The Importance Of Fund Expense Ratios

Reader John had this comment regarding my review of PRPFX last Saturday of:

That said I have not always been this enthusiastic about it (PRPFX). The fund’s expense ratios were unacceptably high for a long time and have only recently dropped into a range I am prepared to support. (I refuse to buy mutual funds with expenses greater than 1%. There are very, very few that are worth it and for those that are, one can generally find cheaper alternatives.) You can build your own Permanent Portfolio with funds that are generally less expensive, although this is more labor intensive as you have to do all of the frequent rebalancing yourself.

One part of John’s comment reminds me of what I have heard from many investors over the past 20 years in that they look at mutual fund/ETF expense ratios as the most important factor in selecting an investment.

This seems to be some leftover attitude from the buy and hold type of investing. Granted, if you hold any fund for years without ever sidestepping any bear market, reducing the cost of that investment makes a lot of sense.

However, when you are in trend tracking mode, upward momentum followed by performance is the most important ingredient for success. After all, who cares what the charges are if the rewards far outweigh the expense.

Case in point is what happened after the 2000 bear market. We re-entered in 2003, and one of my fund selections was the Nicholas Applegate fund. It absolutely exploded by gaining over 60% in 3 months. If I had looked at the expense ratio first, I probably would have not selected this fund.

The lesson learned is that’s it’s not worth trying to save nickels and waste dollars in the process.