Pesticides kill. They’re developed to kill weeds, insects and rodents. These toxins are spread through everything from small spray bottles to crop dusters.
In the late ’80’s, swarms of helicopters would fly over Los Angeles spraying pesticides to try and kill the fruit fly. The helicopters would fly low and dispense poison on everything – homes, pets, people and the fruity fly. As the fleet of helicopters flew over my house, I remember thinking this can’t be good. Thankfully, it only lasted a few months.
Financial pesticides also kill. What are financial pesticides? They are things that can kill your long term investment performance. Here are some:
High fees. The higher your fee, the lower your return. You have the ability to control the fees you’ll pay. Have you ever reviewed the fee structure for your investments? I was reviewing a client’s investment held at another firm and the fee for her fund was over 2.5%. She wasn’t aware her fee was so high because she never received an invoice or noticed it on her statement. I told her she would never see the fee as it was priced into her fund holding. She wasn’t happy and has decided to move her money to a more economically desirable investment.
Excessive trading. The more you trade, the more fees you’ll pay. In addition to increased trading costs, you may trigger a short term capital gains tax. Short term capital gains are taxed as ordinary income and are much higher than the rate on long term capital gains. Excessive trading and short term capital gains are damaging to your long term returns.
Actively traded mutual funds. According to Morningstar, in the first quarter of 2016 less than 20% of active fund managers failed to beat their index. The “stock-pickers” market failed to deliver returns that were above their corresponding benchmark. Active funds also have higher fees than index funds.
Timing the market. Trying to time the market is futile. To be a successful market timer you have to pick the right stock at the right time – consistently. It can’t be done. Market timing will add to your trading costs and expose you to a short term capital gains tax.
Being impatient. It’s possible your investments may take two, three or more years before they show a substantial gain. Impatient investors usually buy and sell at the wrong time. A redwood tree can grow to over 300 feet but it doesn’t do it in a day.
Fear. The fear of losing money will keep investors out of the market especially during a market drop. Billions of dollars left the stock market in January looking for safety. When the market turned around it left these investors on the sideline.
No plan. Investing and trading without a financial plan is toxic. A plan will help guide your investing and improve your long term results. Your plan should also include an investment policy statement outlining your asset allocation strategy, fee structure and investment selection.
How can you avoid financial pesticides? Be patient. Have a plan. Purchase low cost investments. Stay diversified. Review your plan and accounts often. If you follow these guidelines, good things will happen.
Whoever is patient has great understanding, but one who is quick-tempered displays folly. Proverbs 14:29
Bill Parrott is the President and CEO of Parrott Wealth Management, LLC. www.parrottwealth.com