Here’s How the Wrong Investment Choices Might Cause You to Lose Money — Even if They Perform Well

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It’s important to keep your investing fees as low as possible. Read on to see why. 

The investments you add to your brokerage account should serve a purpose — to help you grow wealth over time. That’s why it’s important to choose your investments wisely and ideally, diversify your holdings.

For some people, the idea of having to hand-pick stocks can be daunting. So if you’re someone who would rather outsource that task (perhaps to people who know more about investing than you do), then you may be inclined to load your portfolio with mutual funds.

If you choose the right mutual funds, they might generate a really nice return for you over time. But you might end up losing a lot of money by investing in mutual funds — even if your specific investments perform well.

Be mindful of investment fees

Mutual funds employ fund managers who are tasked with assembling portfolios and creating investment strategies that people like you can put money into. Because you’re benefiting from the expertise of these professionals, you’re typically charged a fee when you invest in mutual funds.

Now, that fee can vary from fund to fund. But generally speaking, the investment fees charged by mutual funds tend to be high. And over time, they have the potential to seriously eat away at your returns. If you want to keep your investment fees to a minimum, a good bet is to look at ETFs, or exchange-traded funds, instead.

When you buy ETFs, what you’re effectively doing is buying shares of a collection of stocks or assets. But ETFs differ from mutual funds in a few ways. First, they trade publicly, and you can buy or sell shares during trading hours as you please. With mutual funds, you can only buy or sell once a day, after the market closes.

Secondly, mutual funds often have a minimum investment requirement, whereas ETFs don’t. In fact, you can often buy shares of ETFs on a fractional basis if your brokerage account allows that. This means that if a given ETF is trading for $240 a share and you only have $80 to invest with, you could buy one-third of a share of that ETF rather than having to wait until you have the money to purchase a whole share.

What’s more, because ETFs are passively managed and are pegged to the performance of different indexes, you’re usually not looking at the same high fees that mutual funds charge. So over a long period of time, the savings there could be huge.

Of course, the one drawback there is that if you buy shares of an ETF and the index it’s tied to underperforms, so too might your portfolio. But there’s no guarantee that a given mutual fund will perform well, either. So why pay such high fees when there’s no guarantee?

Kiplinger cites a Morningstar report that the average fee, or expense ratio, for mutual funds was 0.66% in 2019. By contrast, the average fee for ETFs was 0.09%, according to ETF.com. That means sticking to mutual funds could mean facing fees seven times as high.

Consider your options carefully

Mutual funds can be a rewarding investment for many people. But before you settle on a mutual fund-focused strategy, consider putting money into ETFs. You may find that you benefit from the same solid performance, only your fees are much less significant.

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