We humans are funny animals.
At times, I’ll scour the internet trying to find the cheapest airline flight, perhaps saving $100 or $200, and feeling quite pleased with myself for doing so.
On some other purchases, I confess, I do no comparison shopping at all. A recent example was in choosing countertops for a kitchen. We liked the product and the craftsman who would install it, and decided on the spot to go ahead. Perhaps we could have saved a bundle by shopping around. I’ll never know.
When this inconsistency was pointed out to me, I took refuge in this thought from Emerson: “With consistency a great soul has simply nothing to do.”
Admittedly, I’m not a great soul. Just a typical human.
Many of us will shop around to save a few bucks on books or groceries, or even to save a penny or two on a gallon on gasoline. We’ve all heard some version of the adage about watching your pennies, and the dollars will take care of themselves.
But when it comes to investing, it’s clear that not everyone is comparing costs. While it’s true that lower-cost fund choices have gained ground in recent years—helping to lower the average expense ratio for the fund industry as a whole—many investors are still paying more than necessary. The average mutual fund’s expense ratio—the fund’s operating costs as a percentage of its average net assets—was 1.12% in 2011. That’s a bit more than five times Vanguard’s average expense ratio of 0.20% in 2011.
The difference of 0.82% is $8.20 per $1,000 invested ($82 on a $10,000 portfolio). And you incur a fund’s expense ratio every year. It’s not a one-time purchase price. Shopping around could save a lot of lettuce over time.
While costs should be a big factor in fund selection, they’re not the only consideration. It’s wise to consider a fund’s place in your overall investment plan or portfolio, the risks inherent in putting money in the fund, its investment strategy and objective, and the confidence you have in the fund company and advisor.
Consider past performance, too, but keep in mind that performance truly represents the past—and isn’t a good indicator of future performance. So you can’t count on a repeat of past performance, but you can count on your fund having some level of expenses, year after year after year.
I recognize that this post amounts to preaching to the choir—if you’re at Vanguard, chances are that you’re a cost-conscious investor. But perhaps you can help spread the word about how much costs can matter in investing.
Note: All investments are subject to risk