Salient to Investors:

John R. Talbott writes:
Total costs of 2% per year in a fund earning a 3 percent real return is tantamount to giving Wall Street two-thirds of the profits. ETF’s that cost a half a percent to 1 percent per year can end up costing as much as one-third of total profits over time.

More complex products can cost investors sales commissions of 5 to 12 percent. Usually the more complex and complicated a financial product is, the higher its cost to investors. Insurance companies have excelled at complex products.

Most insurance products, especially those that pretend to be investment products, have very high costs. Variable annuities pretend to be a combination of investment products with an insurance guarantee but cost much more than simply buying insurance and investing in the stock market. Sales commissions exceed 5 percent, and annual costs are greater than even a mutual fund – you pay the insurance company and the fund administrator.

Only buy insurance for events that are so unpredictable and destabilizing that your family could not get by without it. Avoid whole life or cash value policies, and universal life or variable life policies. Buy term insurance only for the shortest time period you absolutely need it.

Reverse mortgages are enormously complex and combine the worst attributes of mortgage products, insurance and annuities. Many reverse mortgage companies have come under scrutiny recently by regulators who find their sales practices and operations fraudulent and deceptive.

The “guaranteed” return is a myth since when times get tough, the institutions making it will face insolvency. And there is little value in guaranteeing a 4 percent annual yield in dollars if inflation returns to 10% per year.

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