A simple plan.

Today we will look at two investing companies and two nearly identical investment plans that only involve four funds. Yes, that's right, four funds. Investing does not have to be complicated! Let's sample each companies low cost funds.

Fidelity is a company you may have heard of. They are a privately held investment firm. They have an excellent website for the new investor that allows you to try many options and retirement type calculators.

Here is a sample portfolio using four of their low cost mutual funds.

Spartan Total Market Index (STM)
Fidelity Total Bond Fund (TBF)
International Enhanced Index (TINT)
Inflation-Protected Bond Fund (INFL)

The first row is the weighting, or the percentage of the fund in this sample portfolio.
The second row is the abbreviation for the fund.
The third row is the expense ratio, or cost as a percentage, for the fund.

40% 25% 20% 15%
STM TBF TINT INFL
0.10% 0.45% 0.63% 0.45


I really like looking at Vanguard's site. If you are not familiar with Vanguard, they have been around for a long time, and are famous for forcing mutual fund and investing costs down overall.

Let's take a look at a sample portfolio using Vanguard's low cost funds.

Total Stock Market Index (TSM)
Total Bond Market Index (TBM)
Total International Stock Index (TINT)
Inflation-Protected Fund (VIPSX) -- actual "ticker" symbol (for the NASDAQ)

The first row is the weighting, or the percentage of the fund in this sample portfolio.
The second row is the abbreviation for the fund.
The third row is the expense ratio, or cost as a percentage, for the fund.

40% 25% 20% 15%
TSM TBM TINT VIPSX
0.18% 0.22% 0.34% 0.25%

Now with these two examples, you can see some differences in costs. The Spartan fund family from Fidelity has a high minimum investment amount compared to Vanguard's funds. The minimum for the Spartan funds is $10,000 while the Vanguard funds require $3,000. That is a lot of money. But up next time, we will look at short term solutions for saving enough money to put into a fund, and other options that will allow you to "chunk" your money into investments.

Disclosure: The author does not own any of the funds listed, but someday hopes to.

The importance of investment costs

The simplest portfolio choices with the lowest costs can equal better long term gains than a high cost investment. Do you own any mutual funds? Do you know what the expense ratio is for your fund(s)? If the answer is no, read the most recent prospectus (the pamphlet with all the financial jargon in it you get annually). You may be surprised to know there are most likely lower cost funds that have matched or beaten your mutual fund(s).

Over time, an investment that had an expense ratio, or cost, of 0.2% annually vs an investment with an expense ratio of 1% will illustrate the importance of looking at costs. A higher expense ratio will eat into your compound interest year after year.

A $20000 dollar investment, at a rate of return of 6% and expense (or cost) of 0.2%, over a period of 35 years will yield around $144,000. This is a one time investment, with no regular contributions, which even with small additions would result in a much higher amount.

The same investment, with the same numbers except with a higher expense ratio of 1% would yield around $108,015.

With this example you can see that a higher cost investment will yield a much lower result. In reality, it is a hidden but direct reduction to your rate of return. A small percentage change in expenses adds up to 25% less money at the end of your savings window in this example. Pay attention to your expense ratios!