Tuesday, June 14, 2016

Teach Teens It’s Expensive To Ignore Expense Ratios

Today’s fantastic family finance article is:

Money Magnifying Glass

You opened a Roth IRA for your teen when she got her first summer job. Brilliant!

You matched her contributions as an extra incentive. Bonus!

You coached her to invest those contributions in a diversified index fund. Bravo!

You compared fund expense ratios to make sure she got the best deal. Oops...

Expense ratios measure how much it costs in fees each year just to own the fund. An expense ratio of 0.80% means you’ll pay 80 cents for every 100 dollars invested.

The weird thing is, two funds that invest in the exact same collection of stocks can have dramatically different expense ratios. Take the funds represented by the ticker symbols RYSOX and VOO. Both track the same popular basket of stocks — the S&P 500. Pop their ticker symbols into Google, and you’ll find that RYSOX currently has an expense ratio of 1.6% while VOO’s is just %0.05. That’s 32 times more expensive! Why pay so much more for the same thing?

Over decades of investing, that could cost your teen thousands of dollars. Oops indeed.

Now you’re teaching your teen how to compare expense ratios for similar funds in seconds. Bingo!

No comments:

Post a Comment