The Impact Costs Have on Investments

Years ago I wrote Costs Matter If You Want to Maximize Investment Returns. It was a summary from the great book The Bogleheads' Guide to Investing, one of the only five money books anyone ever needs to read.

The bottom line: costs are one of the main determiners in how well an investment will do. The lower they are, the better.

Money magazine covered this same issue in an old issue I found recently. They listed the results of investing $1,000 a month for 30 years with a 6% return rate. The only thing that was different were the costs for the fund they invested in.

Here are the results after 30 years of investing:

• Ultra-low-cost fund (0.20% expense ratio): $921,000
• Average index fund (0.50% expense ratio): $874,000
• Average mutual fund (1.30% expense ratio): $761,000

Some thoughts:

• You can get lower than 0.20%. See Improve Your Investing Return with Vanguard Admiral Shares for details.
• The average index fund cost is 0.5%? Yikes!!! Too high!!!
• Big difference between $921k and $761k, huh? This is exactly the point.
• While return rate (which is impacted by fees) is important, time is actually your greatest investment ally.

That's my take on costs and investing. Anything to add?

Comments

[Punit Kumar]

I am investing in mutual funds. They are taking ore than 2% expense ratio. Should I quit?

[Froogal Stoodent]

I'm pretty sure that Vanguard has some ACTIVELY managed funds that cost less than half a percent! See, for example, the Vanguard International Value Fund (VTRIX), at an expense ratio of 0.43% as of July 2017, as listed at https://investor.vanguard.com/mutual-funds/list#/mutual-funds/asset-class/month-end-returns

Value funds require people to pick companies that are undervalued --that's active management. If Vanguard can do it, other financial companies should be able to do the same! That is, if they WANT to...