Investment growth is a function of returns and expenses. Whereas trying to maximize returns requires risk, managing costs is completely within your control. Therefore, you can increase your returns by paying attention to fund and investment expenses.

Many people recommend low cost index funds, but “low cost” may not mean the same thing to everyone. Older investors are used to paying up to 5% up front costs (aka, “loads”, essentially sales commissions) when purchasing mutual funds and actively managed funds, so avoiding this cost is essential. Almost all of these funds have load free competitors.

These free to buy in funds still come with management fees, usually referred to as expense’s. There are a variety of them, but the most important one to pay attention to is the “net expense ratio” which is the total annual cost as a percentage of your money invested. Many funds charge 1-2%, but there are competitors that utilize fully automated trading to reduce expenses down to below .5%, which is usually what people mean when they refer to “low cost” index funds. Most 401k plans carry the expensive funds, but there may be 1 or 2 options with lower expenses.

However, there is one caveat when searching for low expense ratio funds. Just because a fund has low expenses may not mean it is the lowest total cost if it is holding other funds because those other funds have their expense ratios hidden within their prices. You want to find index funds that actually hold real securities like stocks, not a “fund of funds”.

Even though expenses are completely within your control, they can also be hidden to deceive investors. Over time, even small expenses chip away at long term growth. The best options are Exchange Traded Funds (ETF) with around .1% expense ratios with no fees.

Published by BE

I write about my travel and money experiences. View all posts by BE