Some of the best arguments for choosing an index fund were recently made by CBSMarketWatch
The main point: Your mutual fund isn't going to let a little thing like poor performance keep it from charging you an arm, a leg, and a pinky toe in fees. Ferrell cites some startling statistics, including that fund managers make an average of $436,000 a year.
He also demonstrates how Fidelity Magellan shareholders are paying four times as much in fees to underperform the Vanguard 500 Index over the trailing one-, three-, and 10-year periods. And that doesn't account for the 3% front-end load just to get in the fund!
But you don't have to be a Fidelity investor to overpay for underwhelming results. With typical fund managers still losing to their comparable indexes, you should question why you're paying them at all. Let's face it, losing to an index fund is one thing, but paying someone to lose to an index fund just adds insult to injury.
So, are you overpaying your fund manager? Here are some areas to investigate:
Start with your fund's long-term performance. Has it beaten the overall market over the past three-, five-, and 10-year periods (if it has that long of a history)? Past performance is not an indicator of future results, but with fund managers, it's all you've got.
Ferrell quotes index-fund innovator John Bogle as saying that mutual funds understate their real cost to shareholders. Transaction costs, tax consequences, and other hidden fees eat into returns. To see how much might be lost to brokerage expenses and taxes, check the fund's turnover, which measures how often stocks are traded in and out of the fund. The Vanguard 500 has a turnover rate of 4%. That's hard to beat.
Consider whether you'd be better off with Spiders
(AMEX: SPY)or exchange-traded funds. Or, if you're just too attached to the old-fashioned mutual fund, at least find a better one with low fees and proven, market-beating returns.