All Index Funds Are Not Created Equal

I recently read The Little Book of Common Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Returns (Little Book Big Profits) and simply LOVED it. Here's one of their thoughts that I especially liked:

All index funds are not created equal. One example: the difference between $122,700 and $99,100.

So what made such a big difference in the return of one versus another? Costs. Yes, costs matter if you want to maximize your returns. For more on this topic, see Why It Matters Which Index Fund You Own and How You Buy It. The book says that the cost differences charged by the low-cost funds and those of the high-cost funds offered by 10 major fund companies for an S&P 500 index fund were 1.2 percentage points a year. Wow! That's a HUGE difference! So the gross results (returns) were the same (since they invested in the same stocks) -- yet the high-cost funds lost 1.2% because their costs were so high. Yikes!

A couple thoughts here:

• Pay attention to costs!!! Don't think that just because you're invested in an index fund that your costs are low (or can't be lower.) Shop around and compare to get the best price (lowest cost in this case) you can get.

• Personally, most of my index fund holdings are with Vanguard and are rock-bottom when it comes to costs. I have been with the company for years and recommend them whole-heartedly.

For a few more thoughts on investing in index funds, see these links:

• How to Invest Using Only Index Funds

• Why Index Funds Deliver Such Great Returns

• Another Expert Endorses Index Funds

Comments

[Edmund]

Vanguard is by far the best, in my personal opinion.

I have been recommending them to my friends. Many of them took up on it, but most have made a crucial mistake.

Instead of buying Vanguard funds directly from Vanguard, they are buying them through their own brokers. These brokerage firms are charging (excessive) fees on top of the fees that Vanguard charges.

Getting out of that mistake is costly as well, as some of my friends find out. They charge a lot just to sell those funds.

Buy Vanguard, but make sure you buy index funds from Vanguard directly.

[Brad]

Edmund, I agree wholeheartedly. Setting up an account with Vanguard is easy enough, so why take the more expensive route? They have decent research and portfolio tools as well. It's a no-brainer. Now that they have dropped so many of their fees, it's a simple decision if you want to invest in index funds.