While a sudden bear market is what many investors fear the most, there’s a camouflaged threat to your portfolio that can do far greater long-term damage
***A big “thank you” to all our Digest readers
Today, we celebrate the Digest’s one-year anniversary. First and foremost, thank you for helping us make it a success.
The Digest began back on Oct. 6, 2018 as an experiment — a way to try to bring readers the latest news, market events, and analysis from our experts. And thanks to your support, it’s now grown into a thriving publication.
On behalf of my colleague and Digest co-writer, Luis Hernandez, as well as the wonderful “behind-the-scenes” team at InvestorPlace who does so much to get these issues out, thank you. It’s our privilege to do our best to bring you the best, daily market Digest possible.
To that end, how can we improve? What would you like to see more of? Less of?
Given our mantra of “we’re here to help our readers grow wealthier and wiser,” what would help us accomplish that for you?
You can email as us at Digest@investorplace.com.
Thank you again for your support. It’s been a wonderful first year with you.
Now, an odd question, but go with me …
***What are you more afraid of — sharks or mosquitoes?
Let’s try another one …
Are you more worried about crocodiles or snails?
It’s funny — the ferocious animals that terrify most of us … think sharks, lions, crocodiles, wolves … they’re actually responsible for an incredibly small number of human deaths per year.
So, what actually does take a huge number of human lives?
It’s the creatures we don’t really think of as being dangerous.
For example, take the mosquito. Annoying? Absolutely. But a killer?
The answer may surprise you.
While sharks kill only about 10 humans a year, mosquitoes are responsible for 725,000 human deaths per year, courtesy of malaria.
And while lions kill only about 100 humans, freshwater snails end roughly 10,000 human lives. Even “man’s best friend” is more dangerous … dogs with rabies are responsible for about 25,000 human deaths per year.
There’s a parallel to this in the investment world …
While most of us worry about the sharks, lions, and wolves of the investment world — think wars, political tensions, or any type of disruption that sends the markets reeling — there’s far-greater threat to your long-term wealth that doesn’t appear all that dangerous …
These are the “mosquitoes” of the investment world.
While we consider them annoying, the truth is seemingly “small” fees are wealth-killers, slowly siphoning away your returns, year-after-year.
Now, there’s good news on this front in recent days.
The latest industry trend is for brokerage fees to go to zero. Last week, we saw E*Trade follow both TD Ameritrade and Charles Schwab in eliminating their online trading commissions.
Now, this is certainly good news, but let’s be realistic — online commissions before this move were already low, typically in the $5 to $14 range.
So, unless you’re a professional trader who’s placing a huge volume of buy/sell orders every day, eliminating this fee isn’t going to have a profound impact on your net worth. I mean, for most of us, we’re buying and/or selling only a handful of stocks a month — if that much. Eliminating a monthly commission expense of — let’s say $50 — would be welcomed, but it’s hardly going to result in any major lifestyle changes.
The problem of fees is still out there — most notably in the form of recurring advisor fees, ETF expense ratios, and the opportunity cost of idle cash in your brokerage account. So, in today’s Digest, let’s look at how all of this might be quietly and invisibly eroding your long-term wealth.
***How fees turned the best-performing portfolio into the worst-performing portfolio
Regular Digest readers will recognize the name “Meb Faber.” I used to work with Meb prior to joining InvestorPlace. He’s a highly-respected quant investor who runs Cambria Investment Management, which offers a portfolio of ETFs.
In his book, “Global Asset Allocation,” Meb studied the suggested asset allocation portfolio returns of some of the most respected names in investing — think Warren Buffett, Ray Dalio, and Mohammed El-Erian.
Meb examined the performance of these investors and their suggested asset allocation models from 1973-2013, then ranked them from highest-returning to lowest-returning.
Now let’s bring fees into this.
In his book, Meb then looked at the effects of fees on these same portfolio returns by posing a hypothetical:
Starting in 1973, what if we took what would end up being the best performing portfolio strategy over the next 40 years, (El-Erian’s), yet implemented it with average mutual fund fee of 1.25% and average advisor expenses of 1% tacked on?
The takeaway is that those fees transformed El-Erian’s best-performing asset allocation into lower than the worst out of all the strategies included in Meb’s book.
Bottom line — fees make a huge long-term difference.
***Now, you might be saying “well, I don’t invest in mutual funds — I follow newsletters and buy specific stocks”
Okay, great — but do you use an advisor that charges a yearly percentage fee on your portfolio? Or do you own ETFs with recurring expense ratios?
The Securities and Exchange Commission conducted a study a few years ago. It found that over a 20-year period, a 0.5% annual fee could reduce a $100,000 portfolio by $10,000. A 1% annual fee reduces that portfolio by nearly $30,000.
Nerdwallet did its own study. It assumed an investor put $500 per month into a brokerage account for 30 years. So, that’s a total deposit of $180,000. It assumed the account would earn an average 7% annual return.
Look below at the effect of fees on that account.
Note that at investor who pays 2% in fees each year would give up more than $178,000 over a 30-year period. That’s virtually equal to the $180,000 deposited in the account over that same time.
***The opportunity cost of idle cash
Okay, so seemingly “innocent” fees are actually a big deal. But there’s another way you might be missing out on longer-term wealth creation …
Cash that’s just sitting in your account.
Whether it’s due to interest payments, dividend accruals, or money you’ve transferred to your brokerage account that you haven’t put to work yet, most of us have some cash that’s just sitting there.
This is dead money.
You see, while “our commissions have gone to zero!” is getting all the headlines in the last week or so, what you’re not hearing is how the brokerages are milking the cash that’s sitting in your account.
The Wall Street Journal reported on this last week. What it found is that the major brokerages make big money by automatically sweeping your idle cash not into a money-market mutual fund or other such asset that could yield you about 2%, but instead, into its own bank, which pays next to nothing.
For example, as of June 30, deposits at Schwab’s bank totaled $208 billion. Last week, its clients were earning only between 0.12% and 0.55% on those balances. Schwab isn’t alone. Most sweep accounts pay virtually nothing, sometimes as little as 0.05% on a balance of $100,000.
Given this, if you have a lump sum of growing cash just sitting in your account, this could eventually become a big, missed opportunity.
For example, let’s say you have $50,000 in cash in your account. The spread between what you could be earning in an online savings account and the anemic brokerage rates could be up to about 2%. That’s an opportunity cost of $1,000 per year right there.
If you sink $1,000 per year into the right 5G, cannabis, or AI stock that soars over time, that could make a substantial impact on your long-term portfolio.
As we wrap up, we’re pleased to see online trading commissions going to zero, but don’t let that fool you. The real fees that kill your long-term returns are the overall portfolio fees, brokerage fees, and expense ratios that slowly siphon away your wealth. Do you know how much you’re paying here? And do you know how much you’re missing out on earning if you have substantial cash balances in your brokerage accounts?
If not, I hope you’ll spend a few minutes looking into your own portfolio today.
Have a good evening,