A Simple Way to Cut Costs and Improve Your Investment Return

Here's a valuable comment left on my post titled All Index Funds Are Not Created Equal:

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.

I don't understand why anyone would buy Vanguard funds through their broker -- Vanguard makes it so easy and cheap to buy them directly. Maybe convenience? Not wanting to open another account? Whatever the reason, it's probably not worth the cost when you compare buying directly versus through a broker. Remember, those costs result in lower returns which in turn compound throughout the years. Just compare an 8% return to an 8.5% return for 30 years and you'll see what I mean.

For more thoughts on this topic, see these posts:

• Costs Matter If You Want to Maximize Investment Returns

• Why It Matters Which Index Fund You Own and How You Buy It

• How to Invest Using Only Index Funds

Comments

[Luke]

I have been buying Vanguard funds through my Roth IRA for the last few years which is with Banc of America Investments. They don't charge me a penny to buy the mutual funds or sell them. I have also been able to start a few funds with only $1000, not the $3000 needed to start one with Vanguard. I can also purchase addtional shares starting at $250. This has been a deal saver for me as I got started investing.

So, in short, I have heard struggles with buying mutual funds under other brokerages, but for me and many BOA customers, we are getting one sweet, sweet deal!

[Jason]

So how much can you save with the Vanguard account? Here's my situation:

I'm with Scottrade, with whom I have an IRA and regular account, I'm 22, and trying to get an early jump on retirement planning.

I just invested 3,000 in the Vanguard 2045 Retirement Fund and it cost $17 bucks for the purchase.

Would Vanguard be cheaper than this? Even once you factor in the yearly maintenance fees?

[Rick]

Jason: Yes. Vanguard doesn't charge anything for the purchase, and no annual maintenance fees. (Each fund does have its expense ratio, but that's built into the price, as I understand.)

[dong]

I think after a certain point convenience does matter. Yes, my broker charges me $20 bucks for a purchase I could do directly with Vanguard, but if you're buying in a chuck that's about 10k in size, that's less than .2% for the transaction. If the broker was then charging something ontop of that yearly I think it's more of problem. There is something to be said for consolidation. If you're a Vanguard fundie then I would say why bother having anything but a Vanguard fund.