Keep Costs Low

Main Menu

313 Blackstone Avenue
Ithaca, New York 14850
607-255-4405

#12 – Keep your investment costs low. Trading hurts.

In a world where investment returns are finite and limited, investment costs of all kinds will reduce your return. Hold investment costs down. Two economists studied the trading records of 64,715 customers of a discount broker between 1991 and 1996.

The investors who traded the most got the worst returns, while those who traded the least got the best returns. The best investors of the 20th century made their fortunes by buying good companies and holding on to them for a long time. All trading does is eat up profits through transaction costs. (Kiplinger’s, Investing, December, 2001)

Expenses hurt too. In the long run, (brokerage -commissions, annual fund expenses, fees, taxes) matter. A recent study by the Bogle Financial Market Research Center showed that mutual fund investors as a group pay on average 3.1% of their assets in costs annually. That 3.1% may not seem exorbitant but it would eat up 31% of a 10% market return. Source: Kiplinger Retirement Report January, 2002

What counts is your purchasing power after expenses, taxes and inflation. If you invest $10,000 in a mutual fund that returns a little less than 12% annually for 30 years, with no expenses at all, your $10,000 would grow to $300,000. With expenses of 1% annually, it would grow to $229,000. With expenses of 2% annually, it would grow to $174,000. That’s why expenses do matter. The truth is that high fees are not correlated with high (future) returns.

Put another way----with no load mutual funds, all of your money goes to work for you immediately. An expense ratio, expressed as a percentage, is the amount of money the fund sponsor extracts yearly to pay for management and other costs. An expense ratio of 1.42%, the average for diversified U.S stock funds, means that the sponsor takes $1.42 yearly for each $100 you have invested.

Find out about all of the fees and charges for buying, maintaining, redirecting, and getting your money out of an investment. Hefty expenses doesn’t seem to hurt that much when returns are booming. But in a bear market you will definitely feel the bite of them. That’s why expenses should always be a consideration when evaluating mutual funds for your portfolio.