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Focus on Cost, But Don't Be Penny-Wise and Pound Foolish


Small differences in the rate at which you compound your money can dramatically influence the ultimate amount of wealth you acquire.


Consider that an extra 3% return annually can result in 3x as much money over 50 years! The power of compound interest is truly astounding.


The safest way to try and grab an extra few percentage points of return, as in the case of any good business, is cost control.


If you are enrolled in a dividend reinvestment program or DRIP that charges $2 for each investment and you are putting away $50 per month, your costs are immediately eating 4% of your principal. This can make sense in certain circumstances.



For example, my family gifted my younger sister shares of Coca-Cola stock over the years through a special type of account known as a UTMA and it served its purpose beautifully.


It is also true that, given her life expectancy, that initial 4% cost, which was inconsequential in terms of actual dollars in the grand scheme of things, will end up being cheaper than the mutual fund expense ratio on a low-cost index fund over the coming decades because it was a one-time, upfront expense, never to be repeated.


The problem is that many investors don't know which expenses are reasonable and which expenses should be avoided.


Adding to this problem is that there is a huge divide between the wealthy and the lower and middle classes that cause something that is a waste of money at one level to be a fantastic bargain at another.


For example, it will often make sense for someone earning $50,000 a year without a large portfolio to forgo an investment advisor altogether, unless there are some behavioral advantages that lead to better outcomes or the convenience is simply worth it, as it is to many people, instead opting for a handful of well-selected, low-cost index funds.


This is true despite the severe methodology flaws that have been quietly introduced into things like S&P 500 index funds in recent decades.


(There is this illusion, often held by inexperienced investors, that the S&P 500 is passively managed. It is not. It is actively managed by a committee, only the committee has arranged the rules in a way that seeks to minimize turnover.)


This same approach is often idiotic for someone who is rich.


As people like John Bogle, founder of Vanguard, have pointed out, wealthy investors with a lot of taxable assets who wanted to take an indexing approach would be better off buying the individual stocks, reconstructing the index themselves in a custody account.

Vanguard 的创始人John Bogle等人已经指出,有大量应税资产的有钱的投资者如果想采用指数方法,那么买入个股,在一个托管账户中自己重新设定指数,收益会更高。

A wealthy investor can often end up with more cash in his or her pocket, all things considered, paying between 0.25% and 0.75% for a directly owned passive portfolio than he or she would hold an index fund that appears to have a much lower expense ratio of, say, 0.05%.

从各方面考虑,一个有钱的投资者,为直接持有的被动投资组合支付0.25% -0.75%的费用比率通常会比持有貌似费用比率更低,比如说0.05%的指数基金最终赚得更多。

The rich are not dumb. They know this.


It's the non-rich constantly talking about it that are displaying their ignorance of things like the way tax strategies can be employed.



One important note:


History has shown that it is generally not a good idea to sell because of your expectations for macroeconomic conditions, such as the national unemployment rate or the government's budget deficit, or because you expect the stock market to decline in the short-term. Analyzing businesses and calculating their intrinsic value is relatively simple.


You have no chance of accurately predicting with any consistency the buy and sell decisions of millions of other investors with different financial situations and analytical abilities.


To learn more about this topic, read What Is Market Timing? and Market Timing, Valuation, and Systematic Purchases.


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