People often turn to index funds or exchange-traded funds to simplify investing while getting exposure to diverse assets.
But even within this approach, there are many options to pick from. In December 2022, there were over 2,800 index and actively managed ETFs in the US, according to the Investment Company Institute. A less-than-ideal choice could cost an investor six figures over a few decades.
Aside from lagging performance, one big hiccup often overlooked is the expense ratio tagged onto a fund. Expense ratios can range from lower-end fees of 0.04% to above 1%. These numbers may seem small but become significant in the long run.
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For example, a fund with an expense ratio of 1% would cost $188,224 if you were allocating $10,000 a year over 30 years. According to an expense ratio calculator, the same setup would cost $8,278 with an expense ratio of 0.04%.
It's a lesson many investors learn too late, including Michael Quan, who had a basket of funds with expense ratios between 0.69% and 0.76%. Unfortunately for him, his company's retirement plan offered limited 401(k) choices.
In 2013, Quan left the workforce after selling his IT firm, walking away with a net worth of $1.28 million with $110,000 in cash, according to records viewed by Insider. This also enabled him to roll over his retirement plan while having more access to a broader range of funds.
He began buying index funds with lower fees that diversified his exposure to developed and emerging foreign markets. They included the Vanguard FTSE Developed Markets ETF (VEA), a mix of securities from countries including Canada, Europe, and Japan, and the iShares Core MSCI Emerging Markets ETF (IEMG), which has exposure to developing economies. For US stock exposure, he bought the iShares Core S&P 500 ETF (IVV), which tracks the S&P 500. The funds had expense ratios of 0.05%, 0.09%, and 0.03%, respectively.
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However, if Quan had to repeat the process, he would stick to an even more simplistic approach and allocate to one fund: the Vanguard Total Stock Market Index Fund ETF (VTI). This fund tracks the US stock market and has an expense ratio of 0.03%.
"In my younger years, I was more inclined to invest in longer-term trends, such as emerging markets or tech growth," Quan told Insider. "While I don't believe one strategy is inherently better than the other, I do think our investment approach evolves over time, influenced by our changing priorities and focus."
Jeremy Schneider, a young retiree who ditched his day job when he was 36, also came to the same realization about taking a simpler approach. After building and selling a property-listings platform called Rentlinx, he had a lump sum of cash that equaled $2 million that he used to invest, according to records viewed by Insider.
It was money he would decide to scatter across nine index funds to diversify his portfolio. These included funds that tracked the biggest publicly traded US companies, small-cap stocks, US and global real estate, international and emerging markets, commodities, and Treasuries — a little bit of almost every asset class internationally.
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But soon after retiring, boredom pushed him to search for a new purpose, leading him to become an online educator about money. In 2019, he started the Personal Finance Club, which offers free and paid content about index fund investing. He thought that since he retired young, he could teach others a thing or two about reaching their own financial goals.
He began to educate himself on personal finance concepts and test out different investment vehicles, using tools like Portfolio Visualizer, an online simulator for funds. He compared the indexes he purchased in 2015 against alternatives to see whether he made the right choice. But hindsight is indeed 20/20.
He realized that if he had stuck to one fund, it would have provided similar exposure but better gains. He's specifically referring to the Fidelity Freedom Index 2050 Investor (FIPFX), a target-date index fund which offers a mix of securities that become more conservative as the investor approaches retirement. This fund has an expense ratio of 0.12%.
If he could turn back the clock, Schneider says it would be the only fund he'd invest in.
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Vivian Tu was an equities trader on Wall Street for JPMorgan. Today, she's an educator after starting her Your Rich BFF brand. This financial education platform includes a newsletter and social media accounts where she posts about simple financial concepts like credit card debt and saving money.
Tu hit millionaire status at the young age of 27, with a big chunk of her net worth tied to her New York City apartment, which had a market value of $2.73 million as of September 2021, according to appraisal documents viewed by Insider.
When investing her own money, she didn't employ her trading skills. Instead, she had the early wisdom to know that it isn't easy to beat the market. She sticks to one fund: the Vanguard 500 Index Fund ETF (VOO), which tracks the S&P 500 and is rebalanced quarterly to include the top 500 domestic companies. This fund has an expense ratio of 0.03%.
