The market's recent slide gives investors the opportunity to pick through the bargain bin for quality stocks with low prices. But long-term investors know the secret to making money doesn't depend on timing the market.
Consider the simple index fund, often an investor's first purchase and the backbone of many a stock jock's portfolio. As you evaluate companies, immersed in earnings reports and industry news, your index fund hums along quietly in the background, almost unnoticed.
What's it doing back there? It's performing as efficiently as possible by replicating the market's performance for the lowest possible expense. Let's repeat that last part -- the lowest possible expense.
There's not much point in making a lot of money in stocks if you plan to turn over that money to someone else. If your index fund isn't among the cheapest there is, you're giving money away for no reason.
Even small differences can make a big splash over time, and we know you're in the market for the long haul. Let's say Irma Investor puts her money in an index fund with an expense ratio of just 0.10%. Her neighbor, Lotta Cash, imagines she's getting a pretty good deal with an index fund that charges a fee of 0.50%.
If they both stash away $10,000 and earn the market's average return over 30 years, Irma will have $22,000 more than her neighbor because she cut a fraction of a percentage point off her fees. That's a big reward for paying just the tiniest bit of attention to investing costs. Lotta will regret her choice when her friend Irma packs her swim fins for scuba diving on the Swinging Seniors cruise vacation.
A little here, a little there
Luckily, it's not hard to find an index fund with rock-bottom fees. If you plan to add a little bit of money to your index investments now and again, hunt for a mutual fund.
To name a few, the Vanguard 500 Index (VFINX) and the Vanguard Total Stock Market Fund (VTSMX) both have a low 0.15% expense ratio. Fidelity's Spartan 500 Index Investor (FSMKX) and Total Market Index (FSTMX) funds beat that by charging just 0.10% in fees.
If you're going to buy large chunks of index funds infrequently, an exchange-traded fund (ETF) might be a more economical choice. Like a stock, you will owe your broker a commission for each purchase, but you gain an extraordinarily low expense ratio. The Vanguard Total Stock Market ETF (AMEX: VTI ) charges a meager 0.07%. The iShares S&P 500 ETF (NYSE: IVV ) charges only 0.09%.
I've barely scraped the surface. Index funds, as mutual funds and ETFs, have become more common than warts on a toad. You'll find value and growth strategies, along with indexes that track everything from the total market to the more obscure. (Looking to track the Belgian stock market, anyone?)
So, if you think you might be paying more than necessary for your index funds, you'll have a lot of cheaper options to compare. Review the price you're paying for your index investing, and then you can turn your full attention to your stock picks. Let your index fund hum quietly along in the background again.
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