If you're frustrated from having one financial consultant after another financial consultant give you 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 posting, I'll drill down some more to really hammer home those points.
Getting 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 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) Avoid being stingy if you discover a superior advisor; and
(3) Be patient and have plenty of questions in your visit a superior financial consultant.
Don't Hold Mutual Funds
Without a doubt why I'm not a fan of mutual funds. Visit this link have so many hidden fees that it is often difficult to know exactly what your costs are. Besides upfront costs that may be upward of 5% for some funds, you can find 12b-1 advertising , marketing and distribution fees that range from 0.25% to at least one 1.0%, administrative fees that range between 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 may add another 2.0% to 4.0% in costs. And yes you didn't incorrectly browse the first section 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, chances are your 12b-1 fees are higher than average.
Increase this, intangible costs such as the performance that is sacrificed to maintain the necessary level of liquidity to satisfy share redemption, and 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 include insult to injury, sometimes fund managers sell out of these biggest winners to meet up liquidity needs, generating a capital gains income tax for you personally, the investor, even though the mutual fund lost money that year.
But this isn't even where in fact the negative traits of mutual funds end. When you 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 other country, I help you to exercise extreme care. When pullbacks happen in these country's economies as will inevitably happen, you are at risky of losing money quickly. Why? In a mutual fund, you're at the mercy of a herd mentality that generally, will induce panic upon the release of bad news, and cause an incredible number 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 opt to own just the very best stocks in the 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 superior to 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 because a lot of effort and time get into producing that advice. I recall talking to a potential client onetime that had a million dollars in the currency markets and was adament about not paying fees. He just wished to pay commissions on stock trades. When he showed me his statements (incidentally 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 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.
However when I explained that his net returns would be much lower because his portfolios quarterly 100% turnover rate produced excessively high capital gains taxes that could undercut his net returns, he didn't appear to understand. I assume his financial consultant didn't bother explaining this small detail to him. Still, he insisted on paying no fees whatever. I could tell that he was the type of person who was blindly loyal to his financial consultant, so I moved on without wanting to schedule a second 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, so that you will won't be confused in what your true gains really are. Avoid being 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 if you are almost certain to be paying more than that a year just to own a mutual fund?
Be Patient and Ask Lots of Questions
If you persistently ask the three questions I mentioned partly one of this article, you may get frustrated after speaking with ten financial consultants, none of whom can answer those questions. My advice would be to just be patient. Don't give up and don't accept a salesperson that's trained to answer those questions to lead 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 common sales technique to avoid your query is an answer like the following: "I'm not just a stock picker. But don't worry. I know how to find the best money managers in the united kingdom to manage your cash for you, so you're in great hands." Avoid being misled by smokescreens like this. Understand that if your financial consultant truly understands how to get you the best money managers, then he or she must necessarily have discussions about geographical preferences, industry preferences, and specific stocks with those money managers. How do a financial consultant claim to select the best money managers for you personally but have no knowledge of what stocks you possess and why is those stocks special?
To conclude, 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 a fantastic advisor is not really luckiness at all. It originates from your effort, tough questions, and your unwillingness to be led astray by the professional smoke screens of financial consultants.
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