Are Experts Worth All Your Money?
We talk a lot about fees at GoldBean. We try to help our members understand how to avoid fees, and by doing so, keep more money in your pockets.
But do fees actually do some good? Do you, for example, get better returns from an expensive fund, managed by a Wall Street expert? Are you buying expert advice and getting better returns?
The long-standing argument, put forth by Wall Street, is that this is true: That experts can earn you better returns. But over the last few years, there has been mounting evidence that this is not true. Not only do experts have a hard time beating the market, but after fees are added in, the vast majority of expertly managed funds under perform the market.
A terrific article in the New York Times throws another bucket of water on Wall Street’s fee game. They did their own analysis of fund performance and found that after fees, 80% of actively managed funds failed to beat their market benchmark. Even with fees stripped out, 69% still under performed their benchmark.
What does this mean to the average investor? To be blunt, buying an actively managed fund, which includes most mutual funds, makes little sense. To show you how little sense it makes, try this experiment.
Let’s pick two funds that hold exactly the same basket of funds, the first, $SPY a low cost Exchange Traded Fund (ETF) and the second $RSPOX is a Mutual Fund. Now go to the FINRA Fund Analyzer site, an awesome site that can calculate the fees on every mutual fund and ETF in America, and compare the fees.
Once you plug in the numbers (use $10,000 at 5% return over 10 years), you will find that the ETF will cost you $115 in fees over 10 years and the mutual fund will cost you $1,290! The mutual fund is 11 times as expensive, and erases 25% of your potential gains! It’s a huge difference!
So here are the takeaways.
1. Look at your 401K, or IRA and plug in your funds into the FINRA tool to learn the fees you will pay.
2. Avoid high fees. They almost never pay for higher returns.
3. Replace your high fee funds with low cost Exchange Traded Index funds.
At GoldBean we do not offer Mutual Funds. We find it hard to justify their costs. Instead we offer super low cost ETFs. They offer many of the same benefits as a Mutual Fund, at a lower cost.
