Headwinds

Colorado really is a wonderful place. People who don’t live here think that in the winter we are trapped in a terrible freezing tundra, but we actually know that it’s 50-60F half of the time. The only downside is that, especially on the west side of town,  warm winter days usually come with some unpleasant winds, and this year has been no exception.

Before things warmed up I was itching to get out for a ride on the road bike so I thought I would suffer through the wind.  And suffer I did. Compared to a calm day I was slow and completely wiped out from what would have been a simple ride.

Yes, I get to ride here. Yes, you are jealous.

Yes, I get to ride here. Yes, you are jealous.

Headwinds are awful. They wear down on you; chip away at you.  You work harder and go slower.  You crest the top of a hill and think you’ll get a break and the wind picks up and you end up working harder to get down the hill than you did going up. The whole ride you’re working twice as hard to go half as fast.

As investors we face headwinds as well.  They are our costs and taxes.  They push against us, slowing us down despite our strongest efforts. The longer we face them, the more they wear down on us.

Many people in a managed-money environment face multiple levels of fees. Most people pay a 1% advisory fee to their financial professional.  Add another 1% (or more) for mutual fund expenses and at least another 0.50% for internal trading costs (these aren’t included in your fund’s expense ratio.  Give another 1% to the IRS like most investors and now your total headwinds are in the 3%-4% range each and every year. In an environment where most balanced long-term investors are shooting for 6-9% returns, and face long-term inflation of 2-3%, that’s a pretty hefty headwind.

The good news is that we get to choose the nature of the environment we are in. We can decide how strong the headwinds will be. We don’t have to face headwinds of 1% financial advisor fees, 1% portfolio management fees, 0.50% trading costs and 1% in tax costs. We can choose more efficient portfolios and keep more of our hard-earned investment returns.  Financial professionals should be compensated based on the services they provide and not feel entitled to 1% of your portfolio.  Don’t buy actively managed funds and pay 1% to underperform the market.  Stick to index funds and ETFs with low turnover and pay significantly less than 0.50% in internal trading costs.  Build a tax-efficient portfolio using index funds, ETFs and municipal bonds (and use sensible asset location strategies) to keep more of your returns instead of paying up to the IRS every year.

Fighting the emotional headwinds of volatile markets is enough effort. There’s no reason to make our investment environment more difficult than it already is.

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