Reducing Investment Costs: Past Research and Future Strategies

“Recent studies suggest that cost control may be more important to investment results than other factors that have historically received greater attention, such as security selection and market timing.”

Financial economists use the terms “portfolio friction” or “investment slippage” to describe the detrimental consequences of investment costs (including taxes paid on investment earnings). Recent studies suggest that cost control may be more important to investment results than other factors that have historically received greater attention, such as security selection and market timing. This essay will:

  1. Summarize a recent report on mutual fund fees and expenses published by the Division of Investment Management of the U.S. Securities and Exchange Commission (SEC)
  2. Describe the rapidly growing arena of Exchange Traded Funds (ETF). ETFs have become popular due to their low cost and favorable tax characteristics
  3. Discuss other techniques for minimizing investment costs, such as pursuing low-cost mutual fund share classes, using tax managed vehicles, using tax efficient vehicles like ETFs, and minimizing turnover and other fees.
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