Mutual Fund Fees Are Your Retirement Account’s Biggest Drain
Investors often focus obsessively on day-to-day fluctuations of their retirement account, but their balances’ real enemy over the long run are the mutual fund fees they pay. Market prices will fluctuate, but over the long term the market will return what it will return, no matter what you do. And since the vast majority of investors don’t (and can’t) beat the market indices over the long term, maximizing returns is really all about minimizing expenses. All else being equal, the fund with the lowest expense ratio will tend to outperform the others (this holds equally well for bond mutual funds).
Mutual Fund Fees Dramatically Affect Returns
Just how large an impact do mutual fund fees have on long-term returns? The numbers are striking. Assuming you started with $10,000 and the market returned its long-term average of 10% per year, a 1% difference in expense ratios (say, 0.20% and 1.2%) would result in a $41,817 difference in your account’s balance after 30 years (see How Expense Ratio Affects Long-Term Performance at Moolanomy for more details). And that’s assuming you never contributed another dime. If you added to your portfolio monthly (as most people do via their 401k or IRA) the difference would be even more striking.
The moral of the story is that you should keep a much closer eye on mutual fund fees than short-term performance swings (most recent bear market notwithstanding). If you don’t know the amount of mutual fund fees you’re paying in your retirement account (and many investors don’t), now would be a good time to check and make adjustments if necessary. The quickest and easiest way to look up your portfolio’s mutual fund fees is by signing up for a free Morningstar account and entering each funds’ ticker symbol or name into the “quote” box near the top of the screen.
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