Pop quiz, young investor: If you invest $5,000 in a mutual fund with an expense ratio of 0.60%, how much will you pay for that investment? Answer: $30, which is 0.60% (or just less than 1%) of $5,000.
If you didn’t get it, first, subscribe to this blog, and second, don’t lose heart. When the SEC conducted this poll with easier assumptions, only 11% of fund investors came close to estimating the real cost of investing – the rest undershot the mark. In fact, half of the respondents underestimated the cost by more than half, meaning they were unaware of several hundred dollars’ worth of fees on a $100,000 investment.
You might say, “Why does the cost need to be a weird percentage anyway? Just make the darn thing a number!” And in this article, Morningstar’s John Rekenthaler explores all of these same questions, as well as how the fund industry has responded over time. You can imagine they’re not wild about making it easier for consumers, sigh. (Rekenthaler has an excellent, perhaps even snarky moment about this on page 2.)
Read How Much Do You Pay Each Year in Fund Fees? at Morningstar.
Hint: It’s probably more than this.
Do you agree that the funds should take on this problem of consumer education on fees? Leave a comment below!