Investing

Investment fees can wreck havoc on your wealth. Think bull in a china shop destruction. What's worse is that it can happen without you even knowing. The fees seem small and insignificant while they drain your portfolio of its earning potential. In this article, we'll look at just how costly investment fees can be and what you can do about it.

In this article, we are going to examine four aspects of investment fees. First, we’ll look at the numbers to see just how big an impact seemingly small fees can have on your wealth. Then we’ll consider whether high investment fees translate into better returns. Third, we’ll look at how to determine the investment fees you currently pay. And finally, we’ll look at a free tool that I use every day that includes an investment fee analyzer.

Investment Fees Matter . . . A Lot

Even a 1% fee, over a lifetime of investing, can significantly reduce the value of a portfolio. Using Vanguard data, we know that from 1926 through 2019 an 80% stock and 20% bond portfolio returned 9.7% a year. Let’s imagine we invest $1,000 a month over a 40-year career. Using this savings calculator, we know that the portfolio would grow to about $5.8 million.

Yes, compounding is a beautiful thing.

Let's now assume we pay an advisor 1% of our investments for their services. That's a standard fee in the industry, although you can find less expensive and more expensive advisors. The result is that on an after fee basis, our returns drop from 9.7% to 8.7%. The result is a portfolio of just $4.3 million. The one percent fee cost us about $1.5 million, or 25% of our wealth.

Fees matter.

High Fees Do Not Generate Better Returns

In defense of fees, some argue that higher fees generate better returns. Studies do not support this conclusion. A study by S&P Global published in 2020 found that actively managed funds underperformed their respective index over a 10-year period:

Large-cap funds made it a clean sweep for the decade—for the 10th consecutive one-year period, the majority (71%) underperformed the S&P 500. Their consistency in failing to outperform when the Fed was on hold (2010-2015) or raising (2015-2018) or cutting (2019) rates deserves special note. Of the large-cap funds, 89% underperformed the S&P 500 over the past decade.

The results for mid-cap and small-cap funds weren’t much better–”84% of mid-cap funds and 89% of small-cap funds underperformed over the longer 10-year period.”

Studies by Morningstar have similar results.

How to Find a Mutual Fund’s Expense Ratio

Determining a mutual fund’s expense ratio is easy. As a starting point, a prospectus will include this information. Most 401k and other workplace retirement accounts should also provide this information. If you know the ticker symbol of the fund, you can also find the expense ratio on Morningstar. I have a video series that walks you through how to use Morningstar’s free tools.

Keep in mind that the expense ratio is not the only fee a mutual fund will charge. They also charge transaction fees that aren’t reflected in the expense ratio.

As for advisors, make sure you understand the fees they are charging you. If you don’t know what they are, ask.

Free Fee Analyzer Tool

Finally, there is a free tool you can use to evaluate your investment costs. It’s called Personal Capital. One feature of the tool is called the Retirement Fee Analyzer. Once you connect all of your investment accounts, the tool first determines the expense ratios of all of your investments. It shows you this information for each fund and it calculates the weighted average expense ratio for your entire portfolio.

Beyond the data, Personal Capital also provides two tools to evaluate your investment fees. First, it compares your fees to a benchmark. Personal Capital uses 0.50% as its benchmark. More importantly, it shows how the fees will impact your wealth over time. Here’s what it looks like.

Keep in mind that the Fee Analyzer does not factor in any advisor fees you may be paying. It just looks at the expense ratios of the funds that are in your portfolio.

It’s easy to forget about investment fees. Yet they are one of the most important aspects of investing. They are also a great indicator of returns. The lower the fees, the higher your returns. That’s why index funds are such an important part of long-term investing.

My goal for this website is to help readers become better investors and prepare for retirement. To do this, some of the products featured here may be from our partners. This doesn’t influence our evaluations or reviews. Our opinions are our own.

It's easier than ever to begin investing with a small amount of money. From stocks to real estate, it takes just a few minutes to create a diversified investment portfolio. The investing options have never been better. In this article, I'll cover 11 easy ways to invest $1,000 for free.

How to Invest $1,000

1. Pay Off High Interest Debt First

First things first. If you have debit with double-digit interest rates, it needs to be your first priority. You won't find a better investment than paying off any high interest debt. If you have credit card debt at double digit interest rates, that should be your top priority.

I wouldn't worry about low interest debt, like federal student loans. I know there are financial gurus who preach you should pay off all of your debt before you start investing. They are dead wrong. if you have double digit interest rates on credit cards, however, make paying it off a top priority.

