If you're a consistent investor, CONGRATULATIONS. That alone is a major accomplishment!
If you're not sure how to invest, click this link to take my masterclass on getting started.
As hard as you are working to save and invest, I'm sure you would want to know if something was draining your investments behind the scenes.
Well, something is.
It's your investing fees.
Fees come in several forms. The first is related to the investment itself. Each fund you choose has an expense ratio that represents the fund's internal operating expenses. It is represented as a percentage, and can be interpreted as the percentage of your returns that is taken from your account to pay for the fund's fees.
Not sure what the expense ratio is for the funds you've invested in? Just google the fund's ticker (collection of capital letters representing the fund name). Click the Morningstar link. The expense ratio will pop right up.
What's a good expense ratio? I prefer <0.10%. Most of my funds are <0.05%. It is common for actively managed mutual funds to have expense ratios >1%.
The other key place fees are incurred is with financial advisor fees. Some charge flat fees (by the hour or annually), but it is common to charge an Asset Under Management (or AUM) fee that is a percentage of your total investments. This will create a major drag on your portfolio. Avoid any commission based financial advisors, due to the conflict of interest.
Let's review a few sample scenarios. You are a hard working, diligent investor and decide to invest $20,000 per year from 20 to 50. We will assume the historic stock market return of 10% (for your all stock portfolio), for simplicity. We will ignore taxes in all scenarios.
If you manage your own money without an advisor and invest in low cost index funds, your balance at 50 is $3.5 MILLION. Yes, million.
If you invest in actively managed funds, but don't use an advisor, your balance at 50 would be $2.9M. Still a lot, but quite a bit less. I've assumed an average expense ratio of 1% here. I've also given actively managed funds the advantage of assuming the same returns as the index funds, although plenty of studies indicate actively managed funds fail to match their respective indexes over long periods of time.
If you invest in actively managed funds AND use a 1% AUM advisor, your balance drops to $2.5M.
The difference between Scenario A and C is $1 MILLION dollars.
This illustrates the significance of fees over time. If you don't know what your investing fees are currently, now is the time to find out!
Get free tips on saving money and building wealth delivered to your inbox.