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.
Research was recently published 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!
The S&P recently did some research evaluating the performance of
low-cost funds vs. that of the higher-costs funds. So what did
they find out? In eight out of nine categories, the low-cost
fund outperformed their higher-cost counterpart. The average
low-cost fund outperformed the typical fund by an average of 20
percent. It's important that you not only choose a low-cost
fund, but you analyze the performance of that fund in years
past. Check to see who was actively managing that fund over that
time, and if they were successful and are still managing that
fund, then consider putting your money with them.
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?
About the author:
Will Kirby is author of Kirby on Finance, a popular Personal
Finance website. You can visit his site at
http://www.kirbyonfinance.com
