Expense Ratio
Definition
The annual cost of owning a mutual fund or ETF, expressed as a percentage of your investment. A 0.05% ratio on a $100,000 investment costs $50/year. A 1% ratio costs $1,000/year. Over decades, expense ratios compound into serious money.
Why It Matters
Low-cost index funds (0.03-0.20% expense ratios) outperform high-cost actively managed funds (0.5-2% expense ratios) most of the time. After expenses, most active managers underperform. The difference is: let someone else keep 1-2% of your returns annually or keep that compounding.
Example
Invest $50,000 at 8% annual returns. At 0.1% expense ratio: you pay $50/year, keep $4,000 in gains. At 1% expense ratio: you pay $500/year, keep $3,500. Over 30 years: 0.1% = $768,000. 1% = $505,000. The difference: $263,000.