Fees and More Fees and the Investment World

It should go without saying that the financial world survives on the fees that investors and consumers pay related to their accounts. Fees are not a bad thing, but today there is more and more press about the “fee drag” and how it can stifle a portfolio over many years.

The challenge is that the fee world is so complex that it is nearly impossible to calculate exactly what fees that one pays in the various investments that they hold. Some say that the marketplace wants it like that – to keep consumers in the dark, not understanding all the various fees that they are paying each month or quarter. On the surface, in a basic asset management arrangement, there is a percentage of the “assets under management” that one pays for the services provided by the manager. However, behind those fees can be additional layers of fees in the mutual funds held, transaction fees, yearly account maintenance fees, and others, which, when added up, can equate to a sizeable number. Take that out over 20 plus years, and the drag on performance is noteworthy.

In the annuity world, the fee discussion rages on. Some of the variable annuities in the marketplace have fees in excess of 4% per year. It would take a Master’s Degree in mathematics to sort through all of the prospectuses to calculate all of the various ways that the policyholder gets charged. The basic fee structure in both Variable Annuities and Fixed Index Annuities are fairly easy to decipher. It gets more difficult when the policy-owner elects the various “riders” or “add-ons” to the base contract – this is when the “fee drag” takes hold.

One of the most popular mutual fund companies in the world makes a fairly valid claim that it is nearly impossible to find an asset manager that outperforms their S&P Index 500 fund, net of fees. Their fund has an expense ratio of .05%. There have been various studies, easily referenced, which show that nearly 80% of funds with active management do not beat the performance of this fund – which is not actively managed. This is proof that the world of fees drag down performance for most all consumers.

The dirty word today in the financial world is “commission.” That word conjures up visions of the old style stock broker hammering folks on the phone until they buy. The truth is that for many long term investors, they most likely would be better off getting professional advice and purchasing their investments with an upfront commission and being done with the drag of higher ongoing management fees. The jury is continuing to deliberate this, and the volatility in the market will not let the “fee discussion” settle down to the back pages of the financial papers. When markets are up, the fee discussion lessens; when markets are down, the fee discussion heightens.

A Golden Opportunity to Prepare

Amid all the clatter of a new administration and new legislative priorities in Washington, it’s easy to see the trees but lose sight of the forest.

In this case, we’re talking about the U.S. government’s annual budget deficit.

Last year, the deficit grew by more than 30% to $587 billion.

And, according to a new report by the Government Accountability Office (GAO) and Congressional Budget Office (CBO), it’s on “an unsustainable path.”

No doubt the current Congress will pay lip service to the latest warning, as every other Congress and administration before has… just before turning around and opening up the spending spigot a moment later.

This situation has been well documented by experts before.

But the new key point from the GAO is its forecast…

Barring important changes in fiscal policy, the nation’s debt, relative to the size of the economy, will move to catastrophic levels within the next 15 to 25 years. Or it could happen sooner, if federal spending rises at an even faster pace without appropriate cuts elsewhere.

The Path to Ruin

In the wake of World War II, the size of the national debt relative to the economy was a historically high 106%. In the decades since, the long-term average held at roughly 44%.

The debt-to-GDP ratio was just 39% as recently as 2008.

But the fiscal crisis, bailouts and slower economic growth – as well as the lapse of “pay as you go” federal budgeting rules instituted during the 1990s – put the debt-to-GDP ratio into overdrive.

In 2015, the ratio soared to 74%. And last year, it climbed further to 77%.

You can see where this is going. As the CBO notes, large and growing amounts of federal debt:

Mean higher interest costs.
Limit government’s ability to respond to unforeseen events.
Reduce long-term national saving and income levels.
And, more importantly, it makes a fiscal crisis more likely.
The Search for Solutions

The prescription put forth by the GAO and CBO is one that will sound very familiar to you: lower federal spending (with reduced interest-carrying costs), and change programmatic spending on Social Security and federal health care programs.

I won’t plow into that thicket here, but let’s just say that both are going to be a challenge for any Congress or president.

So where does that lead us? It points to preparations for stagflation.

For many investors younger than 50, the idea of stagflation – an economy with both inflationary and recessionary tendencies – is hard to grasp. All that most of this age group has ever known in the past three decades is reliance on paper assets, like owning stock through a mutual fund.

We have to go back to the 1970s and the tremendous rallies in gold and silver to see the value of owning hard assets and the securities backed by them. With gold and gold securities at low prices, it’s not a bad idea to start preparing for that time again.

