One surefire way of boosting your bottom line when it comes to investing is to keep a lid on costs, such as brokerage commissions and the expense ratios of the funds you hold. The price you pay is one of the few variables you have direct control over, and savvy types will want to exert that control early and often: Doing so can mean the difference between market-beating and market-lagging performance.
Not for nothing, after all, do precious few actively managed funds keep up with the Vanguard 500 Index
Still, despite those built-in competitive advantages, Vanguard 500 is destined to lose to the benchmark it tracks by roughly the amount of its expenses. If you want to beat the market with funds, you'll need to shop the actively managed aisle for the money management industry's relatively few keepers. Here's a cheat sheet for doing just that.
1. Look for funds with expense ratios in the vicinity of 1% -- or less.
The typical domestic-stock fund will ding you roughly 1.4% for the "privilege" of investing, but you can find quality funds with price tags much lower than that. All else being equal, a fund with a lower expense ratio will necessarily beat pricier fare. When it comes to investing, all else isn't equal, of course, but at Motley Fool Champion Funds -- the Foolish investing service that I head up -- our recommended funds sport an average price tag of 0.95%. All but one has made money for shareholders since we made our recommendation, and collectively, our picks are beating the market by a double-digit margin.
Coincidence? I think not. There are exceptions to the 1% rule -- especially among smaller-cap and international fare -- but in general, it pays to be a cheapskate.
2. Look for funds with managers who "eat their own cooking."
It also pays to invest with folks who have the courage of their convictions and plunk down their moola alongside that of their shareholders. Doing so means you're investing with managers whose interests are literally your interests, too. Among other things, they'll be just as concerned with tax efficiency and fees as you are: Those costs, after all, will ding their bottom line, too.
With that in mind, when I interview the world's best money managers in Champion Funds each month, I usually wind up our Q&As by asking how much and how significantly they're invested in their funds. That's no coincidence, either. I love to crunch fund stats, but few details can provide as much insight as that one.
3. Look for fund managers who buy quality on the cheap.
We've been living through turbulent times, but top-shelf money managers know that sell-offs represent opportunity. When the likes of Citigroup
Those three names appear in the portfolio of one of my favorite funds, a value-oriented Champion Funds recommendation that has appreciated by more than 460% during the 15 years that ended with February. Since receiving the newsletter's nod, the fund has spanked the S&P 500 by more than 22 percentage points, and its expense ratio is a mere 0.33%.
Not too shabby, eh?
The Foolish bottom line
If you'd like to check out this dirt cheap overachiever, click here for a free 30-day Champion Funds guest pass. Your pass provides access to our complete list of recommendations, model portfolios, and members-only discussion boards, too. There's no obligation to stick around.
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Shannon Zimmerman runs point on the Fool's Champion Funds newsletter service and co-advises Motley Fool Green Light. At the time of publication, he didn't own any of the securities mentioned above. Bank of America, Johnson & Johnson, and Duke Energy are Motley Fool Income Investor recommendations. You can check out the Fool's strict disclosure policy by clicking right here.
