FAQs: Financial Insurance
- What are common mistakes investors make on a stock market?
- Should I use a full-service broker?
- What are mutual-fund expenses?
1. What are common mistakes investors make on a stock market?
On June 18, 1991, The Wall Street Journal ran an article (pp. C1/C10) on Investment Errors and how to avoid them. As summarized from that article, the errors are:
- Not following an investment objective when you build a portfolio.
- Buying too many mutual funds.
- Not researching a one-product stock before you buy.
- Believing that you can pick market highs and lows (time the market).
- Taking profits early.
- Not cutting your losses.
- Buying the hottest stock or mutual fund from last year.
2. Should I use a full-service broker?
There are several reasons to choose a full-service broker over a discount or web broker. People use full-service brokers because they may not want to do their own research, because they are only interested in long-term investing and to hear brokers’ investment ideas. Also, not everybody likes to trade. Some people prefer buying 3 or 4 mutual funds and having their broker worry about them so they don't have to. Brokers who are also financial planners can give tax or estate advice on certain investment options, such as saving for a newborn child's education. Full-service brokers also have access to Initial Public Offerings (IPOs), which are generally reserved for clients who generate a lot of revenue.
3. What are mutual-fund expenses?
Mutual fund expense ratios, and similar investment-related fees, can seriously erode wealth accumulation over time. Those fees and expenses are stealthy, and they go largely unnoticed by investors while steadily diminishing the value of their investments in both up and down markets. What you pay for investing in a mutual fund, exclusive of any sales charges, is indicated by the "expense ratio" of the fund. The expense ratio is the percentage of mutual fund assets paid for operating expenses, management fees, administrative fees, and all other asset-based costs incurred by the fund, except brokerage costs. Those expenses are reflected in the fund's net asset value (NAV), and they are not really visible to the fund investor. The reported net return equals the fund's gross return minus its costs. Expense ratios do not account for every cost mutual fund investors bear: additional costs include any sales charges, brokerage commissions paid by the fund and other significant kinds of indirect trading costs. Mutual fund expense ratios range from less than 0.20 percent for low-cost index funds to well over 2 percent for actively managed funds. The average is 1.40 percent for the more than 14,000 stock and bond mutual funds currently available, according to Morningstar. In dollar terms, that's $14 a year in fees for each $1,000 of investment value; or a net value of $986. That might not seem like a big deal, but over time fees compound to erode investment value.
