Can't Control the Markets? Try controlling the Costs

You can't control the markets, but you can control investing costs

As 2008 proved, the financial markets are prone to unpredictable periods of turbulence. That can make investing feel a bit like a roller-coaster ride. The disappointing results that many mutual funds posted in 2008 and at the outset of 2009 may have left you feeling concerned over your financial future. You're not alone.

However, one maxim seems to hold true: There's one very important element affecting long-term investment return that you can exert a great deal of control over, and that's your investing costs.

Keeping costs to a minimum can help boost long-term investment success. That's because every dollar paid for management fees, trading costs, and taxes is a dollar less of potential net return. And while some costs are not as transparent to the average mutual fund investor, a fund's expense ratio is always transparent.

Although lower costs aren't a guarantee of superior mutual fund performance, higher costs don't necessarily translate into higher returns either—turning the adage "you get what you pay for" on its head.




The track record: Higher costs have often led to lower returns

In the interactive illustration below, U.S. stock funds are divided into three categories: small-capitalization, mid-cap, and large-cap, reflecting the size of the companies the funds invest in. The funds are further divided into quartiles (that is, 25% of each respective group), based on expense ratios. As you can see, the best-performing funds for the period were the ones with the lowest costs in almost all capitalization and expense categories.

The components of investment cost

The costs associated with investing in a mutual fund include operating costs—the fees paid to the fund's portfolio manager—as well as recordkeeping, administrative, and reporting expenses. Together, these costs are deducted from every fund's earnings and are expressed as its expense ratio.

Other costs can also affect your mutual fund returns. For example, some funds charge a 12b-1 fee, which covers the marketing and distribution costs. Sales charges may apply if you choose to invest in a fund that collects a front-end load. Yet another expense is the cost of trading securities, including brokerage commissions.

When thinking about the impact of costs on your own investments, bear in mind that although the cost factors that make up a fund's expense ratio aren't directly deducted from your accounts, they do act as a drag on your net returns.

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Tips to help make kids financially responsible

A recent national survey said that parents are more apt to talk about the birds and the bees than money and finances. Good thing you're not one of them, right? No matter what age, your kids need to hear from you about the money basics. Here are a few tips to help you begin the financial dialogue with them (and keep it open):

• Start'em young – Start their education about money matters by having a monthly family finance meeting. That savings account you've been meaning to open for them? No time like the present.
• School the school-aged kids – After-school jobs are more than just a way to get the kids off the couch. Fiscal responsibility becomes real when it's their hard-earned money at stake.





• College kids? Tell them instant credit = lingering debt – The average college student with credit cards graduates already $4,000 in the hole. So make sure they know to look at the fine print. Tell them to read the agreement before accepting the "free" gift and signing away their financial future.
• Help them make grown-up decisions (with their first grown-up job) – Adult children can learn to budget and curb spending (and make saving part of the equation). An emergency fund should be figured into how they save (think 3-6 months' salary). Scheduling reminders to pay monthly "bills" will help them avoid late fees. And setting up a monthly Automatic Savings Plan will grow their money even faster.

Your child's financial responsibility starts with you. Speak up. Talk to your kids about money and spending. It's one "adult" discussion that won't leave you or your kids blushing.

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Local or Direct Bank or Broker

If you're looking to finance a mortgage, expect to invest some time (and maybe some angst) in the process. Many options are out there – we'd like to help you narrow down the field to 3: local banks, direct banks and brokers.

Local bankers lend the money directly without a middleman, using their bank's money, rates and terms. Direct banks work directly with homeowners (online and by phone) and are usually more flexible. Mortgage brokers work with banks and borrowers to "broker" the best deal. They don't lend their own money. Here are some other difference "makers":

• Local bankers may provide good rates/discounts for existing customers, can add your mortgage to a suite of the bank's products, allow you to set up online automatic payments, etc. But the loans are more conservative, the process can be arduous, possible mistakes and overcharges can appear and they're not required to disclose the "yield-spread premium" (lender's fee for a higher interest rate).
• Direct banks can offer you better rates because of low overhead. With little to no fees, you can save thousands of dollars. Plus, online account access is there 24/7. You can compare lenders, often in record time, from the comfort of your robe and slippers.
• Brokers handle details, shop around, disclose yield-spread premium and can help finance complicated mortgages. But watch out, there's a markup for services. You could end up spending thousands more.

