The real risk in investing is not in the fees, but in investing in the wrong things.

trading babyThere are several online brokerages that do a lot of advertising on television.  The baby making online trades is the best image I can think of.

The general theme of these advertisements is that anyone can make sound investments and that all that is needed is access to technical analysis data and any general Jane or Joe can beat the high-priced brokers who are just out to fleece you anyway.

Then one of the networks had a special on a few weeks ago detailing the horrific effects of a 2% annual fee on your 401 K account—asserting that over 30 years, it will eat up 60% of your savings.  The upshot was to do your own investing. I’ll come back to this in a bit.

In 1983. I got a call from a manager at Price Waterhouse about a new client they wanted me to work on.  It was a brokerage house. The manager asked me what I knew about stocks.  Now, at this point, I knew absolutely nothing about them, but as that has never stopped me, I said “Buy high and sell low,” to which the manager said “cute, get your ass in the office now.” So I did and they assigned me the new audit client and I got to read the blue regulation books and go work on the client.

Given the chance to invest on their own, most of the public will do just that: buy high and sell low. It’s like gambling, which is what TRADING as opposed to INVESTING really is, and the reactions are very similar. Sitting at the Blackjack table, down $300, the true gambler will not walk away and take his lumps, but try to win it back.  The shrinks say this is when gamblers get the thrill and also why they lose way more than they intended. When the stock price starts heading down, the gambler—um, trader—will look for any sign that things are going to turn around and give him hope that he can at least get out with a whole skin.  He watches this until a bottom occurs, at which point he gets out—sells at a huge loss.  Then when the price starts back up (which is usually the case), he tends to wait until a new market high is reached before getting back in. Buy High, Sell Low.

“You can do it, we can help,” one of the advertisers says.  Yes, I suppose it is possible that some can, in fact, do it. They help by providing technical analysis, which tells you nothing about the health of the company.  Technical analysis is defined as ” is a security analysis methodology for forecasting the direction of prices through the study of past market data, primarily price and volume.” Technicians use charts to search for archetypal price chart patterns, such as the well-known head and shoulders or the double top/bottom reversal patterns, study technical indicators, such as moving averages and look for forms such as lines of support, resistance, channels, and more obscure formations such as flags, pennants, balance days and cup and handle patterns. (Thanks Wikipedia for providing most of the definition words and saving me the keystrokes). If this sounds something like watching the patterns of the roulette wheel, it is. And while it does have some basis is science (Including behavioral science) and people can use it to make money, most lose.

The other analysis is called fundamental analysis, which is hard and cannot be done via computer algorithms of volume and price.  To do this, one has to get into the numbers of a company, read and understand the financial statements and try to make informed decisions about where the company is headed and attempt to correlate this with what the market price might be in the future. Using this method means you should be a long-term investor and not a trader because what shows up in the financial results of a company’s operations may take months or years to affect the stock price. Of course, I have been a CPA since 1983 and the more I know, the les I trust published financials.  This is why big companies have analyst calls where analysts get on the phone with the management of a company where earnings and plans are discussed. The analysts then write reports which people can buy and use to assist in making decisions. This, in theory, is why you pay the broker; she has access to these reports and can help make decisions.

Now for the 401 K fees. The math done by the network was correct, but the analysis of the situation was not. There is no way to invest in a stocks without fees.  Ok, sure, some of those online places can get pretty cheap, and if you are good enough and have the time to learn all you must, the god bless you, but for the rest of us, we pay fees.

The real risk in investing is not in the fees, but in investing in the wrong things.

This should be repeated.

The real risk in investing is not in the fees, but in investing in the wrong things.

The network used an annual 2% fee.  First, the industry average is 1.5% or thereabouts, and even the really low cost funds do not dip much below 1%, so the “loss” to fees is not as big as they say, maybe in the 15% range over an investing lifetime.

Some say that investing through mutual funds is a stupid thing to do because of where the investor is in the pecking order, behind management salaries, debt payments and general equity. Yeah, this positioning is correct.  But the theory of mutual funds is to diversify and thereby lower overall risk.  A prudent investor investing directly in common stock would do this given sufficient capital, and the ability to make the correct investment decisions. Managers of mutual funds do the work and make the purchases and sales and thereby enable the typical investor to diversify when they otherwise could not. For this they charge a fee. They have a right to get paid so long as they are doing a good job and we can track that because many places report on fund performance over a year, five years, 10 years and so on.

So what if your employer has bad funds in the 401 K.  While this can happen, it ain’t likely, but if it does, talk to the people in charge and see what can be done.

If you get the impression I do not like the “You can do it, we can help” approach, you would be correct.  It is successful not in  that it is correct but because it appeals to out anti-elite tendencies. Everyone knows we cannot trust the experts and every guy in the recliner could call a better football game than the $6 million a year coach. Except that the guy in the recliner could not get the coaching job at $25,000 a year, and when you really need help, call you call the professionals.

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