How To Retire Early: Your Guide to Getting Rich Slowly and Retiring on Less by Charlton Robert & Charlton Robin

Author:Charlton, Robert & Charlton, Robin [Charlton, Robert]
Language: eng
Format: epub
Publisher: Where We Be Publishing
Published: 2013-03-21T04:00:00+00:00

Keeping Fund Expenses Low

The average mutual fund company charges fees six times higher than Vanguard’s. These fees add up over time and make a significant difference to long-term performance.

Consider this: with no fees at all, a $100,000 portfolio earning 9% per year would grow to $560,000 in 20 years. With a 1% annual fee the final value would be $458,000 – more than $100,000 less. If the annual fee were 3%, which is not out of the question with some mutual funds, the final value would only reach $305,000 – more than $250,000 less. You can see why fees matter and why we might decide to go with an investment firm like Vanguard for this reason alone.

The question of fees is even more important when it comes to bond funds. A high fee can quickly overwhelm a bond fund’s performance. For example, if a bond fund returns 4% in a given year, then a 1% fee is equal to 25% of that return. If the same fund returns 1% in a given year, then a 1% fee effectively translates into a 0% return. Thus a low-return environment, whether for stocks or bonds, only increases the importance of keeping fees low.

Vanguard’s ultra-low expenses apply to both stock and bond funds. To highlight just two examples, the expense ratios for its flagship Index 500 Fund and its Total Bond Market Index Fund are an astonishingly low 0.05% and 0.10% respectively. (These are the expense ratios for the preferred Admiral Shares, which require a minimum fund balance of $10,000.) It’s hard to expect much better than that.

Whichever investment firm you end up choosing, we recommend you make sure their expenses are lower than the norm and that you keep your investments within that single firm as much as possible for simplicity’s sake. We also recommend you compare not just the fees charged but the range of services offered by different investment firms before making a final decision as to which one is right for you. For instance, if you prefer to do most of your investing in individual stocks rather than mutual funds, you might find an online investment firm specializing in low-cost stock trades that suits your needs better than Vanguard.

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