Fees are an Investor’s Worst Enemy (2016 Update)

 

Fees are an investor's worst enemy
Fees are an investor’s worst enemy

“In the short term the impact of costs may appear modest, but over the long run, investment costs become immensely damaging to an investor’s standard of living. Think long term!” – John Bogle

Nothing will eat away at investment gains faster and more pronounced than paying high fees. These fees can come from a number of different sources and often you don’t even know that you are even paying them.

For example, did you know that the average transaction costs a for a mutual fund is 1.44% per year. This is in addition to the average management expense ratio of 1.25%. By owning that mutual fund, you are subject to paying at least 2.69% in fees. Add in the taxes and other fees charged by the mutual fund company, you end up paying a lot of money, which over time leaves you with less money to retire on.

There is a way to make your investments earn more money over time, and that is by simply managing what you pay.

 

Highlighting the Impact of High Fees on Investment Returns

The power of investing for retirement comes from compound returns. Compound interest is like a snowball speeding downhill. Given enough time, the snowball accumulates more and more snow until it is one massive ball. Compound returns work in a similar manner. As your portfolio gets bigger. The returns compound on top of each other which can turn a small amount of money into a huge one.

The problem is that with portfolio fees, the compounding impacts can work in reverse. The fees that you pay each and every year take money out of your account, which erodes your ability to benefit from compounding gains.

Here is an example that highlights how impactful high fees can be to a portfolio, straight from the SEC:

Investing $100,000 over 20 years
Investing $100,000 over 20 years

 

Just by adding 0.75% in fees to an account, the investor loses $30,000 over a twenty-year period. Imagine what the impact will be if you were looking at most mutual funds with average fees of 2.5%.

 

How to Avoid High Investment Fees

The good thing is that there are a number of actions an investor can take to avoid high fees when investing in order to maximize returns. Here a few of the most impactful tools investors can use.

 

Choose Low-Cost Index Funds

Instead of investing your money into higher fee mutual funds, seek out and invest in low cost mutual funds. Vanguard and Blackrock both have quality ETFs that charge as low as 0.09%.

 

Stick with Discount Brokers

An easy way to lose money is by paying high commissions when you buy and sell stocks or ETFs. These commissions are charged every time you buy and sell. It can add up if you are constantly adding money to your account which means you are often buying more shares. Look for low cost brokers who charge no more than $9.99 per transaction. Even better, check out Robinhood which offers free commissions on all trades.

 

Do Not Pay Account Fees

With the amount of competition in the investment world, there is no need for an investor to pay what are called annual account fees. A number of brokerage houses like to try to charge up to $100 per year to administer your account. If your broker charges you these fees, simply call them and ask them to waive them. If they don’t, tell them you are going to move your funds to another broker who does not charge you these fees. Once you threaten to do this, they will more than likely waive that fee for you.

 

See the Impacts of Fees for Yourself

Now that you have seen how devastating fees can be on your portfolio, and how easy it is to avoid them, go now and make sure you are maximizing your gains by removing costs from your portfolio. This act alone will have a huge impact on your future portfolio value. However, if for some reason you are not convinced yet, simply head over the Bankrate’s investment fee calculator and plug in your own numbers to see the huge impact fees can have on a portfolio.


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