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Several months ago, I posted the following poll on the top left of the sidebar on My Personal Finance Journey for readers to respond to:
What is the highest mutual fund expense fee/ratio you pay on the funds you own?
There was a great response to this question, and it was very interesting to learn about you all’s fund-buying tendencies. Shown on the pie chart below is a break-down of the responses that were received broken down in to 7 expense ratio fee categories.
Overall, it was great to see that the
expense ratio category that received the largest number of responses was the 0.1% or less category. This is great news! This means that most of you all, like me, have chosen to resist
active mutual fund management and instead invest the smart way (
passive investing) by using index mutual funds or ETFs! In fact, almost 1/2 of all of the votes received indicated that people paid less than 0.5% as the highest expense ratio for their mutual funds. Wonderful!
Comparison with the Rest of the United States – Average Mutual Fund Expense Ratios
Taking this in to consideration, the pie chart below shows how the MPFJ reader responses compare to this 0.79% average. As you can see, 62% of the readers on MPFJ pay less than the national average. Again, this is great news!
However, there was 38% of the reader responses that indicated paying over this national average. What this indicates is that there is still a very significant opportunity for people to save money by selecting different mutual funds in order to minimize their costs.
But, Isn’t Paying a Higher Mutual Fund Expense Ratio (Above 0.79%) Worth it if the Fund Has Outperformed the Market for the Last X Number of Years?
In short, the answer to this question is unfortunately ‘no.’
Higher expense ratios or front-end/back-end sales loads are often rationalized by actively managed mutual funds as being ‘worth it’ because the fund has outperformed the market in the last X number of years by X%. Examples of this include the American Growth Mutual Fund and the CGM Focus Fund.
While this train of logic sounds good (after all, in most other professions, if someone has performed well in the past, you’d expect good performance going forward), it has been proven time and time again in nearly every investing book I have read that this logic simply doesn’t work in the investing world because there are too many external variables that the fund manager cannot control.
For more reading on this, I’d recommend reading A Random Walk Down Wall Street, What Wall Street Doesn’t Want You to Know, or Stocks for the Long Run by Burton Malkiel, Larry Swedroe, and Jeremy Siegel, respectively.
But, the good news is that there is a simple way to avoid paying these high costs for mutual funds – using passively managed index mutual funds or ETFs. For example, the average expense ratio of all Vanguard mutual funds is only 0.20%, with Vanguard index funds having an average expense ratio of only 0.16%. By selecting any of these types of funds, you can save yourself and your family big money and allow your long-term savings to compound more quickly.
How about you all? What is the highest mutual fund expense ratio you pay on the funds you own? Is it above or below the national US average expense ratio of 0.79%?
Do you typically employ active management or passive management in your mutual fund selection? Why do you choose one or the other?
Share your experiences by commenting below!
