Advantages of Low Cost Mutual Funds
A common misconception about mutual funds is that pretty much any reputable fund will do. Of course, any investment that produces a solid return for you is better than nothing, but not all funds are created equal. When you buy a mutual fund, you’ll pay a management fee. It’s what you pay for someone to handle your accounts. A low-cost fund will charge you one-fifth of one percent per year. A typical high-cost fund will charge about eight times more than that.
Clark Howard recently quoted some research analyzing a 25 year old investing 10 percent of their $30,000 income each year until retirement into mutual funds. Comparing money put high-cost funds with that put into low-cost funds produced quite dramatic results. The good news is that the person investing in the high-cost funds ended up with around $1.7 million at retirement. Not too bad! But here’s the real kicker – the person investing in a low-cost fund ended up with $2.9 million!
What’s great about figures like these is that they show the amazing power of investing over time. Even better is that they show how simple decisions, like choosing a low-cost mutual fund over a high-cost one, can reap dramatic benefits. Look at it this way, would an extra $1.2 million (oh whatever the difference would be based on your age) be worth time it takes to make the right financial decision?
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December 28th, 2005 at 8:19 pm
Damn skippy! At the end of the day it comes down to performance. No one can guarantee performance. Even if there were 20 years of historical on how a set of top performers beat the market they could be dogs for the next 20 years. So why pay more if you do not have to?
February 28th, 2006 at 7:46 am
Good Stuff. I think this is a great post about mutual funds. People need to know that mutual funds are the average joe’s investment tool, and most of the time they outperform people who “intelligently” pick single stocks.
February 28th, 2006 at 7:49 am
[...] 7:49 am Kirby On Finance writes a great article about the advantages of low-cost mutual funds versus high-cost funds. It is always good to see the numbers sometimes. Plus, this just furthers my belief that mutual funds are the BEST investment tool for the average joe investor. [...]