By Craig Erwin, PH.D.
Inflation is raging. When we fill our gas tanks or go shopping, that’s crystal-clear. It’s hard to find anything that isn’t seeing sharp price increases. But there is something that is getting cheaper. In fact, according to Morningstar, it’s been getting cheaper for years – fund fees. Fund fees (mutual fund and exchange-traded fund fees) have been falling for years. Maybe you didn’t notice because, even though they have been falling, fund fees have been low for some time. And fund fees are critically important. High fund fees can result in much lower investment returns over time.
Mutual funds and exchange-traded funds are baskets of investments, like stocks and bonds. They enable investors to buy dozens or hundreds of different stocks and bonds with one transaction. This provides investors with an incredible benefit, the ability to buy a diverse basket of investments quickly and easily.
Although some brokers have eliminated fees for buying funds, many have not. Buying hundreds of individual stocks using a broker who charges fees would cost a fortune because we would have to pay a commission on each stock or bond. That’s why funds are such a bargain – because we pay one commission instead of hundreds of commissions. But even if we used a broker who has eliminated fees, buying hundreds of individual stocks and bond would be a terribly time-consuming process. The process would be so painful that most of us would end up with undiversified portfolios, which would put our investments at risk.
Investing has changed in numerous ways in the past 50 years, providing today’s investors lower expenses and far more choices. There were no IRAs, 401k plans, or 403b plans 50 years ago. There were also no index mutual funds. Although there were alternative investments, such as precious metals, real estate, art, and commodities, they were more difficult and time consuming to buy and they weren’t available in mutual funds or ETF’s and couldn’t be put in IRA’s or 401ks. Cryptocurrencies did not exist and alternative investments such as derivatives were just being born. It was more difficult and expensive to buy and sell alternative investments and, if an investor wanted to sell alternative investments, it might be difficult to find a buyer. There were newsletters and investing publications, but the internet did not exist, so there were no YouTube videos, TikTok videos, or chatrooms. Plus, Robin Hood and Reddit were decades away.
Unfortunately, having such a great array of investments to choose from can lead investors to take higher risks, often resulting in poor investment portfolio performance. Lower fees can lead investors to trade frequently, which is likely to lead to lower performance. And the ease with which investors can buy cryptocurrencies, options, and derivatives can lead them to take excessive risk. Just because it is possible to purchase derivatives and cryptocurrencies doesn’t meet it is wise to do so. Most of us should invest in much the same way and in much the same investments that we did 50 years ago, even though there are far more options available to us now.
So, recognize that you live in an amazing time, when there are so many ways to invest and so many investments to buy. But don’t invest in something exotic just because you can. Investing should not be exciting like a video game; it should be boring. You should not be trading frequently and constantly exploring new types of investments. For the vast majority of investors, the best investment approach hasn’t changed in the past 50 years, except for the introduction of the index fund. The index fund is the best thing since sliced bread. It allows investing to easy and cheap. Couple index funds with declining fees and you should be able to accumulate wealth more reliably and inexpensively than at any time in history. Take advantage. But buy and hold, don’t be a trader.
Do you invest in alternative assets like cryptocurrencies, real estate, and derivatives? Are you happy with the performance of your investment portfolio? Are you saving aggressively for retirement?
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