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Investing isn’t free. But here’s why 20% of investors think it is



Death and taxes are, as Benjamin Franklin famously declared, two of life’s certainties.

Investment fees may be a worthy addition to that list in the modern era — though not all investors are aware of this near-universal fact.

The fees financial services firms charge can be murky.

One-fifth of consumers think their investment services are free of cost, according to a recent Hearts & Wallets survey of about 6,000 U.S. households. Another 36% reported not knowing their fees.


A separate poll conducted by the Financial Industry Regulatory Authority Investor Education Foundation similarly found that 21% of people believe they don’t pay any fees to invest in non-retirement accounts. That share is up from 14% in 2018, the last time FINRA issued the survey.

The broad ecosystem of financial services companies doesn’t work for free. These firms — whether an investment fund or financial advisor, for example — generally levy investment fees of some kind.

Those fees may largely be invisible to the average person. Firms disclose their fees in fine print but generally don’t ask customers to write a check or debit money from their checking accounts each month, as non-financial firms might do for a subscription or utility payment.

Instead, they withdraw money behind the scenes from a customer’s investment assets — charges that can easily go unnoticed.

“It’s relatively frictionless,” said Christine Benz, director of personal finance at Morningstar. “We’re not conducting a transaction to pay for those services.”

“And that makes you much less sensitive to the fees you’re paying — in amount and whether you’re paying fees at all.”

Small fees can add up to thousands over time

Investment fees are often expressed as a percentage of investors’ assets, deducted annually.

Investors paid an average 0.40% fee for mutual and exchange-traded funds in 2021, according to Morningstar. This fee is also known as an “expense ratio.”

That means the average investor with $10,000 would have had $40 withdrawn from their account last year. That dollar fee would rise or fall each year according to the investment balance.

The percentage and dollar amount may seem innocuous, but even small variations in fees can add up significantly over time due to the power of compounding. In other words, in paying higher fees an investor loses not only that extra money but the growth it could have seen over decades.

It’s relatively frictionless. We’re not conducting a transaction to pay for those services.
Christine Benz
director of personal finance at Morningstar

The bulk — 96% — of investors who responded to FINRA’s survey noted their main motivation for investing is to make money over the long term.

The Securities and Exchange Commission has an example to demonstrate the long-term dollar impact of fees. The example assumes a $100,000 initial investment earning 4% a year for 20 years. An investor who pays a 0.25% annual fee versus one paying 1% a year would have roughly $30,000 more after two decades: $208,000 versus $179,000.

That dollar sum might well represent about a year’s worth of portfolio withdrawals in retirement, give or take, for someone with a $1 million portfolio.

In all, a fund with high costs “must perform better than a low-cost fund to generate the same returns for you,” the SEC said.

Fees can affect moves such as 401(k) rollovers

Fees can have a big financial impact on common decisions such as rolling over money from a 401(k) plan into an individual retirement account.

Rollovers — which might occur after retirement or a job change, for example — play a “particularly important” role in opening traditional, or pretax, IRAs, according to the Investment Company Institute.

Seventy-six percent of new traditional IRAs were opened only with rollover dollars in 2018, according to ICI, an association representing regulated funds, including mutual funds, exchange-traded funds and closed-end funds.

About 37 million — or 28% — of U.S. households own traditional IRAs, holding a collective $11.8 trillion at the end of 2021, according to ICI. But IRA investments typically carry higher fees than those in 401(k) plans. As a result, investors would lose $45.5 billion in aggregate savings to fees over 25 years, based only on rollovers conducted in 2018, according to an analysis by The Pew Charitable Trusts, a nonpartisan research organization.

Fees have fallen over time

This annual fee structure isn’t necessarily the case for all investors.

For example, some financial planners have shifted to a flat-dollar fee, whether an ongoing subscription-type fee or a one-time fee for a consultation.

