CHEAP INVESTMENTS NOT ALWAYS BARGAINS

When I was young I purchased a lot of model airplanes.  I bought them at the local hobby shop, which was my only option back then. Their selection and prices were all I had to choose from.
 
Today’s consumers have access to products from almost unlimited sources. If I wanted a model plane today I could find hundreds online and then arrange my options using that amazing tool known as the “sort by cheapest” button.
 
This same tool is used millions of times a day by people looking for things such as clothing, hotels, toys and airline tickets. Once the list of options is sorted, the decision process becomes very personal. There are some who buy the cheapest as a matter of habit. Others may scroll down to consider if value increases with price. Unfortunately, there is not yet a “sort by quality” option.
 
Airline tickets are a unique example of the emotional struggle the “sort by” button has created. In a recent study, one of the most popular airlines in the country was also listed as the cheapest. That comes as no surprise since everyone loves a bargain. But in the same study travellers revealed that this very same airline was also the worst to fly on. What this survey revealed was that much of the travelling public will buy the cheapest seats, then complain that they have no legroom, no snacks, and have to pay extra for luggage. I wonder, just what part of “You get what you pay for,” do American travellers not understand? Apparently, the flying public is fine with being disappointed so long as they get a good deal. I however, am personally familiar with the costs to own, maintain, and safely operate an airplane and this is one area of my life where I would never “sort by cheapest.”
 
There is another area of life where I have personal experience, and would never “sort by cheapest,” although I know many who are regularly tempted to do so. It is in investing. When you sort investments, what constitutes the “cheapest” options? From a purely mathematical point of view it would be the highest rate of return. So, an investment that paid 10% annually would be cheaper than one that paid 5% annually since you would only need to invest half the amount of money for the same return. But the cheapest investments are rarely the best since there is a higher risk that you may not actually obtain the promised higher return.
 
Though investors are tempted to chase high returns, they must remember that in almost all areas of life, “sorting by cheapest” will result in an inferior product and increase the likelihood of disappointment. If you buy the cheapest airline ticket, be prepared to be uncomfortable in your seat. If you buy the cheapest investments (those with the highest returns) be prepared for the increased likelihood of being disappointed. Like most shopping experiences, a wise investor can usually find a happy balance of quality and price between the two extremes.