I hope you're sitting down for this. Based on a recent study cited in The Wall Street Journal, when it comes to your 401(k), you're likely paying more for less.
According to the data, more people are choosing pricey, poorly performing active funds over cheap index funds. The study showed that index funds are outperforming their actively managed counterparts by 0.72 percentage points annually. To make matters worse, you pay an average of 0.35 percentage points more for active funds (in expectation of market-beating results).
All told, you'll lose about 1% of your money every year on poor fund picks.
Just 1%? That doesn't seem like much ...
Think again. Over the course of your working career, that 1% amounts to a substantial difference.
Let's say you're 30 years old and make $60,000 a year. You receive a modest 3% raise annually, save 6% of your income, and receive a 3% matching contribution from your employer.
The seemingly slight difference between a hypothetical after-expense return of 9% and 10% annually turns out to be quite large when you reach age 65:
|
9% Annual Return |
10% Annual Return |
|---|---|
|
$1,726,570 |
$2,145,916 |
If you're choosing more expensive underperforming funds, your portfolio is 20% smaller ($419,346).
What should I do, then?
That leaves you with two options:
- Invest solely (or primarily) in index funds.
- Be careful in your fund selection, choosing funds that are both cheap and poised to deliver above-average results.
Index funds are a safe route -- they're cheap and give broad exposure. But, as Motley Fool Champion Funds analyst Shannon Zimmerman has said, the downside of indexing is that index funds will lag behind the benchmark's performance by the amount of their annual expense fee.
But pick the best of the best
There are only a handful of criteria that you must look for when comparing funds:
- Low expense ratios.
- Long managerial tenure.
- Proven track record under manager's reign.
One fund that exhibits all three is CGM Focus (CGMFX). It has been managed by Ken Heebner since its inception, boasts a low expense ratio, and has delivered outstanding returns since it started.
Let's take a closer look:
|
CGM Focus |
|
|---|---|
|
Managerial tenure |
Manager at the helm since inception in 1997. |
|
Expense ratio |
1.02% |
|
Load? |
None |
|
Recent top holdings |
Schlumberger |
|
Five-year annualized return |
31.2% |
|
Investment minimums |
$2,500 normal; $1,000 IRA |
Time management
It's not difficult to research this sort of information and determine the truly great funds offered by your 401(k) plan.
Of course, if you find it tough to find the time for even this basic fund analysis, I encourage you to check out our Champion Funds newsletter service.
Get a glimpse of Shannon's fund analysis with a completely free 30-day trial and take advantage of all his recommended funds -- if you're not as impressed as I am, you have no obligation to stick around.
Fool analyst Adam J. Wiederman has no positions in the securities mentioned above. CGM Focus is a Champion Funds recommendation. The Fool has a disclosure policy.
