Investing on the Cheap


The Bugatti Veyron is a hand built supercar.  It has 16 cylinders, four turbochargers, 1,001 horsepower, goes from 0-60 in 2.5 seconds, and world record top speed of 254 miles per hour. A new one can cost as much as $3.5 million dollars. Even with that price tag, Bugatti’s parent company, Volkswagen, loses a staggering $6.24 million dollars on every Veyron they make. Why is this car so expensive?

Simply put, you’re paying for quality. You’re paying for an experienced hand putting the best materials together. The Bugatti example is a bit extreme, but everyone understands that you get what you pay for. On one hand, you can pay way too much for something (like a Bugatti). On the other hand, you can definitely pay too little for something.

“Bugatti Varon” by mwiththeat is licensed under CC BY-ND 2.0

I went to Wal-Mart once because I needed a set of earbuds for a conference. I bought the cheapest pair I could find.  It fell apart before making it to my car.  Years back, I decided to save money on a tool built in China; it fell apart less than a year later. I repeated my purchase with the same results. Eventually, I bought one that cost three times as much, but it had Made in America on it. Years later, that American quality is still holding up. I should have spent the money right the first time.

I’m writing this today because many investors today are demanding the cheapest services possible.  People don’t ask for the cheapest doctor to perform a lifesaving surgery. You wouldn’t want the cheapest lawyer out there handling your case.  Why do so many people decide to cut corners on their retirement?

Free Advice is Worth the Price – Robert Half

The reason so many people choose cheap investment advice and products is simple. Cost is one of the few variables that can be controlled. Investors can’t control the markets or business cycles. There is no way of predicting where the market will be in ten years. Low cost investments allow an investor to keep more of their money.  

The reality is you get what you pay for. I worked for the low cost investment leader, The Vanguard Group, for many years. It takes a lot to keep costs as low as Vanguard does. You have to expect tradeoffs. The reality of working with a company like that is you’re sending your hard earned money to a post office box on the other side of the country. When you need help, you’re calling a call center staffed with employees that can’t justify higher wages elsewhere. Think about that.

Rise of the Robo-Advisor

Robo-advisors are the latest cost cutting idea from the financial industry. It’s similar to one of the first cost saving ideas, the low cost index fund. These index funds put zero effort into understanding the market or companies they invest in. They simply buy every company on found in a market.  One of the more popular examples is Vanguard’s S&P 500 index (VFINX) Do you really need to spend money on a money manager to understand who the largest U.S. companies are? No, so save some money and buy an index.

Here’s the problem though… Vanguard’s S&P 500 index fund costs half as much as the S&P index fund I prefer, yet the S&P index fund I use consistently has lower downturns and higher overall returns. Why? Because you get what you pay for. The S&P 500 index cost a little more because the fund family had to put a bit more effort into their design.

Knowing when to spend more for quality is important. Robo-advisors are the latest tradeoff between cost and service. They are online wealth management services that provide automated, algorithm-based portfolio management advice without the use of human financial planners. Robo-advisors use software similar to what traditional advisors use. However, they only offer portfolio management and do not get involved in more personal aspects of wealth management, such as taxes and retirement or estate planning.

What this means is that you’re getting generic investment advice that isn’t working towards your own unique goals. Former senior counsel to the board of governors of the Federal Reserve, says that Robo-advisors do not meet the guidelines required to meet the fiduciary rule required to offer financial advice. Her experienced opinion is that the Financial Industry Regulatory Authority (FINRA) reporting suggests advice is best left in the hands of human advisors. “If a robo-advisor cannot perform overall portfolio analysis, it cannot perform a critical function of an investment fiduciary.”

By no means am I arguing against change for the sake of tradition. There are far too many traditions Wall Street needs to give up on. My point of this post is to start a conversation on value.  Keeping your expenses as low as possible is very important, but it should not be the only factor to consider.  At the same time, there’s no reason to pay for something you don’t need. Your goals are your own.  You need to know how to best use the resources available. Spend your money wisely. Make sure you’re getting something of value.

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