Have you ever invested your money in a product your bank offered? Let me tell you this, either they get a commission for the sale, or they are offering their own mutual funds. Investing through a bank has to be considered carefully. Both are bad for you as an investor. Let me show you why it is a big mistake to start investing through your bank.
What if I told you that you can save over 60% just by selecting an online broker over a traditional bank! It is true, and I have proof.
The annual return on bank offered investment products can be as low as 0,81 percent. On top of the low returns, inflation will eat the remaining profits. To make matters worse, most fund managers cannot beat the indexes. An alternative with 8% return and close to zero costs is index funds following the S&P500.
Investment Products Issued by the Bank
A Scandinavian bank called Nordea offers a product called “Premium Portfølje”, translated to Premium portfolio.
The Premium Portfolio has five categories: Stable, moderate, Balances, Growth, and Offensive. Each mutual fund has different investment targets.
However, as highlighted in the infographic below the yearly return is between 0,04 % to 0,81 %. The average inflation rate in the last 60 years is 3,7%. Therefore, you will lose 3,66% of your money when invested in a typical banking product…
In the infographic above, a comparison has been made from the expected returns in the period of 3, 10 and 20 years based on the Premium Portfolio Moderate fund.
This is a product made by the bank Nordea, and they expect a yearly return of 0,04% to 0,81% based on the period invested in the fund. The yearly cost of owning the fund is 1,56% (everything included).
This is just an example from a Danish bank, but many other banks offer just as poor returns! Be skeptical when the bank wants you to start investing.
Following a simple S&P 500 index fund will return 8% on average. An example is the iShares Core S&P 500 ETF. It has an expense percentage of 0,07%, and will on average return a total of 7,93 per year with the withdrawal of the expense fees.
Fund Managers Can’t Beat the Market
According to an article broad by MarketWatch, only 1 in 20 fund managers can beat the index funds. This statistic is backed by a report of the S&P500.
While it might not come as a surprise as this is recently discussed in the media, fund managers fail to beat the market. This starts the conversation of whether we need mutual funds when investing our money.
“If I were going to put money into an index fund in relatively equal amounts over a 20 or 30-year period, I would pick a fund — and I know Vanguard has very low costs. I’m sure there are a whole bunch of others that do. I just haven’t looked at the field. But I would be very careful about the costs involved, because all they’re doing for you is buying that index. I think that the people who buy those index funds, on average, will get better results than the people that buy funds that have higher costs attached to them, because it’s just a matter of math.” – Warren Buffett
By Mr. Buffett’s recommendation, you should pick a broad index fund and invest a fixed amount in fixed intervals. First of all, a broad index fund bets that the economy will be growing in the long term (which it has done by 8% historically). Second, you will use the dollar-cost-averaging technique. Dollar-cost averaging will ensure you get an average cost of whatever you are buying. This means you no longer have to try and time the market – Because you can’t!
Third, finding low-cost index funds is crucial to the returns you will receive. There are multiple low-cost index funds, regardless of the index you want to follow.
Lastly, the long-term perspective in investing always wins for the average investor.
Costs Investing Through a Bank
Investing through a bank is significantly more expensive compared to online brokers. In the picture below a comparison of the costs is illustrated. The comparison is of the purchase costs of Danish stocks and funds.
Buying national stocks and funds is significantly cheaper in Denmark, however, there is a great difference in whether you use the bank or an online broker.
The calculations are based on the commission, deposit fees, trading fees, and other expenses charged when purchasing stocks or funds.
When looking at the most expensive alternative from Spar Nord, they charge 970 DKK (€130) for 10 trades of 50.000 DKK (€6.692). While it does not look like much, from a one-time perspective, it is a total of 2%.
And it gets even worse when purchasing international stocks and funds!
The costs for the banks and brokers are much higher when acquiring stocks from the international market. Before, where the standard commission was about 0,10-0,15% it is now upwards of 0,60%.
Furthermore, the percentage of total trade will be significantly higher. Using the same bank as before, the total cost for 10 trades at 50.000 DKK (€6.692) is now 4.802 DKK (€545). This translates to a whopping 9,6% fee!
The moral of the story is: Check the expenses!
Alternatives to Investing without Banks
Using the bank can be the obvious choice as they are managing your personal finances anyway. However, you should always focus on your own finances and not blindly follow all the recommendations from the bank.
Avoiding the bank when investing is very easy. Furthermore, it comes with great benefits:
- You can take full control
- Follow your own strategy
- Chose your investment vehicle
The banks will try to persuade you into their own mutual funds or stocks which they are paid higher commissions. While there is nothing wrong with either, they are focusing on financial gains like any other business.
A promoted stock could easily be a profitable investment, but the salesman only focuses on this salary and not your investment.
Choosing Your Investment Strategy
Finding the best strategy for your investments depends on the investment vehicle, the purpose of investing, passive or active trading, etc.
Several very well known strategies that have proven to work in the long term:
- Dollar-cost averaging
- Dividend growth investing
- Buy and hold
Each of these strategies has different purposes and will require different amounts of work.
Dollar-cost averaging can be done automatically at most online brokers. This can be set up as a monthly deposit to your brokage account, followed by an automated purchase of preselected stocks or funds.
Dividend growth investing is known to be a passive investment strategy. When the funds and/or stocks pay a dividend it is reinvested back into the funds and/or stocks for a compounding growth effect. This is not automated at most brokages, therefore you manually have to purchase stocks and funds for the dividends.
The buy and hold strategy is one of the simplest but requires the most amount of work. Finding a company that seems interesting, during tons of research to be sure that it will out-compete the competitors, investors simple buy and hold it. It requires a lot of work to find the right company, and the return is often far distant in the future.
Indexing is probably the most passive investment form. Hence why Mr. Buffett looks at index funds as the best option for the average investor who does not have the time to actively invest. Following indexes is also rated as one of the safest investment strategies, due to the large spread in the industries and markets.
While investing through a bank will force you to invest in stocks, CDs, bonds or funds you can choose to invest in real estate, P2P lending (also known as crowdlending), Cryptocurrencies, commodities and much more.
The investment vehicle depends on the risk, time horizon and money you have available to spend. If you use real estate to rent it can be a life-long investment, whereas P2P lending can be a one-month investment.
Investing Through A Bank – Conclusion
No matter how much time, energy, understanding or thought you give your investments, it can be time well spend as you can end up paying almost 10% of your invested funds in fees at the banks.
Furthermore, the bank’s own funds typically come with high fees and very low yields.
You should look for alternatives to avoid extreme expenses to focus on your long term growth. Even Warren Buffett is convinced that it is the best way to do it!