In yesterday’s post I talked about a client’s retirement account that slowly but surely lost tens of thousands of dollars in fees and commissions over the years.
If you haven’t read it, you can access it here.
Over the years the biggest beneficiaries of my client’s retirement account were the mutual fund companies who provided the funds she was invested in. They made money no matter how the market did – a sweet deal for them, not so much for my client.
I calculated that over $100,000 disappeared from my client’s retirement account into these mutual funds’ pockets over the last 25 years. Her financial advisors also made out well, also with no risk.
Let’s go over four simple steps that you can do to prevent this from happening to you in your retirement account:
Step 1: Determine the expense ratio for each fund you are invested in.
Your retirement account should list the expense ratios for each fund they offer. If you can’t find them, go to www.morningstar.com and enter the ticker symbol of each fund in the Quote box. You’ll find the Expenses listed on the far right side.
Step 2: Eliminate all funds with sales loads.
Some funds impose sales loads of up to 5.75%. A sales load is really a commission paid to brokers for them recommending the fund to clients.
This is money that gets taken off the top – so if you invest $100, only $94.25 actually gets invested for you!
There is simply no reason these days to invest in a fund with a sales load. You don’t need to be paying your broker to invest in funds.
Step 3: Eliminate all funds with expenses over 0.30%
As you’ll see in Step 4, you can do much better!
Step 4: Move your money into low-cost index funds that have expenses below 0.30%. The lower, the better.
What is an index fund? An index fund is an unmanaged fund that tracks the components of a market index like the S&P 500 Index.
What this means is that you get an ultra-low-cost way to invest in the whole stock market, or a sub-section of it.
For example, the S&P 500 index fund invests in the 500 largest companies in the U.S. Companies like Apple, Exxon Mobil, AT&T, Amazon, Caterpillar, and Home Depot are part of the S&P 500.
How low are the expenses? The Vanguard S&P 500 ETF (ticker symbol VOO) has an expense ratio of just 0.05%.
Billionaire Warren Buffett recently gave instructions that his estate’s cash be invested in this particular index fund. You can read more about this below:
The Vanguard fund listed above is an exchange-traded fund, or ETF. LIke a mutual fund, an ETF is an investment fund that owns assets such as stocks, bonds, commodities, currencies, or a basket of stocks.
ETFs have become very popular in the last decade with stock and bond investors because they are great alternatives to higher cost and less tax-efficient mutual funds.
You can learn more about ETFs in this Blog Post:
For most investors, a S&P 500 index fund should be a core holding in their stock investment portfolio.
Many mutual funds that you’ll find in your retirement account essentially invest in the same thing, but charge you up to 2% each year! Just say no and eliminate them!
In addition to the Vanguard S&P 500 ETF, the following article gives you a list of 5 low-cost index funds:
That’s it. By simply following these 4 steps in your retirement account, you will eliminate the high expenses and hidden fees that are part of most mutual funds.
Over the rest of your working career, you will likely save tens of thousands of dollars, depending of course on the size of your retirement account.
I’d love to hear any reader comments on what they find in their retirement accounts. Please post below.
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