The Key Ingredient for Your Financial Success

I'm talking about your discount broker.

Cornier than corn pudding
I know it sounds goofy. And don't worry -- I'm not telling you to shoot off an email to your broker, or call up your favorite telephone operators to tell them how much they mean to you.

But stop and think about just how important your discount broker is. Without your discount broker:

• Only the richest investors, those who could afford the premium prices that full-service brokers charge, would own individual stocks. Although you might be able to take advantage of direct purchase plans that companies like Abbott Labs (NYSE: ABT), IBM (NYSE: IBM), and Wal-Mart (NYSE: WMT) offer, most people would simply never buy individual stocks at all.
• Similarly, exchange-traded funds wouldn't have nearly the appeal that they do now. As a result, you'd have far less access to many different kinds of investments than you do today.

In fact, without a discount broker, most small investors would probably be stuck with portfolios composed solely of mutual funds. That wouldn't be the end of the world; funds can help you build a perfectly good portfolio without owning a single individual stock. Yet it would deny many investors one of the most enriching experiences within the investing world.

Missing out on big returns
Nothing compares to the joy of finding winning stocks. The gains you can enjoy from finding tomorrow's big companies before anyone else has ever heard of them boggle the mind. Just as importantly, the experience of seeing a business go from a great idea with tons of potential, to an industry leader that challenges big-name competitors armed with decades of history, is priceless. In terms of your investing education, that's as valuable as the increase in your net worth that your shares will bring.

It's true that even if you don't buy individual stocks like these directly, you can still tap into mutual fund managers and other institutional investors who successfully identify those opportunities. But inevitably, their best-performing ideas get watered down by other holdings. For instance, look at these funds:

Source: Morningstar. As of Nov. 27.

These funds have long-term track records that put them in the top tier of stock mutual funds. Yet even though several of them have focused portfolios that include only a few dozen holdings, none of them has invested all or even most of their money on the investing ideas that turned out to be their best. As a result, over the years, the total returns these funds have given their investors pale in comparison to how well the best of their stock holdings have done.

Making it happen
In addition, discount brokers have played an important role in promoting other important financial concepts. IRAs wouldn't be half as useful if discount brokers didn't given small investors a viable way to build a diversified portfolio of stocks even with a modest amount of money. Today, for instance, discount brokers offer not only vanilla IRAs, but also more complicated options, such as self-directed retirement plans for owners of small businesses and the self-employed.

So as you consider all the things you appreciate during the holiday season, don't forget about your discount broker. Without the things your broker makes possible, you would have had a much tougher time being as successful with your finances as you have been.

© 2009 UCLICK L.L.C.