Can You Increase Your Investment Returns by Controlling Cost?
While it is impossible to control the financial markets and its return, one can make a positive impact on their returns by CONTROLLING THE COST OF THEIR INVESTMENTS.
Most of us are very cost conscious- you check prices. Most of the time we look to extract the most value of each dollar we spend. You can grocery shop at the local corner store, or derive more value by shopping at BJ’s or Costco’s. Don’t confuse this with being cheap or being penny-wise, but pound foolish, which negates the concept of value. We shop with the cost and value proposition always in mind. We spend a considerable amount of time weighing the benefits of most purchases so that we get the most for our money.
Let me draw your attention to the cost of your investments. If the true cost of investing were more obvious, it would spark considerable attention and clipping coupons or driving across town to save 2 cents on gas would be an afterthought.
Consider the following:
You’re throwing a huge party at your house. You have to buy 100 bottles of each beverage below. Store #2 is around the corner from your house, and store #1 is two towns away. But to make this real, its July, you have 4 crying kids in your minivan and the a/c just died-this has never happened to me
Beverage Store #1 Store #2
Water $.05/bottle $.62/bottle
Soda $.46/bottle $.72/bottle
Juice $.52/bottle $1.10/bottle
I’m willing to say most would drive to store #1 despite the harrowing experience to come, just to realize the savings. To be fair, you would save around $141 on the purchase; before considering the extra cost of fuel, wear and tear on your car, and your fleeting sanity.
But let’s bring it back to investments. See below:
Investment 403b #1 403b #2
S&P 500 Index .05% .62%
PIMCO Total Return .46% .72%
T. Rowe Price Growth Fund .52% 1.10%
If you have $100,000 in each investment at 403b #1 your annual cost would be $1030, while in 403b #2 it would be $2440. The choice of going with 403b #1 over 403b #2 would realize an annual savings of $1410! There are other costs associated with each 403b option, but for today we are just looking at investment cost.
To bring it back to the beverage purchase, using 403b #2 is like driving across two towns in your minivan with 4 crying kids and no a/c- all for the privilege of paying 2x more for the same beverages.
Fact- 75% of teachers who have a 403b are going to store #2 for their 403b solution.
Hint- If your 403b provider is an insurance company, you are shopping in store #2.
If you don’t know, please don’t hesitate to contact me and I will tell you exactly where your shopping!