This article is part of our Better Investor series, in which The Motley Fool goes back to basics to help you improve your returns and be more successful with your investing.
Picking investments that will make you rich is always a challenge, and no matter how much research you do, there's never any guarantee that you've found a stock that will eventually make you a millionaire. But there's one thing you can do that virtually ensures that you'll end up with a ton of extra money by the time you retire: Minimize the amount you spend on management fees, commission costs, and other nickel-and-dime fees that you'll run into throughout your investing career.
You vs. them
Unfortunately, the entire investing process has become a struggle to defend your hard-earned money from those who would take it away from you. If you invest in individual stocks, then you have to make sure that your company isn't overcompensating its executives -- often despite giving shareholders mediocre returns at best. For instance, earlier this year, fellow Fool Alyce Lomax called out several executive-compensation offenders, including Chesapeake Energy (NYSE: CHK), Talbots (NYSE: TLB), and SandRidge Energy (NYSE: SD). These companies all paid their CEOs exorbitant compensation packages without delivering the results that their investors deserved.
Moreover, individual stock investors also have to keep their eyes on their brokers. Full-service brokers can charge huge commissions just for ordinary stock trades, while even discount brokers sometimes have complicated fee schedules that impose a host of add-on charges ranging from high-activity fees to lack-of-activity fees, as well as charges for mergers and other corporate actions.
If you think you'll avoid these problems by investing in mutual funds or ETFs, think again. Not only do you indirectly bear the costs of the individual securities these funds invest in, you also have an extra layer of expenses. It's those expenses that are easiest to avoid -- and doing so will make your final nest egg a whole lot bigger.
Save big money
It's easy to underestimate just how much money you waste when you buy a fund with sky-high fees. After all, a percentage point or two doesn't usually make much difference in the short run, especially during good times when you earn double-digit returns year in and year out.
But over time, those little percentage points add up. A quick look at Morningstar revealed nearly 50 mutual funds with expense ratios of 3% or more in categories ranging from megacap blue chips to mid- and small-cap stocks -- and the vast majority of them haven't come close to matching the S&P 500's return this year.
By contrast, you can find low-cost ETFs that match up with most of those categories. For large-cap stocks with solid dividends, iShares DJ Select Dividend (NYSE: DVY) charges just 0.4% in annual expenses. Vanguard Mid-Cap ETF (NYSE: VO) has an even lower expense ratio of 0.12%.
And when you consider the positive impact of saving 3% each year over the course of your investing career, you'll like what you see. The $3,000 extra you'll save with a $100,000 account by using lower-cost alternatives adds up to $209,200 more in your nest egg after 30 years -- and that's assuming just a modest 5% return on your investments.
Even among ETFs, it's easy to find advantages. For instance, if you like emerging market investments, you'll find that Vanguard MSCI Emerging Markets (NYSE: VWO) and iShares MSCI Emerging Markets (NYSE: EEM) target the identical benchmark -- but Vanguard does it with charges of just 0.22%, while the iShares ETF charges 0.69%.
Keep your money
There's nothing that compares to the rush of finding a stock that produces gargantuan returns over the long haul, and just one find of that size can make or break your retirement. But even if you never find such a stock, what you can do is put a lid on how much money you lose to investing costs. The money you save will mean a lot more in your pocket over the long haul.
Stay tuned throughout our Better Investor series and get the advice you need to succeed with your investments. Click back to the series intro for links to the entire series.
