Wasting money is easy. Case in point: a start-up company called Washboard launched this summer with a simple enough service aimed at consumers without a washer and dryer at home. Those signing up for Washboard received rolls of quarters (through snail mail) to use when doing laundry.
Let me say that again: They mailed you a roll of quarters so you don’t have to use the change machine at the laundromat, or worse, stop at a bank and get change for a $20 before going to wash your clothes.
Here’s the catch, though: You had to pay $27 to get $20 worth of quarters. Yes, they tried charging $7 for that service. Talk about throwing your money away! Luckily, consumers quickly realized what a waste of money it was, and Washboard shut down less than a month after opening for business.
When it comes to the mutual fund firms with which you invest your retirement savings, the options are endless. Whether your nest egg totals $50,000 or $5 million, tens of thousands of stocks, bank accounts, bonds, commodities, collectibles, businesses and even fraudulent schemes are beckoning for your money.
Most people know that saving for retirement isn’t necessarily free – there are expenses associated with investing and planning for your financial future. But unlike the fees charged by Washboard (R.I.P.), or needless trade fees and broker commissions that can eat into your returns, some of those costs are actually worth it in the long run.
Let’s take a look.
1. Mutual funds versus individual stocks or bonds. Mutual funds sometimes get dissed by “industry insiders” as being too expensive and tax-inefficient. In reality, however, mutual funds make it possible for individuals to invest in assets that were once only available to the wealthy.
By spreading your capital over dozens of investments, a mutual fund can diversify its holdings beyond what you could do as an individual investor. The fees you would otherwise face for buying and selling dozens or hundreds of individual investments would be substantial.
Mutual funds are also preferable to single stocks because of their convenience and reduced risks. They also offer increased transparency to make it easier to see where your money is going – not to mention access to a professional fund manager, which brings me to my next point.
2. A good fund manager. Ultimately, a mutual fund’s success is largely the result of its manager, who leads the process of deciding which companies the fund should buy, hold or sell. The fund manager is like the quarterback of the football team, and some are better than others.
For example, Peyton Manning is going to have a much greater chance at winning for the Denver Broncos than most quarterbacks in the NFL. And just like Manning’s contract is more expensive than that of a rookie quarterback, sometimes a good fund manager is not always the cheapest option.
You should know that fund expenses, including management fees, are included when calculating fund returns. So if you did your research – on the funds’ strategy, recent and historical performance, management team and more – and think it’s a good fit for your long-term investing and retirement goals, don’t pass on it just because there may be a less expensive fund available in the next round.
3. Professional advice. Just as you wouldn’t trust a dedicated watcher of “Grey’s Anatomy” to do your emergency appendectomy, some things are better left to the professionals. For instance, attorneys can help you establish important legal documents, such as wills and powers of attorney for health care and finances. These basic documents will help prevent your estate from getting eaten up by unnecessary costs or the courts from making decisions for you.
Likewise, having a professional investment advisor on your side – someone trained, credentialed and experienced in investment planning – can help you design and execute a strategy that meets your specific needs and retirement goals.
Cutting costs is admirable and is often necessary when trying to find money to invest toward retirement, but contrary to the old adage, the best things in life aren’t always free. The trick, though, is to make the extra fees and expenses you do pay work to your advantage.
This post is part of Smart401k CEO Scott Hollsopple’s contribution to the U.S. News & World Report Smarter Investor blog series. To view the original article, click here.