Index Funds Are A Commodity, and Checking Accounts Are Too
May 9, 2008 – 6:08 amIndex funds are a commodity. Buy the one that is least expensive.
I’m a big believer in marketing and the value of name brands. I love my New Balance running shoes, and I wouldn’t trade them in on a pair of Nike’s for anything (except perhaps a free pair on Nike’s!).
I don’t, however, believe in buying name brand gasoline, flour, or water. If you can’t perceive a difference in product quality there’s no tangible reason to purchase a more expensive product.
The same goes for investments as far as I’m concerned. If two index funds track the same index and one costs more than the other, go with the lower cost option. This could be a little bit of work initially, like transferring assets to a different account or having one more account to manage, but you’ll be saving money for YEARS.
Consider this: some people spend time each week clipping coupons and price shopping to save $10 on this or that. Others go and get their oil changed or hair cut based on whether or not they have a coupon or discount. Yet many of us are investing hundreds and thousands of dollars but not price shopping for the best deal! And you pay expenses every single year based on your assets.
I think Vanguard is a great company and has the lowest cost funds around, but if I find a better deal for the same investment I’ll switch in a heartbeat (for new invested dollars; switching out of existing shares can have tax consequences, so consult your tax adviser if this applies to you).
On a related note, you should really look at the rate of return on your checking and savings accounts as well. In an era of no-fee checking, free online bill-pay, and free Automatic Clearing House (ACH) transfers, switching from one checking account to another will probably take you less than 30 minutes. If your checking account doesn’t pay interest or charges you fees, even for ATM usage, you should consider switching to a bank that does.
Like the index fund discussion above, most checking accounts are commodities these days because they offer all of the same services. I would look for the following traits in a checking account:
- No annual fee
- Pays interest (more than 1%)
- Free checks
- No ATM fees (i.e. the company will reimburse you for a certain number of ATM withdrawals each month)
- Free deposit slips
- No or low minimum balance
- FDIC insured
Some initial recommendations worth considering are:
- Five Cent Nickel has a good post and summary of accounts his readers recommend
- Consumerism Commentary keeps an up to date list of checking and savings accounts
- GetRichSlowly compiled a list about a year ago that might be worth a look. The rates are probably out of date, but the list contained the usual suspects.
- Blueprint for Financial Prosperity also did a review on online banking accounts.
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