What matters most? Find the best deal, the lowest rate and the fairest closing costs. Do this and come out a good judge of the best mortgage come closing day.

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When It Pays To Use Cash For Purchases

For years there have been many consumers who have charged through life (pun intended) putting any and all expenses on their trusty credit card. Roughly half of those consumers managed their accounts responsibly and benefited from the many perks associated with using their credit card and paying the balance in full each month. The other half....well many of those people are dealing with the fall out from the economy and struggling with high levels of debt. Not surprisingly more and more people are choosing to pay with cash, debit cards or any other means besides their credit card. This is likely due to the extreme changes going on within the industry as well as an awakening that many of us have been living beyond our means for far too long. The good news is you can reduce debt and also save money by keeping your plastic in your wallet. In fact, while merchants should not charge more for the convenience of using a credit card, there is no rule preventing them from offering incentives to encourage consumers to use cash. Here are a few examples of when it pays to use cash for purchases.



* As many of you may have already noticed, the price for gasoline is slowly creeping upwards again. We are not seeing the numbers that were posted last year (at least not yet) however many merchants still remember the sting of paying hefty credit card fees for purchases made with credit cards last year. As a result many gas stations continue to offer a discounted price per gallon if you pay with cash.
* One area many people do not think about in terms of cash payments is health care. More people are forced to deal with the high cost of routine or emergency health care visits due to job loss (insurance loss). Patients who have no insurance or have high out-of-pocket costs can actually save up to 50% on medical procedures by paying cash. Granted 50% is not the norm, but the point is, you should ask before you pay for services if there is a discount for paying cash.
* While not as common as gas or a trip to the doctor, paying cash for big purchases can also save you money in the long term. If you save money in advance to pay for your next car or even home in cash. Even if you cannot pay off the entire balance upfront, making a large down payment will significantly impact the amount of money you have to finance, in turn reducing the interest fees you would otherwise incur.

When it comes right down to it, with the recent changes in the credit card industry and other areas of the economy, paying cash is one of the easiest ways to save money. Not only will it help you avoid racking up high amounts of debt that may become more than you can reasonably handle when you pay cash you avoid interest charges that drastically increase the original purchase price. While there may be situations when paying cash is difficult or seemingly impossible, consumers who make the effort in this economy will most likely benefit for their efforts.

Trisha Wagner is a freelance writer for DepositAccounts.com, where you can compare rates of checking accounts from dozens of banks in one place. Trisha writes regularly on the topics of personal finance and savings accounts.

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Long Term Investing

Investing has its own language and understanding it can make it easier to be a confident investor. Two common terms you hear when people talk about investing are "bid" and "ask." Here's an explanation of what they mean:

In short, "Bid" is the highest price someone is currently willing to pay for a stock. "Ask" is the lowest price at which someone is currently willing to sell a stock.



* Say you decide to buy stock in XYZ Company. To buy those shares, you'll have to pay what sellers are "Ask"ing.
1. First, you check the "Ask" price.
2. If the price looks good, you place your order.
3. The order is routed to an exchange and executed at the "ask"ing price the market is offering at that moment.

* Eventually, you decide to sell your stock in XYZ Company. Since you're now the seller, you'll receive the current price that the buyers are "Bid"ding – or willing to pay.
1. First, you check the "Bid" price.
2. If the price looks good, you place your sell order.
3. The order is routed to an exchange and executed at the "bid" price the market is offering at that moment.

Luckily, brokerages do all of this action behind the scenes – it's what they get paid to do. Although the bid and ask prices for any security are great indicators of the market, keep in mind, the bid and ask prices change constantly throughout the day. The price that you get might not exactly match the bid or ask price.

Now that you've got your bids and asks straight, you're on your way to becoming a savvy investor.

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