10 Ways Investors Lose Money Without Knowing It

Churn,

fees, spreads, taxes, cash drag, and even your own panicky mind.

None of these feel dramatic in the moment, but over decades, they're the difference between retiring at 60 with a glass of wine on the porch and retiring at 75 with a glass of warm prune juice in the cafeteria.

Hello, friends, this is Tyler Gardner, welcoming you to another episode of Your Money Guide on the Side, where it is my job to simplify what seems complex, add nuance to what seems simple, and learn from and alongside some of the brightest minds in money, finance, and investing.

So let's get started and get you one step closer to where you need to be.

You know those crime shows where the detective walks through the house and points out that the burglars didn't just take the television.

They also siphoned the gas out of the car, borrowed the dog, and left the fridge just slightly ajar.

Well, that's basically Wall Street with your retirement account.

They're not always robbing you blind, and yes, there are plenty of people out there who are providing you with a great service of helping you understand what you're doing with your money, et cetera, et cetera.

But, or,

and,

you need to know how all of these services work, how retail investing works, how asset management works, and how sometimes even the most noble of people who are helping you make decisions about your money are, to follow the crime metaphor above, just leaving a couple faucets dripping, little leaks that don't seem like much until the water bill arrives and you realize you could have funded a trip to New Zealand with what just went down the drain.

And all, genuinely, because you simply didn't know it was happening.

So, my goal in this episode is not to condemn any fee or service or product, but rather to, as per usual, make you aware and educate as many as possible about where and how you could be losing money to tiny fees each year.

And as I note, in almost every episode, most investors continue to think the biggest risk to their nest egg is picking the wrong stock, like choosing Blockbuster in 2007 instead of Netflix, or Pets.com instead of Amazon.

But the real killers, seriously, aren't the big mistakes.

I know this sounds counterintuitive.

The biggest and most guaranteed killers of long-term wealth, the type of FU money that we all want at some point, are the slow yet countless leaks.

A percent here, half a percent there, a rash decision in a bad week.

It doesn't feel dramatic.

You don't see fireworks when it happens, but over years and decades, it's the difference between retiring at 62 with a boat and retiring at 72 with a pair of binoculars to watch other people's boats.

If you've seen the movie Office Space, you might remember their perfect crime.

Siphon off a penny here, a penny there, nothing anyone would notice day to day, and eventually it would add up to millions.

That's how fees and hidden costs work in your portfolio.

Whether you have someone manage your money or you do it on your own.

A basis point here, an expense ratio there.

Again, no explosions, no headlines.

But unlike office space, this scheme, as it stands and pertains to your investments, is completely legal and Wall Street has perfected it.

So today's episode is all about 10 ways you're losing money as a retail investor without even realizing it.

I'm going to point out the leaks, explain how they work, and most importantly, show you how to plug them so you can get back to more important things like re-watching Office Space for the 10th time and wondering if Milton will ever find his stapler.

And if you're listening right now and thinking, Tyler, this is exactly the kind of stuff my brother-in-law needs to hear before he buys his fourth crypto coin named after a dog.

Do me a quick favor.

Leave a review on Apple Podcasts or share this episode with your brother-in-law.

Those are the best ways to help more people find the show and it lets me know that what I'm making is actually somewhat useful to somebody.

So, to kick it off, let's talk about leek number one,

churn.

And no, not the kind you see at the Cabot Creamery when they're whipping butter.

That kind of churn turns milk into something wonderful.

This kind, the one we're talking about, turns your retirement into a form of cottage cheese that you don't want to touch anymore.

Churn is just a fancy word for trading too much.

Every time you or your financial advisor buy and or sell, you're clipping little bits of your portfolio off and handing them to someone else.

Brokers, the IRS, or that guy on the other side of the trade who probably knows more than you.

Think of it like digging up a plant every week just to see if it's grown.

You don't just fail to help the plant, you actively kill the roots.

Investors do the same thing when they can't resist poking and prodding their portfolios just to see if they should be investing in some other stock du jour.

I've said it before and I'll say it again and probably again.

According to Dalbar, the average equity investor has underperformed the SP 500 by about 3 to 4% per year over the past three decades.

That's not because they bought bad stocks, but because they traded too much and panicked at the bottom and chased performance at the top.

We'll get to those later.

But over 30 years, that's the difference between having a million bucks and 600,000 bucks.

This stuff matters.

The practical fix to churn.

Pick a strategy, automate it, and stop fiddling.

The odds of your trades beating the market long term are about the same as your odds of winning the hot dog eating contest at Coney Island.

Technically possible, but probably not how you want to spend your life.

And Joey Chestnut, for lack of better words, would eat you, along with 83 hot dogs, for lunch.

And note, it's not just retail investors.

