The Best Of Both Worlds

Tweet

Performance, low cost.

These funds offer a compelling blend of good performance (on a risk-adjusted basis) and low cost (in annual overhead and sales commissions). Our Best Buy formulation gives equal weight to cost and performance for stock and junk-bond funds. It gives a heavier weight to cost for high-grade bond funds, where results are more a function of interest rate shifts than of security selection.

It's a common myth that expenses don't matter in bull markets, only bear markets. Mathematically, this is nonsense. Losing 2% of your capital every year to management fees and other costs means losing a compound total 33% after 20 years. That is, you end up with a third less money than you would have had without that ghastly cost burden.

This is true whether your securities went up, down or sideways for those 20 years. And every 2% nick did the same damage, whether it occurred in a good year or a bad one.

In our scorecard the risk adjustment penalizes volatile funds and rewards stable ones. The cost measure equals the expense ratio plus one-fifth of the sales load.