One of the basic tenets of investing is “Don’t pay more in fees than necessary.” You can’t control whether you’ll make a profit or loss on any investment, but you can control what you pay to acquire and hold the investment.
Fees are fairly consistent, in the sense that they consistently eat into your profits (also known as your return on investment, or ROI). This is one area where investors should focus a lot of their attention. The concept is so obvious and simple you’re probably staring at this page wondering if I take you for a dolt. But the sad fact is that many investors never consider fees when evaluating an investment.
Most financial advisers and mutual fund advertisements focus strictly on annual returns. Even articles by personal finance journalists can be guilty of this. The idea is that if a particular fund or stock earned a 15 percent profit last year, it has a good track record and a reputation for making money. Hence, it must be a good investment. Of course, the same advisers and marketers who promote the fund or stock will then add a phrase you’ve probably heard hundreds of times: Past returns are no guarantee for future performance.
The reason they say that is because the SEC makes them say it. Usually, they say it under their breath, or in small print, as if it were just a throw-away line. In fact, this is the most important piece of information they are telling you. Yesterday’s great investment might be tomorrow’s dud. That’s because no one ...