Churn, though technically frowned upon by the SEC, is still a practice that some money managers use to either pretend they're doing something with your portfolio that justify the ludicrous fees, or a way to create trades within the account that can benefit brokers with trading fees and potential kickbacks.

So if you're working with someone who trades your account regularly for very little real reason, you might want to ask them why and then ask them to stop.

Money leak number two, management fees, or the 1% perpetual problem.

I've talked about this before, but it belongs in this episode.

Management fees intentionally sound harmless.

1%,

half a percent, that's it.

You wouldn't think twice about a 1% markup at the co-op, as is indicated by how many people choose to just round up their spare change.

But in investing and in rounding up, 1% is like a hungry raccoon that sneaks into your garage every single night.

You might not notice the first few scraps it drags off, but come winter, your birdseed, your firewood, and half your snow boots are gone.

Here's some math to consider.

If you're paying a financial advisor 1% of your assets under management, and you're planning on following the 4% retirement rule, just remember you've just given away 25% of your safe spending each year.

Congratulations, you now work for them.

Over 30 years, that single percent fee can eat nearly a third of your portfolio's growth.

That's the difference between your own cabin on the lake and a tent by the lake on someone else's land.

And this isn't just theory.

A Morningstar study found that the single best predictor of a fund's future performance is not past returns, but, wait for it,

fees.

Guess what?

Their incredibly extensive and most likely expensive study found.

Lower fees equal better returns.

Period.

Not to mention, it's one of the only things in our investing lives that we can control.

So don't lose money or give money away if you don't have to.

The practical fix to clog this leak, if you want or need professional help, pay flat annual fees, not a percentage of your assets.

Or better yet, if you're comfortable doing it on your own, just use low-cost index funds that charge you between 0.03 and 0.05%

instead of 1%.

And that's like swapping a leaking faucet for a tight Vermont maple tap.

One drips away your wealth, the other steadily produces the world's best syrup.

Sorry, Canada, we've got you beat on this one.

Leak number three,

load fees.

This is like the cover charge of investing.

Very few people I talk to who haven't worked in investing or finance know about this one.

So listen up.

Load fees are the investing world's version of a bar cover charge.

You pay 5%

just to get in, then you enjoy the privilege of buying drinks at $18 a piece.

Let's say you invest $100,000 in a fund with a 5%

load fee.

Well, now you're starting at $95,000.

And for what?

Studies from FINRA and the SEC show no evidence, zero evidence that load funds outperform no-load funds.

Surprise, you're just lighting your money on fire for the thrill of being sold to.

Again, I get it.

It's that fun idea that has been proven to get us time and time again.

If somebody makes something exclusive, we want it.

And if I charge you 5% just to get into my fund to begin with, well, it must be amazing.

And if the front-end load fees don't get you, guess what?

We also have funds that have back-end load fees, where you don't even see the fee until you try to get out.

Like paying an exit fee for leaving a ski lodge after discovering they only serve lukewarm cocoa that has minimal cocoa and zero, I repeat, zero, little delightful tiny marshmallows.

Practical fix.

If someone's charging you money to get into a fund or out of a fund.

No,

no, and no.

By any other name, this is just called stealing your money.

With Vanguard, Fidelity, and Schwab all offering no-load index funds, paying a load fee in 2025 is like driving a horse-drawn carriage down I-89.

Although, to be fair, part of the charm of I-91 in Vermont is that I do see tractors on occasion heading up towards the Northeast Kingdom, and it is delightfully charming.

But please, figure out right now if you are paying any type of load fees, and tell your advisor or yourself, never again.

Leak number four, expense ratios, or death by decimal point.

Expense ratios, unlike cover charges, are how funds pay for management, marketing, and the intern who keeps the coffee pot running.

A few basis points sounds harmless, but over decades, even tiny differences compound into piles of money.

Example, say you put $100,000 into an index fund charging 0.05%,

and another $100,000 into an actively managed fund charging 1%.

Assume both return 7% before fees.

After 30 years, the index fund grows to $761,000, the actively managed fund, $574,000.

That's nearly $200,000

gone.

Enough to buy your own tractor to cruise up I-91 and enjoy the no-billboard scenic views.

And as we all know, but need to be reminded of daily, according to the S ⁇ P SPIVA report and every other report ever that studies this, 80 to 90% or more of active managers underperform their benchmarks over 10 years.

You're paying more and you're getting less.

It's like paying extra for organic snow in January in Vermont.

Pretty, but indistinguishable from the stuff that's already covering your driveway.

Practical fix, as always, stick to low-cost index funds.

If you must go active,

like you really want someone to manage your your money.

At least be honest with yourself.

You're not buying a better return.

You're buying entertainment and the ability to tell people you work with a money manager who at least knows how to manage their own income and perpetual cash flow.

Leak number five, fund of funds fees or the Russian doll problem.

