Many people are incapable of actively managing a portfolio. They simply don’t know enough about economics or the stock market in general to make wise decisions about what to invest in, when to buy, when to sell, etc. It is probably most accurate to call them inexperienced instead of stupid. Without the experience of investing or learning from someone who does, it is hard to know how to actively trade stocks.
While many people are therefore at a disadvantage, there are alternatives: index funds, mutual funds, etc. Essentially a grouping of different stocks that has inherent security from the diversity of the stocks and markets of companies. Today, investors have more options that allows them to continue their ignorance. Older generations must shake their heads at the current generation’s access to automation or information in an instant.
What’s the Catch?
I know what you are thinking: “What’s the Catch?” You’re right. This information and tools to invest for the ignorant or inexperienced investors does not come without a price. As it turns out most of these fund have a management fee. That means that a company or individual is paid a certain percentage of the return based on a number of things.
While many people may accept these fees, regardless of how large, it is something to consider when you are investing. It is important to start investing early, but don’t be fooled into losing too much of your return to management fees. If the fees are too large, it can practically reduce the positive effects of compound interest.
What to Consider When Evaluating Fees
When you are investing your money, you need to make sure to consider a number of options before jumping in with both feet. Failing to consider these things will not only mean losing money, but it also means giving other people the opportunity to take advantage of your inexperience. You don’t want that!
The first thing to consider is the investment fees themselves. How does this percentage compare to similar funds? Is it about the same? Is it significantly higher or lower? If so, make sure to find out why it is higher or lower. This can be a result of a variety of different reasons, so make sure to do your homework.
What is the history or returns on this fund and how does it compare to similar funds? If it is significantly higher, does it come with a larger fee? If so, it may mean that it isn’t as attractive of a plan as the alternative. If the return is lower, make sure to think about whether it is accompanied with a lower fee.
Usually new brokerages have higher fees in order to pay their bills. As companies are more established and reputable, they can afford to lower their fees in order to further increase the number of their clientele and focus on competitiveness. When considering available funds, make sure to consider the reputation of the broker. Have they been around for a while? What types of benefits are there with investing here as opposed to there.
To put it simply, it’s important to consider all the options together. A larger fee will take away from your return, but this needs to be considered alongside the potential return and reputation of the broker. Don’t settle for what’s easiest because it may mean a huge loss in revenue. That’s the last thing you want to do with your retirement fund.