We never cease to be amazed at what little time is spent by the typical investor trying to get a handle on what his or her investing costs are. It’s amazing because, aside from the fact that costs can have a major impact on portfolio returns, they are still the only thing that we, as investors, have control over. And, as John Bogle, founder of The Vanguard Group, and considered by many to be the father of the index fund, so cleverly put it some years ago: “When it comes to the costs of investing, you end up getting what you don’t pay for!”
An article in the Wall Street Journal (The Hidden Costs of Mutual Funds, by Anna Prior, dated 3-1-2010) brought to our attention the strong case that can be made for keeping an eye on your investment costs. The article listed the average annual expense ratio and the average trading costs (which are not included in the expense ratio) of the Morningstar universe of actively managed US equity funds. The combined numbers came to 2.75%. That’s a significant number… and one that we’re confident most people who invest in these funds are not aware of!!!
As a way of comparison, we checked the average expenses of holding a U.S. all-equity portfolio managed by Plancorp and using all DFA funds…a typical U.S. equity portfolio held by Plancorp clients. The difference was quite astonishing. To begin with, the average expense ratio of these DFA funds came to .27%, a number dramatically lower than the average actively managed mutual fund. More surprising, the trading costs of the DFA funds actually showed a slightly negative number (which means they actually make money on trading…a real benefit to the investor), reflecting DFA’s expertise as a major player in the trading of small cap stocks. The combined average expenses would then come to something short of 27 basis points…a number quite a difference from the 275 basis points of the average actively managed mutual fund…and an amount which can easily account for the difference between an investor making money in the market or losing it. In actual dollars and cents, here’s an example of what it would look like: On a $1,000,000 investment, the investor would be staring at a difference of somewhere close to $25,000 a year…just in annual investment expenses. And, even adding our maximum management fee of 1% to the mix, the investor is still ahead by an amount close to $15,000.
That’s a hurdle that few money managers can overcome on a consistent basis.
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This material has been prepared for informational purposes only and should not be used as investment, tax, legal or accounting advice. All investing involves risk. Past performance is no guarantee of future results. Diversification does not ensure a profit or guarantee against a loss. You should consult your own tax, legal and accounting advisors.