Investing in the stock market will generate positive real returns on wealth over long periods of time.  This is a much better alternative to holding cash, as inflation will erode the value of low-yielding cash; you lose value over time instead of gain.  Different investors pay wildly different prices to take part in the market.  There are several ways to invest in stocks, from doing it yourself (least expensive) to investing with a hedge fund that charges 20% of profits and 2% of asset value a year (most expensive).  This post examines the cost of each type of investing, and the importance of keeping fees low.

Keeping Down Costs Matters

The less you pay in investing fees, the more money you keep in your account to compound over time.  It really is that simple.  The average real (inflation-adjusted) total return for the S&P 500 (SPX) over the last 100+ years is about 7%.  If your investing costs you just 1% a year, you are giving away over 14% of your profits on average.  You don't (or at least shouldn't) invest for the fun of it, so giving away 14% of your reward for taking on investment risk is not a fair proposition (and that's before taxes).

Maybe high fees are worth it…  Do high cost mutual funds outperform low cost funds.  The image below should put that notion to rest.  The image below shows that low cost mutual funds outperform high cost mutual funds regardless of asset class category.

Source:  Vanguard

Ways To Invest by Fees

There are a variety of ways to invest in the stock market.  The list below shows the cheaper options available for investors.  These options will generally be better than the most expensive ways to invest in the market.

The list below shows the most expensive ways to invest in the market.  These investment options should generally be avoided, unless you have a very very good reason why someone deserves high fees.

High Cost Mutual Funds

According to Morningstar, the average U.S. equity based mutual fund has an expense ratio of 1.16%.  You pay the fund manager 1.16% of your invested wealth every year in hopes that they will outperform the market.  As the image above from Vanguard shows, this is not a good bet.  It gets even worse though.  Some mutual funds have much higher fees.  According to Morningstar, the mutual fund with the highest expense ratio in U.S. equities with over $300 million in assets under management is the Calvert Capital Accumulation fund (CWCBX).  The fund has underperformed the market since inception, not surprising, considering its high expense ratio of 2.86% a year (ouch!).