The Importance of Low Costs

August 24, 2006

In SmartMoney’s Save 50% on Everything article, Anne Kadet says "Fussing over investment fees is a bore, but if you want to get rich, it’s a must."

I agree.  Keeping investment costs at a minimum is one of the most important things you can do to have a successful portfolio.

Investment costs (for mutual funds) include:

Annual operating costs – mutual funds have an annual operating cost to cover fund manager salaries, marketing costs, etc.  These can range from 0.20% up to 3.0%.  Index funds and Exchange Traded Funds (ETFs) will be at the lower end of the range, with specialized, actively-managed funds at the top end. 

Commissions – many mutual funds charge a commission, which goes to the person who sold you the fund.  Commissions can be charged up front, when you sell the fund, or continuously, and typically range from 3% to 6%.

Redemption fees – to discourage market timing, or active trading, some funds have a redemption fee.  Redemption fees average about 2% and usually occur if you sell shares of a fund within a certain time period, such as 6 months to a year.

Transaction costs – unless you purchase the mutual fund directly from the mutual fund company, you will probably have to pay a transaction fee to purchase or redeem shares.  This is true for ETFs, shares of stock, or individual bonds as well.  Transaction fees can be a flat fee per trade, or they can be a percentage based on the value of the securities traded.  Discount brokerages will have lower fees than full service brokerages, but fees vary widely, so you’ll need to shop around.

In addition, there are many other fees you may encounter, such as account maintenance fees, IRA fees, inactivity fees, transfer fees and more.

The bottom line is that money that’s not working for you is money wasted.  The more money you pay for investment fees, the less money that is working for you.  Saving 1% per year in investment costs, could mean 20% more money in your portfolio after 20 years.

More resources:

Don’t Let Brokerage Fees Undermine Your Returns
Mutual Fund Fees and Expenses
About.com – Mutual Fund Fees

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