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Protecting Your Wealth in Good Times and Bad Chapter 5

Chapter 5 A dollar saved is a dollar earned. The old axiom, updated for inflation, applies particularly well to investing your savings. Every dollar unnecessarily spent on mutual fund fees, custodial charges, commissions, advisor fees, and other expenses is one dollar less you have for retirement, plus interest. | chapter 5 The High Cost of Low Returns He who will not economize will have to agonize. Confucius A . L X. dollar saved is a dollar earned. The old axiom updated for inflation applies particularly well to investing your savings. Every dollar unnecessarily spent on mutual fund fees custodial charges commissions advisor fees and other expenses is one dollar less you have for retirement plus interest. Scrutinize your accounts. Get rid of the excessive costs. Let s assume you were asked to give a 24-year-old some investment advice. A young woman you know just landed her first fulltime job at a large company and her starting pay is 36 000. The company has a 401 k plan. She intends to put 10 of her salary into the plan each year. The plan has two investment choices. Both are balanced stock and bond mutual funds. Your analysis of the investment options reveals that the only difference between the two funds is the management fee. One fund charges 1.5 and the other charges 0.5 . Which mutual fund would you recommend to the young woman This is not a trick question. Copyirght 2003 by The McGraw-Hill Companies Inc. Click Here for Terms of Use. 71 Protecting Your Wealth in Good Times and Bad Naturally you would recommend the fund with a 0.5 fee. All else being equal that option will likely yield a 1 higher rate of return each year because the fee is 1 less than the other option. You might think that this is a poor hypothetical example because it does not happen in the real world. But in fact this situation is very common among 401 k and other employer-sponsored retirement plans. Many plans I have looked at offer two nearly identical investment options whose only difference is the fee. For example a corporate retirement plan may offer the Smith Barney Growth and Income Class A shares with a 1.17 fee and the Vanguard S P 500 Index Fund with a 0.18 expense ratio. Both funds invest in the same group of large-cap blue-chip companies and have basically the same weighting to industry