Tuesday, May 27, 2008

Educate thyself, part 4: Expenses of investing

Now, there are all kinds of expenses when it comes to investing, expenses that you have to pay no matter whether you're up or down.
Here's an incomplete list of them:
1. Expense ratios of mutual funds and ETF's- these are percentages of the money invested that are deducted by mutual fund companies to compensate themselves ( from 0.18% for Vanguard S&P 500 Index Fund to 2-3% for actively managed mutual funds, and from 0.09% for S&P 500 ETF's to... I don't really know what is the highest)
3. Additional fees on certain mutual funds ( 12b-1 fee, for instance, is paid by a mutual fund to whatever organization is selling this fund to an investor, but these fees are coming out of investor's pocket)
2. Brokerage fees. These are paid for a transaction (buy/sell) only if you have a real brokerage account.If you invest directly into certain mutual fund , those fees are not paid. ( these brokerage fees can be as low as zero, yes, nil with certain discount brokerages, esp. on a limited number of trades and as high as $50 with so-called "full -service" brokerage.)
4. Custodial fees for IRA accounts. Sometimes they're waived for accounts with higher balances.
All of the above mentioned fees are going to financial industry.
5. Taxes for taxable accounts. Sometimes taxes are due on mutual funds even though you as an investor didn't sell your shares. These are , obviously, Uncle Sam's cut.

So the easiest and the surest thing in investing is to minimize all these multiple fees so it will be more left for us to really invest.
In the next posts I'll try to describe what I did to cut these costs.

1 comment:

Marianas Eye said...

Vanguard (the company John Bogle founded) is king of the low expense ratios. They're hard to beat.