Why You Should Avoid High Cost Funds

Author:

Doug Carey
By now many people understand that there is no reason to pay exhorbitant fees for a mutual fund. It has been shown time and time again in research studies that low-cost index funds on average always outperform actively managed, high-cost funds. With so many choices out there today and the ease of use of online trading platforms, there really is no excuse for paying the high fees associated with many actively managed funds.

In 2010 Vanguard, the pioneer in low-cost index funds, reduced the expense ratio on their S&P 500 Exchange Traded Fund (ETF) to an unimaginably low 0.06 How they make money on this fund is hard to understand, but it is an absolute gift to those who want exposure to U.S. stocks.

The typical actively managed U.S. mutual fund charges about 1.5per year in expenses. On top of that, there is constant turnover as portfolio managers trade in and out of stocks. This means capital gains taxes for any holdings that are sold at a gain. So on top of the 1.5annual expense, investors are paying higher taxes and also get dinged on the bid/ask spread for all of the trades that take place inside the fund. The bid/ask spread means the fund pays more for the stock than they can sell it for at that moment. This compensates exchanges which make markets in stocks.

Index funds rarely pay capital gains taxes and have very low turnover because the goal of these types of funds is to simply mirror a relatively static index, such as the S&P 500. Trades are only made when the constituents of the indexes change, which does not happen very often.

It is a simple exercise to compare high-cost funds vs. low-cost funds over time. I ran a comparison of the Vanguard S&P 500 ETF vs. the typical mutual fund that charges 1.5in fees, as well as a fund that charges 1in fees. I assumed an 8annual return for 30 years for each fund.

Starting with an initial investment of $10,000 the investor will have slightly over $97,000 using the Vanguard ETF. Using the actively managed fund, the total amount will be only a little more than $66,000. This is a 48difference in the total amount of money at the end of 30 years and all simply due to a difference in expenses. Also note that this does not take into account the higher tax bill in the higher-cost fund due to its turnover. With this taken into account, the difference in the investment values would be even larger.

Studies have shown that due to the higher expenses and higher tax bill, actively managed funds on average would have to outperform index funds by 4.3each year just to break even with them. Of the 452 equity mutual funds that have existed in the Morningstar database for at least 20 years, only 13 have outperformed the S&P 500 index by more than 4.3annually over this time period. That is less than 3of the funds investigated.

Investors have a vast array of choices these days when it comes to low-cost index mutual funds and ETFs. There is no easier way to increase your returns over time than to move from higher-cost actively managed funds to lower-cost index funds and ETFs. And this doesn\'t just apply to U.S. stocks. This also applies to U.S. bond funds as well as international stocks and emerging market stocks. Investors now have access to investing in international and emerging market ETFs that are tied to an index, which means very low trading activity. They also have much lower expenses than their actively managed counterparts.

So do yourself a favor and review your portfolio today. Readers can perform the same analysis I I\'ve discussed here by going to our free Planning Tools page and clicking on the link for Compare Investment Fees.

If any of your funds are actively managed and/or charge more than 0.3per year in fees, take a look at index funds and ETFs that invest in similar themes. It\'s an easy way to guarantee yourself more money when you retire.
Article Source: http://www.articlesbase.com/wealth-building-articles/why-you-should-avoid-high-cost-funds-5352799.html
About the Author
Doug Carey is the owner and founder of WealthTrace. He has over 16 years of experience in the financial markets. He is a Chartered Financial Analyst with a masters degree in Economics from Miami University in Oxford, Ohio and a B.S. degree in Economics, with an emphasis in Finance, from Ball State University. Before starting WealthTrace, Mr. Carey helped build a financial software company where he designed and created software to help portfolio managers and investment professionals analyze and manage portfolios and securities.

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Things to Remember Before Buying Auto Insurance

Author:

chaitanya patel
As the individuals begin to accumulate the number of items they have in their possession, the risk they face of suffering a loss also increases as well. Those with a lot of items may not be able to recover from certain events that may lead to them experiencing a loss in the end and it becomes important to ensure their belongings. Insurance is the financial safety precaution taken by an individual to protect them against various risks that they may face in the environment. Insurance ensures that should any loss of an insured item be experienced, the individual is able to replace the item and will not feel the loss on their finances. How Insurance works: Insurance is often provided by a large company that provides the financial cover in case anything happens. These companies deal with a lot of customers and one is able to insure whatever it is they have in their possession which is valuable. One of the most common items include expensive products, houses etc. The company values the product and provides a cover worth a similar amount. The individual pays a certain premium every month to the insurance company to cater for this insurance. The monthly premium paid directly related to the actual value of the product. It means that an expensive item is entitled to be paid high monthly premium. The premium will also depend on factors such as the amount of risk involved in the product. A safer item means that the premium to be paid will be less. There are many factors, which decide the risk associated. For instance, if you drive a car in a safe area, the risk associated will be less. On the other hand, if you reside in a theft prone area, the risk and hence the premium will be high. In case, you are insured, then you are entitled to get recovery for every loss incurred. In order to achieve this, the individual has to first file a claim with the company over the loss experienced. However, there are specific steps taken by the insurance company and its employees to ensure that the claim is viable or not. Once the investigations have been completed, the company pays off the individual over the loss. Insurance has helped many individuals who would have been able to recover from a loss experienced and is recommended for every individual. Types of Insurance: The type of insurance chosen varies from person to person and depends upon his or her requirements, circumstances and a host of other factors. There are the two types of insurance covers that are most common among the individuals. One is able to insure their possessions against such occurrences. There also exist some mandatory types of insurance such as vehicle insurance, which no vehicle owner can ignore. Other insurance plans involve the individuals such as medical insurance in case the person finds themselves ill and in need of expensive procedures such as operations.Article Source: http://www.articlesbase.com/insurance-articles/things-to-remember-before-buying-auto-insurance-5356142.html
About the Author
Chaitanya Patel is an independent freelancer who loves writing about variety of topics, right now he is writing on how to find los angeles auto insurance.