The Boring Newsletter, 3/4/2023

Hello Friendos!

Last week I waxed rhapsodic about investing in low-cost index funds. I promised in a future newsletter I would explain exactly what I meant by “low-cost.” The day has arrived!

Now, this is usually when a financial writer would launch into a mathematical example to demonstrate that if you invest for decades and pay lower fees all along the way, you will end up with more money at the end vs if you pay higher fees. If you’d like to read something like that, here’s a nice example. Here’s another from Vanguard, an investment firm I use. Pay less, keep more…I know you get it.

Mutual funds and ETFs must charge something to pay for their operations; the way they do this is by charging each investor a little bit every day. This way, if you only invest for a short time you pay less than someone who invests for a long time (seems fair to me). They structure the fee as a percentage of the amount invested, so if you have lots of $ invested and use more of their services, you pay more than someone with only a little bit of $ invested (also seems fair). So if the “management fee” is 0.5% that means for every $100 you invest in the fund, you pay 50 cents in fees. This charge never appears as a line item on an investment statement, though. It is baked into the price per share at which you buy and sell a fund. You know how some stores include sales taxes in their posted prices? It’s like that – no separate line item because it’s already included.

So is 1% low? Is 0.5% low? To me, an “expense ratio” under 0.20% is low enough. Here’s an example of a very low-cost index fund in my own 401k that has an expense ratio of 0.015%. This screenshot is from the fund’s “prospectus” – a document with info about the fund:

Every $100 I invest, I pay only 1.5 cents in fees each year. What a bargain! 

Here’s what my 0.015% fund looks like on Morningstar, lined up next to a different index fund that charges 0.500%. The charts examine costs of investing $10,000 over different time periods:

Maybe you think $628 is not so bad. Well, it can always be worse. Here’s a pricy actively managed fund (a non-index fund):

This fund charges multiple types of fees, including something called a “front end load” (the blue part in the chart) where they just take $ off the top before investing it for you – you don’t need to ever pay a load.

My cheapo boring index funds don’t try to beat the market – I cheerfully settle for “average” and get a great deal every time.