Please. Take our money.

Most people watch movies to pass time or just let off some steam.  When I watch a movie, I make it worth my while.  I like thinking about the characters and their relationships, and what values or morals the movie was trying to get across.  For all the talk of Hollywood being a soulless money making machine, which it essentially is, most movies do have a beneficial lesson or two in them.  You just have to look for them.

I recently watched The Wolf of Wall Street (I know I’m like a year late to the game).  And being a personal finance blogger, this movie REALLY resonated with me.  It takes place in the 80’s and is about a man named Jordan Belfort.  Mr. Belfort (who ironically is currently a motivational speaker) is a Wall Street broker.  Which means he manages investments for people and gets a cut via commissions.  He got an entry level job with a firm and was idealistic to the core.  He just wanted to help people make money, and make a little bit himself in the process.

As the story usually goes, he let the money get to his head.  He eventually founded his own brokerage firm, which was doing some very shady stuff.  They were essentially cheating people out of their money and getting fat on commissions.  The FBI finally caught wind of this and he got some jail time, though not nearly enough in my opinion.  The movie pretty much chronicles his career.  It’s a very entertaining movie, but be warned it’s pretty vulgar so make sure there are no kids in a 50 foot radius.

But this post is not just a movie review.  It also contains some financial lessons I picked up from watching:

1.  There are some bad SOB’s out there trying to take your money.  Mr Belfort and his cronies had one goal and one goal only:  make lots of money.  And they would do it by any means necessary.  This included super high pressure sales tactics, misleading investors and lying to the SEC.  The biggest thing I noticed from their methods is that they wanted to make the investor feel that this one investment decision is the most important one of their life.  That if they don’t agree to investing with them, they will regret it for years.  Because they seemed like a very legit and professional company, many investors complied.

Lesson learned:  Never work with someone who wants you to make a decision right away.  Any major life or investment decision takes time and thinking.  If the salesperson wants you to make a decision on the spot, take your business elsewhere.

2.  There are a lot of gullible people out there.  As the saying goes, there is a sucker born every minute.  I’m not sure who said it, but it was probably Albert Einstein or Ben Franklin.  Mr. Belfort and friends defrauded a LOT of people out of their money with their antics.  I was actually surprised that so many people were willing to invest so much money on a whim.  It shows that as long as you have a good pitch, you can get a lot of people to buy your product.

Lesson learned:  Marketing is key.  If you can effectively (and honestly) market yourself and are diligent about it, you should be able to get what you want (money, clicks, ratings etc.) eventually.

3.  No one knows what the market is going to do.  There’s a scene early in the movie where Jordan is having lunch with his first boss (played hilariously by an old looking Matthew McConaughey).  The boss tells Jordan that no one knows if the market is going to go up or down, that it’s a losers game to time the market.  But as long as you make the investor think that it’s going up, and as long as you make them rich on paper, they will keep investing and the brokers will keep getting rich off of commissions.

Lesson learned:  Don’t try to time the market.  Stick with index funds that have low expense ratios, keeping more money in your pocket and out of the broker’s. 

4.  Technology is awesome.  Since the events of the movie took place in the 80’s, most of the transactions were done over the phone.  This made it easy for the brokers to employ their high pressure tactics and make the investor seem like they had no other choice.  Online trading wasn’t really an option back then so investors were at the mercy of the broker.  It was also harder to get the latest business news so when the broker is telling you something big happened, you had to believe him.

Lesson learned:  Do your research online.  It’s easier than ever to find which funds are the cheapest and what is the right asset allocation for you.  Online transactions are cheaper than phone transactions as well.

5.  There is never enough money.  The main characters of this show totally gave themselves over to money.  It was all they thought about day and night.  This eventually landed them in lives of debauchery fueled by booze and sex, day after day.  No matter how big their houses got, how fancy they traveled or how lavish their parties, they just wanted more and more.  Until the FBI got them.

I sometimes believe I think about money too much,  but then I realize that I want to make money to keep my family secure and help those in greater need than myself.  I wouldn’t say I’m the most noble person out there, but there’s a difference between wanting money for the sake of wanting it and wanting money for higher purposes.

Lesson learned:  Money is not an end, but a means.  It’s up to you to decide what ideal end is.  

“Don’t mind if I do” said the broker.

Depending on who you ask, investing can be many different things.  Talk to a young day trader, and investing is a heart wrenching, gut busting and sweat inducing race that never ends.  Ask a guy in his fifties who has been passively investing in his 401k throughout his working years, and he might tell you he checks his investments once a month.  Some people enjoy the number crunching and up to the millisecond information they can get from day trading, while others enjoy doing other things in life and let their investments grow on their own in the background.

