There's only so much you can do to pick
investments that will give you the best returns. Doing
what you can to minimize your costs, however, will always put
money back in your pocket.
Unfortunately, investing involves a tug of war between you
and your investments. Even if you invest directly in
individual stocks, you have to stay vigilant to make sure
that company managers aren't taking too much compensation out
of company profits, and you also have to
keep an eye on your brokerto make sure your commissions
don't get out of control.
Moreover, if you invest in mutual funds or
ETFs, you have a whole other layer of expenses to deal
with -- one that can make a huge difference to your net worth
over a lifetime of investing.
Don't get fleeced
Too often, mutual fund investors fall prey to the fees
and expenses that funds charge. Lulled by the promise of
better performance, you may discount the huge impact that
high expenseshave on your prospects for future gains.
For instance, take a look at these funds:
Fund
Annual Expenses
5-Year Return
Holdings Include:
Pacific Advisors Multi-Cap Value
A (PAMVX)
3.20%
(0.02%)
Chevron (NYSE: CVX),
Home Depot (NYSE: HD),
Chesapeake Energy (NYSE: CHK)
Munder Technology A (MTFAX)
3.46%
1.01%
Apple (Nasdaq: AAPL),
Hewlett-Packard (NYSE: HPQ)
Dunham Large-Cap Growth C (DCLGX)
2.77%
(9.64%)*
Microsoft (Nasdaq: MSFT),
Google (Nasdaq: GOOG)
Source: Morningstar. *Three-year
return; fund not yet open for five years.
It's tough to blame the stocks that these funds own for
their poor performance. In a market that has punished good
and bad stocks alike in recent years, many funds have seen
their gains from the previous bull market go up in smoke. But
these three funds have trailed the S&P 500 substantially,
and they fell short of their fund category averages by an
even bigger margin.
Given how badly the overall market has performed over the
past two years -- the
recent rallynotwithstanding -- few investments have
managed to avoid the carnage that these funds have
experienced. Yet as returns rose and fell, the one constant
was that a huge amount of money was disappearing from
investors' fund accounts -- because of expenses.
Picking alternatives
The saddest part is that it's easy to avoid high fund
fees. Depending on what area of the market you want to focus
on, there's almost always an
index-tracking ETFor mutual fund that will get you the
exposure you want a lot more cheaply.
For instance, value investors can look to an ETF such as
Vanguard Value (VTV), with its 0.15% expense
ratio. Growth investors might instead try
iShares Russell 1000 Growth (IWF), which
charges 0.20% annually. And if you're looking for a
technology sectorfund, the
Technology Select SPDR (XLK) clocks in at
just 0.21%. All of those ETFs are outperforming the funds in
the chart above.
A percentage point or two may not seem like that big a
deal in any given year. But over time, it really adds up, as
you can see: Continued... |