It's natural and smart when people start investing for incomes to look for the highest yield or return on their money.
However, too many people don't know where to look. It's not in the rate of interest or yield.
It's the Expense Ratio
If you want real financial bargains, study the expense ratios.
That's the amount of shareholder funds used to pay the bills. You have to pay something, because banks, mutual funds and other financial institutions can't be expected to work for free. They need to pay the electric bill to keep their computer servers operating.
However, just as families do, some watch their pennies and some spend way more money than they have to.
Most people don't realize it, but this can make all the difference in returns. This is especially true when the financial securities are pretty similar as they are in all kinds of fixed income investments.
Money Market Funds Are All Similar
Money market funds are one example.
On the whole, they're much the same. They buy up short-term commercial paper for market rates of interest.
The market interest is what the market interest is. No money fund manager can change it.
When the Riskiness of Fund Portfolios are the Same, It's Expense Ratios that Make the Difference
Founder of Vanguard John Bogle studied yields of many money market funds, and found they differed from their cumulative average almost exactly by their expense ratios.
That is, if a fund had a lower than average yield, it was lower by the amount its expense ratio was higher than average.
Funds that had higher than average yields, had expense ratios lower than average.
This is probably true of certificates of deposit as well.
One Bond of the Same Kind and Credit Rating is the Same as Every Other Bond of the Same Kind and Credit Rating
It's certainly true of bond funds. If you're a manager buying up investment grade long term corporate bonds and I'm a manager buying up investment grade long term corporate bonds, how different can our funds be?
How can I make my corporate bonds return more than your corporate bonds? I can't. The truth is, they all return the current market rate for that particular type of bond.
But if I collect a salary that's ten times bigger than yours, plus fly around the country on a private jet, and pay rent in downtown Manhattan instead of rural Iowa . . . I'm taking more of my shareholder's money than you are, so your fund's yield will be higher than mine.
In the Long Run, Stock Mutual Funds Average Out to the Same
To a large degree, this is also true of stock mutual funds in the long run.
One large cap mutual fund returns pretty much the same as every other large cap mutual fund -- before taking out management expenses.
Therefore, when you're shopping around, don't compare yields or last year's return -- look for the lowest expense ratio.
Don't pay more than you have to when you're investing for incomes.
Author Resource:
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