Expense Ratios Are Nonsense
One of those investment counselors says, “I will take your money and make you a profit every year, but I have a very hefty fee. For every dollar I make you I will charge you a dollar”. “How much will you make for me?” He replies, “Because I invest in the stock market I am not sure what each year will be, but I have a real time track record that I have doubled my clients money every three years. If you start with $10,000 you should have $20,000 three years from now.” “In other words out of the $20,000 you make with my money you get half? That seems like an awful lot.” Mr. Money Manager asks, “Does it make any difference how much I make if I can double your money?” Here we are computing a 50% expense ratio. Who cares as long as he doubles the money? When you talk to brokers when buying mutual funds one of their pet talking points is that a particular fund has a very low expense ratio. Who cares? The only thing that is important is the final return. Does it make any difference if a fund has a 3.5% expense ratio or a 1% expense ratio if the 3% fund makes more money? Of course not. This is part of the Wall Street mystique designed to confuse clients. Whatever mutual fund you choose it should be one that has the highest return. When it is no longer going up it should be switched to a better performing fund that is why you should only buy no-load funds. Full service brokerage companies do not want to sell no-load funds. Commissions are expenses, but brokers don’t talk about that. Do NOT pay commission. Brokers will tell you that load (commission) funds are better than no-load funds. Not true. Get up and walk away from that broker. He is lying. Be careful of certain types of mutual funds that will have several classes of the same fund some of which have hidden commissions. Don’t be afraid to ask. To be absolutely sure call the mutual fund company. They all have toll free numbers. There is only one way to make sense out of expenses and expense ratios and that is the performance of the fund in relation to all other funds. First eliminate commissions. All other expenses are apportioned over the year. One other nasty charge funds have started adding is redemption fees. Most are 2% and run out for long periods of time. These are added to discourage selling; no other reason. There is only one thing that distinguishes a “good” fund from any other. It is going up while the investor owns it. If it doesn’t you should not have it. When it starts down it should be sold and this has nothing to do with expense ratios. There is only one reason to own any equity and it has nothing to do with expenses. It must go up. Copyright 2006 Al Thomas' best selling book, "If It Doesn't Go Up, Don't Buy It!" has helped thousands of people make money and keep their profits with his simple 2-step method. Read the first chapter and receive his market letter for 3 months at no charge at http://www.mutualfundmagic.com and discover why he's the man that Wall Street does not want you to know. |
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