By Brian Kehm
Many investors pay more for smaller returns.
It’s ridiculous… In the age of the internet, you don’t have to pay more for less. You can shop around from your comfy chair at home. Always look for the lowest cost service that provides the most value.
In the words of Warren Buffett, “Price is what you pay, value is what you get.” This line of logic is crucial for maximizing your wealth. Yet most investors constantly mistake price for value. So today, I’ll show you how to avoid this common investor pitfall. You’ll then have the potential to pay less and collect more.
The chart above shows that roughly 90% of all U.S. equity funds underperformed their market indexes over a multiyear period. Investors had a 1-in-10 chance of picking a winning fund.
Those aren’t odds any logical investor should accept. And pulling back the curtain, it’s easy to see why funds underperform. Here are three of the most common reasons…
Fees – The average fund expense ratio is around 1.3%. No matter the fund’s performance – whether it’s an up or down year – fees never sleep. They eat away at your potential return.
Turnover – Most funds buy and sell frequently. The turnover in some funds even tops 90% of assets per year… But this active trading isn’t always in the investor’s best interest. Trading fees and realized capital gains taxes add up.
Cash on Hand – Many funds need to keep cash on hand for redemptions and buying opportunities. The percentage of cash in a fund can top 5%. So for every $1,000 invested, $50 is sitting idle, earning low to no interest in the current rate environment.
Buying into most actively managed equity funds is a proven way to underperform the market. That’s why some of the world’s greatest investors advocate for low-cost investing…
Ten years ago, Warren Buffett made a $1 million bet that a hedge fund couldn’t beat a market index fund through active management. The bet ends in December, and it looks like Buffett is a shoo-in to win.
Legendary investor John Bogle has also built a business around index investing… The Vanguard Group. It offers some of the world’s lowest-cost funds. One of its most popular funds is the Vanguard Total Stock Market ETF (NSYE: VTI). It has an incredibly low expense ratio at 0.04%.
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All investors have access to low-cost funds and cheap trading today. Technology has leveled the playing field. There’s no need to follow the herd into costly funds that underperform.
It’s counterintuitive… Who in their right mind would pay more for less?
Unfortunately, many folks are funneled into higher-cost funds through 401(k) providers. They’re often pushed toward the service provider’s funds.
And Wall Street is constantly looking for ways to increase and create new fees. The U.S. financial industry accounted for less than 3% of GDP in 1950. Today, it’s closer to 8%. The new fees chip away at your wealth.
This kind of extractive money management doesn’t have the clients’ interests at heart. And many Wall Streeters are well …read more
Source:: Investment You
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