Churning
Monday, December 11th, 2006
Why do you need a strategy for investing? The answer’s very simple;
- You’re looking for returns; the more, the better
- Different opportunities have varying return profiles - ideally, you’d like to have the freedom to cherry pick the best at all times
- Yet, to maximise your return from a particular opportunity, you need to commit resources for some time; and breaking those commitments incurs a cost. Sometimes, the cost of breaking free is more than the expected gain from a better investment.
- Again, taking up new investments involves costs; broker fees, sales fees, fund management, fund transfers and so on.
The problem gets complicated, because investment advisors usually have an axe to grind; the “it’s a good investment for you” actually means it’s a good income for them! Several investment advisors run insurance and fund marketing activities, and get a commission for business generated.
If you’re shifting your portfolio around in response to such advice, they make the money; you may or may not. This kind of “churning” as its called, rarely benefits the investor.
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