CHICAGO (Reuters) – Individual investors could be throwing away as much as $7 billion a year on expensive index funds that are no better than cheaper funds – without even realizing it.
This estimate from Morningstar researchers comes from a new study of over 3,600 individuals who were asked to allocate $10,000 in a hypothetical account. They had three seemingly identical S&P 500 index funds to pick from, with the only difference being the fees charged.
Decision - Fund - Money
The decision should have been simple: plop the full $10,000 into the cheapest fund to get the most for the money.
Instead, analysts from Morningstar and National Opinion Research Center (NORC) at the University of Chicago found that people had no idea what to do and consequently relied on a platitude of investing: Diversify. They spread their money across all three funds, which meant they wasted money in needlessly expensive funds.
Mistake - Points - Driver - Nation - Retirement
The mistake points to one major driver of the nation’s retirement crisis: Not only do people save too little, but they also invest poorly.
The study is especially disconcerting because it focuses on index funds, where the only decision is a simple one – comparing price.
Choices - People - Morningstar - Study - Index
The choices offered to people in the Morningstar study, ranged from index funds charging 0.40 percent to 0.04 percent. The highest would cost a person about $1,300 in fees over 20 years; the cheapest $134.
When researchers told participants they had to choose just one of the three funds offered, 47 percent chose wisely and picked the cheapest. But the rest chose more expensive funds, with 14 percent choosing the most expensive.
Research - Hints - Reason - Decisions - Consumers
Other academic research hints at a possible reason: When faced with complicated decisions, consumers often choose the most expensive option thinking that high price signifies quality. That’s a strategy that can doom investments.
That behavior is particularly disconcerting when you consider that some index...
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