The True Cost of Buying

Saturday, April 14, 2018

 

Principles of Wealth: #13 of 61

Delray Beach, FL – We buy financial products and services because we believe they will make us richer. But we should never forget that the purchase itself is almost always a cost that makes us, for the moment at least, poorer.

You buy the new $45,000 Audi you’ve been dreaming of. It makes you feel like rich. But the moment you drive it out of the dealership its value – and your net worth –go down by about $6,000.

“One day this watercolor will fetch a hundred grand at Sotheby’s,” the art dealer tells you. You want to believe him. But his profit on the $80,0000 artwork is $20,000, which means you are now, for the moment, at least $20,000 poorer.

It’s no different with stocks. You have read about the company in your favorite financial newsletter. Your broker agrees it’s going to double or triple if this or that happens, as it surely will. So you buy it and can almost see all those dollars in profit appearing on your account statement. But at that moment, at the moment when you buy it, you are poorer by the fees and commissions your broker is taking.

This is not to say that fees and commissions are bad. They are simply part of the cost of buying.  All financial products and services, however advertised, have a cost of buying.

When you buy a “no load” index fund you pay a very small cost of buying – usually about one half of one percent. But when you buy a penny stock or whole life policy your cost of buying could be 30% to 50%.

The prudent wealth builder knows the true cost of his buying and understands that in nine cases out of ten that cost will make him, for the moment at least, that much poorer

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How the “Big White Lie” of Investing Almost Cost Me My Retirement

Originally published in the October 2011 issue of “The Palm Beach Letter

I consider myself to be an expert of sorts on retirement. Not because I’ve studied the subject, but because I’ve retired three times.

Yes, I’m a three-time failure at retiring. But I’ve learned from my mistakes. Today, I’d like to tell you about the worst mistake retirees make.

It’s a very common mistake. Yet, I’ve never heard it mentioned by retirement experts. Nor have I read a word about it in retirement books. The biggest mistake retired people make is giving up all their active income.

When I say active income, I mean the money you make through your labor or through a business you own. Passive income refers to the income you get from social security, a pension, or from a retirement account. You can increase your active income by working more. But the only way you can increase your passive income is by getting higher rates of return on your investment (ROI).

When you give up your active income, two bad things happen:

First, your connection to your active income is cut off. With every month that passes, it becomes more difficult to get it back.

Second, your ability to make smart investment decisions drops because of your dependence on passive income.

Retirement is a wonderful idea: put a portion of your income into an investment account for forty years, and then withdraw from it for the rest of your life. Once you retire, you won’t have to work anymore. Instead, you will fill your days with fun activities: traveling, golfing, going to the movies, and visiting the kids and grandkids.

It’s a great idea. But it never actually worked.

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