Behold the wonder that is the Invesco American Franchise Fund, class A shares.

I meet people all the time who have no idea what the funds in their company retirement plans do, or what they cost. There are over 7,700 mutual funds in the U.S, and I only learned of this one when a prospective client showed me an old employer 401k plan that had shares in this fund.

I will now pick on them not because they are unusual, but because they are typical.

All mutual funds are required to publish a prospectus: the document that spells out all of the horrible, horrible things that can happen if you invest in their fund as well as all of the charges and expenses they will make against shareholder funds.  I think more people spend time writing these things than people do reading them.

On page 5 of this little gem, the Invesco company spells out the price of the Invesco American Franchise Fund, class A shares.  Here, let me save you the trouble: 5.5% up front sales fee (day 1); annual operating expenses of 1.14%.   They then take the issue a step further with an illustration of what those fees could amount to: a mythical $10,000 invested with them that grew at 5% return every year.

After ten years, the investor’s $10k has grown to $13,801.  Keep that number in your head.

If our client had bought an index fund with annual expenses of 0.2% and no up-front sales charge, after 10 years of the same mythical 5% annual return his investment would now be worth $15,981.

Remember, the fund’s growth in both cases was exactly the same.  The only difference was the cost of ownership.  For the moment I will ignore the fact that most actively manage mutual funds fail to beat their index counterparts!

Which would you rather have: $13,801 or $15,981?  Phrased differently: would you rather hand 5% of your investment’s performance to the manager, or 40%?  As John Bogle might say, “to ask that question is to answer it.”

There are cars that cost $20,000; there are also cars that cost $160,000.  If you were paying 8x as much for a car, would your expectations be a bit different than for the lower priced car?

Don’t pay Porsche 911 prices for a car that cannot out-perform a Honda Fit.