One way to deal with credit card debt is to transfer it to a 0% balance transfer credit card. That's what I did back in the day to get out of debt. If that's not available to you, the $1,000 should be “invested” in paying down that debt. You can check out this credit card payoff calculator to estimate how long it will take you to get out of debt.t

2. 401(k) with Matching Contributions if Available

If your employer matches contributions to a 401(k) or other workplace retirement account, this is where your first invested dollar should go. Your priority should be to contribute enough to take full advantage of those matching contributions. As I pointed out in an article on Forbes, the value of matching contributions over a lifetime can exceed $1 million. In other words, friends don't let friends miss the match!

3. High-Yield Savings Account for Short-Term Savings

Investing is a long-term endeavor. You can't “invest” for a day, a week, a month or even a year. They call that day-trading or swing-trading. I call it speculation. If you need money in the short term, then the best option is simply an online savings account. The rates aren't great, but the accounts are FDIC insured, and you're not going to lose any money.

One of my favorite options is CIT bank. It's an online bank that pays one of the highest yields on FDIC-insured money market accounts. It has no monthly fees, you can deposit checks remotely, there is no minimum balance required, and just $100 to open an account.

4. Betterment for Easy Diversification

Betterment is one of the easiest, least expensive ways to invest in a diversified portfolio of stocks and bonds. Unlike many mutual funds, there are no minimum investment requirements to meet. You know I love Vanguard, but most of their funds have a $3,000 minimum. That doesn't really help us when we've got $1,000 to invest. Betterment solves this problem.

I met the founder Jon Stein back in 2011. I've had accounts with betterment to try it out. It's incredbily easy to use. You deposit money into a Betterment account, and based on your investing goals, it divides your money between stock and bond ETFs (I prefer mutual funds for most investors, but automated services such as Betterment use ETFs, which is perfectly fine).

If you're new to investing and not quite sure how much to invest in stocks versus bonds, Betterment will help. It will walk you through a series of questions that will help you make that decision. And of course, you can change it anytime.

As always, we must consider investment fees and minimums. First, there are no minimums. Second, fees are relatively low. The cost is 25 basis points (0.25%) plus the cost of the underlying ETFs (which are cheap). , What you get in return is a very easy way to invest. I really like betterment, I think it's a great a great option.

5. E*Trade Core Portfolios also for Easy Diversification

Another option along the same lines as betterment is E*Trade Core Portfolios. I've included this option because some may feel more comfortable with a traditional brokerage company. The minimum investment is $500, which works well when you have $1,000 to invest. As you can see from this screenshot, you get a well diversified portfolio of stocks and bonds (because it includes municipal bonds, or munis as they are called, this portfolio would be best suited for a taxable account).

In terms of costs, E*Trade charges 30 basis points plus the cost of the underlying ETFs. That makes it 5 basis points more expensive than Betterment. I believe in keeping expenses as low as possible, but it's not a huge difference.

6. M1 Finance for Individual Stocks

For those who want to invest in individual stocks, M1 Finance is one of my favorite options. You can buy individual stocks without paying transaction fees. What I really like about M1 Finance, however, is that you can create what they call Pies. These are baskets of stocks, much like creating your own mutual fund. I created one that contained three bank stocks:

If I wanted to invest in this pie, I could just contribute to it. M1 Finance would then divide my contribution among these three stocks in the percentages that I set: 34% would go to Wells Fargo, 33% of JPMorgan Chase, and 33% to PNC.

Transferring money into M1 Finance and getting my money out was extremely easy. So I think this is a good option for those looking to invest in individual stocks.

7. Robinhood for Free Stock Trades

I include Robinhood in this list with some reservation. It is a free way to trade stocks, and the website and app are fun to use.

I should warn you, however, that Robinhood does a lot in my view to encourage certain types of very risky investing. That includes buying and selling options, buying and selling cryptocurrencies, buying and selling commodities and buying on margin. I think those strategies are a good way to lose a lot of money. If you avoid those and just invest in individual stocks, Robinhood is a reasonable option.

8. Wealthfront for Real Estate Exposure

You can invest in real estate even just $1,000. Perhaps the simplest way is to invest in a REIT mutual fund. REIT stands for real estate investment trust. One potential problem is you've got to deal with minimum investments. So one approach is to use a service like Wealthfront.

Wealthfront is very similar to betterment and E*Trade Core Portfolios. I've used Wealthfront in the past for a SEP IRA and found it very easy to use and inexpensive. Unlike Betterment, Wealthfront includes exposure to real estate in its retirement portfolios.

9. Realty Income for Monthly Dividends

If you want even more exposure to real estate, you could invest directly in a REIT. One that I like is called Realty Income (ticker: O).

Realty Income is best known for paying a monthly dividend for over 600 consecutive months and counting. You can also see from its portfolio that it is very diversified. One thing I'll caution is that REITs like Realty Income should be held in a retirement account. They are not tax efficient.

