The Most Important Thing to Know when Investing in Funds? Fees.

One of the pieces of financial advice that “New Zealand’s Most Trusted Money Expert” Mary Holm gives in her book “Rich Enough? A Laid-Back Guide for Every Kiwi” (affiliate link) is to look at the fees when investing in funds of any type. Holm cites a plethora of data to support this claim.

Past Performance and Investing in Funds

One important piece of information is that “past returns are no guarantee of future performance.” A fund that has high fees and outperforms every other fund one year is just as likely to be in the middle of the pack or lower the next. It will still have high fees, but the returns will be smaller. Instead of chasing past performance and allowing recency bias to cloud your judgement, choose the funds that have lower fees. They will generally perform as well over time as the higher cost funds, and the lower fees will allow you to invest more into the account creating greater returns in the future.

Fees Don’t Change

For most funds, the fees won’t change. If you can find one that charges based on the performance of the fund, you may choose that option, but there’s a reason why fund managers keep their fees stable. Past performance does not indicate how things will go in the future. Holm suggest investing in “index” funds. These accounts are also known as “passive” or “tracker” funds. They usually have low fees. The drawback is they may not perform as well as active funds during downturns. Holm reasons that no one is good at predicting downturns, and the markets generally go up over the long term. These two facts outweigh the drawbacks for her.

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