This is one of the biggest detriments for both new investors and seasoned investors. Lots of things can’t be controlled in investing, but fees are definitely NOT one of them.
If you read any of John Bogle’s books he often talks about how the financial industry is by far the biggest drag on personal wealth. Many fail to see it and, thus, lose much of their potential gains to this scourge,
Many items seem to be only small fees so they are overlooked by the investor. Bad idea! The longer someone invests, the compounded effect of these fees grows. At year twenty (You are investing for retirement, right?), the effect can easily be in the thousands of dollars.
This year I purged what few mutual funds and ETF’s I had out of my portfolio. Over 20 year holding periods, stocks (on an IRR basis) blew mutual funds out of the water by 7 percentage points. Do the math and you will see the negative compounding effect fees have on returns.
Here are a few to watch closely:
- Front end loaded funds. With a 5% load, only 95 cents of every dollar invested goes to your benefit. You start out in the hole!
- Mutual fund annual expenses. The more AUM the fund has, the more operational leverage the management company has. What this means is the same investment processes are done for a 10M, 100M, 1B or 10B fund. The expenses don’t rise very much with more money to invest. This is worth more, way more than a gold mine to the management company.
- Wrap fees. These are paid every year forever. They are charged on the entire portfolio no matter if anything is done for the investor or not. Does your doctor take a percentage of you net worth each year just for being your doctor? Does your mortgage broker take a percentage of your house value every year for helping with the initial sale/purchase? That is ludicrous, but that is what the financial industry does and many just accept it to their significant detriment.
To be successful in investing requires paying close attention to fees no matter how small. There is a lot in investment that cannot be controlled. Fees are not one of those!
Be smart, be well-read, be aware and be successful.
“When trillions of dollars are managed by Wall Streeters charging high fees, it will usually be the managers who reap outsized profits, not the clients.”
-Warren Buffett.
