February 2008
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Cost: $4,000
If you buy mutual funds from a broker, investment adviser, or other salesperson, you could pay commissions, or "loads," of up to 5.75 percent. But if you buy no-load funds, you'll pay no sales charges and start off that much ahead. Annual expenses can also vary widely among funds, from 1.5 percent or more a year to as little as 0.1 percent.
According to the Investment Company Institute, a trade association, stock fund investors made initial investments averaging $23,000 in 2005. We projected that out over 10 years, assuming the money had been invested in one of two S&P500 index funds and that our investor had added nothing further during that time.
The high-cost fund that we chose had a 5.25 percent load and annual expenses totaling 0.45 percent. The low-cost fund was a no-load with annual costs of only 0.18 percent. The high-cost fund grew to $36,000, the low-cost one to $40,000. Note that we could have chosen a fund with even higher expenses, had we not done our comparison with index funds.
What you can do. Consumer Reports has long recommended that investors choose no-load mutual funds with low expense ratios. You can buy them directly from investment companies such as Fidelity, T. Rowe Price, and Vanguard.
