Episode 33: The Wealth On Any Income Book – Section 3: Invest without Paying Commissions – Transcript

Invest without Paying Commissions

Hi Folks, Welcome to the Wealth On Any Income podcast. This is where we talk about money tips, techniques, attitudes, information and provide inspiration. I’m your host, Rennie Gabriel.

In the previous episodes I spoke about your five year financial goal; the difference between good debt and bad debt; how good debt can support you to create wealth. We discussed how to complete a Balance Sheet and determine your net worth so you know how close you are to Complete Financial Choice™. For the Income and Expense form, when you focus on expenses first you’re rewarded with more income. We discussed how to measure the level of pleasure based on where you spend your money.

In the last episode we spoke about investing versus gambling, how to pick a financial planner and how the Dow Jones Industrial Index changes over time.

Today, I’ll continue to read the last of the 12 steps in the Wealth On Any Income book that deals with creating your prosperous financial future. Today we’ll cover some terms like Dogs of the Dow, loads, dollar cost averaging and how to invest without paying commissions.

 This is an education in terms and concepts you need to understand if you plan to invest in equities. It will be less than 20 minutes today.

As I read, I could stumble over some words. I am not a professional voice over actor so please forgive me if that happens.

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The Dogs of the Dow

I’m not certain of the origin of this investing term. It may come from sled dogs that lead the pack, or dogs that lag behind. The “Dogs of the Dow” generally refers to 10 stocks of the 30 listed on the Dow Jones Industrials. They have a price per share that lags behind other stocks on the Dow, when viewed by corporation’s earnings per share. It would be expected that these ten stocks would grow in share price faster than the other stocks on the Dow, to reflect an alignment of its value based on its earnings.

The strategy is based on the calculation that you can beat the market return, based on the Dow, by limiting your investment portfolio to 10 of the stocks that are expected to be the best performing from the Dow index. It makes sense the rate of return will be higher from the best ten performers on the index, than the performance of the entire 30 stocks listed. You can even beat this return by focusing on the top four or five stocks from the average. Again, these are major corporations that will most likely still be in business when you and I are dust. We are not talking gambling here. You can invest in a mutual fund that is patterned after this concept through many of the major stock brokerage firms. Listen to the section “Mutual Funds” for a general explanation of this investment approach.

You can also create this on your own. The information on which stocks make up the “Dogs” can be obtained by calling a stock brokerage firm, depending on who is left standing after the meltdown in 2008, or go to www.dogsofthedow.com to see an updated list. Another place to look would be Motley Fool at https://www.fool.com/ . When I first wrote this section in 1998, the top 10 stocks were: Philip Morris, AT&T, Caterpillar, International Paper, Exxon, Kodak, General Motors, Chevron, 3M and J.P. Morgan. In 2008 the following companies were on the list: Citigroup, GM, Pfizer, AT&T, JP Morgan Chase, Altria (which used to be Phillip Morris), Verizon, DuPont and Home Depot. In 2013 the following companies were on the list: AT&T, Verizon, Intel, Merck, Pfizer, DuPont, Hewlett-Packard, General Electric, McDonald's, and Johnson & Johnson

Once you’ve made your purchase, you do NOT have to look in the newspaper daily to see how you are doing. You only need to review your portfolio once per year. At that time you can see which stocks to keep, sell, or just invest in the new leaders. Keep it simple. Limit your portfolio to 5–8 stocks. If you want to do some gambling, you can add a stock or two from a speculative area for a total portfolio of 10 holdings.

Remember when I was talking you how little bits of money add up to large amounts? You don’t need a lot of money to get started in building your portfolio. You can start with as little as $100, or even less. You can buy online through a discount broker, such as Scottrade, which was acquired by TDAmeritrade, or Schwab, which acquired TDAmeritrade. You can purchase one share of sock instead of a block of 100 shares.

And there used to be E*TRADE which was acquired by Morgan Stanley. Since my book was first published even more investing platforms were created to buy stocks such as Robinhood with no commissions. You can type into Google “commission-free brokers” and a host of platforms will be listed. I heard a funny observation from Charles Schwab regarding people trading online by themselves instead of using a broker. He said, “It allows people to make the same investment blunders as before, only faster.”