10. Fundrise for Direct Investing in Real Estate

One final option for those looking to invest in real estate is Fundrise. It allows you to get as clsoe to being a landlord without actually being a landlord. The minimum investment is $1,000. The fees are on the higher side (about 1%), so keep that in mind. If we look at its historical performance, though, it's been reasonably good over the last six years:

11. Target Date Retirement Funds for Simple Retirement Investing

One last option I want to give you is what are called target date retirement funds. Most of the major mutual fund companies offer a target date retirement fund, and you'll find these investing options in your 401(k). They're similar to something like Betterment or Wealthfront in that you invest your money into a single mutual fund. The mutual fund then takes your money and invests it in U.S. stocks, international stocks and bonds.

They are different than robo advisors in one important respect. As you near retirement, the allocation between stocks and bonds will change. It will gradually move away from stocks and toward bonds.

Choosing a target date retirement fund is easy. Simply select the one that most closely corresponds with the year you plan to retire. Here are several options from Vanguard.

The one thing I'll caution about target date retirement funds is that they can be on the expensive side. Vanguard's funds cost just 15 basis points, which is very low. Others tend to be higher, so you want to keep an eye on the fees.

How NOT to Invest $1k

When it comes to investing $1,000, there are several strategies you should avoid.

The first one is what's called day trading. Day traders seek to make money buy buying a stock, holding it for a few minutes or hours, and then selling it before the market closes. The reality is in study after study after study shows this day traders do not make money. One such study found that “it is virtually impossible for individuals to day trade for a living, contrary to what course providers claim.”

The second strategy you should avoid is buying and selling options. There are a lot of websites that try to sell options trading strategies. But again, study after study after study shows that most people lose money trading options. One study found that the “results show that most investors incur substantial losses on their option investments, which are much larger than the losses from equity trading.”

The next one, and I know this is going to be controversial, is Bitcoin and other cryptocurrencies. I know that they're all the rage right now because prices are up. The problem is that they have no intrinsic value and are subject to wild swings. Can you find people that have made a fortune with crypto? Sure, but you can also find people that have made a fortune in the lottery. I don't think it's a good way to build long term wealth.

And the last way not to invest $1,000 are commodities, such as gold and silver. The historical returns have been terrible, and they are not a productive asset.

Invest $1k Video

New to investing and managing your money? Check out my book,
Retire Before Mom and Dad.

---

“This book is a must-have for anyone, regardless of age, to understand how to grow and protect our money over the course of our lives.” — Adrienne

---

Buy on Amazon

In this article, we're going to look at the differences between exchange traded funds (ETFs) and mutual funds. In past videos (check out my YouTube channel) I've mentioned that for long-term buy and hold investors, I don't see any reason that we need to bother with ETFs. That's sparked some emails and comments from folks wanting to understand why I believe that for most investors, all you need are mutual funds.

We're going to start by looking at mutual funds. And then we'll turn to ETFs. And then we'll get into the differences and why I don't think ETFs are necessary for most of us.

Mutual Funds

So I want to begin by looking at the Vanguard 500 index fund (VFIAX). Here's a snapshot of the fund from Morningstar (it's one of my favorite investing tools).

This is an example of a mutual fund. To better understand mutual funds let's look at the problem they were designed to solve. Before mutual funds, if you wanted a diversified portfolio you had to research companies and governments and then buy enough stocks and bonds to create a diversified portfolio. It was very time consuming and expensive. You could hire a broker, which many people did, which just added to the cost.

Mutual funds made it easier and less expensive for investors to create a diversified portfolio. Rather than having to go out and research all these companies, you can just invest in a few mutual funds and get instant diversification. Your money is divided up among hundreds, if not thousands of stocks and bonds at a relatively low cost.

Actively Managed vs Passively Managed (Index) Funds

There are two types of mutual funds–actively managed and passively managed.

An actively managed fund is one where the management of the fund picks specific stocks or bonds based on fundamental or technical analysis. A passively managed fund, also called an index fund, simply tracks an index such as the S&P 500.

How Mutual Funds are Bought and Sold

There are two important thing to understand about mutual funds. First, shares of a mutual fund are bought and sold directly with the mutual fund company. If you want to invest in a mutual fund, like our Vanguard 500 fund above, you buy directly from Vanguard. Vanguard issues you shares of the fund and invests your money in the underlying assets of the mutual fund.

In contrast, when you buy a share of stock, the transaction is with another investor. This distinction is going to become important when we get to ETFs.

Second, with a mutual fund, you always pay what's called the Net Asset Value (NAV). The NAV represents the value of the stocks and bonds the fund owns. NAV is reported on a per share basis. You can see in the above screenshot that the NAV for the Vanguard fund was $342.68.