This is another one that very few people I talk to are actually aware of.

So let's call attention to this leaky faucet.

Fund of funds are indeed fun to say, but they're also like those Russian nesting dolls.

Charming until you realize every layer inside costs you more money.

A lot of 401k plans are packaged with target date funds that look simple on the surface.

Just pick the year you retire and you're done.

But under the hood, that fund, along with many other types of funds like this, is buying other funds, each with their own expense ratios.

So instead of paying one set of fees, you're paying layers of them.

Morningstar has shown that fund of funds often charge 0.2 to 0.5%

more than their underlying funds alone.

Because you've bought a fund to buy more funds and each of those funds funds has its own management team and coffee interns.

Not so fun.

And again, doesn't sound like much.

But back to that raccoon sneaking into your garage every night, by the time you're 65, you're wondering where half the birdseed went.

Only the bird seed is your ability to retire and do what you want to do with your life.

And the real pain in the tush, and if you don't know this yet, you need to right now, is those extra fees don't buy you extra performance.

They buy you you convenience.

Nothing wrong with that, but it's like paying someone 5,000 bucks to stack your firewood.

And they go and hire a team for 2,000 bucks to do it.

And that team goes and hires a team for 50 bucks to do it.

You just paid a lot of money for something you could have gotten for far cheaper if only you had realized what was underneath the hood and available to you the entire time.

Hint, Apple, and NVIDIA.

The practical fix.

If you're in a 401k with only target date options, fine, it's better than nothing.

But if you have access to underlying index funds, that means the funds that these other funds are buying and packaging as a single fund, you can recreate the same allocation yourself and save the layering costs.

In other words, open the doll, skip the middleman.

VOO stock fund and AGG bond fund will create any risk profile you want of stocks and bonds for a fraction of the price.

Leak number six, the spread, or the hidden toll booth.

The spread is the tiny toll you pay between what someone is willing to buy an asset for, called the bid, and what someone else is willing to sell it for, called the ask.

For big liquid ETFs, it's a penny or two.

But for smaller, less liquid investments, it could be a few dollars.

One trade, who cares?

But if you're like many people I know, darting in and out of positions daily in response to Kramer's latest tip of the minute, those spreads pile up.

It's death by a thousand toll booths.

And over time, you'll find yourself wondering why your brilliant trading system performs worse than the SP 500 by a suspiciously familiar 3%,

the exact drag caused by costs.

And watch out, because little known fact, spreads get wider, sometimes much wider, in times of market turbulence.

Remember March 2020?

Markets fell apart, liquidity dried up, and spreads blew out.

So if you were trading in that chaos, you weren't just losing money from falling prices.

You were handing an extra chunk to the market makers who kept the lights on so you could do so.

Practical fix: trade less and stick to highly liquid popular funds.

Think of it like Vermont dirt roads in mud season.

You drive sparingly and only on the well-traveled ones.

Otherwise, you're going to lose more than just your traction.

Leak number seven: Commissions or the Paper cut factory.

Because I know my audience, I know that many of you remember when trades cost money.

Entire brokerage empires were built on the backs of those commissions.

Thankfully, most of that is gone.

Robin Hood and some others dragged the industry to zero.

That's a good thing.

But, of course, nothing is really free, and mostly we just change the language.

Brokerages now make their money through what's called payment for order flow.

They sell your trades to market makers who skim a fraction off the spread.

Translation, you're still paying.

It's just a little less obvious.

So instead of a clear bill for 20 bucks, it's the hidden cost of slightly worse prices on every trade.

Like when the general store throws in free delivery but adds two bucks to the price of every gallon of milk.

Amazon Prime, I'm looking directly at you, you evil, evil geniuses.

And if you're still with a broker charging commissions, that's madness.

I have no joke to insert here because it's not funny.

It's madness.

Stop.

Practical fix, if you're at a legacy broker charging for trade, switch.

If you're at a zero commissions platform, just remember the old saying, if the product is free, you're the product.

That doesn't mean don't use it, just keep your eyes open.

Leak number eight, taxes or the silent partner you never knew you had.

If you're investing or trading frequently outside retirement accounts, you've got a silent partner, the IRS.

And they don't just want a slice of the pie, they want it served on the good china.

Remember that short-term capital gains, the money you make off of appreciated assets that you're selling, if you've held the assets for less than a year, are taxed at your ordinary income rate, which can run as high as 37%.

Long-term gains, however, if you've held the asset for more than a year, are more like 15 to 20%.

Same gain, wildly different outcome.

If you turn $10,000 into $12,000 in the markets, the difference between holding for a year versus selling before that could be $1,700 in your pocket or Uncle Sam's.

That's not lunch money.

That's someone's mortgage payment.

And don't forget dividends, interest, or the Medicare surtax if your income is high.

