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TME 033: Will Your Broker Make You Broker?

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I was looking at a house the other day. I was looking at it as an investment property. The house had foundation problems. The man who came to look at the house was a foundation repairman. When he got out of the truck my perception of him was that he probably was a man who had been working his whole life. He probably barely gets by. We talked and I asked him if you could make any money renting houses. He said to my shock I have 30. We talked for a while. In fact he has since become a friend. He is somewhat of a mentor to me in the real-estate world. In that initial conversation he said his houses provide 25k per month. This man educated me on money and how he makes money work for him. At one part of our conversation I asked him what he thought about the stock market. He said I got me a broker one time. He said after he had lost about 200k I figured out that a broker will make you broker.

When we talk about a broker making you broker you need to ask about broker fees. Fees eat into your return. Fees are one of the reasons that many funds underperform. In mutual funds many times there are yearly fees or transaction fees. Mutual funds have expense ratios the expense ratio has in it the following.

Cost of hiring the fund manager.

This cost can be .5% to 1% that may seem small but when an account has 2 million that’s a pretty big check. There are also admin costs in the fees as well.

Now there are ways around brokers but you would need to do the analysis to see if the back test works out.

If you look up a mutual fund they give the top 10 companies in that mutual fund. Find a good mutual fund with a good track record. See what those top 10 companies and see how they perform. If it is close to the mutual fund performance and matches up with the fund then you should be able to use those stocks instead of paying fees by buying mutual funds.

How do brokers get paid?

Stockbrokers get paid on commission. The commission comes from the execution of trades. So if you use a broker you pay for trades not performance. That really makes no sense. You pay them to trade. If you pay them to trade they are going to trade. If they are an investment advisor this may vary. In that case they may choose a flat fee. So in the end I guess the old man was right a broker can make you broker.

Now I understand that people have made a lot of money by allowing someone else to manage thee money. That is ok. For some that is what makes them comfortable. Others may want to consider trading on their own. If that is the case there is a better way the trend following way. It takes learning but if you have a proven system then you don’t have to continue letting the broker make you broker.

My Old Friend.

Now my old friend will never put his money in the stock market again. His broker made him broker then broke him from ever wanting to be a part of it. He does pretty well without the market so I think at 70 it would be hard to teach an old dog new tricks. If he were younger I might try to teach him the trend following way. His way worked for him and it would work for us as well if we did what he did.

What About You?

Now you may look at your 401k and say well my broker has not made me broker. When the stock market booms you might be right. Over your lifetime you might make a lot of money in the market by using a broker. We have all been taught that the broker is the way. The question is not did you make money but did you make more money by using a broker than you would have made on your own. If you educate yourself and put trend following in to practice I think you will find that if your broker did not make you broker then he made you less wealthy than you would have been on your own. Now I want to make something very clear before you go out and fire the 40-year family broker and start trading penny stocks. You have to be educated and know what you are doing. Mutual funds average 10% over the past 100 years that is pretty good. If you can’t beat that in your back test the stick with the broker. You will know when your education is up to the point where you can dump your broker. You need to test your system on different markets. Does it work on all markets? Can you beat a good mutual fund? Only then are you ready to put real money into action. Even at that point you need to start slow with just a little money build your confidence. Then you can become a trend following trader.

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