You’re Giving Away $155,000... And You Don’t Even Know It

Marc Lichtenfeld
by Marc Lichtenfeld, Chief Income Strategist, The Oxford Club

A Note From the Editorial Director: When it comes to building and protecting our wealth, we like to think of ourselves as do-it-yourselfers. One of our core beliefs is that nobody cares more about your money than yourself - not even a highly paid full-service broker. Today, Marc shows us why taking charge of your portfolio could dramatically boost your wealth.

- Andrew Snyder

I recently met up with an old high school friend of mine. He’s the smartest person I’ve ever met. When a teacher would explain a new and difficult physics concept, he would shrug his shoulders and say under his breath, “Of course it works that way. How else could it be?”

My friends and I thought, this guy could cure cancer someday. Instead, he crunches numbers for a financial institution. I’m sure he makes good money doing it. Brains like his usually get paid well.

Investing can be incredibly complex. And that’s not an accident. The harder it is to understand, the more you need paid experts to guide you. All that advice and service and all those complex products cost money, big money. But you can cut your investment costs with a few simple steps. And save yourself hundreds of thousands of dollars.

Last week, Mark Ford wrote about why he prefers to let someone else manage his money, even if it means paying him $50,000 per year in fees. To him, it’s worth it because it frees him up to do other things instead of spending time on his portfolio.

My parents do the same. They’re not particularly interested in the markets. It’s worth it to them to pay the 1% per year fee to have someone else handle their investments.

And if you’re like them and you don’t have the time or desire to manage your own money, you’ll sleep better at night letting someone else do it for you. Even if you have to fork over a substantial amount in costs.

But if you’re reading Investment U, you certainly have the interest to do it yourself. So it would be nuts to pay anyone thousands of dollars per year to do something you can probably do better yourself.

Hope You Didn’t Need an Extra $155,000

How much would a broker who charges 1% a year cost you?

Let’s say you have a portfolio worth $250,000 and that portfolio grows by the market average of 7.48% per year. Over the next 10 years you’ll pay out over $36,000 in management fees.

A recent study by think tank Demos showed that an average two-earner household pays $155,000 in 401(k) management fees over their lifetime. And if you’re a higher-income household, you shell out almost $278,000.

Sometimes, there’s not much you can do about it. I once had an employer whose benefits manager knew nothing about investments. She selected a 401(k) program whose fees were exorbitant. When I complained, she asked me to provide her with some lower-fee alternatives.

I did. And she did absolutely nothing about it.

If your 401(k) fees are too high, talk to your benefits manager. Maybe she’ll be more on the ball than mine was.

Let me be clear. If your employer matches any of your contributions, you should invest in a 401(k), whatever the fees. That’s free money. You’ll still come out ahead.

You also get a nice reduction in your taxable income. If you make $100,000 per year and contribute $10,000 to your 401(k), your taxable income is now $90,000. So not only are you saving for retirement, but you are no longer paying taxes on the money you save. If you’re in the 28% bracket, that will save you $2,800 on your federal taxes.

But there are some steps you can take to lower the amount you’re paying your 401(k) manager if the fees are too high.

Consider an IRA. After you’ve maxed out your employer match (again, it’s free money, so take it), consider investing in an IRA with lower fees rather than in the 401(k).

In an IRA, you can choose very low-cost index mutual funds such as the Vanguard Total Stock Market Index Fund (Nasdaq: VTSMX), which has an ultra-low expense ratio of just 0.17%. Compare that to American Century Equity Growth C (Nasdaq: AEYCX), another fund in its category. In the American Century fund, you’ll pay 1.68% per year. Not surprisingly, the fund performed more than a full percentage point worse per year over 10 years than the Vanguard fund.

If you had invested $10,000 in the American Century fund 10 years ago instead of the Vanguard fund, today you’d have $2,500 less to show for it.

Find the lowest expense ratio funds in your 401(k) offerings. In my own 401(k), I have two choices in the small-cap category.

