Step 3 - Minimize expenses

Most investors skip this step and billions are made thanks to their oversight.

Investors spend countless hours trying to find an angle to give their investments a boost. This hope persists because the financial industry invests millions spreading the myth that you can beat the market.

Unfortunately, beating the market is highly unlikely, especially over the long term.

Focus on what you can control

If investors cannot control what their investments’ return, what can you control? You control how much money you give to your investment company.

This gift (the expense ratio) is really a fee for managing your investments. Most investors pay tens of thousands more for the same, but often sub-par, performance.

The cost of doing business

The expense ratio is charged annually, even when you lose money (returns are negative) and is expressed as a percentage of your total investment. Because large amounts are involved, the percentage is measured in basis points, one hundredth of one percent (0.01%). However, even small differences in fees add up over time.

Some investors are pretty generous, giving up two, three, four, even ten times as much for the same performance.

This generosity is not repaid. Over forty years, an investor simply paying 1% more (for the same 6% return) will lose over $192,000 compared to a more cost savvy investor. (see chart to the right)

To get the best deal, compare your current costs to this list of Vanguard’s funds. Vanguard pioneered low-cost mutual funds. Their expenses are generally the lowest in the industry because they are a non-profit, member-owned organization.

Four Steps to Financial Success is a six-page pamphlet on building wealth, distilled into four simple, reliable steps. Continue reading online, or download the color pdf.

• An Introduction
• Step 1 - Start now
• Step 2 - Save enough
• Step 3 - Minimize expenses
• Step 4 - Own everything
• What’s next?