Fines versus Fees

August 26, 2022

In my last article I wrote that the behavioral aspect of investing is critical to long-term success. 

I realize many people are still struggling during this difficult year and it would be worthwhile to provide some more tools that may help everyone stick to their long-term investment plan.

This particular tool, fine versus fee, is lifted directly from the book, “The Psychology of Money” by Morgan Housel.  If you find this post helpful, you’ll really enjoy his entire book.

There is a stubbornly persistent idea in our culture that a wise investor sells off investments in anticipation of market declines, and decidedly reinvests once the lows have been reached. 

Wouldn’t that be the best of both worlds- being completely spared the pain of seeing account values decline, while not sacrificing one point of investment return in the long run!  (We’ll ignore the unfortunate interruption of compounding dividends.)

If anyone still believes that an advisor’s value lies in providing this specific service, let me set the record straight.

While perfectly logical, this strategy would require a magical crystal ball to be consistently effective.

Since that doesn’t exist, I would compare an attempt to execute this strategy to medical malpractice. 

And I mean the type where the doctor cuts off your entire arm to relieve a hangnail!  I would never attempt or recommend it in a million years, because I genuinely care about my clients and their success.

Dave Ramsey uses the analogy of stepping off a moving roller coaster, equally vivid in its picture of pain, to keep investors from abandoning their plan. 

Over the years I’ve witnessed many attempts to avoid market declines, and the results are consistent:  underperformance, goal setbacks, frustration, even despair. 

Morgan Housel puts it this way: “the money gods do not look highly upon those who seek a reward without paying the price.  Some car thieves will get away with it.  Many more will be caught and punished.”  Ouch! 

This brings me to Mr. Housel’s concept of “fee versus fine.”  Most people have a plan-based investment strategy, and are aware that the zigs and zags of the market are normal and expected. 

This does not always prevent us from feeling like the “losses” we experience as our account values decline are a type of a fine, a penalty for making a bad investment decision.  Some investors feel like they must have done something horribly wrong to be penalized in this way.

In the chapter “Nothing’s Free”, Mr. Housel invites us to shift this thinking from “fine” to “fee”.  He says “Like everything else worthwhile, successful investing demands a price.  But its currency is not dollars and cents.  It’s volatility, fear, doubt, uncertainty and regret- all of which are easy to overlook until you’re dealing with them in real time.  The inability to recognize that investing has a price can tempt us to try to get something for nothing.  Which, like shoplifting, rarely ends well.”

I’ve written often about common pitfalls and mistakes- so what does it take to be successful?  I would assure you that many people have made a mistake of this type at least once, experienced the poor results, and resolved to stay on the straight and narrow path going forward.

While some people can only learn the hard way that they are not the exception to a well-tested rule, I urge you to avoid that route.

Resolving not to react and to stay invested according to your plan, no matter what is going on, can feel like a high price to pay, yet it is the cost of reaping the full returns of your customized investment strategy over time. 

Most people are willing to give up some upside gains, to limit their downside.  That is called personal risk tolerance, and as long as it can be realistically accommodated in pursuit of your goals, we have found the “price” you’re willing to pay. 

Through the financial planning process, once you determine what is required for you to live a life of financial independence and dignity, accepting the price that comes with staying the course can become much easier. 

If you haven’t done it yet, I’ll be happy to help!

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. Investing involves risk, including possible loss of principal.

Securities and Retirement Plan Consulting Program services offered through LPL Financial, a Registered Investment Advisor. Member FINRA/SIPC. Investment Advice offered through Western Wealth Management LLC, a Registered Investment Advisor. LPL Financial, Kennebec Wealth Management LLC and Western Wealth Management LLC are separate entities.