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The Power of Low-Cost


In the world of investing, every dollar counts. Our low-cost investment approach emphasizes minimizing fees and other expenses associated with managing an investment portfolio, which ultimately leads to superior long-term results. By reducing the costs of investing, individuals can increase the potential for higher returns and greater financial security.


Summary

  • Low-cost investing emphasizes minimizing fees and expenses to increase potential for higher returns and greater financial security.

  • Key features include choosing low-cost index funds or ETFs, avoiding commission fees, and reducing turnover.

  • Different asset classes have varying levels of expenses, and what constitutes a "low-cost" fund can vary by category.

  • Adopting a low-cost investment strategy can significantly increase returns over time, as every dollar saved on fees and expenses is a dollar that remains invested in the portfolio.



What it means to be low cost

Key features of a low-cost approach include choosing low-cost index funds or exchange-traded funds (ETFs), avoiding commission fees, and reducing turnover. High-cost funds generally include expense ratios, sales charges, and other administrative expenses. For example, some actively managed mutual funds may have expense ratios of 1% or more, meaning that investors are paying 1% of their investment each year in fees.


In contrast, low-cost funds, such as an S&P 500 index fund, generally have much lower expense ratios, sometimes as low as 0.05%. The Vanguard Total Stock Market Index Fund has an expense ratio of just 0.04%. By choosing low-cost funds, investors can keep more of their investment returns and potentially see higher long-term gains.


The definition of "low-cost" is not as straightforward as ensuring all investments are below a certain threshold. Different asset classes carry different levels of expenses. Real estate investment trusts (REITs) tend to have higher expense ratios due to the costs associated with managing and maintaining physical properties. It's important to note that what constitutes a "low cost" fund can vary by asset category. A 0.35% expense ratio for an S&P 500 index fund would be considered quite expensive, whereas 0.35% for a REIT may be low cost. At Selective, we focus investments that are in the top decile in terms of low cost for their respective category.


Low-Cost Investing and long-term success

Low-cost investing plays a crucial role in long-term financial planning, as it enables investors to achieve their financial goals more effectively. By reducing the impact of fees on investment returns, low-cost investing can lead to significant improvements in portfolio performance. This approach also offers additional benefits, such as reduced risk through increased diversification, and improved liquidity due to lower trading costs. In essence, low-cost investing allows investors to make the most of their hard-earned money, maximizing their chances of long-term financial success.


The Vanguard Effect

One notable case study illustrating the benefits of low-cost investing is the story of Vanguard, a leading investment management company. Vanguard's founder, John C. Bogle, revolutionized the investment industry by introducing low-cost index funds. This approach allowed investors to gain broad market exposure at a fraction of the cost of traditional actively managed funds. According to Morningstar, Vanguard's average expense ratio was 0.10% in 2020, significantly lower than the industry average of 0.45%. As a result, Vanguard has consistently delivered above-average returns for its investors and has grown to manage over $7 trillion in assets.


While Vanguard is well-known for its low-cost investment options, there are many other investment management companies that offer low-cost funds. For example, companies such as BlackRock, Fidelity, and Charles Schwab all offer index funds and ETFs with expense ratios comparable to or lower than Vanguard's.


Conclusion

Low-cost investing is a powerful tool for achieving long-term financial success. By minimizing fees and expenses, investors can maximize their returns and set themselves on a path to achieve their financial goals more effectively. Choosing low-cost index funds or ETFs, avoiding commission fees, and reducing turnover are key aspects of this approach, which has been proven to deliver superior results over time.



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