Unlike a stock price that fluctuates throughout the trading day, a mutual fund's NAV is adjusted just once after the market closes. When you buy or sell shares of a mutual fund, the price you pay or receive is determined after the market closes. That means, as a practical matter, that when we submit an order to buy or sell shares of a mutual fund, we won't know the price until after the market closes. The price, however, will always be the NAV–no more, no less.

Exchange-traded Funds

Let's turn to exchange traded funds or ETFs. This screen shot is of the Vanguard S&P 500 ETF (ticker: VOO) taken from Morningstar.

It is virtually identical to the mutual fund above in several respects.

Just like a mutual fund, it provides a low cost way to achieve easy diversification. This Vanguard ETF, just like the mutual fund, invests in 500 of the largest US companies. ETFs are also inexpensive, just like index funds.

There are, however, some significant differences. The best way to understand these differences is to understand why ETS exist in the first place. If they're so similar to index mutual funds, why in the world do we have them? The answer is that some investors want the ability to trade a mutual fund in ways similar to trading a stock. An ETF enables them to do that. An ETF is like taking a mutual fund, but giving it the ability to trade like a stock.

So what does that actually mean? Well, the first thing is that just like buying or selling a stock, the price of the Vanguard S&P 500 ETF, or any ETF for that matter, fluctuates throughout the day when the market is open. That's why, in the above screenshot of VOO, you see the Day Range, Opening Price and so on. You also see a bid/ask spread, just like you would for an individual stock.

As a result, an investor can short an ETF just like shorting a stock. You can also buy and sell options on an ETF. That's not possible with a mutual fund. It also allows you to sell or buy the ETF at the price that exists during the trading day. So if I want to buy VOO right now, you can see the bid/ask I could buy it at. I know what price I'm going to get at least within a couple of pennies. If I buy the mutual fund, I'll pay the NAV as calculated after the close of the market.

ETFs vs Mutual Funds

Why Mutual Funds are Better than ETFs for Long-term Investors

At first glance ETFs may seem like the better deal. You get all the benefits of a mutual fund, along with some extra trading features of a stock. Not so fast.

First, long-term buy and hold investors don't need the features ETFs offer. We have no need to short a stock or an ETF. We have no reason to buy or sell call or put options on an ETf.

Second, buying ETFs adds complexity because of the bid/ask spread. In the case of VOO, the bid/ask spread is not significant–Just a few pennies. For other ETFs, it can be much wider . The result is that we would pay more than NAV when we buy and receive less than NAV when we sell. There's simply no good reason for long-term investors to take this haircut.

Finally, if you want to set up monthly contributions, mutual funds are the answer. You can automate contributions or withdrawals to or from an ETF.

VFIAX vs VOO

To underscore why EFTs are not necessary, let's compare VFIAX and VOO. Their portfolios are identical. Since they both track the S&P 500, it makes sense that they would hold the same investments. For example, they both have 99.04% in U.S. equities. The both have a P/E ratio of 19.59. The price to book is 33.17 and the price to sales 2.31% for both.

Now, if we look at the expense ratios we see a small difference. The mutual fund is four basis points (0.04%), while the ETF is three basis points (0.03%). So I suppose one could say why not go with the least expensive option, even if it is just one basis point.

There are two reasons. First, you still have to deal with the bid/ask spread, it's not significant, but it will add costs as you buy and sell above and below the NAV.

Second, we need to look at each fund's performance on an after-fee basis. A comparison of performance from Morningstar shows that the mutual fund more often than not actually outperforms the ETF. It's not by much, just a few basis points most years. But it's enough to erase the one basis point difference in expenses.

When an ETF may be a Better than a Mutual Fund

I will concede that there are a few times when it may make sense for long-term, buy and hold investor to consider an ETF. The first reason deals with the required minimum initial investment of mutual funds. VFIAX above has a minimum investment of $3,000. In the case of the ETF, there is no minimum investment. This could be a hurdle for some. In my view, one should save up the $3,000 and then invest. Alternatively, there are other S&P 500 index funds that have no minimum investment, such as those offered by Fidelity.

Second, you could want exposure to certain very unique asset classes where ETFs are the better option. A friend of mine likes to invest in country-specific ETFs rather than developed and emerging market funds. For the vast majority of investors, however, this is not necessary.

If you have already built a portfolio of ETFs, I'm not suggesting you should exchange them for mutual funds or that you've made a mistake. As we've seen from the Vanguard funds, they are virtually identical in terms of fees and portfolio. Certainly, there's no reason to make any changes if it's going to trigger tax liability in a taxable account. But for those that are just beginning or thinking about this question, I think for most buy and hold long-term investors, mutual funds are our ideal.

ETFs vs Mutual Funds Video