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Avoid High Investing Fees

MoneyWise

Christian talk radio with Rob West

September 8, 2022

You’ve heard it said there’s no free lunch, but did you know there’s no free investing, either? If you have money in a 401k, IRA or a regular brokerage account, do you know what that costs you in fees and commissions? We’ll pull back the curtain today on investing’s hidden costs. We’re certainly not trying to dampen your enthusiasm for investing. Just the opposite, really. We want you to feel confident that you’re getting the most from your investing dollars. To do that, you need to understand that there’s always a cost associated with any type of investment, even a qualified retirement account where taxes are deferred for many years. Again, there’s no such thing as a free lunch. So why bother telling you about those costs? Because they can and do vary greatly. VARYING INVESTING COSTS Some brokerages may charge more than others to manage a retirement plan or a particular mutual fund. When you know what types of fees are charged, you can then shop around for investments with lower fees and commissions. Now, what are some of those common fees? Different investments have different types of costs. Mutual funds, for example, charge something called an expense ratio. This is the cost of managing the fund - given as a percentage. Let’s say you had a great year with a particular fund and you made 10%. Probably not this year, but we’re talking hypothetically here. So you made 10%, but the fund has a 1. 5% expense ratio. That means you really only made 8. 5%. The fee isn’t exactly hidden, but you’ll never see it as a bill, either. It’s deducted from your assets. Other fees can be hidden within your expense ratio. One example is something called a 12B-1 fee, which is for marketing costs. That’s where you get to pay your fund manager to promote it to other potential investors. You also have annual and custodian fees. Annual fees typically run from $25 to $90 a year. Custodian fees are what retirement plan managers charge for complying with IRS reporting regulations. They usually run from $10 to $50 a year. Mutual funds tend to have other costs called purchase and redemption fees, and they’re usually a percentage of the amount you're buying or selling. LOAD CHARGES You’ve probably heard the terms load and no load for mutual funds. A loaded fund is one where a commission is charged, and there are three types of these so-called loads. A front end load is a single charge you pay when you purchase shares in a mutual fund. A back end load as you might expect is a one-time fee you pay when you sell your shares. And then there’s something called a level load fund. That’s where there’s an annual fixed percentage taken from your assets. A front load fee may run you 3 to 6% when you purchase shares. A back-end load may cost you 4 to 6% when you sell your shares. A level load may run between . 25 and 1% of your fund investment, and while that sounds like a great deal, remember, that’s not a one-time fee, it’s annual. That’s charged each year you hold your shares, and that can add up. But what about no-load funds? Obviously, they’re preferable to a load fund, but even no-load funds may still have some fees. For example, you may have to hold your shares for a period of time, often five years, or you’ll be charged a commission. So what, if anything, can the average investor do about all this? Obviously, you want to choose investments that have lower fees and commissions because, again, those costs add up. Now, you might hear an argument that the higher the fees for an investment, the greater the return will be. In other words, you get what you paid for, because often those higher fees suggest the fund is more actively managed, and therefore, will perform better. Well, you’d think so, but studies show that’s not the case. Some of the cheapest equity funds have outperformed the most expensive ones over long periods of time. Morningstar has determined that in most cases, you’ll have greater earnings over time just by choosing funds with lower expense ratios. Simply put, cheaper is better when it comes to fees and commissions. So we hope that encourages you to look carefully at the investment fees you’re paying, and choose wisely. Ben Franklin said a penny saved is a penny earned, and that is so true when it comes to investing. On today’s program, Rob also answers listener questions: ● What is the best way to handle funds from a sizable state tax refund? ● What are I-bonds and are there any drawbacks to I-bonds? ● How should you determine how to handle unneeded funds in retirement years? RESOURCES MENTIONED: ● Treasurydirect. gov

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