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I preach constantly about low-fee investing. The less you pay in fees and sales commissions, the more you’ll save and the longer your money will last. Even small costs add up to huge losses over time.
For example, assume that you put $500 a month into an investment account for 30 years, earning an average of 7 percent. At a 2 percent annual fee, you’ll wind up with about $409,500, as calculated by NerdWallet, a consumer finance website. If you slash that fee to 0.25 percent, however, you’ll retire with about $561,500—that’s $152,000 more! Every penny you pay cuts into your future or current standard of living.
What qualifies as a low fee depends on the type of investment you choose and on how you opt to buy it. Here’s what thrifty investors should be looking for.
Mutual funds
The key is the expense ratio, which gathers together all the sales and administrative costs. Index funds—so-called because they track market prices as a whole— charge practically nothing. If you buy a fund that tracks the Standard & Poor’s 500 (S&P 500) index of big-company stocks, you’ll pay as little as 0.03 percent a year at the discount broker Charles Schwab (that’s 3 cents per $100), 0.035 percent at the fund company Fidelity Investments, and 0.04 percent at Vanguard. Index funds will be the lowest-cost choice in a 401(k), along with target-date funds—a mix of stock and bond funds appropriate to your age.
Index funds are called passive investments, as opposed to active funds in which managers try to beat the market by picking individual stocks. Active funds charge an average of 0.75 percent and usually don’t perform as well as the indexed group. Investors have noticed. They pulled $326 billion out of active funds in 2016 and poured a record $429 billion into passive funds, according to Morningstar’s report on mutual fund data.
