A recent study conducted by mutual fund tracker Morningstar found that a bit of simple wisdom just might prove more valuable in picking mutual funds than the fancy explanations offered by Wall Street’s brokers and fund managers: pay less, earn more.
In a study released in August, Morningstar examined five broad categories of stock and bond funds, and sorted the funds based on expenses. Their findings? Low fund fees are the strongest predictor of a mutual fund’s future success.
With a bit of egg on its face, Morningstar admitted that low fees proved to be an even better indicator of future results than its own well-known star rating system. The study looked at performance over 5 years—beginning in 2005 and ending in 2009—as well as 1-, 2-, 3- and 4-year returns. In all time periods, across every asset class studied, low-cost funds beat high-cost funds.
These results come as no surprise to us. We’ve long championed the idea that, while we can’t control the markets, we can control the things that matter most: How we’ll spread your nest egg across stocks, bonds, real estate and cash; how we diversify within these asset classes; when we rebalance; and how much you pay in expenses.
Consider this: the average stock mutual fund in the U.S. today charges 1.4% for management, and international stock fund fees approach 1.7%. These costs do not even factor in the generally higher tax burden imposed by high-cost, high-turnover funds. This creates a stiff headwind for those traveling on the road to retirement.
1 Kinnel, Russel. “How Expense Ratios and Star Ratings Predict Success.” MorningstarAdvisor, August 10, 2010.