In Praise Of Index Funds

Investment expenses aren't something I spend a lot of time thinking about. I've usually moved my money between a few funds that I thought would bring a good return, shifting the balance when I thought I needed to. When we switched 401k providers at work this year, I took a look at the expenses and noticed that most of the funds have expense ratios of 2% or more. That doesn't sound like a lot if you have $100 invested for your retirement, but once you get up to say... $101, it starts to add up in a hurry. The added money you pay in expenses could be going toward your retirement instead of to the mutual fund company.

Besides the fact that index funds have expenses that sometimes go under .10%, consider that the majority of actively managed funds don't perform as well as index funds, and you're money ahead. If the managers of a fund that charges twenty times more than an index fund would guarantee that I'd earn twenty times more in their fund, I'd put my money there. (The stocks picked by those actively managed funds actually make up the market itself.) You can hope to beat the market by choosing a fund with "expert" stock pickers, but you can't guarantee that any fund will make you money year in and year out. What you can guarantee is that you'll pay less by lowering your expenses which, along with asset allocation, is among the only things you can definitely control. I don't know about you, but I'm sold on low expenses.