Have I Lost the Low-Cost Religion in Highlighting Some Higher Cost Mutual Funds?
I was struck in recent months by a couple of emails I received from some newer subscribers to my website who had first read my books. The gist of these messages was that these folks felt that my website recommended funds were inconsistent with and contradicted those I touted in my books.
The chief concern was that a number of funds I suggested on my website had higher costs than those I recommended in my books. These readers queried if I had lost my mind and low-cost religion!
My Fund Philosophy and Approach Are Unchanged
The approach I have for recommending funds on my website is really no different than it is in my books. However, I do post more recommended funds on the website in large part because space allows me to do so.
The “offending” high cost funds on my website which have stirred the ire of some subscribers seem to be from the No Load Fund Analyst newsletter lists of their highly recommended funds. While I don’t publish these same lists in my books, I do in fact recommend that newsletter on my short list of recommended fund resources in my books.
My regular readers know that I have long advocated focusing on low-cost and lower-cost funds, including index funds. Among actively managed funds, I have long recommended sticking with lower-cost funds all else being equal.
Is it sometimes worth paying a little bit more for a fund with excellent managers and an excellent track record? Yes, sometimes it is. As an example, several years ago in early 2010, I recommended the Sequoia Fund, which had been closed for many years but then reopened to new investors. With an annual expense ratio of 1.0 percent, its costs are certainly higher than many comparable funds which focus on larger company U.S. stocks. But, those who took my advice have done exceptionally well as the fund has beaten its peer group by about 5 percent per year on average. Sorry, but this excellent fund is now closed again.
Getting Comfortable with Your Own Approach
There is no one single approach that is “best” or right for you. Selecting an investment approach is partly personal. You’ve got to do what you feel comfortable with.
If you really prefer and feel most comfortable investing in the lowest cost funds, then by all means, follow that approach. But, recognize that all approaches have some drawbacks. And I would argue not to be too rigid.
Thrift is great and if you have two fund that are largely identical, then by all means, go with the lower cost of the options. But, sometimes, it’s worth paying a little more or a premium for an outstanding manager or approach that has worked for the long-term.