How Much Are You Paying for Your Portfolio?
The difference between an expense ratio of 0.66% and 0.08% may not sound like much, but it can easily mean thousands of dollars lost to fees and expenses over the course of a decade.
The greatest value financial advisers offer is the quality of their advice, the way they help their clients manage their emotions and their investment intelligence. Their next greatest value? Helping to reduce internal investment costs without negatively impacting portfolio returns.
Over the past 20 years the financial services industry has experienced a boom in product innovation. Many of these developments provide investors with the ability to greatly improve their long-term performance simply by cutting underlying investment costs. For instance, if you own a large-cap U.S. stock mutual fund, odds are you are paying roughly 1% in internal expenses plus hidden trading costs for the fund … and you may be subject to considerable dividend and capital gains distributions, further reducing your net after-tax return. If, however, you owned any one of the large-cap ETFs (exchange traded funds) that has similar holdings and portfolio characteristics, you would be cutting your internal expenses by over 0.75% while essentially owning the same portfolio.
For illustration purposes, take the Growth Fund of America (ticker: AGTHX), which has over $162 billion in assets and a very reasonable 0.66% expense ratio. This is a solid fund with a decent track record and a terrific investment for smaller accounts (below $50,000) where trading costs and other outside factors can greatly impact performance. Comparing this fund to the iShares S&P US Growth ETF (ticker: IUSG), the informed investor will quickly notice that its 0.05% expense ratio represents a much better value and significant cost savings.
From just $107.88 $24.99 for Kiplinger Personal Finance
Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special Issues
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Both investments have similar return, risk and volatility patterns, which is why I chose to compare them. However, over time – say the past 10 years – the difference in expense ratios compounds significantly, costing the investor thousands of dollars. In this example, the 61 basis points savings in expenses compounded at the net return of 7% by the Growth Fund of America over a decade (according to Morningstar data) for a $100,000 investment amounts to over $13,000 in additional net returns for the investor.
As a financial professional with over 20 years portfolio management experience I have learned that there are very good reasons to own all sorts of products to implement your investment strategy. And while there are bound to be times when selecting a higher-cost investment makes absolute sense (variable annuities immediately come to mind), generally speaking investors are well served to research and select lower-cost investments.
This column is the fourth in a six-part series on investor education.
- Column 1 – Understanding your goals
- Column 2 – Why benchmarking to the S&P 500 is not a good strategy
- Column 3 – Investors: Focus on Cash Flow, Not Returns
- Column 4 – How much are you paying for your portfolio?
- Column 5 – 5 critical questions to ask your financial advisor
- Column 6 – ‘Senior Inflation’ the not so silent retirement killer
-
The 7-Month Deadline That Sets Your Lifetime Medicare PremiumsUnderstanding Medicare enrollment is crucial, as missing deadlines can lead to permanent late enrollment penalties and gaps in coverage.
-
Retirees Living in Portugal: You Need a Post-NHR Tax StrategyWhen your 10-year Non-Habitual Resident tax break ends, you could see your tax rate soar. Take steps to plan for this change well before the NHR window closes.
-
Target-Date Fund Innovation: Built-In Income GuaranteesWith target-date funds falling short on income certainty, retirement plans should integrate guaranteed income solutions. Here is what participants can do.
-
If You're a U.S. Retiree Living in Portugal, Your Tax Plan Needs a Post-NHR Strategy ASAP
When your 10-year Non-Habitual Resident tax break ends, you could see your tax rate soar. Take steps to plan for this change well before the NHR window closes.
-
Could Target-Date Funds With Built-In Income Guarantees Be the Next Evolution in Retirement Planning?
With target-date funds falling short on income certainty, retirement plans should integrate guaranteed income solutions. Here is what participants can do.
-
Your Year-End Tax and Estate Planning Review Just Got UrgentChanging tax rules and falling interest rates mean financial planning is more important than ever as 2025 ends. There's still time to make these five key moves.
-
What Makes This Business So Successful? We Find Out From the Founder's KidsThe children of Morgan Clayton share how their father's wisdom, life experience and caring nature have turned their family business into a respected powerhouse.
-
Past Performance Is Not Indicative of Your Financial Adviser's ExpertiseMany people find a financial adviser by searching online or asking for referrals from friends or family. This can actually end up costing you big-time.
-
I'm a Financial Planner: If You're Not Doing Roth Conversions, You Need to Read ThisRoth conversions and other Roth strategies can be complex, but don't dismiss these tax planning tools outright. They could really work for you and your heirs.
-
Could Traditional Retirement Expectations Be Killing Us? A Retirement Psychologist Makes the CaseA retirement psychologist makes the case: A fulfilling retirement begins with a blueprint for living, rather than simply the accumulation of a large nest egg.
-
I'm a Financial Adviser: This Is How You Can Adapt to Social Security UncertaintyRather than letting the unknowns make you anxious, focus on building a flexible income strategy that can adapt to possible future Social Security changes.
