How to avoid paying unnecessary fees in the stock market

Let’s look at in detail at exactly what those expenses are, and could be costing you—and then talk about what you can do to reduce them. Say you invest $10,000 a year in a stock mutual fund that earns the historical compound rate of 11.2% a year.

- If you were charged a 5% load, or commission, for buying that mutual fund, and 2% more in management fees, at the end of 10 years you would have $160,329.

- With no commissions, and fees of 1.3%, your investment would have grown to $174,315, or about $14,000 more.

- But if you paid no acquisition charges, and expenses of just 0.2% of the money invested—possible if you bought a well-run index fund—you would have $185,614 at the end of 10 years, nearly 16% more than the person who was hit with all those fees and expenses. How can you limit expenses?

Here are a couple of ideas. Use index funds to save time and money. Their performance mirrors the market, and, as we have seen before, their expenses are low. All else being equal, go with the lowest costs. A true S&P index fund—one that buys the 500 stocks that makes up the index, and holds onto them—is no different from one firm to the next.

If you are comparing apples to apples, go with the firm charging the lowest fees.