Mutual fund expenses may be making you poorer. Investing in actively-managed mutual funds that charge high fees can lower your standard of living in retirement by as much as one-third over a low-cost index fund strategy. This is the conclusion of Nobel Laureate William Sharpe in his latest Financial Analysts Journal article The Arithmetic of Investment Expenses.
When I first read Sharpe’s article on why high fund fees can shrink the size of a retirement portfolio by about one-third, my first thought was “Well, duh? Of course they do!” Then I recalled my own rule about articles that explore the benefits of low-cost index fund investing — the truth about index funds must be repeated over and over again because myths about the superiority of active management are constantly being told. All articles are worthy, regardless of the angle used to deliver the message.
The Arithmetic of Investment Expenses explores the benefits of index funds in a way that should resonate with the public. Sharpe states that people who invest in index funds are very likely to accumulate more money than those who buy higher cost actively-managed funds. Actually, he says it the other way around. An investor will have less money if they buy actively-managed funds than if they stick with index funds. I think this is a good approach because the fear of having less money is more powerful than the prospect of having more.
read the complete article here: A Sharpe Assault on Mutual Fund Fees – Forbes.