increasing amounts of high net worth individuals to our clientele, we often times alienate other potential investors by giving the impression that their kind is simply not wanted. Of course, after years of promoting this ideal client, I’m certainly not surprised, that the effect of this myth continues to permeate negatively on a broad scale. However, the rationale behind this impression actually underscores just how inexpensive professional advice can be. With many fee-based investment professionals charging between 1%-3% of the account value to manage client assets, it actually behooves us to seek out investors with larger sums of money to invest. Because when you really think about it, 1%-3% annually is actually quite inexpensive for the services provided. Compare that fee with the cost of depositing your money in a savings account, for example. Most savings accounts today are paying miniscule amounts, but remember that inflation historically hovers around 3%. This means that in the long run, you might actually be losing money by doing so. By hiring a professional, you gain the opportunity for your money to substantially stay ahead of inflation, and for such a nominal fee, it’s certainly worth the cost of doing so.
Myth #2 "All Those Guys Are Crooks, Anyway"
Another of these contributing myths is the assumption that all of us associated within the investment profession are no more than slick talking, pull-the-wool-over-your-eyes, bandits, who are just waiting for the opportunity to trounce on an investment naïve public. Many trade publications and news organizations help to solidify this image, by only showing the negative side of the profession; which usually includes some alleged, meticulously scheming stockbroker being hoisted away in handcuffs. I don’t intend to imply that our line of business is without flaw. The investment profession, along with many others, has its fair share of unsavory characters. And, just like other professions, the antics of these individuals unfortunately overshadow the more predominate, successful stories of the business; those which the non-investing public normally hears very little about. To help prevent employing such an individual, as you prepare to hire a financial advisor, I would suggest performing the same principals of due diligence that you should when hiring a professional in any field: conduct interviews, ask for references (and check them) and review their professional database for consumer complaints and past indiscretions. When you find the right person for your particular situation (and you will know), I think you’ll be pleasantly surprised to find that he or she doesn’t have a horned brow and pointed tail, at all. But in fact, upon complete reflection of the relationship, you may actually conclude them to be a gift from above.
Myth #3 "I Don't Have Enough Money To Invest"
Amazingly, some of the people who say that they don’t have enough money to invest are the very same people who actually can’t afford not to. Many of these individuals often have so many different sources siphoning from their finances, that most would need the proceeds generated from investments simply to break even! Usually, poor economic decisions help contribute to their arrival at this conclusion. Some may be paying $400 a month on a car whose value depreciates on a daily basis, and others may be supporting an unsustainable shopping habit. But whatever the vice, the commonality linking them together is the unquestioned fact that their money is hard at work for someone else, instead of working hard for them. This is why investing is so important. When one invests, they are putting their hard-earned money to work for them, instead of for someone else. As for the money, if you can afford a fast food lunch five days a week, you can afford to invest. The notion that you somehow need these large sums of money to begin the process is simply untrue. You may not be able to employ the services of a professional at those rates, but placing those proceeds in well positioned no-load mutual funds will more than adequately suffice, until you have enough money accumulated to hire a professional.
I hope this myth busting portion of the series helps you to gain greater comfort regarding the possibility of investing. And although I don’t expect you to come rushing through the doors of your nearest investment professionals’ office anytime soon, hopefully, those seats are beginning to feel just a little bit more uncomfortable. Next week we explore the actual costs associated with non-participation, and believe me, you can’t afford to miss it.
(Anthony Rhodes is a Registered Investment Advisor and owner of wealth management firm The Planning Perspective www.theplanningperspective.com)