February 18, 2016

Low cost investing: Why not? – Financially Simple

Low cost investing: Why not?  When you buy into a mutual fund, you have to pay for the expertise of the fund manager and the research that goes into choosing assets for that fund. That cost can vary widely between funds. As a result, some experts believe you should stick to funds with the lowest available costs. In other words, why should you be paying any more than absolutely necessary, when that cost comes directly out of your pocket? This is not a bad strategy, but it may not always be the best idea for your situation. Let’s look at an example. Say an investment returns 10 percent and the cost is 1 percent; in that case, your net return is 9 percent. If another investment with the same return costs only a quarter of a percent, your net grows by three-quarters of a percent, to 9.75. So the argument says that if two funds perform identically, only a fool would take the higher-cost choice. Makes sense, no? The problem is that “if” is a troublesome word. If two investments return the same, then yes, you should go for the lower cost. But your pursuit of low cost should not […]