Investment statements disclose such things as capital gains and dividends. What you won't find on them is a tidy sum of all the fees you're paying. That's important information because with a little digging you can predict and manage expenses, but you have relatively little control over returns. And the less you spend on fees, the more of your returns you get to keep.
Start by trimming the fat off fund fees you're paying. Investment firms slice a bit off the top behind the scenes by periodically deducting management fees and most other costs of doing business from a fund's assets. A fund's annual expense ratio reveals how much fund charges in total.
The longer you hold a fund, the more those fees can string. Suppose the market returns 8% a year. If you invest $10,000 and earn the market returns, you'll have $58,485 after 25 years. But if you invest in a fund with average expenses of 1.20% a year, you'll have $17,659 less. Fees, in other words, would erase about 30% of your gains. To see what you may be losing to fees, visit Vanguard's website and use its free "Principles for Investing Success" tool, which shows how fund fees can add up over different times frames.
If you're paying for high-cost funds with subpar records, consider investing in exchange-traded funds or mutual funds with lower fees that hold similar kinds of stocks or bonds.
Among actively managed mutual funds, one of our favorites is Kiplinger 25 member Dodge & Cox Stock (DODGX), which tilts toward large-cup value stocks and charges just 0.52% per year. For low-cost exposure to the entire U.S. stock market, consider Vanguard Total Stock Market ETF, a member of the Kiplinger ETF 20; it charges just 0.05% annually. In the bond world, our favorites include Kip 25 members Fidelity Intermediate Muni (FLTMX), with annual fees of 0.36%, and Vanguard Short-Term Investment Grade (VFSTX), which changes just 0.20%.
Trading commissions can also erode your returns. Fidelity, our top-rated discount broker overall, charges a reasonable $7.95 per stock trade. But you can fare even better with Scottrade ($7) or Merrill Edge ($6.95), which offers 100 free trades a month for accounts with at least $100,000.
If you get help from an adviser, make sure he is earning his keep. Advisers who manage your investments charge a percentage of a portfolio's value, typically starting at 1% of assets per year. That's well worth it if your investment outpace the market averages or other appropriate benchmarks. But on adviser's value becomes more dubious if your returns are falling short. And the chances of your results falling short increase if your adviser is investing your money in high-fee funds, which could result in your total costs exceeding 2% a year.
Many advisers provide more than investment advice, helping with tasks such as retirement planning and budgeting. But if an investment roadmap is all you need, consider switching to an online, "robo" adviser. These services use algorithms to create a basket of stock and bond funds tailored to your needs, and they automatically adjust it to maintain a steady mix. Betterment, one of the original robos, charges 0.25%to 0.35% annually for monitoring accounts of up to $100,000, and 0.15% above that amount, making it one of the better deals. Schwab offers a free robo service, but it forces customers to hold at least 6% of their portfolio in cash (which can drag down long-term returns). Robos can also take the emotion out of investing keeping you on the right path through the market's bumps in the road.
By Anne Kates Smith and Daren Fonda
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