And some fee models are different. Investors who buy single stocks or bonds may pay a one-time upfront commission instead of an annual fee. A rare handful of investment funds may charge nothing at all; in these cases, firms are likely trying to attract customers to then cross-sell them other products that do carry a fee, said Benz of Morningstar.

Here’s the good news for many investors: Even if you haven’t been paying attention to fees, they’ve likely declined over time.

Fees for the average fund investor have fallen by half since 2001, to 0.40% from 0.87%, according to Morningstar. This is largely due to investors’ preferences for low-cost funds, particularly so-called index funds, Morningstar said.

Index funds are passively managed; instead of deploying stock- or bond-picking strategies, they seek to replicate the performance of a broad market index such as the S&P 500 Index, a barometer of U.S. stock performance. They’re typically less expensive than actively managed funds.

Investors paid an average 0.60% for active funds and 0.12% for index funds in 2021, according to Morningstar.

Benz recommends 0.50% as a “good upper threshold for fees.” It may make sense to pay more for a specialized fund or a small fund that must charge more each year due to smaller economies of scale, Benz said.

A higher fee — say, 1% — may also be reasonable for a financial advisor, depending on the services they provide, Benz said. For 1%, which is a common fee among financial advisors, customers should expect to get services beyond investment management, such as tax management and broader financial planning.

“The good news is most advisors are indeed bundling those services together,” she said.


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AI will change how you invest – and what you invest in – The Globe and Mail



While investors around the world rallied in the aftermath of the COVID-19 market crash, Scott Juds’s artificial intelligence-driven ETF was languishing.

The WIZ Bull-Rider Bear-Fighter Index, which uses AI to track changes in markets that determine whether it should shift its portfolio of exchange-traded funds to skew either more aggressive or conservative, suddenly couldn’t make sense of the data after an aberration as large as COVID-19.

“You had the initial shock of things which was followed by a series of closings and openings,” said Mr. Juds, the co-founder of Merlyn.AI, which runs WIZ.


He said the constant back-and-forth threw off the signals that AI use. “When it does that in a period of three months or less, you can’t properly determine momentum.”

As a result, WIZ is up just 7 per cent since its inception in October, 2019. Compare that with the S&P 500, which is up 37 per cent over the same period. Other simple index-tracking ETFs have posted similarly positive returns.

The performance of Mr. Juds’s ETF, which has suffered consistent losses since 2020, has sent investors running. At its peak, WIZ and DUDE (another Merlyn.AI ETF) had assets-under-management values of roughly US$250-million. Today, it’s just US$50-million.

But with AI constantly learning and big tweaks being made to the software with help from advisers, Mr. Juds is optimistic and said there has been considerable new interest in his products as long as they remain steady in the near future.

While multiple AI-driven ETFs have so far failed to beat the market, people like Mr. Juds still believe AI will be able to look through cluttered data to make investment decisions and eventually extract the best gains. Others believe it’ll be revolutionary for the user experience by giving retail investors greater education and control in customizing their portfolio while guiding them through different risk profiles.

Artificial intelligence has been one of many tools that large investing firms have consulted for years, but the popularity of ChatGPT has brought discussions of how AI can be relevant to investors at the retail level.

Mr. Juds said AI’s ability to find opportunities is rooted in the signal-to-noise ratio in investing.

There are countless data points in the world of equities that are simply background noise: They don’t mean anything. But buried deep within are valuable signals that point to meaningful investment opportunities in specific sectors.

“A very small signal like a tenth of a per cent in one day trend could get a 25-per-cent gain over a year,” said Mr. Juds. “But a 0.1-per-cent change in the market, that can get lost.”

Will AI take over the world? And other questions Canadians are asking Google about the technology

There are still people who remain skeptical about whether AI can actually bring greater returns simply by trying to make smarter or quicker trades.

Joel Blit, an associate professor at the University of Waterloo specializing in the economics of innovation, said there’s an old adage that fund managers are no better than monkeys when it comes to picking stocks.

