When you sold your last house, it was free to do so? Probably not. If you have hired a real estate agent (which I suggest), you’ve probably paid a commission on product sales for his or her expertise and effort. This is reasonable, given the fact that the sale of a home is not something you do every day and pretend to be an expert can be harmful to your financial health.
Purchase and sale of mutual funds is nearly the same. Every time your fund manager buys or sells stocks or bonds inside your fund, they bear the transaction costs. It is also called “Turnover Cost” and more often than not, your investments are returned, the more it costs you. There are certainly good reasons why your investments should be changed, but I want to ask you a question.
In other words, do you expect your fund to have a low turnover and consequently low turnover costs? Have you ever looked to see what your turnover costs are in your funds inside your 401(k) or IRA?
The performance of the market is certainly out of your control. But owning investments that manage costs, and compared to similar investments IS under your control. We have a client who, before meeting with us, the owner of a significant amount of money in a mutual fund that has a 1 400% of the turnover ratio. This means that the manager of the fund sold and redeemed investments in the fund of 14 times during the year! Needless to say, it was not very efficient or cost-effective investment.
Typically, mutual fund costs are understood to be those which appear in the fund’s prospectus. The other costs are often difficult to determine and take into account, but they are there. In a very popular article in the Wall Street Journal, many of these costs have been identified for a shocked public.
Although mutual funds remain an excellent option for small investors, allowing diversification and professional management for small sums of money, investors who are more advanced in their build-up could have earned the right to invest differently and more effectively. More specifically, investors with $100,000 or more of your investments may wish to consider the merits of the institutional investment. Seek the advice of a Registered Investment Advisor of the company (RIA) can help you regain control in the area of investment expenditures. After all, when the costs are controlled, that the money is able to stay in your account, working for you. Maybe it’s time you graduated to the “retail” world of investing.