Taxes are like Vermont black flies.

You can ignore them.

You can pretend they're not there.

and you'll regret it.

Practical fix, max out your tax-advantaged accounts like 401ks, Roth IRAs, and HSAs.

If you really need to trade daily and that's your fix, do it within tax-advantaged accounts so you're not realizing the capital gains.

Also, hold investments for over a year if you can afford to do so.

And when possible, harvest losses in down years to offset the gains in taxable accounts.

I'll hit on that.

It's called tax loss harvesting in another episode.

Yes, taxes are inevitable, but overpaying is optional.

And just remember, every time you trade in a taxable account, if you're not offsetting those gains, you're just giving up potential compounding that could be a massive silent killer of long-term wealth.

Leak number nine, cash drag or the mattress problem.

This is one of my favorite sleazy moves that money managers still absolutely practice.

If you're paying a money manager 1% of your assets, just remember you're paying 1%

on all assets under management.

So if your money manager has cash on the sidelines for the next great opportunity, you're being charged 1% for that cash.

This is cash drag.

And it is what happens when too much of your portfolio sits idle, whether your money is being managed or you're managing your own.

A little cash is fine.

You need dry powder for liquidity.

But let inflation or management fees nibble at your pile for too long, and it's like leaving a cord of firewood outside uncovered.

By February, it's damp and useless.

And with historical inflation at 3%,

$100,000 in cash loses $3,000 in purchasing power every year, not to mention another $1,000 in management fees.

So over a decade, you're talking about $44,000 or so gone.

Enough for a brand new Subaru Outback.

And guess what?

Curveball that almost nobody knows about, including people I know who work in finance.

Funds can also hurt you here.

Many mutual funds that you invest in hold 5 to 10% in cash just in case, which means you're paying management fees for someone to sit on their hands.

Practical fix.

If you want to keep enough cash for near-term expenses and liquidity, that's great, but let the rest work.

And if your money manager is sitting on a large pile of cash, telling you it's just not the right time, great, then give me back the freaking money and I'll give it to you when it is the right time.

We can transfer money in a matter of hours these days, so there is no reason they should be sitting on a large pile of cash, letting it be eaten away to inflation, and charging you a percent to have them do so.

Leak number 10 emotional decisions.

And we've been over this one in a few episodes, so I certainly will not belabor it, but we do need to talk about the mother of all leaks, you.

The biggest drain on returns isn't fees, spreads, nor is it taxes.

It's panic and our emotional wiring.

When markets fall, fear screams louder than reason.

You sell at the bottom to stop the bleeding.

When markets soar, greed takes over again and you buy whatever's already doubled.

Back to Dalbar, the average investor underperforms the very funds they invest in by 3 to 4% annually, not because the funds are bad, but because people mistime their entries and exits, or people try to enter and exit in the first place.

Think of it like Vermont winters.

If you sell your snowblower every May because you don't think you're going to need it again, but you got to sell it for very cheap just to get it out of your garage, and then panic buy it back every January at full markup, you're not just cold, you're broke.

Practical fix, automate every single thing you can in investing in money management.

Contributions, rebalancing, even withdrawals and retirement.

The less your plan relies on you, the better.

Build a plan in calm times so you don't need to improvise in chaos.

And if you must panic, go scream into a pillow instead of butchering your brokerage account.

So, there you have it.

That's 10 ways money quietly leaks out of your portfolio.

Churn,

fees, spreads, taxes, cash drag, and even your own panicky mind.

None of these feel dramatic in the moment, but over decades, they're the difference between retiring at 60 with a glass of wine on the porch and retiring at 75 with a glass of warm prune juice in the cafeteria.

To zoom out, you don't have to outsmart Wall Street.

You just have to stop handing them your lunch money.

Because right now, yes, they're the ones getting the free lunch.

So lower your costs, simplify your strategy, automate your decisions, and for the love of all things holy, stop trying to time the market.

Again, if today's episode helped you spot even one leak in your own portfolio, do me a favor, leave a quick review on Apple Podcasts.

It helps more people find the show, it tells me what's resonating, and it keeps me motivated to keep making episodes that protect your wallet and maybe occasionally your sanity.

Or if you know someone else who could use this, the brother-in-law, the co-worker, or anyone who still brags about their daily trades and doesn't know what spread means, send it their way.

The fewer leaks we all have, the more boats stay afloat, and the more we will do our best to hold the industry as a whole to a higher level of accountability.

Thanks for listening, and as always, I hope this gives you something to think about throughout the week.

Thanks for tuning in to your money guide on the side.

If you enjoyed today's episode, be sure to visit my website at tylergardner.com for even more helpful resources and insights.

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Until next time, I'm Tyler Gardner, your money guide on the side, and I truly hope this episode got you one step closer to where you need to be.