Everywhere I look, people are talking about lowering costs of all kinds (I guess that's what a bad economy will do for ya.) In particular, I'm seeing tons of pieces on how investment costs can dramatically lower your overall return. Here's what Money magazine has to say on the issue:
The cheaper funds outperformed the costlier ones by an average of 1.44 percentage points a year, a margin very close to the 1.35 percentage-point difference in their annual expenses.
This is just one fund group over one period of time, of course. But former Vanguard chairman and fund-fee zealot John Bogle found much the same relationship after taking a much more extensive look at fund costs and performance in his book “Common Sense on Mutual Funds.” And Chris Jones, chief investment officer of 401(k) advice firm Financial Engines devotes an entire chapter (“How Fees Eat Your Lunch”) to the corrosive effect of high fees in his recently released book, “The Intelligent Portfolio.”
Does this mean that a fund with above-average expenses is doomed to lousy performance or that you’re assured superior results if you invest in low-expense funds?
No. there will always be exceptions. But your odds of achieving higher returns certainly increase if you stick to funds with lower expenses and avoid ones with bloated expense ratios. Which means you’re also likely to end up with a larger account balance by opting for low-cost funds.
This guy is singing my song! My only worry: when everyone starts to say "this is the way", isn't it usually time to head another way? ;-)
Seriously, here are some posts that give additional detail on how costs influence your investment return:
You might be on to something with the contrarian hunch...but for the time being, if it comes down to two funds with similar risk/reward profiles, I'll take the one with the lower expense ratio any day.
Posted by: Everyman | July 18, 2008 at 02:10 PM