- Tax Planning
- Investments 1: Before you Invest
- Investments 2: Your Investment Plan
- Investments 3: Securities Market Basics
- Investments 4: Bond Basics
- Investments 5: Stock Basics
- Investments 6: Mutual Fund Basics
- Investments 7: Building Your Portfolio
- Investments 8: Picking Financial Assets
- Investments 9: Portfolio Rebalancing and Reporting
- Retirement 1: Basics
- Retirement 2: Social Security
- Retirement 3: Employer Qualified Plans
- Retirement 4: Individual and Small Business Plans
- Estate Planning Basics
Low Cost
Investment returns are limited, and investment costs of all kinds reduce your returns. If you have two funds with the same return, the fund with the lower expense ratio will give you the higher return. Keep costs low!
I recommend you invest in low-cost, no-load (without a sales charge) mutual funds. You should rarely (if ever) pay sales charges of any kind (for example, front-end loads, back-end loads, or 12-b1 fees). Because you are a long-term investor, it may be acceptable to invest in funds with back-end loads or funds with a sales charge if you sell it within a specific period of time, as long as that period of time is less than 180 days. You should also minimize management fees as much as possible. Remember, a dollar saved is a dollar you keep and a dollar you can invest to earn more money.
Costs are explained in the mutual fund’s prospectus (a document that describes all aspects of the mutual fund) in the section entitled “Fees, Management Fees, and Expenses” (see Table 25.2). This section details all administrative costs, management fees, 12-b1 fees, and other charges. The most important ratio listed in this section is the total expense ratio. This is the overall cost of the listed fees. Remember that the fund manager will reduce your investment by this amount every year. The lower this ratio, the more you will be able to earn for your personal goals. Note that the Vanguard Fund charges 0.18 percent (18 basis points) a year for total expenses. Compare this to the average total expense of large-capitalization stocks, which is 1.24 percent. While you cannot change the management fee once you are in a fund, you can and should understand the management fee before you ever invest in any fund.
If you are investing in a non-retirement investment vehicle, taxes are another important expense you should analyze. Look at the tax cost ratio in the section entitled “Returns: Tax Analysis.” Too many investors fail to account for the impact that taxes will have on their returns: taxes typically reduce returns by about 25 percent each year.
Table 25.2
Morningstar Website: Costs
