Financial Planning: Understanding the Table Leg of Cost

‘Tis the season for stock market year-end reviews along with 2020 predictions to get spread across investors’ tables. Our recommendation is to use a table with four legs.

Finding the next dollar of growth will get all the attention. But, that’s just one leg. There are three more that can put the same dollar in your pocket.

1. Risk

2. Cost

3. Tax

4. Growth

The dollars in your account from the first three are much easier to find because you already have them. All you have to do is keep more of them.

[Read Part 1 of our Year-End Financial Planning Series on Risk]

If the COST leg is just a little too long, then many of your dollars are sliding off your table and hitting the floors on Wall Street, perhaps without you even noticing.

The Two Extremes of Investment Costs

Red Adair once said, “If you think hiring a professional is expensive wait until you hire an amateur.” He was talking about fighting oil field fires, but his wisdom applies to investments even more often.

Cheaper is certainly NOT always better. Just make certain you know what you are actually paying. Before you look for an extra dollar in appreciation, it is far easier to keep the one you already have.

After 30 years of earning 6% annually, a $1 million portfolio looks quite different after fees:

  • 2% annual cost = $3mm

  • 1% annual cost = $4mm

  • 0.5% annual cost = $5mm

- Many investors are shocked to learn that after accounting for all of the layers of expenses inside funds and the advisors’ fees on top of those, that a 2% cost may even be below what they are paying all-in each year.

- Others would be surprised to learn about the hidden cost of “free” and what that might really mean. [Find out more about that in our “Bank Yourself” Financial Freedom post.]

In both extreme cases, the simple math of compounding costs gets far too little attention compared to compounding returns.

Do you know exactly what you are paying? The extra burden of that math weighs heavily and consistently on your results.

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It does not matter how fast the horse you pick can run if it is carrying a jockey a few hundred pounds overweight. When performing your year-end financial planning, don’t let that costly invoice or the true cost of “free” eat away at your annual return.

We invite you to subscribe to our email newsletter (sign-up form below) to receive information on the next leg of our series on Tax. We are here to help you on your journey to Financial Freedom!