Articles, Investing Basics

A Short Guide for the Fee Conscious Investor

OVERVIEW               

One of the most prolific changes in the investment world over the last decade is the amount of downward pressure the investment community has put on fees of all types. Brokerage fees, commissions, management fees, expense ratios have all come under fire as competition becomes increasingly stiff. Retail investors often prefer funds with lower expense ratios, while apps like Robinhood have become popular for their no fee trading platform. With all these changes, it’s hard for active managers and other investment professionals to justify the fees they charge if their performance is anything less than stellar. So how can retail investors maximize the utility of the tools at their disposal while attempting to seek low cost investment instruments? Well, you have questions and we have answers.

 

INVESTMENT TOOLS

So how can we find low fee investment tools to execute these types of strategies. Looking for low cost ETF’s such as those offered by Vanguard and iShares is a great place to start. Each company has S&P 500 ETF’s that are extremely low cost. As mentioned earlier, Robinhood offers free trading to purchase your ETF’s and other investments. Between these financial services companies, and others, the average investor has a multitude of tools to execute their strategies. However, investors beware. Most all offers, whether in the financial industry or not, come with risk and reward ingredients to them. Seeking investments with a priority of low expense will most likely lead you to a portfolio consisting solely of domestic U.S. equities. Funds including bonds, foreign equities and other securities are often more expensive, but can diversify one’s portfolio and smooth returns. A properly diversified portfolio is critical in maintaining proper risk reward. Further, Robinhood can offer zero trading fees for several reasons pertaining to their business model, but these trades are often not executed by Robinhood in the same manner of urgency or timeliness as those executed by more traditional Broker Dealers who levy trading costs on client transactions.

 

IMPLEMENTATION

When taking a long-term approach to investing there are times to row and there are times to sail. All to say that there are times when actively trading a portfolio can result in increased performance and there are times when it is best to play off market momentum and frequent trading can lead you chasing the market for returns. Allow us to use one of Hedgehog Investment Research’s proprietary models to illustrate the power of this point. Hedgehog’s Stock-Bond Rotation Model (SBRM) provides a trading strategy that has provided exceptional risk adjusted returns when back tested as far back as 1976. The model has produced 22 signals cueing a shift in asset allocation from stocks to bonds, or vice versa, since then and up to 2019. According to this strategy you would have made a trade in the account slightly less often than once every six months. The model only assumes investments in the S&P500 and the Barclays Aggregate Bond Index; meaning that outperformance to the S&P 500 is rather difficult during bull markets, but an appropriately timed shift to bonds when expecting a market downturn can yield phenomenal outperformance if significant declines in equities are avoided. Active trading in an account is only necessary when the market changes courses. Whether the adjustments taking place are from stocks to bonds, growth to value, or between market cap sizes, restructuring of a portfolio should be done utilizing a long-term perspective even if an investor’s time horizon is short.

 

SUMMARY

Technology, competition and innovation continue to drive the progress of innovation forward in all industries. The changes allow individuals access to products and services never previously considered only a decade ago. It is up to each unique investor to determine the right course of action in their portfolio. Along this arduous journey we hope Hedgehog Investment Research can be a guide to your investment strategy.

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