Beware of expenses: A small leak will sink a great ship.
Investors should never forget that quotation from Ben Franklin. You can do everything else right, but if you let your investment gains leak out of your portfolio, your money won't be there when you need it.
Expenses and taxes are like leaks. Even small ones can cripple the best-laid plans. Over a 20-year period, paying an extra 1 percent in annual expenses can reduce your ending account balance by 17 percent. Stated another way, this means that the more you pay for investment services, the less chance you'll have enough money to retire.
If your goal is to accumulate $1 million in 25 years and you can save $1,000 a month, you'll need a return (after expenses) of 8.3 percent. But if you pay out even one-half of one percentage point in unnecessary expenses every year, earning only 7.8 percent, you will end up nearly $80,000 short, with only $920,688.
One half a percentage point of return may seem insignificant. But in this example, that extra half a percentage point will have cost you the equivalent of more than six and a half years of the $1,000 payments you made into your account over a quarter of a century.
Unfortunately, this sort of waste happens much too often for my taste. Morningstar Inc. reports the expense ratios for thousands of mutual funds, individually and by categories. In Morningstar's nine broad style-box categories for U.S. equity funds, such as large-cap ...