5 Investment Landmines That Could Potentially Destroy Your Financial Future!
When you are trying to build a nest-egg for your future, it is just as important to know what NOT to do with your investment strategies, as it is to know WHAT TO do. The financial world is riddled with pit-falls that if you are not aware of them could cost you hundreds or even thousands of dollars. According to Tony Robbins, “The system is riddled with loopholes- what I would call landmines- that can blow up your financial future.” If you don’t see these landmines coming they will systematically destroy your financial future! Here is a list of “landmines” that kill many investors without them even knowing what has happened, because they are camouflaged with hype and deception:
- Because most people don’t know where or how to invest, they will go to professional investment managers to get advice, thinking that these “pros” will best know how to pick stocks, or will know strategies for how best to beat the market. Most often these pros will recommend the hottest group of mutual or hedge funds that are sure to beat the market. The fact is that incredibly 96% of actively managed funds fail to beat the market over any sustained period of time! TAKEAWAY: You are better off investing in passive, non-managed index funds like the Vanguard 500 Index. By passively owning the market, you can beat 96% of the world’s “expert” mutual fund managers and nearly as many hedge fund managers.
- The investment manager might say, “It only costs 3.17% per year for management fees. That’s nothing!” The truth is that as small as this number sounds, it can cost you a significant amount of money at the end. These fees are often hidden, so you don’t know until it’s too late! Here’s an example. If you made a onetime investment of $10,000 at age twenty, and, assuming 7% growth over time, you would have $574,464 by the time you’re 80. But, if you paid just 2.5% in total management fees and other expenses, your ending balance would only be $140,274 over the same period! How do you like that? Interestingly enough, this also applies to 401K fees. TAKEAWAY: Keep tabs on your fees no matter how small they seem to be. Your total annual fees should be 1.25% or less on average. By avoiding mutual funds and instead investing in low-cost index funds, you could recoup up to 70% of your potential nest egg!
- Average returns are what money managers like to talk about to impress the investor. “We made an average 20% return last year!” However, average returns don’t paint the real picture. This return is not a “dollar-weighted” return. It’s not what we actually get to keep, because most often we don’t invest in lump sums. We invest over time perhaps $100 from each paycheck so your investment is averaged. TAKEAWAY: Don’t believe the advertisements when they talk of average returns. If the fund advertises a 6% return, you are most likely to earn something closer to 3%.
- Can you trust your broker? You go to a broker because they are the “pros.” He seems like a nice guy whom you can trust with your money. He also seems to know what he is talking about because he just told you what amazing “average returns” his company is getting. According to a 2009 study by Morningstar, it was found that 49% of the managers owned no shares in the fund they managed. Of the remaining 51%, they only owned a token amount of their funds. TAKEAWAY: Your broker is not your friend. If the people who manage the fund are not investing in it, why in the world should you!! Make sense?
- I’m set. I have a 401(k). 401(k) plans are tied to the market. So, if the market goes up, you make money, but if the market goes down, you lose money. Look what happened during the market collapse of 2008. These retirement plans lost about 50%! Many people who thought they had a secure retirement, had to go back to work. In addition, most 401(k) plans have lots of hidden fees! Excessive fees are very destructive. Furthermore, not all 401(k) plans are created equal. Some are worse than others. TAKEAWAY: Don’t assume that you are set for retirement just because you have a 401(k) plan. You have to account for fees and taxes at the end. 401(k) plans are still a good investment but you need to know what fees you are paying. There are plans that have less than 1% management fees with no hidden fees. Check out “America’s Best 401(k).
Reference: Money- Master the Game, by Tony Robbins, 2014.
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David Figueroa- Success Coach