Most folks don't think much about the cost of investing because they aren't active traders, and so discount brokerages offering $7 stock trades as an alternative to much higher full-service fees don't mean much. Yet odds are you have some money, maybe even quite a bit, tucked away in one or more mutual funds in, say, your 401(k) or an IRA and that you pay no attention to the recurring fees these funds impose on you whether you buy, sell, hold or, well, just go to sleep. These fees fly under the radar because they are deducted from your balance and typically minuscule next to the gain or loss in your portfolio. But make no mistake: you pay them, and the costs can be surprisingly high.
Thankfully the costs can also be chopped down fairly easily. The key is sticking with extremely low-cost index funds, where the annual expense may be as little as 0.2% of your balance as opposed to actively managed funds where the annual expense typically runs about 1.19%. What does that mean? On an account worth $100,000, your annual cost in index funds is a mere $200 instead of $1,190 with actively managed funds. So you'd save $990 a year by switching. But that's only the start. The money you save each year stays in the fund and grows. Let's say a low-cost index fund and an average-cost actively managed fund both grow 8% a year for 20 years. Over that period, you'd end up with $75,678 more with the index fund by virtue of the additional compound returns from lower expenses; the index fund would grow to $449,133 while the actively managed fund would grow to $373,455. That's more than $3,700 a year.