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Fees are very important because what the investor gets is what the investment manager has earned,
less the fees charged. If an investment manager earns 6% for you, but charges two percentage
points in fees, what you get is 4%. I think any of us who talk about investing need to
be very modest about what we know and don't know. But the one thing about investing that
I am absolutely 100% sure of is the lower the fee I pay to the purveyor of the investment
service, the more there's going to be for me.
Morning Star, which is a company that rates mutual funds, and they give them one, two,
three four, five stars, did a study to see how good their star ratings were. Did five-star
funds do better than two-star funds or one-star funds? And what they found was it didn't make
any difference. The stars didn't predict at all. Then they decided, "We'd try to see what
did predict."
And what did predict the return you're going to get from an equity fund or a bond fund,
the best predictor was the expense ratios. The lower the expense ratio charged to the
investor, the higher the net return the investor gets. And of course, the quintessential low-cost
funds are index funds, the ones that we use in Rebalance IRA, because competition has
driven the costs down so that you can buy the whole market portfolio and pay an expense
ratio of five one-hundredths of 1% or less.