Let's Talk About the Hidden Costs of Investing

What may seem immaterial in the short run can cost you big bucks over the long haul.

Because it can be so consequential to your long term financial health, I want to dedicate another blog to demonstrating the impact of paying too much for mutual fund annual operating expenses. What may seem immaterial in the short run can cost you big bucks over the long haul. If you are have trouble playing the video below, you can access it through this link: https://youtu.be/A0AIcy7xeNwhttps://youtu.be/A0AIcy7xeNw

‍Fees...and Wazoos

Jack Bogle, the now deceased Vanguard icon, was known for his famous utterances, among them, that Vanguard’s fund owners and others benefit from “getting what they don’t pay for”. To point out the significance of this statement (using Bankrate’s Mutual Fund Fees Calculator), let’s measure the cost of Vanguard’s average expense ratio, currently 0.11%, against the industry’s 0.62% average, and determine its impact on a 30-year, $100,000 front-end investment yielding 6%.

To summarize how Wazoos can fleece you over time, after investing $100,000 for 30 years at 6% and while paying .11% vs .62% in average annual operating expenses, the hypothetical Vanguard investor would end up with over $79,000 more of value in his/her account by saving $37,000 in fees. This savings would allow the Vanguard investor to earn an additional $42,000 by avoiding the opportunity cost associated with those fees. Over the long haul, fractions of a percent do make a difference. Better to have the difference show up in an investor’s account than in a Wazoo’s wallet. Reminds me of the old saying, “Watch the pennies and the dollars will take care of themselves.”

No wonder the late Mr. Bogle is given credit for savings billions of dollars for millions of large and small investors who are now taking advantage of the lower fees he forced on the financial industry.

Don't be a Lazy Investor

By the way, another “opportunity cost” we often impose on ourselves is keeping too much cash in non- or low-interest-bearing bank accounts or with those certain brokerage firms paying next to nothing. It’s estimated that $9 trillionlounge in such accounts paying about 0.09% or less (Source: Crane Data). A quick check of my Vanguard Group taxable Federal Money Market Fund revealed a YTD yield of 2.11% as of 12-11-2019. This spread between what banks and money funds pay is in a constant state of flux so keep an eye on it.

Free Trading is not Free

The latest “fad” among many of the brokerage firms (Schwab, TD Ameritrade and E-Trade come to mind), is called free trading. It ain’t free, folks. Many of those firms who advertise free trades make up the difference by sweeping customer cash into lower yielding deposit accounts, investing it at a higher rate for their own account and keeping the spread. In fairness, a couple of the big boys don’t participate in this sleight of hand…Fidelity and Vanguard. Their retailer accounts’ idle cash is swept into higher yielding money market accounts, benefiting their investors.

‍A Word of Caution

Of note, money market mutual funds (short-term securities whose value fluctuates very little) aren’t backed by the government, while bank savings accounts are federally insured against loss, generally up to $250,000.