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A Word About Fees and Expenses.
If you invest a portion of your cherished nest egg into a stock mutual fund with an average annual expense ratio of 1% for example versus a comparable fund with an expense ratio of .2% do you know how much more it costs you? Likewise, if one investment advisor charges a .5% asset management fee per year while another charges 1% how much do you save? Neither answer is particularly difficult to calculate once you plug in the amount you are investing but if we scratch beneath the surface a little the topic becomes far more interesting.
Say for example you have a $500,000 portfolio that one year returns 15% before expenses. In the case where the expense ratio is 1% and the management fee is another 1% the total expenses of the portfolio would be 2%. This would produce a net return of 13%. But if the expense ratio was just .2% and the management fee .5%, all else being equal, the net return would increase to 14.3%. In this case the difference between total expenses of 2% less .7% or 1.3% represents approximately 9% of the before expense return (1.3/15 = 8.67).
But what happens if instead of a 15% return the before expense return is just 5%? Now the expense differential represents a full 26% of the before expense return (1.3/5 = 26). The higher cost portfolio's returns are effectively reduced by 40% while the lower cost portfolio's are reduced by just 14%.
The key is that expenses are always a drag on portfolio returns. When returns are way up the differential may not seem so important but in the long run it is. Use competition for your investment dollar to your advantage. Find mutual funds that are right for you that are extremely similar in style and then closely examine the associated expenses. Likewise, when selecting an advisor, compare those whom are a good fit for you and then closely scrutinize their management fees. Ask a lot of questions. It's your nest egg that you're talking about. The lower cost fund and advisor will more often than not help you get a significantly bigger bang for your investment buck in the long run.
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