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Low Cost Investing

This lesson is a part of an audio course Become a Self-Directed Investor by Damanick Dantes

So, I might have thrown a bunch of jargon your way. And you're probably wondering how to put all of these investments into a global portfolio. Don't worry, it's not complicated.

To be sure, I'm not recommending any securities or products, and please do not take this course as investment advice. For this reason, I will broadly point you to asset classes and some examples of what you can research to include in your portfolio.

For broad exposure (as opposed to picking individual stocks), we'll turn to funds that hold a basket of securities. But they all come at a price.

To determine your cost, look at the expense ratio, which is the annual fee that funds charge to shareholders. It's the percentage that's deducted from fund assets to cover the expenses of running the fund.

Mutual funds are the typical go-to for investors, and they're included automatically in many 401(k)s. The problem is that active mutual funds (those that aim to outperform the market by picking stocks) generally have expense ratios around 1.45% (or 145 basis points). This is compared to 73 basis points for an index mutual fund that tracks the overall market, or 23 basis points for the average exchange-traded fund (ETF), which, unlike mutual funds, trade on exchanges like stocks.

Some passive ETFs that track the overall market have expense ratios as low as 5 basis points, and some active ETFs charge around 30 to 60 basis points. There are many ETFs that hold baskets of securities in particular sectors such as tech and retail, or regions such as developed and emerging markets, which you'll need to construct your global portfolio. One example is the MSCI EM ETF (ticker: EEM), which has an expense ratio of 68 bps.

You should visit to discover and compare ETFs. The website has screeners that allow you to find ETFs based on sector and currency exposure, and so much more.

The reason why I included this section on low-cost portfolios is that so many investors give away precious dollars for the subpar performance of these funds. Studies show that paying ongoing fees of 1% can cost investors around $20,000 over 20 years. Combine that with the potential for smaller equity returns as a result of home country bias, and you can see the system is set-up to squeeze small investors who don't take action to become self-directed. It's flat out unacceptable.

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Written by

Damanick Dantes

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