I can go with the Principal Small Cap S&P 600 Index R5 (Nasdaq: PSSPX), which has an expense ratio of 0.42%. Or I can go with the Fidelity Advisors Small Cap A (Nasdaq: FSCDX) and its 1.06% expense ratio.

Guess which one I own? If you said the Principal fund, you are correct. And the returns of the Principal fund have beaten the Fidelity fund over the past three and five years.

Be sure to talk with a tax advisor before making any modifications to your retirement investing, as the changes could have important tax consequences.

You work too hard for your money to give it to someone who likely won’t do as good a job as you can. And I’m sure you can use an extra $155,000 in retirement. If you don’t need it, I’m sure my smart friend will find some ways to take it from you.

Good investing,


P.S. My latest report shows how you can generate up to 2,100% more income over time than the average 401(k) or retirement account. Using the compounding secret behind this strategy, you can turn a small stake, and as little as $2 each day, into $3.1 million or more...

And as a result, retire years and even decades sooner than your friends and colleagues. To learn more about it, click here.

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How to Turn $10,000 Into $181,227

Marc’s Oxford Income Letter, which launched in April, has already brought his subscribers substantial gains. Four of his six Instant Income Portfolio recommendations are sitting above 15% returns - and just one yields less than 3.6%. (For more information on Marc’s letter, click here.)

One pick that hasn’t had much success yet, however, is Brookfield Infrastructure Partners (NYSE: BIP) - down 4.68% since he recommended it in April.

But despite the poor return so far, Marc calculates that it could still reasonably help you turn $10,000 into $181,227 within 20 years.

Here’s what he recently told Oxford Income subscribers:

“Despite our shares being down slightly, Brookfield is coming off its most profitable quarter in its history. In the second quarter, funds from operations (FFO), a measure of cash flow, was $0.88 per share. FFO grew 47% over last year and 10% over the first quarter.

“Additionally, the company entered into agreements to divest some non-core assets including timberland in the United States and Canada. Brookfield will receive $610 million for the land, which will strengthen its already solid balance sheet.

“Sam Pollock, CEO of Brookfield Infrastructure Partners, also said companies are scrambling to position themselves with capital ahead of rising interest rates. Over the coming months, that will provide opportunities for Brookfield to acquire businesses from companies that need to sell. It’s a nice position to be in. And we’ll be ready to take advantage of any price appreciation in the stock.

“Brookfield is a master limited partnership (MLP). Most MLPs are energy related, but Brookfield owns a wide range of businesses including those involved with transportation, energy and utilities. It owns:

  • 9,900 kilometers of transmission lines in South America.
  • The only freight rail network in Western Australia.
  • Three gas-fired steam plants in Toronto.

“That’s just a few examples, however. In total, the company has over $175 billion worth of assets under management spanning four continents.

“When Brookfield was first recommended in April, it yielded 4.6%. Today’s buyers will receive a payout of 4.7%. Most important, though, the company remains a perfect candidate for the Compound Income Portfolio, which is designed for stocks in which dividends are reinvested.

“Brookfield has raised its dividend every year for six years. In the first six months of this year, it generated $1.68 per share in FFO. That’s just about enough to cover the entire year’s dividends of $1.72. So paying the dividend and raising it next year should be no problem.

“And if next year looks as promising as this year has been so far, I wouldn’t be surprised to see a substantial raise - perhaps 15% to 20%. That’s very achievable considering its average raise has been over 12% per year.

“If over the next 10 years the stock’s price appreciation is simply in line with the historical market average and the annual dividend growth is 12.5% as I project, then $10,000 invested today should turn into $36,213 for an annual return of 13.73%. The yield on the original cost would be 22.79%

“In 20 years, $10,000 turns into $181,227 with a yield on cost of 175.8%.

“Brookfield Infrastructure Partners can definitely still be bought and added to your portfolio if you do not already own it.”

- Justin Dove with Marc Lichtenfeld

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