An Unfair, But True, Rule in Investing
It’s unfair and counter-productive for ordinary investors, but the axiom is true: “It takes money to make money.” Or, better phrased, “It takes money to more cheaply make money.”
Money begets more money
I’m talking here specifically about fees. If you want to keep fees on mutual funds to their lowest levels, you need a lot of money to start with.
It’s eminently true that fees and taxes play a greater role in your investment success than what particular fund you choose or trying to time your investment. In fact, the effects of taxes and fees can be startling.
So of the two large factors, taxes and fees, you only have control over one - fees. I’m a huge believer in index funds for investing, either in taxable or retirement accounts. Among other things that recommend them, they are extraordinarily cheap in terms of fees.
But even the large money management firms offering index funds have to make a profit. Fees exist at these firms in two main forms - accounts maintenance fees and management fees. Unfortunately, you usually have to have a great deal of money to invest to get these fees to their rock-bottom level.
As an example, Vanguard offers a total stock market index fund with a management fee of 0.19%, which is a very good, low rate. For accounts less than $10,000, Vanguard also charges a $20 per year account maintenance fee. (These numbers are representative of the other big fund companies, by the way.)
2 Ways to save money
Vanguard offers what they call “Admiral Shares,” which are essentially a preferential fund class for large investors. To qualify, your account must have a balance of at least $100,000 or a $50,000 balance if it’s been open for 10 years or more.
The Admiral shares for the total market fund charge a management fee of 0.09%, which compares well to Vanguard’s total market ETF (0.07% management fee).
You can also eliminate the $20 account maintenance fee at Vanguard if you sign up for online access and agree to have all fund material sent to you electronically instead of on paper.
So despite the constant cries to get individuals to save and invest more, it’s still true that the more money you have the more money you can make.
