April 20, 2017
If you have been invested in U.S. stocks the past few years you have no doubt made some serious money. The U.S. markets are up more than 300% since this bull market began in 2009. But I want you to understand that great returns are in no way a guarantee going forward. Yes, stocks are always the smart investment if you are a long-term investor, but I hope you realize that over the next 10 years we might not see such robust U.S. stocks returns, simply because they have had such an incredible run.
That’s not a reason to bail on stocks. Again, for your long-term goals—such as retirement-you want to stick to a well-diversified portfolio. But you can give yourself a nice investment boost if you make sure you are investing in the lowest-cost index mutual funds or exchange traded funds. There is a wonderful fee war going on among some of the big fund and ETF providers, such as Vanguard, Fidelity and BlackRock. They keep reducing the annual expense fee on their funds and ETFs. You can now invest in ETFs that charge an annual expense ratio of 0.10% or less. That’s less than one-tenth of one percent! Some index mutual funds charge just 0.20% or so. That’s also an incredible deal.
I know plenty of you have old 401(k)s from former jobs that you’ve just left sitting in that plan. If your old employer plan offers low cost index mutual funds (few 401(k)s offer ETFs) it’s fine to leave it there. But you better really check. If your old 401(k) is invested in funds that charge a lot more than 0.10% to 0.20% I think you are wasting money. Plenty of you will be surprised to find out you may own some funds that charge 1% or more a year. That’s 10x what you can pay for an inexpensive ETF. And the difference between paying 1.0% and 0.10% can mean your retirement fund will be tens of thousands of dollars smaller than if you made the move to the inexpensive options.
Please understand, once you leave a company you are allowed to move your 401(k) account to any discount brokerage. This is called a 401(k) Rollover into an IRA. You will owe no tax if you do a “direct” rollover from your ex-employer straight into your new IRA account. And once the money is at the brokerage, you have the freedom to choose among plenty of super-low cost ETFs and index mutual funds.
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