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One mutual fund company is growing faster than all of its peers combined. And behind this trend is a critical investing lesson for anyone who hopes to retire.
Let’s appreciate the trend first, though. You get bonus points if you already guessed that I’m about to describe the mutual fund company Vanguard Group.
The New York Times reports that investors have poured $823 billion into Vanguard mutual funds over the past three calendar years. That’s more than eight times as much as Vanguard’s competitors combined; the rest of the mutual fund industry — more than 4,000 other firms — brought in a net of $97 billion during the same period.
Alina Lamy, an expert on fund flows at Morningstar, tells the New York Times:
“Flows of this magnitude into one company are unprecedented. Since the crisis, investors have been saying, ‘I may not be able to control the market, but I can control how much I pay in mutual fund expenses.’ And when they look for quality funds with low fees, the first answer is Vanguard.”
Now, give yourself a few more bonus points if you also guessed that today’s lesson is about the value of index funds.
An index fund is a type of mutual fund — a pool of investments like stocks or bonds — that mimics the performance of a particular group of stocks or bonds. The Vanguard 500 Index Fund, for example, mimics the performance of Standard & Poor’s 500 stock index.
Because they simply try to mimic an index’s performance, index funds are generally managed by computers. Thus, they are generally cheaper than actively managed mutual funds run by a flesh-and-blood portfolio manager who tries to outperform an index.
By cheaper, I mean that index funds have lower fees, which means more money in your nest egg.
As we detail in “Of All the Fees You Pay, This One Is the Worst,” over the course of your working lifetime, even a small fee can easily reduce your nest egg by six figures — if not more.
Money Talks News founder Stacy Johnson considers buying index mutual funds to be the best way to reduce investing costs, and he typically recommends Vanguard due to its low costs.
Vanguard is thriving because it understands the importance of keeping fees low. Investors who keep a lid on their own investing fees also increase their odd of growing wealthy.
To learn more about minimizing investing expenses, check out “9 Tips Beginning Investors Must Know.”
If you’re ready to get started with index funds, check out: “Ask Stacy: How Do I Invest in a Mutual Fund?”
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