You know how the investment companies always say “Past performance is no guarantee of future results.”? And do you ever wonder how you are supposed to pick your investments if that’s the case?
Turns out there IS one really clear cut predictor of how well your mutual fund investments are likely to do. And any ordinary person has access to that information. Do you know what it is?
The number one predictor of how well your stock investments* will do over time is the cost of the investment. The less you have to pay in fees to invest in something, the more money it is likely to yield you over time. You can read more about the research behind this in the Morningstar article How Expense Ratios and Star Rating Predict Success
So how do you find out how much you are paying in fees? Well, every fund is obligated to disclose this in the form of its expense ratio. Lower is better. You should be able to find this information on the company’s website or you can always check Morningstar which is the leader in independent investment research.
For a quick look at how fees can impact your returns and how much they can vary among very similar funds check out these charts below:
Impact of fees over time
Expense ratios from a random** selection of different investment management companies
These numbers were taken from their websites in September 2016
*For the record, when I say investment I really mean mutual funds, which are generally the most appropriate type of stock investment for the average person. If you are into individual stocks, options or other type of stock investing this research may not apply. Also you probably aren’t going to do as well as people in mutual funds.
**Ok, not totally random. Vanguard is in here because its expense ratios are typically (but not always) the lowest. They are my go to company.