Last week I met up with my college roommate in San Diego. I reserved us each a room on the beautiful San Diego bay. The rooms were right next door to each other. Both had gorgeous views and identical amenities. Yet, my room was 30% more expensive than hers. They were identical rooms! (That got handled, pronto.)
Boomer, this is what happens when we buy mutual funds without paying attention to the expenses.
Boomer, do not pass go!
I’m about to save you some serious dough here. I’m alerting you to a website that’ll let you clearly see—in dollars and cents—exactly how much each mutual fund you buy is charging you for the pleasure of your business. It is called FINRA.org.
The Financial Industry Regulatory Authority (FINRA)
The Financial Industry Regulatory Authority (FINRA) is a nonprofit, non-government organization charged by Congress to protect America’s investors. They have a variety of tools on their website to do just that. I particularly like the Fund Analyzer.
The Fund Analyzer compares investment returns and fees on over 18,000 actively and passively managed funds. (We discussed these in detail here.) Now let’s look at how much extra you can spend for almost the same investment return if you’re not careful.
Boomer, now is not the time to be flushing Benjamins down the toilet.
How much do you want to pay for the same thing: $2,534 or $302?
I’m looking at two index funds who invest in the same identical companies: Schwab and State Farm. On the day I ran this, the returns for both funds were close: 6.87% for Schwab (SWPPX) and 6.23% for State Farm (SLIAX). State Farm has an expense ratio of 0.66% and Schwab has an expense ratio of 0.09%.
What does that mean? It means over a 20 year holding period, State Farm charges fees of $2,534 vs. “only” $302 charged by Schwab. Boomer, even index funds can be expensive if you fail to pay attention to the fees. Imagine what managed funds would be charging, given that most of them are more expensive than any index funds.
(If you choose to replicate this exercise, I plugged into the fund analyzer a $10,000 initial deposit, a 5% return, and a 20 year holding period.)
Nobody cares more than you.
It’s your nest egg Boomer. Nobody cares about it as much as you do. You don’t want a room at the Ritz Carlton for $2,534 when you can get it for $302.