Review & Outlook

Our take on the investing, financial, & economic themes of the day

The Hidden Costs of Mutual Funds

1 March, 2010 by Ben O'Brien in Commentary

We are often asked why we use individual stocks and bonds instead of mutual funds in client portfolios. One answer has to do with size. If you have, say, a few thousand dollars to invest, a mutual fund is great for diversification. But a larger portfolio, anything over $250,000, can achieve adequate diversification on its own without the cost and complexity of the mutual fund format. Consider that there are more mutual funds than there are stocks and bonds; how do you know which one to pick? You might do it on the basis of expense, but how do you know what the real expense is. Consider that a high rate of portfolio turnover, that is to say a lot of buying and selling, can generate transaction fees that are next to impossible to discover. An article in today’s Wall Street Journal speaks to this problem of hidden expense.