Smart mutual fund investing includes buying low-cost funds. Morningstar has conducted numerous studies that all echo the same point: Low cost funds out perform high cost funds.
The argument is straightforward. Say in investor puts $10,000 in two funds for the same period of time and both portfolios delivered the exact same pre-expense performance: 7 percent per year for twenty five years. The only difference between the two funds is the expense: One has an annual expense ratio of 0.5 percent while the other costs 1.5 percent annually.
The difference in after-expense investment performance is striking. The lower cost fund would have returned $48,277 over the period while the higher cost fund would have returned $38,134.
Considering what most investors need to save for retirement, that roughly $10,000 difference in investment performance would be multiplied many times for most real-world portfolios.
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