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Control What You Can (Part 1 of 3)--Keep Expenses Low.


You get what you pay for, right? Not always.

Common wisdom suggests, in many cases, the more expensive the product is, the higher the quality. Not always. Especially when it comes to mutual fund type investments.

There are certain ongoing costs and expenses associated with running a mutual fund and they are passed on to you, the investor, and are referred to as the expense ratio. Unless you invest exclusively in individual stocks (which I don’t recommend unless your name is Warren E. Buffett), you’re going to pay an expense ratio to invest in mutual funds.

As of December 31, 2009, Lipper (a large mutual fund research, ratings and analytics company) said the mutual fund industry average expense ratio was 1.19% and the low-cost mutual fund (e.g. Vanguard) average expense ratio was 0.23%. It’s easy to see that’s about a 1% difference, and remember, every dollar more you pay in ongoing expenses is a dollar less in potential return you can earn on your investment.

To back this up, a recent study by Morningstar (another large, well-respected mutual fund research, ratings and analytics company) found that: "In every single time period and data point tested, low-cost funds beat high-cost funds… Expense ratios are strong predictors of performance. In every asset class over every time period, the cheapest quintile produced higher total returns than the most expensive quintile."

You can’t control the market, but you can control the expenses you pay to invest in the market. Keep ‘em low baby.