Black-Friday-Is-A-Good-Day-To-Evaluate-Your-Expense-Ratios

Black Friday Is A Good Day To Evaluate Your Expense Ratios

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Thanksgiving is maybe my favorite holiday of the year.  Between family, football, and an insane amount of delicious food, the fourth Thursday of every November is something I always look forward to.

But while the traditions of Thanksgiving are something I hold dear, the traditions of the day that follows are something I’ve never really gotten into.  Of course I’m talking about Black Friday, when shoppers get a day off of work to recover from eating too much and line up early in the morning to experience things like this in search of a good deal:

 

 

Now I appreciate saving money as much as the next person.  Studies have shown that the average person spends about $400 on Black Friday and that the average discount is about 40%.  (I’ll leave whether that 40% savings is realistic for another discussion).  That means that the average Black Friday shopper hopes to save about $250 by skipping sleep and navigating some pretty serious crowds.  Even if the scene is not my cup of tea, I can see where people are coming from.

So am I simply being lazy by staying at home and enjoying a peaceful weekend?  Maybe. But if anyone asks, I just say that I’m doing something that will save way more money than fighting over an inexpensive television or running for the last Princess Unicorn so you won’t have to buy one from that guy at the office.

I’m evaluating my expense ratios.

Sound silly?  Let’s run a few numbers.  The average 401k today contains about $100k, and the average actively managed equity mutual fund has an expense ratio of about 1.3%.  That means that many people spend about $1300 every year on investment expenses.  Now 401ks are notorious for having a poor selection of funds, but almost all of them offer some sort of low-cost index fund as an option.  Since the typical index fund alternative has an expense ratio of well under 0.2% with no measurable long-term disadvantage in returns, that means that lots of people pay about $1100 a year more than they have to in their retirement accounts.

Take a moment to switch to new low-cost index funds, and that savings is yours to keep not only this year but also every year into the future.  And due to the power of compounding the difference really adds up over time.

 

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These two Portfolio Growth charts show the exact same asset allocation, and the only difference is that one has an expense ratio of 1.3% typical of actively managed funds while the other has one of 0.16% using low-cost index funds.  Over time, small differences in expenses add up to hundreds of thousands of dollars!

So if you’re in a deal-seeking frame of mind, what seems like the best return for one day of effort — saving a few hundred dollars today or many thousands of dollars over a lifetime?  The choice is up to you, and I understand that “both” is still an option, but I’ll personally take the expense ratio savings and a turkey sandwich on the sofa over circling the mall parking lot for hours for a place to park.

Whether you love Black Friday or prefer to avoid the crowds, consider making the weekend after Thanksgiving an annual event to review your expense ratios.  Remember that they do change every so often so it’s worth checking in and shopping around.  It only takes a few minutes of your time, it falls at an advantageous time of year to evaluate any tax consequences of changing funds, and the potential savings from finding a better deal are tremendous.  And what better way to balance the excitement of gift giving than to take a moment to check in on the ultimate layaway gift to your future self?

You’re worth the effort.  Happy Thanksgiving!