How to Find Low-Cost Investments
How to Find Low-Cost Investments
How to Find Low-Cost Investments
Reduce investing costs, and you'll keep more money working for you. But how do you choose low-cost investments from the thousands of funds out there? Here are some tips for bargain hunting.
First, know your time frame and needs
Determine how long until you need to spend your money. If you need it in the next 3 years--for a house down payment, college, or living expenses--focus on safety. The goal here is to avoid losses. Use money market mutual funds, certificates of deposit (CDs), Treasury bills, or similar accounts.
If you won't need the money for 10 or more years, invest it for growth with stock-based funds. Worried about stock investing? It's still the best way to get good returns over the long term.
Next, discover low-cost funds
All investments have costs. Your goal is to find the lowest fee ones that will give you growth with diversification.
The bargain stars in this category are stock-based index mutual funds and exchange traded funds (ETFs). What makes them low cost? They are mostly run by computer, so fees are minimal. Think of them as generic or store brand investments.
Their methods are simple. Track one of the many financial indexes. There are indexes for most every category, but we'll focus here on large, stock-based indexes. Examples are the S&P 500 or Russell 3000, which can be good building blocks for part of a retirement fund you won't need to tap into for 10 or more years.
What are the costs associated with these funds? They both have annual management fees, called expense ratios. Watch this expense ratio when comparing funds.
Where can one buy these funds? Index mutual funds can be bought directly from the mutual fund company, or through brokerages. ETFs can only be purchased through a brokerage account, so there will be buy/sell commissions. Select a discount broker to keep your costs lower.
Compare fund costs with this free tool. http://apps.finra.org/fundanalyzer/1/fa.aspx
Comparison shop to save big money
How much can you really save by choosing low-cost funds? Annual expense ratios for funds usually run 0.15% to 1.5% per year. (Did you notice the higher fee is 10 times bigger?)
Now let's follow 2 fund shoppers for cost examples. The numbers here are taken from Vanguard.com, and represent a hypothetical investment of $10,000 in a stock fund earning an annual 9.86% for 10 years with no additional money added.
Investor A buys the fund with an annual expense ratio of 1.11%. Over the 10 years, it's estimated he'll pay $2,705 in fees as that fund grows.
Investor B wants to find some bargain alternatives. She chooses a similar fund, but with a much lower expense ratio--only 0.18%. Her fees over 10 years are estimated to be only $457. She would have saved $2,248 over that decade, compared to Investor A. That's a big savings for doing 15-30 minutes of easy comparison!
Pay special attention to the fees listed for any investment, especially ones you plan to hold long-term. Being a bargain-savvy consumer here can reward you well.
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