With all of the political and financial noise of this week you would totally get a pass if you missed the most important small investor news for quite some time. What’s so important?
In the blog entry titled “Tale of two 401Ks” I spoke about the effects of expenses on long term investments. Remember Sally and Mark? Both work for a veterinary practice that offers a “Simple IRA” (Savings Incentive Match PLan for Employees). This plan offers an array of investment options. Sally decides to invest in a combination of no-load low cost index mutual funds from a well known investment company. Mark decides to go with a popular actively managed fund. Both manage to save $250 a month for the entire length of their career. They both manage to earn 6% on their investments but when they go to retire, Sally (blue line) has over half a million dollars while Mark has less than $400,000! What happened?
Mark paid a typical 1% expense ratio while Sally paid 0.02%. Because of this, Sally retires with ~$129,000 more than Mark. This will pay for quite a few vacations, provide a down payment on a summer home or who knows! The point is that small changes in the expenses charged by an investment can result in big changes in outcomes.
Why no-fee funds are a big deal.
This week, Fidelity Investments made a truly significant announcement that somehow flew right under the news radar: No-fee stock index funds! That’s right, now you can invest in a stock index fund that charges absolutely no fees!
Why is Fidelity doing this? After all you cannot make money charging zero. They are hoping that expense savvy investors will come for the free stuff and stay and invest in their other financial instruments. What will other low-cost investment firms (e.g. Vanguard) do? To early to tell, but I would bet that we will see comparable products being offered in the next 6-12 months. So if you are happy where you are, you could wait for a while and see. Are these no- fee stock index funds right for you? Maybe, maybe not, but you owe it to your self to check them out!