I recently built this chart for a series of speaking engagements I was asked to deliver. I used it to make a variety of different points – many of which I’ll share with you in the coming weeks.
But for starters, I wanted to highlight some thoughts about investing fees and commissions – a subject I consider to be among the most critical for us to keep top-of-mind when navigating our own wealth-building paths.
Wall Street – or perhaps better labeled the Wall Street Cartel (since the gamut of players extends to banks, governments, and others) – tends to offer us investment options that lie within the confines of the blue band.
- The potential for reward goes up as we assume risk, and
- Safety of our money goes up as we forfeit the potential of larger returns
Pretty straightforward.
Then – I’ve given names to many of the more popular investment options – and plotted them on my “Risk-Reward” continuum – more on that in later blogs. For today, I want to focus on those that impose the greatest fee or commission load on our money.
I believe the most expensive investment on the continuum is the beloved Bank Certificate of Deposit. Now that may be a head-shaker to you. But bear with me.
Banks are in the business of borrowing inventory (cash from deposits and CDs) and renting it out to others (lending) at a higher rate. They’re the quintessential middle-man.
Today, we can borrow money from a bank at about 5%; and we can lend money to a bank (by purchasing a Certificate of Deposit) at about 1%. If banks were willing to lend at the same rate at which they borrowed – a CD would pay the same 5%. But they don’t. They take a margin in between – and that margin becomes the “cost” we bear to purchase and own a certificate of deposit; in this example, 4%.
I don’t know of another product on the continuum that assesses such an exorbitant fee for the product they sell. And they impose another hidden – and perhaps even more devastating cost – on us when those paltry interest rates don’t keep pace with inflation.
There are alternatives that offer both safety, and upside potential – at considerably less cost. Find them – and you can have your cake and eat it too!