Wall Street’s Secret Language Revealed

Say these five words out loud real fast: Bifurcation, Backwardation, ZIRP, NIRP, Contango.

Did you do it?

If so, did you sound like a cheerleader chanting some foreign language?

These are actual words used by many traders, gurus, and Wall Street promoters.

They may sound funny or confusing but they serve several purposes. (1) They reveal or describe certain market conditions. (2) They act as “signals” for trading purposes. (3) They’re meant to confuse and/or impress you.

And they’re only a few of the many words, acronyms, and sayings that make up Wall Street’s “Secret Language.”

Funny thing is, most people (myself included) aren’t impressed with words that don’t make sense.

However, if you have a basic understanding of them, you’ll be better equipped as an investor and more likely to stay ahead of the crowd. Think of it as learning how to “connect the dots” of a financial puzzle.

Compare this with trying to run a business in a foreign language (German, French, Japanese, Greek, etc.). If you don’t understand the language, you’ll most likely lose money… a LOT of money.

So, like learning any language, you need a good teacher or translator that makes it simple and easy to understand.

That’s where we come in.

In this article we’re going to feature a few words so you can see how easy it is to learn the language and, at the same time, realize how Wall Street makes things so confusing.

Let’s start with ZIRP. It’s an acronym meaning “Zero Interest Rate Policy.”

It was initiated after the 2008 meltdown to “supposedly” stimulate the economy. The truth is ZIRP has caused critical damage to most of the nations Pension Plans. (They need interest rates to be high in order for them to fund their plans for their pensioners.) ZIRP has also crippled most senior citizens who depend on the interest from their investments to live.

Even though rates are slowly going up, it’s going to take a long time to unwind the damage done by ZIRP.

But, let’s move on to NIRP. It’s another acronym meaning “Negative Interest Rate Policy.” Yes, you read that right. NEGATIVE Interest Rate Policy.

It’s more collateral damage from the 2008 meltdown and has been in effect mostly in European countries.

Here’s the crazy part. When a country’s government bonds have negative interest rates (currently -0.05% up to -0.36% or higher) investors have to PAY THEM to hold their money.

It’s a losing proposition for the investor and it’s hard to imagine anyone buying bonds with negative rates but millions have been sold.

We’ve only scratched the surface here but hopefully you see how these acronyms are very confusing and misleading.

Getting Your Financial Data From A Service Provider

Using professional financial data services is very important since you can have opinions, news and even social media analyzed on your behalf. The analysis is very helpful in guiding you through the financial markets and in making investment decisions. When you have all the information you need from across equity markets, you will be better placed to make a good decision getting the most value from your investment.

The service providers have their own effective ways and tools of finding out everything there is to know from the financial markets to keep you updated. However, there is need to make sure that the kind of data you are getting from your provider turns out to be more convenient and beneficial to you as a trader. A good provider should offer you data through customized data feed that is suitable for algorithmic trading, if at all, it is to add any value to your investment. Here is what your data should contain to be most valuable.

Platform agnostic – Your service provider should have an API that can work with all given platforms as well as all programming languages. It ensures that no trader is shut out and you can work effectively from any given platform. Consider how possible this is when choosing your service provider.

Low latency – Financial data is very important to any serious trader or investor and so there should be very low time delays in the process. The time between which the data is acquired, analyzed and made available to you should be as low as possible. Time is of the essence in any kind of trading and investing and hence you should get feeds as soon as information is got so you can take important steps in time.

Categorization – Considering that the financial market is huge, data categorization is very important and you should get this from your data provider. APIs that are organized as sector, industry, exchange and equity will be most beneficial at any given time. This kind of data categorization gives you an easy time picking on areas that are most relevant and interesting to you compared to having to go through the huge volumes of data before finding what you are looking for.

Analysis – Besides making the most important information available to you, your financial data service provider should be in a position to offer proper data analysis to make it easy for you to digest. From the analysis, you should be able to access velocity, trends, sentiments, time series and impact data for every market and equity. The detailed analysis will give you a smooth pleasant experience handling your decisions and investments at large.

Standards – The way you receive your data ought to be the best possible. The interface should be friendly enough for you and even make it possible for you to interact and get responses to what you are interested in. Apart from getting instant data updates and notifications, your provider should make it possible for you to find out more of whatever you are interested in by providing a platform that gives you nothing short of this.

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