Welcome to post number six in our continuing series of most common investor errors.
Today, we are going to look at something that relates back to several of our earlier bullet points on fees and active management relative to investor structures.
Mutual Fund vs ETFs: The average mutual fund charges far more than the average ETF does. Whenever possible, I recommend substituting a low cost ETF over the more expensive Mutual fund.
The fund industry seems to have figured this out. Some have put out ultra-low cost mutual funds that typically mimic broad indexes. Others have ETF-ified their existing mutual funds, converting them into Exchange Traded Funds. Over the next decade, it would not surprise me to see nearly half of the existing mutual fund offerings morph into ETFs.
The bias against mutuals over ETFs is in the many ways that mutual funds can tag you with hidden costs, taxes, 12b-1 fees, and expenses. With ETFs, you pretty much get what you pay for.
Do note however: Even within the ETF universe, there are a wide range of internal fees. These expenses come off of the top of your investment performance, so it pays to watch them closely.
Reducing your costs is a surefire way to improve long term results. Consider what ETFs you can substitute instead of mutual funds.
Top 10 Investor Errors
1. High Fees Are A Drag on Returns
2. Reaching for Yield
3. You (and your Behavior) Are Your Own Worst Enemy
4. Asset Allocation Matters More than Stock Picking
5. Passive vs Active Management
6. Mutual Fund vs ETFs
7. Not Understanding the Long Cycle
8. Cognitive Errors
9. Confusing Past Performance With Future Potential
10. When Paying Fees, Get What You Pay For