Have you ever considered how many degrees of separation exist between you and your money?
When it comes to people, the theory is that everybody on this planet is separated by only six other people. This is referred to as “Six Degrees of Separation,” popularized by John Guare, who wrote a play in 1990 and later a film in 1993 by the same title.
Notwithstanding the popularity of this theory, I don’t know whether it’s true or not. What I do know is that the more degrees of separation that exists between you and your money, the more it’s going to cost you and the less you’re going to get.
Let’s start with zero degrees of separation. An example would be an investment in you, like education or skills training. If you’re a business person, making an investment in your own business results in zero degrees of separation. You, and you alone, benefit from the investment you make.
The first degree of separation is when you hand your money over to someone else to make an investment on your behalf. Perhaps it’s a stock broker or a real estate company. They are going to buy something on your behalf and in both cases they are going to charge you either a one-time fee or an ongoing fee. When the transaction is completed, your name is attached to that investment. When you pay someone to invest your money, you give up some of the benefits and assume all the risk.
The second degree of separation is when you give your money to someone else to invest, and they in turn hand it over to another person to invest. This is what happens with mutual funds and managed accounts. You hand the money over to your mutual fund broker or your bank branch and they in turn hand it over to a fund manager. The costs here are increased because there are more people involved. Everyone along the chain has to be paid so yet again you’re giving up even more benefits and still assuming all the risk.
The third degree of separation can actually count as the fourth, fifth and sixth degree as well. At this level you have no idea who’s actually managing your money and there’s so much skimming going on, you’re lucky if you can make any money (or get your money back). In this category I’d put in mutual funds made up of other mutual funds, some real estate trusts and a whole lot of tax sheltered investments. It only stands to reason that if you have to go through multiple people or companies to get to your money, then you’re probably going lose more than you’re going to gain.
Before you make any investment you should have a clear idea of how many degrees of separation are between you and your money. Your objective should be to try and keep it down to zero or one whenever possible. Remember, it’s your money and the more of it you keep the better.
Now, can anyone introduce me to Kevin Bacon?