Tuesday, March 21, 2006

Mutual Fund Fees



A few weeks ago, thanks to a moderate snafu in my tax withholding for 2005, I determined it time to open up a traditional IRA for my wife.

Now, if my interest had purely focused on retirement savings, I'd have dumped the cash into her Roth IRA. (She and I both have Roth IRAs at various institutions. I also have a slightly-matched 401k through my employer.) In this case, though, I opened her IRA primarily to mitigate some of our tax liability for last year.

I used to be in the camp that didn't much care about mutual fund fees, because I was a dedicated stock-picking guy. To my mind, mutual funds were for 401k-only folks and anyone else too lazy to delve into individual stocks. But no more. Now that we have a kid tearing up the place, I understand what it is to live with a Time Crunch. Stocks are fun to follow, and charts are still a blast to "read," but I don't have the time or the inclination to do that any longer ... or, at least, not to any large degree.

But even before I cared much about mutual funds, I was a Vanguard advocate. I didn't much like that my 401k invested in American Funds, because their fees seemed to be at the high end compared to others I'd researched. Being a 401k, though, the account doesn't allow for a great deal of "fee control" on my behalf. I pay what they say, and that's that.

So when it came time to open my wife's IRA, I chose Vanguard. (It was going to be either them or T. Rowe Price.) As I said, I didn't always pay attention to fund fees, but I sure do now, and you should, too. Take a look at the following:



Three managed mutual funds, all with some focus on growth ... and all with very different fee schedules. It's actually a bit easier to see the differences here:



Look again at that bottom row. The difference in fees paid for a $10k investment, after 10 years, is startling. At least, it was to me.

Glance again at the fees for the Gartmore fund. I'd heard of them, but only tangentially ... until a reader emailed me recently to get my opinion of the mutual-fund recommendations her bank was suggesting for her IRA.

If those Gartmore fees didn't seem particularly egregious to me before, they do now. We can be pretty sure that my reader's bank investment representative has a "paycheck interest" in pumping Gartmore funds. Part of those fees would go straight to Mr. Banker's pocket/paycheck, after all. That'd be okay, I suppose, if the Gartmore funds blasted away all lower-fee funds' performance, year-in and year-out.

But the odds say they won't. Most managed funds struggle just to keep pace with their corresponding market indexes.

I bring all this up mostly to admit that I was too apathetic in discounting the effect of mutual-fund fees on true investment returns. Study after study reports that, over long periods of time, fees have a major impact on returns. Now that I'm moving more toward fund investments outside of my 401k, I'm a believer. The numbers are pretty stark.

Now if only Vanguard would find a low-fee way to sell houses . . ..

— Posted by Michael @ 3:05 PM








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