In a book by Michael Lewis, Flash Boys: A Wall Street Revolt, the author contends that the stock market is rigged, like this would be news to the average investor. What is news is how it is rigged in favor of the large trading firms that use high speed computer trading. They have literally figured out the shortest route to an exchange over the Internet to shave fractions of milliseconds so that they are able to identify your desire to buy shares of a company and buy them in front of you and sell them back to you at a higher price. This might only give them an advantage of a few pennies, but with millions of trades this amounts to billions of dollars a year. What does that mean to you? It might mean that you paid an extra $1 to buy 100 shares of a stock. When you look at this that way, it’s not really very relevant to the average investor. But it does confirm that the big boys will take advantage of the small investors.

Before you start however, you will need to have established your future spending account for the expense items we discussed earlier, like car repairs, property taxes, vacations, clothing and so on which don’t show up each month. The spending account money will not be invested; it will be sitting in a savings (or spending) account ready for the time when you need it.

Another way to Invest Without Paying Commissions

Over 200 companies in the U.S. and around the world offer the opportunity to investors to purchase their stock without going through stockbrokers and paying commissions. They vary from consumer products to utilities. Some very well-known names are on the list, such as Gillette, Mattel, Chevron, Exxon, Merck, Owens Corning, Home Depot, and McDonald’s.

You can buy your stock directly from these companies for a little as $50. Most often, dividends can go back in and purchase additional shares. This is called a dividend re-investment program, or DRIP. If you want to know more type “DRIP Investing” into Google. While you can do this on your own, you may still want to use a broker or financial planner after I read the section, “Don’t be Afraid of a Load.”

Investment Clubs

Many people enjoy the opportunity to meet and discuss their investment ideas and get feedback from like-minded people. There are many different approaches and personalities to investment clubs as there are people.

Some clubs do extensive research based on fundamentals, others go on hunches with minimal research, and still others will buy and hold while others trade actively. Some will go for the stocks of large corporations and others want start-ups. Some require you pay a fee of $25 per month to participate; others could require $1,000 up front.

To find out more about investment clubs, you can find books written by some clubs: The Beardstown Ladies’ Common Sense Guide and The Money Club by Crockett and Felenstein are two examples. Do not believe the specifics about their profits, they are bragging. Just look at the big picture – working together. The leading source of information is the National Association of Investors Corporation. This is the organization that oversees investment clubs nationally.

The NAIC’s web address is https://www.betterinvesting.org/.

Mutual Funds

Mutual funds allow you to participate in the investment opportunities offered by the stock, bond and money markets, with several advantages over trying to build your own portfolio of individual stocks. Mutual funds offer these four advantages:

  1. Diversification. You can invest in a broad variety of stocks, bonds, and other securities with as little as $250. This helps reduce the risks of investing.
  2. Professional Management. Experienced managers and analysts invest your money. They study companies, industry forecasts, and market factors before (and after) committing to an investment.
  3. Various objectives. You can pursue a variety of objectives with mutual funds, from seeking high income to long-term growth, from technology stocks to forest products, and from conservative to aggressive investments.
  4. Liquidity. You can withdraw your money at any time at the current net asset value, which may be higher or lower than your purchase price.

Funds that pay a sales commission to the person who provides you the fund are called load funds. A ‘load’ is a commission. No-load funds do not pay sales commissions. And both load and no-load funds will still charge management fees. These and other details are found in the prospectus that the companies must provide to you before you invest. Please read this information. You can get a list of various load and no-load funds by putting “Mutual Fund Forecaster” into Google.

Don’t Be Afraid of a Load

While I briefly discussed in previous sections how to buy stocks without paying commissions, and that you can purchase mutual funds with or without loads (commissions), you don’t have to be afraid of paying a commission or load. All mutual funds will have various management fees and expense charges, whether or not they charge a load. These costs are usually deducted from the overall fund and are reflected in a reduced rate of return. They are not taken out of your individual account. If you have little investment experience, you may want to look at the load from the perspective of paying a fee for a service. And, you could actually be financially better off paying a commission. I’ll explain this later with a chart, but for now let’s look at how you might see a commission, or load, from the perspective of simply paying for a fee for service.

If you’re someone who repairs your own car, then you probably wouldn’t pay a mechanic to change your oil. If you can do it yourself, and it’s something you normally do, why pay someone else? You may have taken classes, read books, played around on your own, or been taught by someone else how to repair a car.

Over the years, I’ve spoken to thousands of people in seminars, and most people I speak with don’t repair their own car. And, none of them take their auto in for repair and expect the mechanic to work for free. The mechanic has the parts, training, education and experience to do the repair, and people expect to pay for that.

