I’ve always had an affinity for the teachings of Stoicism. The general idea of accepting life as it comes and only worrying about what I can control appeals to me. Relatedly, one of the more frustrating aspects of investing is how much is out of our control. We can’t control the whims of the market any more than we can control the turning of the Earth. We’re along for the ride. However, there is one element of investing that is mostly within our control: keeping investing fees low. High fees will silently chip away at your investment earnings if you allow it to happen. Therefore, you should do everything in your power to control your investing costs.
When Stoicism is applied to investing, a good practitioner would be an index investor. He or she would happily accept the returns of the market while controlling the only thing they can: the cost. Although not officially labeled a Stoic, I think John Bogle imbodied many of the attributes of the practice. His investment sermons on the importance of patience, simplicity, and contentment are evidence of this. Through his work, he provided a toolkit for stoic investors everywhere to invest in an acceptable way. Mr. Bogle famously said, “In investing, you get what you don’t pay for.” Let’s learn why he couldn’t have been more correct.
Control Costs with Lower Expense Ratios
All modern-day mutual funds and exchange-traded funds (ETFs) have an expense ratio attached to them. The expense ratio is the annual amount a fund operator charges to manage the fund. The expense ratio is usually expressed as a percentage. For example, Vanguard’s S&P 500 mutual fund (VFINX) has had an average expense ratio of 0.16% between the years 2000 and 2024.1 This means that if the S&P 500 earned 5% in a year, the investor would realize a return of 4.84% with VFINX after applying the expense ratio. High expense ratios can severely diminish the returns of a fund. For this reason, you should always compare synonymous funds to make sure you control your investing costs.
Figure 1 below shows what can happen if an investor neglects to pick the most cost-efficient fund option. The returns in Figure 1 are inflation-adjusted (real) and show the growth of $1.00. The chart compares three results:
- VFINX with its original average expense ratio of 0.16%
- VFINX with a hypothetical expense ratio of 0.50%
- VFINX with a hypothetical expense ratio of 1.00%
Over the 25 years, the original S&P 500 fund (VFINX) with its average 0.16% expense ratio turned $1.00 into $3.33. The hypothetical funds with 0.50% and 1.00% expense ratios turned $1.00 into $3.06 and $2.70 respectively.
Small Figures, Big Impact
Expense ratios are insidious because they don’t appear very large. A new investor might think 1.00% a year is insignificant. However, let’s see what happens if we apply the numbers from Figure 1 to an initial investment of $100,000. See Table 1 below for the results.
As you can see, an investor who chose the fund with a 0.16% expense ratio would have earned $27,073 more than the hypothetical option with a 0.50% expense ratio, and $62,953 more than the option with a 1.00% expense ratio. That’s a significant amount of money lost due to poor due diligence up front. This situation is not uncommon. You can easily find two index funds tracking the same index with wildly different expense ratios.
Advisors and Managers Are Expensive
When most investors think of funds with high fees, they generally think of actively-managed funds. Active managers often charge exorbitant expense ratios for their services. Expense ratios over 1.00% are quite common in this realm of Wall Street. In addition, advisors often charge people who require their services a percentage of assets under management (AUM). This fee is in addition to the expense ratio.
If you let them, the inhabitants of Wall Street will gladly separate you from your money. As a general practice, I think screening out funds with an expense ratio over 0.50% is wise for most individual investors. Furthermore, being willing to learn the intricacies of investing can save large sums of money. Financial advisors are expensive. If you must use a financial advisor, hire one that is a fee-only 100% fiduciary. Otherwise, your “financial advisor” may be earning commissions on what they recommend you invest in, which is a conflict of interest.
Don’t Miss the Forest for the Trees
We have now established how important it is to control your investing costs. However, obsessing over every penny in expenses can be counterproductive. How is this so? Fixating on expenses can cause you to avoid diversifying your portfolio in certain ways.
Before I continue, you must first realize that you can have a perfectly well-diversified portfolio with inexpensive total market index funds. However, if you’re someone who likes the idea of tilting your investments to underrepresented segments of the market, then you may need to be willing to pay a bit more.
Figure 2 below shows the results of two mutual funds from January of 2000 to December of 2024. The two funds are Vanguard Developed Markets Index Fund (VTMGX) and DFA International Small Cap Value Fund (DISVX).2 The returns are inflation-adjusted (real).
As you can see, DISVX outperformed VTMGX during this period. The real return for DISVX and VTMGX was 5.69% and 1.11% respectively. As of February of 2025, DISVX had an expense ratio of 0.43% and VTMGX had an expense ratio of 0.05%. Thus, DISVX costs over eight times as much as VTMGX, but DISVX still delivered a much better return. VTMGX is a total developed international fund and is very inexpensive. However, DISVX holds a segment of the stock market that VTMGX does not cover very well. Due to its special nature, DISVX is more expensive.
If an investor had wanted to tilt his or her portfolio with DISVX, but decided not to because it cost 0.38% more, they would have missed out on the additional return as well as the extra diversification. The lesson is simple: costs matter, but don’t obsess about them. Specialized funds will cost more than total market funds and the additional diversification may be worth the price. Especially if it helps you create a portfolio you’re more comfortable with.
401ks, 529s, & HSAs Oh My!
I would be remiss if I failed to mention a common source of additional investment fees: tax-advantaged accounts. There are many workplace 401ks, educational 529s, and healthcare HSAs that levy significant operating and recordkeeping fees. Whenever you open one of these accounts, make sure you know what the fees are. If the account in question is a workplace account, don’t be afraid to ask human resources for the details. The fees could be significant and render the tax-advantages moot. Unfortunately, these fees often remain undisclosed, so you may need to do a little detective work to find the truth.
Take Control and Keep Costs Down
In conclusion, investing wisely means focusing on what you can control, and fees are one of the few factors within your influence. By selecting low-cost index funds for the bulk of your portfolio and being mindful of expense ratios, you can preserve your investment returns and control your investing costs. Although high fees may not seem like a big deal at first, over time they can compound and significantly reduce your wealth. With that being said, don’t let the focus on costs lead you to neglect the bigger picture of diversification and long-term growth. Additionally, keep an eye on hidden fees in tax-advantaged accounts like 401ks, 529s, and HSAs, as they can further erode returns if overlooked. In the end, being a mindful, cost-conscious investor will help you achieve greater financial success while adhering to the Stoic ideal of focusing only on what you can control.
Thanks for reading.
1 Average expense ratio data for VFINX obtained from the Bogleheads Forum.
2 I should note that DISVX was not readily available to all investors during this time period. Dimensional requires investors use a financial advisor to invest in their mutual funds. However, as of February 2025, all investors can now invest in Dimensional ETFs. The ETF equivalent for DISVX is DISV. I used DISVX as a proxy for DISV because the fund is older and has more data.
Data source for:
Funds: Yahoo Finance