I am often asked in regards to the Insight Folios investment strategy “if it’s so good, then why isn’t everyone doing it?” What this question refers to is the use of dividends to create income. Most investors have a basic misunderstanding of how dividend income actually works; they believe the price of the stock controls how much dividend income they will receive. The great news is that couldn’t be further from the truth. The fact is, at some point in the year a company will state its dividends, and they will pay that stated dividend amount no matter what the stock price does over the coming year. This is how dividends work.
The question then becomes “why”. Why is Wall Street not pushing investors into this type of portfolio, or even educating the average investor to understand this concept better? At the risk of sounding very pessimistic, Wall Street simply has too much money in the game to teach you this. The more empowered you are as an investor to do things for yourself, the less opportunity Wall Street will have to charge you fees.
What types of fees am I talking about? Let’s look at an eye opening Forbes article “The real cost of owning a mutual fund”1. As this article highlights, the average cost of owning a mutual fund is between 3.17% and 4.17%. That is a lot of money! (Rarely, if ever, is the cost of owning a mutual fund as low as the stated “Total Expense Ratio” – however this is the only fee they are required to disclose!) This is exactly why I believe that Wall Street will never educate you on the power of dividend paying stocks. By independently investing in equities, you will take away their ability to charge you those types of fees on products such as mutual funds. If you do things yourself, how will they make money? To be clear, not all mutual funds are inherently bad, but they definitely charge you a premium on what they do for you.
If you want to learn more about hidden fees, go to personalfund.com. (Insight Folios is in no way associated with this site, we simply find it to be a very helpful and informative site for our clients). On this site you will find the “rest” of the story of just how much Wall Street is really making on mutual funds. You can see firsthand how much you are paying within any mutual fund you might own. If you prefer not to create an account at personalfund.com but you would like information on a particular mutual fund, just reach out to us and we will be happy to provide you with the information you are looking for.
1Bernicke, Ty A. (2011, April 4). The real cost of owning a mutual fund. Forbes. Retrieved from https://www.forbes.com/2011/04/04/real-cost-mutual-fund-taxes-fees-retirement-bernicke.html#5635374d3244 on December 6, 2019.