Watch The Fees on Your Mutual Funds and ETFs !
I recently helped someone with their investments and found that this individual's local insurance agent had placed the money into a series of mutual funds that had expense ratios approaching 2% per year.
In addition, the funds had either front-end or back-end loads, which means that either you pay money upfront to invest in the funds, or you pay a fee to exit the fund.
For instance, if you invest $100 into a fund with a 5% front end load, $5 is deducted from your investment account immediately, and your account starts at $95. Similarly, if you have $100 in a fund that has a back-end load, you will be required to pay $5 to redeem your shares.
Perhaps the most insidious of the problems with these funds were the extremely high expense ratios. There are many good investment options out there that have expense ratios below 0.75%. To see an example of how fees eat into investment returns over the long-run, I plugged some assumptions into a calculator at www.dinkytown.net
The assumptions were that $10,000 was plugged into funds with 4 different expense ratios that return 10% gross per year. Then, the ending net balances were compared at the end of 25 years. The results are shocking.
With no expense ratio, the account would be worth $108,347.24 in 25 years. If you had invested in the account that had a 0.3% expense ratio, your investment was worth $101,196.57 at the end of 25 years. Meanwhile, a fund with an expense ratio of 1.0% would be worth $86,231.19. Finally, a fund with an expense ratio of 2.0%, would only be worth $68,484.80. So, it's easy to see how much investment management fees can eat into your portfolio returns.
The moral of the story is to be very cautious when investing and always make sure to check out the amount of any fees or expense ratios involved in putting your money in that fund. I recommend no-load funds as much as possible, and funds with expense ratios below 0.75%. Good index funds can have expense ratios as low as 0.20%, so be sure to investigate index funds if any are available.
In addition, the funds had either front-end or back-end loads, which means that either you pay money upfront to invest in the funds, or you pay a fee to exit the fund.
For instance, if you invest $100 into a fund with a 5% front end load, $5 is deducted from your investment account immediately, and your account starts at $95. Similarly, if you have $100 in a fund that has a back-end load, you will be required to pay $5 to redeem your shares.
Perhaps the most insidious of the problems with these funds were the extremely high expense ratios. There are many good investment options out there that have expense ratios below 0.75%. To see an example of how fees eat into investment returns over the long-run, I plugged some assumptions into a calculator at www.dinkytown.net
The assumptions were that $10,000 was plugged into funds with 4 different expense ratios that return 10% gross per year. Then, the ending net balances were compared at the end of 25 years. The results are shocking.
With no expense ratio, the account would be worth $108,347.24 in 25 years. If you had invested in the account that had a 0.3% expense ratio, your investment was worth $101,196.57 at the end of 25 years. Meanwhile, a fund with an expense ratio of 1.0% would be worth $86,231.19. Finally, a fund with an expense ratio of 2.0%, would only be worth $68,484.80. So, it's easy to see how much investment management fees can eat into your portfolio returns.
The moral of the story is to be very cautious when investing and always make sure to check out the amount of any fees or expense ratios involved in putting your money in that fund. I recommend no-load funds as much as possible, and funds with expense ratios below 0.75%. Good index funds can have expense ratios as low as 0.20%, so be sure to investigate index funds if any are available.
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