How to ignore your brokerage account could cost you thousands
Between work, family and social obligations, we are all busy. Few of us want to keep our brokerage accounts. However, the sad truth is this: You could lose thousands of dollars by adopting the “set it and forget it” method of investing.
Should we spend our days tinkering with our investments, reacting to every little change in the market? Absolutely not. Investments are intended to make our money grow in the long term. Obsessing them daily (or even weekly) is not just excessive; it’s a sure-fire recipe for making emotionally motivated decisions. That said, pretending that investments don’t exist is an expensive habit.
Here we will look at three ways that bypassing investment accounts could be extremely costly.
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High fees go unnoticed
A few years ago, the financial services firm Morningstar conducted a fascinating experiment. They asked 3,600 people to put $ 10,000 into a hypothetical investment account. Individuals had three S&P 500 index funds to choose from. All three funds were apparently identical, except for the fees associated with administering each.
The obvious decision would be to look at the fees associated with each fund and put the entire $ 10,000 in the fund with the lowest fees. This way the investor would get their money’s worth.
Rather than doing so, however, many of the 3,600 participants spread their money across the three funds. In a way, that makes sense. After all, we constantly hear about the importance of diversification and the safety of our investments when we allocate them. But diversification advice sometimes gets out of hand: As we diversify, we should also look for the lowest possible fees.
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For this experiment, the fees ranged from 0.40% to 0.04%. Yet when the researchers asked participants to choose one of the three funds, less than half chose the fund with the lowest fees.
What this would mean if participants were dealing with real investments is that the lowest fees would cost an investor $ 134 over 20 years. Choosing the fund with the highest fees would cost around $ 1,300 over the same time period.
If $ 1,300 doesn’t sound like bad to you, let’s extrapolate a bit. What if the amount invested was $ 100,000 instead of $ 10,000? Paying a 0.40% fee means losing $ 13,000. At the same time, investors who opt for the low-fee index fund would pay $ 1,340 over 20 years.
If you haven’t done so recently, check the fees associated with your investments. If they’re too high for your liking, maybe it’s time to rearrange them.
Portfolios become unbalanced
Failure to keep your portfolio in balance can also eat into profits over time.
Let’s say you have 75% of your portfolio in stocks and the remaining 25% in bonds. When you first decided on the allocation of your investments, that allocation worked perfectly. However, the performance of each asset has likely changed over the years. Maybe stocks have risen in value much more than bonds, and it’s time to rebalance.
You want to balance your portfolio in order to reduce risk while increasing your return. There’s no way of knowing exactly what the future holds, but by semi-regularly checking your brokerage account, you can identify when one allocation is out of whack relative to the others.
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Dividends are wasted
Let’s say you invest in a company that pays dividends. When that company makes a profit, it pays a portion to the shareholders and you receive a dividend. As nice as it is to receive a dividend check, you can make the money work for you just by reinvesting it.
Here’s how it works if you own 1,000 shares in a company that pays a quarterly dividend of $ 1:
- Your first dividend check is $ 1,000.
- If the company’s stock sells for $ 50 per share, your reinvestment buys 20 shares. So now you have 1,020 shares instead of 1,000.
- When the next dividend is paid, you get $ 1,020. If the share price is unchanged ($ 50 per share), your final dividend will buy 20 more full shares and a fraction of a share. That brings you to over 1,040 stocks.
- The process continues, with earnings buying more stocks.
You could use these dividends for other purposes, such as paying for living expenses. But by reinvesting them, you have the opportunity to buy new shares in a company without brokerage fees. Plus, reinvesting dividends makes your portfolio grow effortlessly on your part.
Registering to your brokerage account only takes a few seconds. Call your broker or check your brokerage account online to make sure you are ready to reinvest the dividends. There is usually a box you can check off to indicate your desire to put your dividends back to work.
A balanced financial life can be found in the space between obsessing over every detail of your money and setting aside time for occasional exams. As long as you know what to check, you can quickly make sure your investments are working for you and get your life back on track.