Armchair Millionaire Community Bulletin: Key to Investment Success is Lowering Costs

Taking the right steps to reduce investment costs is consistently an essential part of achieving long-term investing success.

(PRWEB) February 29, 2004 --The trouble with choosing investments on how they've performed in the past is that this is a terrible indicator of how they'll do in the future. In contrast, a fund's expense ratio-the money it extracts each year from your portfolio to pay for managing the fund-is something you can predict with some surety. And one thing is certain: the higher the expenses, the less there is left for you.

While you might shrug at the seemingly small difference between, say, a fund with a .4 percent expense ratio and one with a 1.5 percent expense ratio, it actually adds up to serious bucks over time. Let's assume that you invested $10,000 in each fund for 15 years, and both had an annual return of 10 percent. At the end of that 15 years, the lower-cost fund would grow to $39,335. In contrast, the higher-cost fund would grow to $33,299--a difference of just over $6,000. That's not chicken feed. (You can compare your own costs by using the terrific mutual fund cost calculator found on the Securities and Exchange Commission's Web site at www.sec.gov.)

To lend some perspective, we recently asked investors in the Armchair Millionaire community about how they deal with investment costs. We received this thoughtful reply from Ian:

"Fees do impact my investment choices. Because there are so many good mutual funds to choose from, there are always several to select from that do not charge commissions and have low expense ratios. I take advantage of the vast number of fund choices to select only investments that are both likely to produce the type of return for my acceptable amount of risk and have low fees."

When it comes to the many fees and charges investors face, mutual fund expenses are only the tip of the iceberg. Since every single fee you pay drags down your overall investment performance, it pays to diligently cut costs wherever you can. My checklist has the basic steps you should take.

The Armchair Millionaire's Checklist for Cutting Investment Costs

Never pay a load. Loads are the sales fees that some mutual funds change. They can range from a percentage or two all the way up to 8.5 percent. Some loads are charged when you first buy the fund, and others when you sell. Either way, avoid load funds altogether. They do not perform any differently from no-load funds.

Cut your commissions. Even with most brokerages now offering inexpensive commissions for trading stocks, there's still a wide range. If you trade more than a couple of times a year, the difference can really add up. Shop around to get the lowest prices.

Consolidate accounts. Most mutual funds and brokerages charge annual account maintenance fees. The more accounts you have with different companies, the more you'll pay. Consider consolidating your accounts with one institution. You'll reduce these fees and, if you have enough assets with one company, may even have your fees waived altogether.

Minimize taxes. Reduce the amount Uncle Sam claims of your investments by stashing as much as possible into tax-advantaged accounts such as 401(k)s and IRAs. For your taxable accounts, buy and hold your investments for as long as possible to reduce capital gains taxes.

THE BOTTOM LINE: While you can't control the direction of the stock market, you can control your cost of investing in the stock market. The steps you take to reduce costs-and keep more of your own money-can add up to tens of thousands of dollars over your lifetime.

Armchair Millionaire Web site was founded in 1997. The company's first book, The Armchair Millionaire, was published in 2001. Today, www.ArmchairMillionaire.com is a fast-growing community of common sense savers and investors.

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