Avoid the trap of expensive annual fees on mutual fund investment


What are you paying in expenses for investing?

I was deflated to read a recent Morningstar report that found people are spending 1.41% annually in fees on the typical mutual fund.

That means before you make your first dollar, you have to give up almost one and a half cents in fees on every single dollar you have in your account every year. That can really hurt if your fund goes down in value during a given year.

But consider this: One of the greatest investing stories of the last five years has been the proliferation of ultra-cheap investment choices in the marketplace.

As an example, Charles Schwab has funds that have annual management expenses of less than one tenth of one percent annually, while Vanguard is comparable. Here are just two specific examples:

Vanguard Total Stock Market Index

Invests in approximately 3,400 companies
Expense: 0.18% (other fees may apply)

Schwab Total Stock Market Index Fund

Invests in 4,000 companies
Expense: 0.09%

Mutual funds should never bought be from commissioned salespeople and they should never bought with fees that are higher than .75%, at the absolute worst.

If you’re feeling bad about how little your retirement money is growing now, know that one area you can attack is what you pay in annual expenses.


Editor’s note: This segment originally aired Nov. 7, 2011

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