Why and How to Lower Your Investment Management Fees

by on June 12, 2012

Would you agree with the statement that “the average actively managed fund does not beat the market”?  If so, then this advice on how to lower your investment fees will especially apply to you.

First of all, let me start by saying that, on average, actively managed mutual funds do not outperform the market indexes that they target.  While there are always those funds that perform well in a particular year, no single fund beats their market average year after year after year.  That means that you may be better off investing in the market indexes themselves, while at the same time taking on less risk.

Let’s look at the fees.  The average mutual fund fee is about 2%, with low cost funds averaging closer to 1%.  However, because of all the ETF funds available now, you can easily buy a market fund with an expense ratio of only a fraction of a percent.  This can save you between 1 and 2% in investment management fees.  Are you following me so far?

Don't pay high investment fees

Now, look at the average market returns over the past 12 years.  During the time period between 2000 and 2012, the Dow Jones Industrial Average has risen from 11,000 to 12,500.  That is an annualized return of just over one percent.  Assuming you bought actively managed mutual funds or other investments, you would have actually lost money during this time period.  Instead of making the market average 1% per year, you would have been paying even more than that for your investment fees.

Of course the last decade has been an exception, with such low growth rates and so many hard economic times.  But even in prosperous markets, it is still important to keep your fees low.  After all, if you are getting average returns of 8%, and paying 2% in fees, then you are paying 25% of your returns in fees.  This is really an absurd amount to pay someone to actively manage your fund.

My advice, consider buying ETFs.  There are several thousand available and you can find funds that track specific countries, sectors, metals, commodities, and nearly any other type of investment that you can think of.  Another advantage is that you can buy and sell ETFs during the market, as compared to mutual funds, which are only bought and sold at the end of the day.  This gives some safety if you are the type of person that may want to sell your investments during a large sell off, rather than be forced to hold them until the end of the day.

Do you have an opinion on investment fees?


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