“Why would we think that an AI system would be any better? If they can parse through large amounts of data and find the needle in the haystack, then presumably they could do better,” said Prof. Blit, but he said there are examples of AI stock pickers that have been unable to beat the market so far.

When it comes to faster trading times, Prof. Blit said that if every big hedge fund had ultrapowerful AI making quick trades to make the best gains, then everyone having similarly powerful programming could negate any real increase in returns.

On the flip side, if AI reads too deeply into certain signals and makes ill-conceived decisions, it could lead to more market volatility.

“If there’s some kind of signal that’s heavily correlated to past bear performance in the market and all of a sudden all these algorithms start selling at once, it could lead to a major market collapse,” said Prof. Blit.

That’s why a whole other world of AI experts see a different potential for the technology: to bring knowledge that has always been inaccessible and dense to the everyday investor in a way that’s personalized and meant to help guide investing strategy.

This form of AI could help someone figure out if their portfolio is too heavily weighted to a certain sector, or is too susceptible to changes in the credit market or an economic downturn.

Companies such as Global Predictions are already providing advice to thousands of investors with billions of dollars, with input from AI.

Led by Canadian chief executive officer and co-founder Alexander Harmsen and based in San Francisco, the company created an AI-driven platform to help people make future investing decisions.

The program, called PortfolioPilot, allows people to simply plug in the details of their financial life such as their debt, real estate and investment accounts to receive nuanced advice on whether the investments they’re making actually match the goals and risk appetite they have.

A new ChatGPT plug-in by the company allows people to have basic conversations with an AI that can make similar suggestions, simply by reading a copy and paste of your investing statements. If you have a couple extra thousand dollars you’re looking to invest, it can give you suggestions based on your existing portfolio about where to spend next.

The idea builds on the already-revolutionary effect that robo-advisers and simple investing products such as ETFs have had on making it easier to be a self-directed investor.

“The main value in AI is about personalization and being able to democratize access to this sort of expertise,” said Mr. Harmsen.

“We can reflect back to people that you’re not diversified enough or that your risk-adjusted return you’re taking isn’t high enough. We feel people need that extra step of, ‘Here’s a couple things you can do to improve your portfolio.’”

PortfolioPilot is free to use and has advised roughly 5,500 users with more than US$3.4-billion in assets. The company plans to eventually make money by releasing its own set of AI-guided ETFs.

Mr. Harmsen doesn’t see AI bringing human wealth managers to extinction. But he does hope it could push wealth managers to step up their game by increasing interactions with clients, lowering fees and moving away from simple risk-profile categories for investors to choose from, and instead allow for more personalized approaches to portfolios.

Already, he’s seen interest from portfolio managers who’d like to use his program.

Reducing ‘risk of extinction’ from AI should be on par with pandemics, nuclear war, experts warn

Edward Kholodenko, CEO of Questrade, said he sees client experience as the lowest hanging fruit where AI can make a difference. That includes helping clients understand how to make trades or how to complete a certain function on the company’s website.

He said Questrade is also developing and using AI internally, but providing advice to the public could be tricky because there are no regulations around the technology or its use of user data.

“It’s an area you have to be very, very careful … in terms of mining and using the data. We’re examining how to use the data to help our customers become more successful and financially secure,” said Mr. Kholodenko.

James Rockwood, founder and CEO of the fintech company CapIntel, said another obstacle is ensuring that AI remains compliant with rules if it were to directly provide financial advice, a service that is heavily regulated.

“People talk about how ChatGPT is so confident in everything it says but it doesn’t yet know if what it says is correct,” said Mr. Rockwood.

“You could run into issues where an AI could say something like, ‘This guarantees 100-per-cent returns,’ and a person can land in hot water.”

The Globe and Mail reached out to the Office of the Superintendent of Financial Institutions and the Canadian Securities Administrators, but neither regulatory body provided comment on whether national regulations for AI usage in Canada are coming.

