As if we needed more evidence of the power low-cost investing, a new article illustrates the power of low fees when it comes to bond fund performance.
Low-cost investing = higher returns
Here’s the most important chart from the article:
Based on the author’s analysis, cheaper bond funds consistently beat out their higher cost peers. Low-cost investing for the win!
All kidding aside, it’s a truism in investing that every dollar of fees represents a 1:1 reduction in investor returns. From that, it’s simple commonsense to expect that lower fees will lead to higher investor returns on average.
Obviously, some high-cost, active funds will outperform a low-cost, passive index fund. Heck, in any given year, there might be many funds that outperform. But it’s damn hard to do so over a long period of time. Charlie Munger recently said about 5% of investment managers can consistently beat an appropriate passive benchmark over time. The other 95% exist in a state of denial and act like fortune tellers or astrologers.
What about risk?
To take things one step further, the author also found that higher cost funds exhibited higher risk:
The author posits that higher cost funds must take on more risk to justify their higher fees. And this makes sense. Higher investing fees act like an anchor over time. So fund managers must “push the envelope” to gain higher returns in order to keep investors happy.
At the end of the day, costs matter. Remember, as an investor, you get what you don’t pay for.
