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.
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