When it comes to financial planning and investing, you no doubt want to get the best bang for your buck. You want the highest returns at the lowest cost. This is one of the ways you’ll be able to grow your nest egg and save enough for retirement.
But are you sure that’s what you’re getting? Do you know how to get better results?
There are two key things that you can easily do in order to save up to $8,000 per year on your $1 million portfolio. And you don’t need to be a financial planning expert to do them.
Dump Your Mutual Funds and Buy Index Funds
When you first started investing, you were probably told by mutual fund companiesthat you absolutely needed to buy their funds because their portfolio managers regularly beat the market and can make you a lot of money. You were likely told that having a professional time the market, decide which stocks to buy, and tell you when you should sell is the best way to get maximum returns.Mutual funds that have portfolio managers “actively” manager the assets of the fund are called actively managed mutual funds.
Unfortunately, owning actively managed mutual funds may not be such a good idea. For all but the most successful investors, the portfolio managers of these funds fail to outperform the market, time and time again. In fact, 66% of fund managers can’t match the S&P results. Most fund managers generate results that fall short of their benchmark stock index.
There are a couple of basic reasons why you’re not getting the returns that you want when you have actively managed mutual funds. First, you have to pay those portfolio managers for their time, expertise, and knowledge, and they do not come cheap. Second, fund managers tend to trade more often, so you end up paying more taxes and fees. You’re also faced with a higher risk of human error. Fund managers can make mistakes like the rest of us, after all.
This is why you often end up paying more for underperformance when you own actively managed or traditional mutual funds.
To save a significant amount of money every year, you can switch to index funds. These funds are managed automatically by computer systems that track the markets. The systems automatically maintain the right weightings.
Index funds are not only a lot simpler to manage, but they’re also more successful because their fees are also much lower. You don’t have to pay fund managers. You trade less, so you pay less in trading taxes and fees, and you won’t be paying for human error, either. Generally, the expense ratio for index funds is between 0.05 to 0.20%, which is almost a full percent lower than the typical 1% that you’d be paying for actively managed mutual funds. So if you sell your actively managed mutual funds costing you $10,000/year in fees (1% of a $1,000,000 portfolio) and buy index funds costing you $1,500/year in fees, you can save more than $8,000 per year.In five years, you’ll have a portfolio worth about $40,000 more.
This is a hypothetical example and is for illustrative purposes only. No specific investments were used in this example. Actual results will vary. Past performance does not guarantee future results.
Check Your Financial Advisor’s Fees
Another way to save on your portfolio is to check your financial advisor’s fees. Financial advisors can be paid in different ways, and the way your advisor is paid should matter to you.
Typically, a financial advisor will take a monthly deduction from your account, based on a percentage of the value of the account. So if you make money, the advisor makes money, and if you lose money, they lose money, too. However, it’s important to know exactly what percentage the financial advisor is taking from your account. It could make a big difference in terms of your returns and what you have to fund your retirement.It should never take more than 1%. If yours is taking more, it might be time to shop around for a new advisor.
Another important note: beware of advisors that collect mutual fund trails on top of their usual percentage. An advisor that collects trails sells you these funds because they get more money out of the deal. This means they might not be working in your best interest—and you might not be buying the best mutual funds.