Do you know how much you are paying for your investments and how that fee is affecting your investment performance? A fund that charges 1 percent expense ratio will likely return 1 percent less than the index it follows. Therefore, it’s important to evaluate the fees a fund charges and determine if it’s time to move to a lower-cost fund.
Discount broker Charles Schwab understands the importance of low costs by offering exchange-traded funds that charge as low as 0.08 percent. Investors have paid attention. The assets of its eight ETFs passed $1 billion five months after being offered. What has helped is Schwab clients are able to buy and sell the ETFs without paying a trading commission.
A recent study done by MarketRiders gave a look at how high fees hurt over long time periods. It makes investors turn their head and consider lower costing ETFs instead of mutual funds.
MarketRiders created two portfolios. Each started with $100,000 and assumed a $4,000 annual contribution, an average expense ratio of 0.21 percent for the ETF portfolio and a 1.39 percent for the mutual fund portfolio and an annual return of 7.5 percent for both.
An investor who opened each account at age 35 would have seen the mutual fund portfolio grow to $2.04 million by age 76 while the ETF portfolio grow to $3.15 million. The example shows the power of compounding over a long time period even with such a small expense difference.
Managing a portfolio is not investing in what’s hot or what is returning more, but a careful consideration of many factors that affect taxes and growth.
Contact SFP about the benefits of how you could be paying less for your investments.
