16 January 2018

Figure Out How Much You're Paying in Investment Fees

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All Americans want to keep down their investing costs and hang on to more of their money. But figuring out how much they are actually paying in fees — and most important, whether it's too much — can be confusing. For the typical investor with most of their assets in mutual funds via a 401(k) or IRA, the most important number to check for is the "expense ratio" charged by those funds. The figure is expressed as a percentage of your total assets. As a practical example, a mutual fund with a 0.7% expense ratio charges investors $70 each year for every $10,000 invested.

You can find fee information pretty much anywhere you choose to look, said Charles Sizemore, chief investment officer at Sizemore Capital Management in Dallas. You can check the fund's prospectus if you just really like reading legalese, Sizemore said, however popular finance sites, including investment research firm Morningstar and the USA TODAY Portfolio Tracker are more accessible to the casual investor.

The thing to remember, he adds, is that you don't get a bill for these fund fees; they are "baked in" to your investment's performance. For instance, if that same mutual fund charging 0.7% each year generates a 10% annual return, it passes 9.3% in gains on to you and takes 0.7% off the top. Furthermore, "returns lost to fees actually compound over time," he said, since you lose not just that fixed fee up front but also potential investment returns that could have been made on that extra cash.

Given all this, it's crucial for investors to keep an eye on what they are paying and try to keep costs as low as possible. But what is a reasonable expense ratio to shoulder on your investments? Well, a 2014 report by Morningstar states the typical mutual fund that focuses on U.S. stocks charged 0.67% in annual expenses; the average among the entire universe of funds with more sophisticated strategies was 1.25%.

Those are good places to start, Sizemore says, but it's also important to compare funds to their peers. Depending on the strategy, some funds are naturally more costly or cheap to manage.

There are also a host of other fees in the investment world, particularly for self-directed investors purchasing individual stocks or funds in a brokerage account, thanks to additional costs for fund transfers or fees incurred with each trade, all of which can vary greatly. And those using a professional money manager also can see a wide range of charges, from flat hourly rates to commissions on certain transactions and annual administrative fees. But the bottom line, says Sizemore, is to always shop around and find the least expensive way to meet your financial goals.

Click here to access the full article on USA Today.

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