A common misconception about mutual funds is that pretty much any reputable fund will do. Of course, any investment that produces a solid return for you is better than nothing, but not all funds are created equal. When you buy a mutual fund, you'll pay a management fee. It's what you pay for someone to handle your accounts. A low-cost fund will charge you one-fifth of one percent per year. A typical high-cost fund will charge about eight times more than that.
Research was recently published analyzing a 25 year old investing 10 percent of their $30,000 income each year until retirement into mutual funds. Comparing money put high-cost funds with that put into low-cost funds produced quite dramatic results. The good news is that the person investing in the high-cost funds ended up with around $1.7 million at retirement. Not too bad! But here's the real kicker - the person investing in a low-cost fund ended up with $2.9 million!
The S&P recently did some research evaluating the performance of low-cost funds vs. that of the higher-costs funds. So what did they find out? In eight out of nine categories, the low-cost fund outperformed their higher-cost counterpart. The average low-cost fund outperformed the typical fund by an average of 20 percent. It's important that you not only choose a low-cost fund, but you analyze the performance of that fund in years past. Check to see who was actively managing that fund over that time, and if they were successful and are still managing that fund, then consider putting your money with them.
What's great about figures like these is that they show the amazing power of investing over time. Even better is that they show how simple decisions, like choosing a low-cost mutual fund over a high-cost one, can reap dramatic benefits. Look at it this way, would an extra $1.2 million (oh whatever the difference would be based on your age) be worth time it takes to make the right financial decision?
About the author:
Will Kirby is author of Kirby on Finance, a popular Personal Finance website. You can visit his site at http://www.kirbyonfinance.com
Written By: Will Kirby
