Lower Fees, Higher Returns - Page 4 of 8

Lower Fees, Higher Returns

did, and because further weakening is expected. If you buy a foreign stock fund and the dollar weakens, the value of foreign companies’ earnings will increase for U.S. investors. Johnson’s investment advisor includes the following funds on her list: First Eagle Overseas (SGOVX) and Longleaf Partners International (LLINX).

Morningstar’s Portnoy also advocates holding international funds in your portfolio: “Foreign stocks do not perform exactly the same as U.S. stocks, so adding a foreign fund can reduce your overall risk. Foreign funds that buy mid-sized and small companies are more likely to hold stocks you won’t find in your domestic equity funds.”

Among fixed-income funds, Johnson and his advisor like PIMCO Real Return (PRTNX) and Columbia High-Yield (CHGAX). The PIMCO fund holds inflation-indexed Treasury bonds to protect bond holders against inflation. Columbia High-Yield invests in junk bonds but there are no C-rated bonds in the portfolio, so the quality is relatively strong. All of these funds have low expense ratios for their category.

Stay the course. A low-cost mutual fund may or may not post a good return in any given year. The real advantage of lower expenses will become apparent over the long term, so it pays to keep investing, no matter what’s happening with your life or with the market. Pat and Marc Marshall, both 38, of Mitchellville, Maryland, are building a family and a dream house, yet they still manage to invest in mutual funds. “We’re in for the long term,” says Marc, a business development executive at a high-tech company. “We practice dollar-cost averaging, putting money into funds each month. When prices go down, we can buy more shares, which probably will pay off over the years.”

The Marshalls invest in funds through a discount broker and they buy no-load funds (funds with no sales charge) to hold their costs down. “We own Janus (JANSX) and Janus Worldwide (JAWWX),” says Pat, a mortgage banker, “so we have domestic and foreign funds.” Both funds are well below their category averages in expenses and they have excellent long-term records, although recent results have lagged in the 2000 — 2003 bear market. “We also own Invesco Telecommunications (ITLAX) and Red Oak Technology Select (ROGSX),” says Marc. “These are specialized funds and they can be volatile, but I like to invest in what I know.”

LeCount R. Davis, a certified financial planner and registered investment advisor in Bethesda, Maryland, who has advised the Marshalls, says he is always mindful of the cost of the funds he recommends: “We have several criteria when we pick funds, and a low expense ratio is one of them. We want the funds on our ‘buy’ list to be below average for their category when it comes to expenses. The more a fund spends, the less profitable it is and the less clients will have.” Other criteria Davis uses in his fund picking include consistency of returns (in relation to a fund’s category), continuity of management, and adherence to a specific investment style.

You can also cut your costs by avoiding sales