Cost versus Value in investing

When you’re making purchasing decisions, cost can be an important factor, but value is often just as crucial. Value is even more important when it comes to getting financial advice, and investing.

Balancing cost and value in your financial plan can help you get more out of your money.

When talking about the investment market, Warren Buffett, known as one of the world’s most successful investors, once said: “Price is what you pay; value is what you get.”

How to measure the value of an item or service

The cost of goods or services is usually easy to assess by looking at the price. Determining value could be more difficult. Yet, it is an important task so you can make decisions that are right for you.

To calculate the value of an item or service you might need to consider quality or performance. In addition, your particular needs will also affect the value. So, your view of how valuable a particular item is could be different to someone else’s. This is why there is a wide range of cars available. For some driving a top of the range Mercedes is a reflection of good value at a higher price, whereas for others, the cheapest second-hand car that gets them from A to B will suffice.

Deciding the value of an item is something you almost always do when you’re making purchases.

If you’re buying a new TV, as well as looking at the price tag, you might assess the type of screen technology it has or whether it boasts smart features. You may also consider the quality of the brand or read reviews from other customers.

We discussed this in our recent podcast, Time Well Invested, where we agreed that when it comes to travel as a point of reference, the cheapest option is often not the best, and that most of us will make a value assessment of safety and track record against price.

When it comes to your investment advice and managing your money, the cheapest option is often not the best. We would go further and argue that when it comes to making financial decisions, value outweighs price.

Our recent article on the pros and cons of managing your own money, talks about value versus raw cost and the hidden costs that can detract from net returns. You can read that article here.

Here is an example: Let’s say you have a lump sum that you’d like to invest on your own. How do you determine which option is right for you from the thousands of funds, ETFs, portfolios, direct assets and other options?

When reviewing different investments, the cost, such as the investment management fee or the set up cost, may factor into your decision. When you’re weighing up value, you might want to consider value factors of which there are many: returns, past performance, volatility, size, how long they have been in operation, net cash inflows and outflows, team expertise and turnover, accessibility, liquidity, exit charges, personalised service, jurisdiction, currency, license, and consumer protection to name a few.

There are other layers of complication when you are making these assessments. It is important to always remember first and foremost when you are looking at the track record of an investment that investment returns cannot be guaranteed, that all investments carry some risk, and that past performance is no guarantee or prediction of future performance. What worked in the past may not work in the future.

Another way of saying this, is that if not assessed properly, a cheap investment can end up being very expensive if something goes wrong.

In summarising the many components of the value decision making process, which can leave you better off than just focusing on price, it also highlights the value of good financial planning and professional investment advice.

Financial planning adds value by guiding you to the best financial decisions for your objectives, directing you into the most appropriate investments, and in doing so, can also deliver a boost to your wellbeing. Of course, there is also the value in time and effort being saved from not having to operate outside your area of expertise in trying to make all these decisions on your own, with the accompanying stress reduction.

Bringing it all back to dollars and cents, the monetary benefits of financial planning can still outweigh the cost, and we expect it certainly will over the projected advice term.

This is backed up by research in the UK that indicates those working with a financial planner benefit financially. According to a report from the UK consumer watchdog, Unbiased, those who seek advice about their retirement planning at the start of their careers could look forward to a retirement that offers more financial freedom (all other things being equal). They illustrate this with the below table.

In summary, making good investing and financial decisions requires a thorough assessment of the value, and not just the cost of the advice and the investment. If you focus on cost alone, cheap can end up being very expensive.

If you are already a client of Black Swan Capital you will see that we focus on your investments in the context of your objectives and timeline and assess your financial position from a net value to you. As we summarised in the podcast, we aim to deliver wealth and peace of mind, and help our clients to be objective. That is a value add that adds to the total return to the client.

If you’d like to arrange a meeting to talk to us about your finances, whether or not you are a client, please get in touch.

Please note, this blog is for general information only and does not constitute advice. The information is aimed at retail clients only.