January 26, 2015
The expense ratio on one’s investments is a critical piece of information every investor must know. Why?
The expense ratio on one’s investments is a critical piece of information every investor must know. Why?
An investor’s expenses ratio is the amount of money they are paying in fees expressed as a percentage compared to the annual yield. It is important to know so that you know you have your money properly invested and you aren’t paying more fees than what you should. The lower your expense ratio, the more money you will make.
The expense ratio tells you how much your investment will cost in a year. There is a big difference between an expense ratio of 1% and .1%. To many 1% may not seem like very much but fees and expenses compound just like earning would. So the higher the expense ratio is the higher the compound costs are. You want to keep your expense ratio below .33% when investing with index funds. If you end up using a Fee-only planer you may go up to 1% but remember to always look at the costs on both sides of a planner, look at the portfolio cost and the management costs together.
Knowing and understanding the expense ratio on one’s investment portfolio is easily one of the most critical pieces of information one should be aware of. The expense ratio is the cost of holding the investment. It is a combination of the fees, commissions and maintenance charges the brokerage company charges to own that security. Over the life of your investment the fees compound just as the interest and growth does, except that money goes to the brokerage firm rather than to the investor. Understanding the fees paid should be the first question to the broker when investing. Most fee based advisers will be reluctant to share this information because the fees they charge are rather high. What is high? As an example consider a $100,000 investment with an 8% return for 25 years. at a mere 2.3% fee, the broker would keep 50% of the return on this investment over the life of the investment when you consider the compounding effect of the fee. Alternatively, with a fee of just .25% the broker will only keep 6.8% of the returns over the life of the investment. Fees this low and even lower can be found using low cost index funds, which typically have higher returns than most mutual funds over time. To see the effect of expense ratios on investments go to https://personal.vanguard.com/us/insights/investingtruths/investing-truth-about-cost and manipulate the sliders to see the effect of various expense ratios on an investment over time. Keeping the expense ratio as low as possible means having a lot more money in an investment over time.
When it comes to investing, one of the main critical things is the expense ratio. The expense ratio is measured of what it costs a company to operate a mutual fund. Every smart investor wants to have an expense ratio cheap. The best way to keep cheap expense ratios are investing in index funds. According to Warren Buffet, he states that one should not have someone do investments for them, the reason is because of fees. The more fees, the less money. Do it yourself and find index funds like Total Stock Market Index Fund that has an expense ratio of .05. That is gold!!
Great answers, gentlemen. Let’s recap.
(1) The expense ratio affects your bottom line. The higher it is, the lower your total return.
(2) Knowing that, focus your efforts on owning very cheap no-load index mutual funds.
(3) Strive to get your portfolio expense ratio below .2% and keep working on it until it goes under .1%. Higher returns will follow!