Ever since my daughter turned one, she’s been drinking milk almost by the gallon. Because of this, our monthly grocery bills have significantly climbed. Suddenly I’m intimately acquainted with the price of this product I couldn’t have cared less about a year ago. I know what it costs at the convenience store down the street ($4.69) and I know what I’ll pay if I take the longer trip to the supermarket ($3.99) or BJ’s ($3.50). I know the difference between the 1% and the full fat stuff.
In general, we try to buy as much as we can when we grocery shop to get the best deals. But if my girl’s in need and time is short, I’ll pay another dollar or so. I’m cheap, but I’m not that cheap.
But what if there were a store right next door that sold milk? This would be the height of convenience, and I’d shop there almost exclusively. But what if there were a catch? What if the milk cost $159.60 per gallon? Do you think I’d buy it?
Of course not. My yearly milk bill would run into the tens of thousands of dollars. I’m not alone; no one but the richest, most price insensitive consumer would buy $150 gallons of milk. But when it comes to our investments, we’re nowhere near as savvy shoppers. A lot of people are currently buying the equivalent of $150 jugs of milk.
Some of the most efficient investment companies carry index mutual funds with fees as low as .05%. To put this in perspective, a $10,000 investment would only cost $5 per year at this rate.
At the other end of the spectrum, I regularly see 401(k)’s and traditional mutual fund products that cost 2% per year or more, with up-front ‘load’ charges each time money is invested. On the same $10,000 investment, you’re paying $200 yearly, which is forty times more expensive.
Just for fun, let’s apply this multiplier to other items and see how much they would cost if household products worked like mutual funds:
- Gas near my house: $156 per gallon
- Box of diapers: $1,200 (!) for a box of l00
- Loaf of bread: $120
- Cup of coffee: $80
Now, I love coffee. If I could find coffee that tasted forty times better than my local brew, I might even pay $80 per cup once a year or so for the pleasure. But it’s not likely to happen. Likewise, it’s nearly impossible for high-fee investments to return forty times more value than a low-cost index fund. In fact, there isn’t much evidence that more expensive funds can consistently beat the wider market by any margin at all.
What is more likely to happen is this: in any given year, some funds will beat the market and others will trail it. All of the funds, good and bad, charge fees. After those fees are subtracted, some of the funds that “beat the market” actually only treaded water. Then the whole game plays out again the next year, with very few companies beating the wider market for a significant amount of time.
You don’t choose your 401(k) -- your company does -- and not every fund company is going to carry low-cost funds. This makes it even more important for each person to review their plans and pick the cheapest investments that fit into their asset allocations. And it’s important to roll those balances out into an IRA after a job change, preferably with a company that does offer low fee funds. Chances are, that cheaper product won’t be worse than the expensive one.
A $150 gallon of milk may taste better than the cheap stuff, or it may taste worse. The quality is uncertain; the price is. Is it worth the risk?