Fund expenses count. And they count more for some investment categories than others. The general rule is that if you invest in a fund that has a significantly higher expense ratio than the average for its category, the long-term performance drag will be costly. Few active fund managers cover the cost of the increased expenses of active management compared to the rock-bottom cost of passively managing an index fund. And if a fund manager is saddled with a relatively high expense ratio due to a small net asset base or high management/research costs, or both, the task of providing above-average category performance is all the more difficult. Some managers, when faced with this dilemma, may boost the risk level of the fund to remain competitive.
Stock funds are more expensive to manage than bond funds, international funds are more expensive than domestic funds, and funds with large asset bases are cheaper than small funds. But if the expense ratio of a bond fund is approaching 1.00%, or a stock fund 1.50%, think twice before investing. And don't forget, stock index funds often charge 0.25% or less.
Continue to Step 4 »
