Investment fees: Ignore them at your peril
But in reality, people buying taxable bond funds do just that -- because Treasury yields are just three or four percent and the average fund charges fees of slightly more than one percent, according to Morningstar. The highest bond fund management fee is a whopping 2.98 percent.
You don't have to pay that much to work with bond mutual fund managers. You can buy bond index funds and cut your costs dramatically. For example, Vanguard's Intermediate Term Bond Index charges a fee of 0.19 percent, and it's a no-load fund -- one in which shares are sold without a charge or commission. If you pay a load to get into the bond fund, you're giving up even more of your money.
You may think that a one or two percent fee for managing your mutual fund portfolio isn't that bad, but commissions and fees can be a real drag on your long-term investments. The lower you keep your commissions and fees the better it is for you.
In fact, a load mutual fund for which you paid a 5.75 percent front-end load (a commission charged when shares are purchased, one of the most common commissions paid to brokers) with two percent annual operating expenses can cost you more than $27,000 in lost earnings over 20 years on a $10,000 investment, based on research I did for my book the Pocket Idiot's Guide to Mutual Fund Investing. If instead you chose a no-load index fund, such as Vanguard's Total Stock Market Index, with a management fee of just 0.16 percent, it would cost you only $2,853 over 20 years.
I developed the numbers in the chart below using the SEC's mutual fund fee calculator to show you the impact fees have on a long term investment. The total fees column are the fees you pay. Foregone earnings are the earnings you lose on the fees you pay, because fees are subtracted from what would otherwise be your gains.
Impact of Mutual Fund Fees on a $10,000 Investment
Held in Fund for 20 Years at Average 11% Per Year Return Rate
No Load Mutual Fund
Value after 20 Years
You might hold a mutual fund for 20 years, or even more, if you're saving for retirement. Why even consider taking such an unnecessary loss when there are more than enough solid no-load mutual funds from which to choose. When I'm looking at funds, I won't even consider a fund with a management fee over one percent. And unless I really think the fund manager is some super star, I tend to select funds that have management fees under one percent. My average mutual fund fee costs are 0.36 percent for my portfolio, but I do purchase most of my funds through Vanguard, which is a leader in low-cost mutual fund investing.
What's even better about Vanguard is that it is the only major mutual fund company that is owned by its mutual fund shareholders. All other major mutual fund companies have dual allegiances between their mutual fund shareholders and their stock shareholders. Often this creates a conflict. In order to make money for their stock shareholders, most mutual fund companies must charge higher mutual fund management fees, which hurt their mutual fund shareholders. Vanguard doesn't face that conflict because any profit it makes is fed back to the mutual fund shareholders. That's what helps to keep the fees so low.
So take a look at how much you are spending on mutual fund management. Use the SEC mutual fund fee calculator to determine what you'll lose to management fees over the next 10 or 20 years, and decide whether the management you're getting is really worth those fees.
Lita Epstein has written more than 25 books, including The Pocket Idiot's Guide to Mutual Fund Investing.