Investment Products: If It Has to Be Sold, Don't Buy It!

    by William Reichenstein

    Investment Products: If It Has To Be Sold, Don't Buy It! Splash image

    Non-financial firms can make consistent profits by combining parts into a whole. For example, GM buys parts, puts them together, and sells cars for more than the cost of the parts. GM adds value by putting the parts together.

    But financial firms cannot add value merely by buying securities and combining them into a portfolio. Mutual funds can charge a convenience fee for combining securities into a portfolio and for reinvesting the distributions, but these conveniences can be attained for 0.20% or less. Thus, there is, at best, a very small value added merely from combining securities into a portfolio.

    Many investors have not thought about this concept or its investment implications. But it explains why investors should avoid investments and investment products with commissions. This extra charge is only going to a sales person, and that sales person is not providing a service—or adding value—to the individual investor.

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