Compound interest has a magnifying effect. It’s totally amazing over time!
Let’s take a simple example. Suppose the stock market will return exactly 6% annually for the next 20 years. At that rate, compound interest will turn $100,000 into $320,714! Pretty damn sweet, huh?
But now suppose you invest in the market through a mutual fund that charges an annual fee of 1%. That fee sounds small, until you realize that it decreases your return rate from 6% to 5%, and reduces your final balance by a huge amount. THIS ADDS UP CONSIDERABLY OVER TIME!
The difference between what the market gives and what you get is more than $55,000 – way more than what the 1% fee would make you expect. After all, it’s just ONE measly percent right? (And who keeps the fifty-five thousand? The people who charge the one percent fee, of course. They love compound interest as much as you do!!)
An annual fee of 1% sounds small, until you realize that it’s significant in proportion to the annual return of the market, so it causes you to lose a significant amount of money.
If you want full exposure to the U.S. stock market, you’ll find that Schwab US Broad Market (NYSEMKT:SCHB), iShares Core S&P Total U.S. Stock Market (NYSEMKT:ITOT), and Vanguard Total Stock Market (NYSEMKT:VTI) are some of your cheapest choices in the fund market today.
I personally use Vanguard and highly recommend them.
The Vanguard choice
Vanguard Total Stock Market represents the largest and longest-established ETF on this list. The fund has a slightly higher expense ratio of 0.04%, but it dwarfs its low-cost peers in terms of size. Vanguard’s unique structure combines its mutual fund and ETF assets into a single corporate structure divided into different share classes, and that’s how the fund giant achieves maximum scale and expense savings.
The Vanguard ETF tracks the CRSP US Total Market Index, which is yet another take on getting maximum breadth from stocks throughout the stock market. Like Schwab, Vanguard offers its ETFs on a commission-free basis to its brokerage account holders, and with close tracking of its benchmarks over the years, the Vanguard ETF has done a good job of giving its investors the market performance they seek.
With index funds, there’s little reason to pay more than you have to. These three ETFs have cost advantages over their peers, and choosing one of them will keep more of your hard-earned money in your pocket!
Simple Summary. Because of their low costs, index funds consistently outperform the majority of their actively managed competitors. … Before investing in an index fund, take the time to compare its expense ratio to the expense ratios of other index funds in the same fund category! Be wise and don’t give your hard earned money to high dollars brokerage firms! After all, IT’S YOUR MONEY!
Thanks for reading,