A study commissioned by the Autorité des marchés financiers, Quebec’s financial regulatory body, and undertaken by the University of Montreal and Polytechnique Montréal, recommended the government create a framework for the use of AI that would identify unacceptable practices and data regulations for the use of this technology.

Depending on self-thinking robots for investment decisions certainly doesn’t come without risks. Mr. Kholodenko said investors should have a sober approach to AI, since people could create bots that push people to buy products that are not in their best interest.

And already, there are multiple get-rich-quick schemes online that have little proof of working.

One thing that experts agree on is that AI technology is in its infancy. As the technology develops and the amount of historical data that AI is able to access continues to grow, Mr. Rockwood said any prediction about where AI will prove to be most valuable in the financial world is simply that: a prediction.

“I don’t think anybody is talking about what AI is today when they’re having these discussions,” he said. “They’re talking about what could happen in the future, and that future has such a wide set of potential outcomes.”

Investing 101: A beginner’s guide to growing your money

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Invest Like Warren Buffett With These 3 Stocks



Warren Buffett, commonly known as the Oracle of Omaha, is a familiar name to many when thinking of the financial world.

Of course, many mimic his portfolio moves.

One of his purchases in particular, Occidental Petroleum OXY, has gained widespread attention over the last year amid volatile energy prices.

And it seems that the Oracle of Omaha can’t stay away from the stock; Berkshire has been buying more OXY throughout May, now holding roughly 2.2 million shares, reflecting a 25% stake in the company.


In addition to OXY, two other stocks that the legendary investor has placed big bets on include Coca-Cola KO and Apple AAPL.

For those interested in investing like Buffett, let’s take a closer look at each.

Occidental Petroleum

Buffett’s been in the headlines numerous times over the last year regarding his OXY purchases. Still, it’s worth noting that the Oracle of Omaha said there were no plans to fully acquire the company at the latest annual shareholder meeting,

OXY posted lighter-than-expected results in its latest release amid falling energy prices, with the company falling short of the Zacks Consensus EPS Estimate by roughly 16% and posting a negative -3.7% revenue surprise.

Zacks Investment Research
Zacks Investment Research

Image Source: Zacks Investment Research

Of course, the favorable operating environment has allowed OXY to reward its shareholders nicely, growing its dividend payout by nearly 40% just over the last year. Berkshire owns roughly $10 billion of OXY preferred stock, which pays an 8% dividend yield.

Zacks Investment ResearchZacks Investment Research
Zacks Investment Research

Image Source: Zacks Investment Research


Buffett has stated many times that he’s attracted to the mega-cap giant due to a simple fact – brand loyalty. Apple consumers tend to trade old Apple products for new ones, establishing a loyal customer base.

The company posted solid results in its latest quarter; iPhone revenue totaled $51.3 billion, 4% above the Zacks Consensus Estimate and improving 1.5% from the year-ago period.

As we can see from the chart below, the better-than-expected iPhone results snapped a streak of back-to-back negative surprises.

Zacks Investment ResearchZacks Investment Research
Zacks Investment Research

Image Source: Zacks Investment Research

In addition, shares provide exposure to technology and provide income, with the company’s annual dividend currently yielding 0.5%. While the yield is undeniably on the lower end of the spectrum, Apple’s 6% five-year annualized dividend growth rate helps pick up the slack.

Zacks Investment ResearchZacks Investment Research
Zacks Investment Research

Image Source: Zacks Investment Research


Coca-Cola is an American multinational corporation best known for its flagship Coca-Cola beverage. It’s a long-term holding for Berkshire, having first purchased shares in the late 1980s.

The company continues to grow steadily, with earnings estimated to climb 5.3% on 4.7% higher revenues in its current fiscal year (FY23). The growth is forecasted to continue in FY24, with estimates indicating earnings and revenue growth of 7.5% and 5.2%, respectively.

