10 Ways Investors Lose Money Without Knowing It

Tyler Gardner (0:00)

Churn, fees, spreads, taxes, cash drag, and even your own panicky mind. None of these feel dramatic in the moment, but over decades, they're the difference between retiring at 60 with a glass of wine on the porch and retiring at 75 with a glass of warm prune juice in the cafeteria.

Hello friends, this is Tyler Gardner, welcoming you to another episode of Your Money Guide on the Side, where it is my job to simplify what seems complex, add nuance to what seems simple, and learn from and alongside some of the brightest minds in money, finance, and investing. So let's get started and get you one step closer to where you need to be. You know those crime shows where the detective walks through the house and points out that the burglars didn't just take the television. They also siphoned the gas out of the car, borrowed the dog, and left the fridge just slightly a jar. Well, that's basically Wall Street with your retirement account. They're not always robbing you blind, and yes, there are plenty of people out there who are providing you with a great service of helping you understand what you're doing with your money, etc., etc. But, or, and, you need to know how all of these services work, how retail investing works, how asset management works, and how sometimes even the most noble of people who are helping you make decisions about your money are, to follow the crime metaphor above, just leaving a couple faucets dripping, little leaks that don't seem like much until the water bill arrives, and you realize you could have funded a trip to New Zealand with what just went down the drain. And all genuinely because you simply didn't know it was happening. So my goal in this episode is not to condemn any fee or service or product, but rather to, as per usual, make you aware and educate as many as possible about where and how you could be losing money to tiny fees each year. And as I note, in almost every episode, most investors continue to think the biggest risk to their nest egg is picking the wrong stock, like choosing Blockbuster in 2007 instead of Netflix, or pets.com instead of Amazon. But the real killers, seriously, aren't the big mistakes. I know, this sounds counterintuitive. The biggest and most guaranteed killers of long-term wealth, the type of F-U money that we all want at some point, are the slow yet countless leaks. A percent here, half a percent there, a rash decision in a bad week. It doesn't feel dramatic. You don't see fireworks when it happens. But over years and decades, it's the difference between retiring at 62 with a boat, and retiring at 72 with a pair of binoculars to watch other people's boats. If you've seen the movie Office Space, you might remember their perfect crime. Siphon off a penny here, a penny there, nothing anyone would notice day to day, and eventually it would add up to millions. That's how fees and hidden costs work in your portfolio, whether you have someone manage your money, or you do it on your own. A basis point here, an expense ratio there, again, no explosions, no headlines, but unlike Office Space, this scheme, as it stands and pertains to your investments, is completely legal, and Wall Street has perfected it. So today's episode is all about 10 ways you're losing money as a retail investor without even realizing it. I'm going to point out the leaks, explain how they work, and most importantly, show you how to plug them so you can get back to more important things, like rewatching Office Space for the 10th time and wondering if Milton will ever find his stapler. And if you're listening right now and thinking, Tyler, this is exactly the kind of stuff my brother-in-law needs to hear before he buys his 4th crypto coin named after a dog. Do me a quick favor. Leave a review on Apple Podcasts or share this episode with your brother-in-law. Those are the best ways to help more people find the show, and it lets me know that what I'm making is actually somewhat useful to somebody.

So, to kick it off, let's talk about leak number one. Churn. And no, not the kind you see at the Cabot Creamery when they're whipping butter. That kind of churn turns milk into something wonderful. This kind, the one we're talking about, turns your retirement into a form of cottage cheese that you don't want to touch anymore. Churn is just a fancy word for trading too much. Every time you or your financial advisor buy and or sell, you're clipping little bits of your portfolio off and handing them to someone else. Brokers, the IRS, or that guy on the other side of the trade who probably knows more than you. Think of it like digging up a plant every week just to see if it's grown. You don't just fail to help the plant, you actively kill the roots. Investors do the same thing when they can't resist poking and prodding their portfolios just to see if they should be investing in some other stock du jour. I've said it before and I'll say it again, and probably again. According to Dow Bar, the average equity investor has underperformed the S&P 500 by about 3-4% per year over the past three decades. That's not because they bought bad stocks, but because they traded too much and panicked at the bottom and chased performance at the top. We'll get to those later. But over 30 years, that's the difference between having a million bucks and 600,000 bucks. This stuff matters. The practical fix to churn. Pick a strategy, automate it, and stop fiddling. The odds of your trades beating the market long term are about the same as your odds of winning the hot dog eating contest at Coney Island. Technically possible, but probably not how you want to spend your life, and Joey Chestnut, for lack of better words, would eat you, along with 83 hot dogs, for lunch. And note, it's not just retail investors. Churn, though technically frowned upon by the SEC, is still a practice that some money managers use to either pretend they're doing something with your portfolio that justify the ludicrous fees, or a way to create trades within the account that can benefit brokers with trading fees and potential kickbacks. So if you're working with someone who trades your account regularly for very little real reason, you might want to ask them why, and then ask them to stop. Money leak number two. Management fees, or the 1% perpetual problem. I've talked about this before, but it belongs in this episode. Management fees intentionally sound harmless. 1%, half a percent, that's it. You wouldn't think twice about a 1% markup at the co-op, as is indicated by how many people choose to just round up their spare change. But in investing, and in rounding up, 1% is like a hungry raccoon that sneaks into your garage every single night. You might not notice the first few scraps it drags off. But come winter, your bird seed, your firewood, and half your snow boots are gone. Here's some math to consider. If you're paying a financial advisor 1% of your assets under management, and you're planning on following the 4% retirement rule, just remember you've just given away 25% of your safe spending each year. Congratulations, you now work for them. Over 30 years, that single percent fee can eat nearly a third of your portfolio's growth. That's the difference between your own cabin on the lake and a tent by the lake on someone else's land. And this isn't just theory. A Morningstar study found that the single best predictor of a fund's future performance is not past returns, but, wait for it, fees. Guess what? Their incredibly extensive and most likely expensive study found lower fees equal better returns, period. Not to mention, it's one of the only things in our investing lives that we can control. So don't lose money or give money away if you don't have to. The practical fix to clog this leak, if you want or need professional help, pay flat annual fees, not a percentage of your assets. Or better yet, if you're comfortable doing it on your own, just use low-cost index funds that charge you between.03 and.05% instead of 1%.