Tip: Fees and Mutual Funds

Keep costs as low as possible when investing in mutual funds; the general idea that the more we pay the more we receive does not apply in this case.  Every dollar spent on fees is one less received by you.

Here is an example from the Bogleheads Guide to Investing:

If I start investing $3500 a year at the age of 25 until the age of 65, with the long-term stock return average of 10.5%, I would accumulate $1,961,795.  If I continued to invest that money at the same rate past the age of 65, I would receive an average annual income of about $200,000.  Of course you aren't guaranteed these returns, but let's assume you are just for comparisons sake.

However, let’s say I invest the same amount but have only a 7.2% return due to 3.3% annual costs.  At the age of 65 my investment would be worth $788,745. This would result in an average annual income of  $56,790 past the age of 65.  That is less than half the total value and less than a third of the average annual return!

A cost of 3.3% per year is the difference between living in luxury making an average of $200,000 a year, and getting by on $56,000 a year during retirement.  You can see why keeping costs low is extremely important.