Zacks Investment ResearchZacks Investment Research
Zacks Investment Research

Image Source: Zacks Investment Research

Coca-Cola’s annual dividend presently yields 3.1%, well above the Zacks Consumer Staples sector average. It’s also worth highlighting that KO is a member of the elite Dividend King club, showing an unparalleled commitment to shareholders through 50+ years of increased payouts.

Zacks Investment ResearchZacks Investment Research
Zacks Investment Research

Image Source: Zacks Investment Research

Bottom Line

Many mimic Buffett’s moves for understandable reasons.

And interestingly enough, the Oracle of Omaha has continued to purchase Occidental Petroleum OXY shares throughout May.

Two other stocks – Coca-Cola KO and Apple AAPL – also reflect sizable bets from the legendary investors.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report



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A Bull Market Is Coming: Here's Warren Buffett's Life-Changing Investing Advice – The Motley Fool



Recession fears sent the S&P 500 tumbling into a bear market last year, and the benchmark index is still down 12% from its high. But history says that drawdown is temporary. Every past bear market has eventually ended in a new bull market, and investors have no reason to expect a different outcome this time. That makes the current situation a buying opportunity, but not every fallen stock is worth buying.

Consider this investing advice from Warren Buffett.

Buy and hold high-quality stocks

Buffett once said, “All there is to investing is picking good stocks at good times and sticking with them as long as they remain good companies.” There are two important lessons there. First, valuation matters. A great business at the wrong price can be a terrible investment. Second, think long-term. Investors should ignore the day-to-day fluctuations in the market and instead focus on buying and holding good stocks.


But what qualifies as a good stock?

Invest in companies with a competitive advantage

In his 1995 letter to Berkshire Hathaway shareholders, Buffett wrote the following: “In business, I look for economic castles protected by unbreachable moats.” The term “moat” refers to a competitive advantage, the quality or qualities that protect a business from its competitors.

There are many different types of competitive advantages. Apple possesses immense brand authority that not only keeps consumers loyal, but also affords the company a great deal of pricing power. Amazon Web Services offers a broader and deeper suite of cloud computing products than any other cloud provider. Nvidia can design more performant graphics chips and data center accelerators than other semiconductor companies. Costco Wholesale derives significant purchasing power from its scale, and its operating expertise further enhances that purchasing power.

All of those stocks have crushed the S&P 500’s return over the past decade, and investors can attribute those market-beating performances to the fact that each company possesses a durable competitive advantage.

Buy stocks within your circle of competence

In his 1996 letter to Berkshire shareholders, Buffett wrote the following:

You don’t have to be an expert on every company, or even many. You only have to be able to evaluate companies within your circle of competence. The size of that circle is not very important; knowing its boundaries, however, is vital.

Buffett expanded on that advice a few years later. In his 1999 letter to Berkshire shareholders, Buffett explained that he typically avoids investing in technology companies — despite knowing their products and services will transform the world — because he finds it difficult to identify competitive advantages in that sector. In other words, Buffett avoids technology stocks because they are beyond his circle of competence.

Think carefully before buying or selling a stock

Buffett once said, “An investor should act as though he [or she] had a lifetime decision card with just twenty punches on it.” Those words should not be taken literally — Berkshire owns far more than 20 stocks. Instead, Buffett is telling investors to think deeply about every decision. Never buy or sell a stock on a whim.

Knowledge can pay huge dividends

Buffett once said buying Benjamin Graham’s book, The Intelligent Investor, was the best investment he ever made (excluding two marriage licenses). Graham is viewed as the father of value investing, and his teachings formed the bedrock of Buffett’s investing style. The message here is simple: Never stop learning. An investment in knowledge can produce incredible returns.

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Trevor Jennewine has positions in and Nvidia. The Motley Fool has positions in and recommends, Apple, Berkshire Hathaway, Costco Wholesale, and Nvidia. The Motley Fool has a disclosure policy.

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