If you have the education, training and experience to do financial planning, insurance analysis or investment evaluations, then you wouldn’t need to use a financial planner, insurance agent or stockbroker. If you can do it yourself, you wouldn’t need to pay someone else for their advice or assistance, unless you still want to have someone confirm your conclusions. You’ve probably heard the expression, “If a lawyer represents himself (or herself) in court, they have a fool for a client.”

If you want someone who can provide advice, someone who can ask you questions which will create clarity and provide appropriate recommendations based on your unique situation, then you will need to pay someone either through a fee, or through a commission from the products they sell. As I said in a previous section, many financial planners and insurance agents will work with you for only the commissions they will receive from the products you buy. This can be an easy, nearly painless way, to get advice and pay for their services.

Now, let me describe a chart that’s in the book for some hard evidence on why you don’t have to fear paying a load. I’ve used two mutual funds as an example. I’ve tracked the management fees and expenses shown from the prospectus of each one. The prospectus is the document that is required to be provided to you under law. It contains the information that the Securities and Exchange Commission feels every investor ought to have. Always read the prospectus and, if you don’t understand what it says, have it explained to you. One of the funds is from one of the largest mutual fund companies in the country and is representative of a no-load fund. The information for the load column comes from another of the country’s largest fund that most financial planners and insurance agents represent. The chart illustrates that if you’re going to buy a mutual fund, and keep it for only a couple of years, you’d be better off buying a no-load fund. If you are going to keep the fund for five years or more, you may be better off in a fund where you pay a commission up front. You would want to look up this information for yourself with specific numbers for any of the funds you are considering.

I’ve also made some assumptions in the chart. One, both funds have the same rate of return over the period that I am illustrating, and there is no way to know if this will happen. The rate of return for the future is calculated the same as the past performance, and there are no guarantees that this will occur. Second, the management fees and expenses remain level throughout the period. In reality, these items could increase or decrease. These fees can be higher or lower from one mutual fund company to another, and even from one fund to another within a family of funds. As an example, Fidelity has dozens of mutual funds available and each one can have different expense and management fees.

In the Load Column the total expenses that would reduce your return include the commissions paid to the salesperson and their firm plus the management fees and expense charges. In the first year this adds up to 7.34%.

In the no-load column, which represents management and expense fees alone, with no commissions, this figure is only 2.62%; almost 5% less. However, the expense fees in the load column are less than those in the no-load column and, over time, this makes a big difference. By the fifth year, the total expenses, including the load for the load column, are 12.30%, while the no-load column total expenses are 13.10%, almost 1% higher.

The chart explains that by the fifth year, you will have paid less in this load mutual fund than in the no-load fund to which it is compared. By the eighth year, the difference is over 4% more paid in the no-load fund than if you had stayed in the load fund and paid a commission up front.

So, if you are going to keep your money invested in the same mutual fund for several years, you don’t have to be afraid of a load. And, by paying a load, you should have been given the advice about which fund would best suit your attitude and objectives. With several thousand funds from which to choose, that can be an intelligent and time-saving approach to selecting the right one.

Dollar-Cost Averaging

This is a method of systematic investing. It requires an investor to purchase equal dollar amounts of a stock, or a mutual fund, on a regular basis, such as weekly, monthly, quarterly, etc. The success of the strategy is based on the fact that the same amount of money will buy a different amount of shares based on prices rising or falling with market conditions. The strategy alleviates investment timing problems.

While no specialized expertise is required for success, it does require the discipline to invest regularly, even in declining markets. Over time, this approach yields an average cost of shares that is less than the average price. Over time, investments at a lower share price will benefit your account when you ultimately sell. It’s better to dollar-cost average in a falling market than to make a lump sum investment. This also works well when you are nervous about current holdings. In a mutual fund, if you re-invest dividends and capital gains in additional fund shares, you are using a type of dollar-cost averaging.

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Here’s your opportunity to grow: Buy either the paper version or PDF version of the Wealth On Any Income book from my website instead of Amazon. Profits from any book purchased from my website are donated to the charity Shelter To Soldier. Just go to www.WealthOnAnyIncome.com/books

In the next episode we’ll cover common insurance products from life and health to property. You will be amused at how simple this can be, and how complicated an insurance agent can make it.  Also covered; investing in real estate, peer to peer lending, trust deeds, life settlements and tax advantaged investing.

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Until next week, be prosperous. Bye, bye for now.

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