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.
Sign up for Kiplinger’s Free E-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
To continue reading this article
please register for free
This is different from signing in to your print subscription
Why am I seeing this? Find out more here
Oliver Pursche is the Chief Market Strategist for Bruderman Asset Management, an SEC-registered investment advisory firm with over $1 billion in assets under management and an additional $400 million under advisement through its affiliated broker dealer, Bruderman Brothers, LLC. Pursche is a recognized authority on global affairs and investment policy, as well as a regular contributor on CNBC, Bloomberg and Fox Business. Additionally, he is a monthly contributing columnist for Forbes and Kiplinger.com, a member of the Harvard Business Review Advisory Council and a monthly participant of the NY Federal Reserve Bank Business Leaders Survey, and the author of "Immigrants: The Economic Force at our Door."
-
Is a Phased Retirement Right for You?
Want to keep working, just not as hard? A phased retirement may just be the answer.
By Kimberly Lankford Published
-
Four Tips to Make Your Sales Presentation a Winner
Being prepared and not being boring can go a long way toward persuading a potential customer to buy into what you’re offering.
By H. Dennis Beaver, Esq. Published
-
Four Tips to Make Your Sales Presentation a Winner
Being prepared and not being boring can go a long way toward persuading a potential customer to buy into what you’re offering.
By H. Dennis Beaver, Esq. Published
-
Pros and Cons of Waiting Until 70 to Claim Social Security
Waiting until 70 to file for Social Security benefits comes with a higher check, but there could be financial consequences to consider for you and your family.
By Patrick M. Simasko, J.D. Published
-
Now Could Be Time for Private Investors to Make Their Mark
The venture capital crunch may be easing, but it isn't over yet. That means there could be direct investment opportunities for private deal investors.
By Thomas Ruggie, ChFC®, CFP® Published
-
How to Stop Boredom From Ruining Your Happy Retirement
Retirees who explore new interests and have an active social life are more likely to find joy — and even greatness — in the newfound freedom of retirement.
By Richard P. Himmer, PhD Published
-
The Life-or-Death Answers We Owe Our Loved Ones
How our life ends isn’t always up to us, but that question too often must be answered by loved ones and health care workers who don’t know what we would want.
By Joel Theisen, RN Published
-
Hot Tips for Home Buyers and Sellers Right Now
Real estate looks to be especially hopping this spring, thanks to pent-up demand and buyers adjusting to higher mortgage rates. Here’s how you can prepare.
By Pam Krueger Published
-
Is 100 the New 70?
Eating well, exercising, getting plenty of sleep and managing chronic stress can help make you a SuperAger. Funding that long life requires longevity literacy.
By Phil Wright, Certified Fund Specialist Published
-
Nine Lessons to Be Learned From the Hilton Family Trust Contest
Disclaimers, good communication, post-marital agreements and more could help avoid conflict in a family after the owners of a wealthy estate pass away.
By John M. Goralka Published