There is one thing in common in both these scenarios, however, and it presents itself in different ways.  And that is investment fees.  Everyone knows there is a cost to do business.  When you get the dinner bill, you’re not just paying for the food.  You’re paying the restaurant employees’ salary, the rent and utilities.  The same goes for investing.  When you invest in a stock or a mutual fund, you’re not just paying for the privilege of investing.  You’re paying the company that facilitates the trade, the manager who manages the mutual fund and everyone in between.  This means that every time you make a trade, you automatically generate negative returns because your investment needs to make up the cost of your transaction just to get back to square one.

While we can’t avoid all fees, there are two types fees that we can try to minimize:

Trading fees

Any time you buy or sell a stock or mutual fund, there is a trade involved that costs you money.  Here are some ways to minimize this fee:

Trade less.  This is more or less what is known as “no-brainer.”  In order to minimize the fees racked up from each trade, try to trade a little less.  This is not feasible for some investors like our day trader friend, but for someone who is investing for the long term, it doesn’t make much sense to make frequent trades because it doesn’t give the investments time to grow and the fees will just eat at your returns.

Consider an online brokerage.  There was once a time when trades were made over the phone.  This was expensive because there was a broker involved, and anytime a middle man is involved, you gotta pay.  The vast majority of trades nowadays are done online, which makes things easier for the investor and the broker.  Scottrade, for example, is an online broker known for its low trading fees.  It costs $7 per trade when you use the internet.  Making a trade over the phone costs $32.  Almost five times as much!

Trade big.  If you buy one dollar worth of Apple shares, you will pay a flat trading fee.  If you buy $1000 worth of Apples shares, you will pay the same flat trading fee.  You want that fee to be as small of a percentage of your investment as possible.  Making 10 separate stock purchases of $100 each with a 7$ fee will cost you $70 in fees.  That’s 7% of your money already going towards fees.   Making one single purchase of $1000 will cost $7 in fees, 0.7% of your money going towards fees.  Another no-brainer.

Expense ratio

An expense ratio is what it costs a company to operate a mutual fund.  It’s usually expressed as a percentage, as in what percentage of your money the company takes.  Expense ratios vary wildly from fund to fund, and a higher expense ratio doesn’t mean you’re getting more expertise.  It just means that you’re paying more for the privilege of investing with that fund.  In fact, having a higher expense ratio just means you have to earn that much more in returns to get back to where you should be.

Here are a few ways to keep that expense ratio low:

Look at it.  It’s that simple.  As of last year, mutual funds are required to make their expense ratio front and center, not hiding behind an avalanche of fine print.  This makes it easier than ever to avoid fees.  If you’re looking for a great Target Retirement Fund, a mutual fund that shifts its asset allocation over time, you can easily see which one has the lowest expense ratio.  Recent returns may or may not give an accurate picture of the fund’s performance, but a low expense ratio can assure that more of your money will be going towards your investments.

Consider individual funds.  Many people love the aforementioned Target Retirement Funds.  They automatically shift your asset allocation towards “safer” investments as you near retirement.  This will help avoid any major aftershocks to your portfolio like the one that occurred after the 2008 crash.  Many almost retirees who were heavily invested in stocks lost a lot of money, and either had to put off retirement and continue working or try to live off of less money.  A Target Date Fund will automatically adjust your portfolio as time goes on, making it almost idiot proof.

Almost.  There are many out there who are not fans of Target Date Funds, and one reason is that they carry relatively high expense ratios.  Vanguard, which is the bastion of mutual funds with low expense ratios, has a Target Date Fund called Vanguard Target Retirement 2050.  It’s for those investors who predict they will retire in the year 2050, when flying cars will obviously be the norm.  The expense ratio for this fund is 0.18%, a very low ratio by most companies standards.  The Vanguard Total Stock Market Index Admiral fund, a fund that simply invests in the broad US stock market, has an expense ratio of 0.05%, almost four times less than the Target Fund.  The Vanguard Total Bond Market Index Admiral fund has an expense ratio of 0.08%.  Both of these funds have a much lower ratio than the Target Date Fund.

The point is, Target Date Funds are great and have relatively low expense ratios, but you can do better.  Investing in an overall stock and bond fund and adjusting your allocation yourself takes a little more work, but will save you money in fees.  Again, you can do a lot worse than a Target Date Fund, but we want to be the best don’t we???!!!

These are just two types of fees that any investor can try to minimize.  We all try to save money on things like car insurance, electricity and cable.  No one likes paying more for something if they don’t have to.  The same thing applies to investment fees.  Remember, any amount you pay in fees is money that is working for someone else and not for you.