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Your Retirement Account Could Be Costing You MillionsBy
Monday, July 22, 2013
Most retirement accounts are rigged to cost you money.
The losses won't show up on your monthly statements. And your broker probably can't even tell you the real costs – he doesn't know.
But over time, a common type of investment eats up your returns.
You could be throwing away millions of dollars over a lifetime of investing.
If you have a 401(k) or an IRA, you need to hear this message. By making a few simple changes, you can save yourself serious money.
Best of all, it can be done in less than an hour with just a few mouse clicks. Let me explain...
If you have a retirement account – or practically any investment account – there is one kind of investment you almost certainly own... mutual funds.
On the surface, mutual funds are a great idea. They offer simplicity in the complex investing world.
You see, most folks don't want to be stock-pickers. They don't want to comb through research reports to find the next hot growth stock. They aren't going to spend hours learning about strategies that might make them an extra 2%-3% a year.
Most folks are busy. They work. They have families. They want simple investments. And they want the safety of diversification. That's exactly what mutual funds offer. They are an easy way to buy a basket of investments.
Say, for example, you want to own international companies. You could find your favorite 100 international companies and buy them all. Or you could simply buy the JPMorgan International Equity Fund (JSEAX).
This mutual fund owns 96 international companies spread across various sectors and regions of the globe. And it's simple to buy.
But it charges a 1.31% annual investment fee. That doesn't sound like much. But what most investors don't realize is you can achieve the same investment goals without paying big fees. In the case of international stocks, you would cut that fee by more than one percentage point a year by selling JSEAX and owning the Vanguard Total International Stock Exchange-Traded Fund (VXUS). VXUS charges just 0.16%.
Our friend Mebane Faber of Cambria Investments has crunched the numbers on the true cost of mutual funds. He's personally launched two exchange-traded funds (ETFs), with more on the way. So he understands the industry. According to Meb, fees aren't the only way mutual-fund investors lose.
Because of the way mutual funds work, they're completely tax-inefficient. You see, in mutual funds and ETFs, fund managers buy and sell stocks or bonds. But whenever a security sells for a profit in a mutual fund, the U.S. government wants its cut. So often, mutual funds pay capital gains at the end of the year. And you're on the hook for the tax bill. Sometimes, even investors who lose money in a mutual fund are still on the hook for a capital-gains tax bill... That's ridiculous!
ETFs use a different structure. It allows them to buy and sell whatever they want without worrying about capital-gains taxes. So you only pay capital gains when you sell the ETF.
All-in, Meb estimates fees and taxes cost mutual-fund holders up to 2% a year more than ETFs. That might not seem like a lot. But it devastates your long-term gains.
Take two investors, Jack and Jill. They both make the same investments. But Jack uses mutual funds while Jill invests in ETFs. They both invest $10,000 a year and make 8% annual returns. But over time, Jill's returns crush Jack's. Take a look...
As you can see, those 2% annual costs really add up. After 40 years, Jack has lost over $1 million in potential gains. His account size is 44% smaller than Jill's... even though they made identical investments. Of course, some mutual funds are better than others... some offer lower fees. But the tax problem won't go away.
In short, there's no good reason to own a mutual fund if there is a similar ETF available.
If you have a retirement account, or any investment account, you most likely own mutual funds... but you shouldn't.
Spending an hour today to move your accounts into ETFs is time well spent. If you're a younger investor, it could literally save you millions of dollars.
Good investing,
Brett Eversole
P.S. Meb runs a fantastic, idea-rich blog. As a number cruncher, Meb always finds unique ways to exploit the market. And he's generous with his knowledge. In fact, through the end of the day today, Meb is giving away his recent e-book on shareholder yield. You can find the details, along with his other ideas, at www.mebanefaber.com.
Further Reading:
Dr. David "Doc" Eifrig has another simple way to increase your retirement nest egg. It's what he calls "the easiest way to make $1 million in the stock market." If you want to retire rich, "this is the way to do it." Learn more about this strategy here.
And if you're concerned about how taxes will affect your nest egg, Doc has found a way to earn "the market's safest, highest tax-free yields." It's one of Doc's favorite ways to "dodge" taxes. Get all the details here.
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