It ultimately comes down to two things:
- The cost of diversification
- The cost of trading assets
To build a safely diversified investment portfolio, you’ll need to own many different assets – owning just one asset is very high risk, because you’re 100% dependant on the performance of that asset. If that asset, whether its ownership in a profitable company (equity/stocks/shares) or a loan (corporate/government bonds etc), doesn’t perform as hoped, and it’s the only one you own, your whole investment portfolio doesn’t perform as hoped.
To diversify properly across many profitable investments – the more you have, the lower risk it is – you have to purchase many different investments. And to do this, there is always a cost involved, whether that’s a fixed purchase fee, or a compromise to make (i.e. holding your assets with a financial company which offers “free” trading, but doesn’t fully segregate your assets so you’re not protected if something goes wrong). So to fully diversify your investment portfolio, it costs something.
Secondly, there’s the trading fees. Things change, and if your investment portfolio doesn’t keep up with things as things change, you will often lose out on better investment returns, or in the worst cases, make a loss. Again, trading lots of assets, lots of times over several years, isn’t cheap.
One of the most common ways to mitigate these fees, and make it much lower cost – and therefore have a higher return, because your money is invested instead of being spent on fees – is to pool your diversification and trading costs with others, by investing into an investment fund. This way, when a trade is made (i.e. buying/selling an asset), the cost of doing it is split with everyone else investing in the same fund. Instead of many small transactions, there is one larger transaction, which is significantly lower cost, and everyone participating in the transaction benefits from collaborating together. There is obviously the benefit of delegating investment decisions to a specialist in any particular sector, which generally speaking delivers considerably better returns than guessing things as an amateur, but when you’re investing just a few hundred, or even a few thousand each month, the fees involved to do this properly on your own would end up being more than you’re saving each month.
The reason for investing via a “product”, i.e. a savings plan product, rather than investing into investment funds directly, is similar. If you want to diversify your investment portfolio into different sectors or geographies, or across different fund managers, you’ll need to own shares in different funds. And the cost of doing this directly can be prohibitively high – a common “minimum investment amount” per investment fund is often $5,000 or higher, so if you want to split your assets between 10 different funds, you’ll need $50,000 or more just to be able to do that by investing directly into each fund. And then there will be the purchase fee – often around 5% of the amount invested, and up to 6.5% on the more “fancy” specialist funds run by the most well-known and respected private banks.
By investing via a “product”, such as the one available from SavingsForNomads, you pay one (fixed) set of fees/charges to the product issuer (Investors Trust, in this case), and they cover the cost of diversification and trading from that fee, making it “free” for you to invest and trade different investment funds, because any/all applicable fees are covered by your small product fee schedule. Because of the economies of scale they enjoy, they can negotiate lower fees than any one individual could manage, and pass on most of the savings they make to you by way of low (and fixed) product fees – making it much easier for you to grow your wealth in the most optimised way possible.