Manage and Lower Your Investment Expenses and Fees
Another important investing rule required to stay on the right investment path is to keep your investment fees and expenses low. The effect that fees have over the long term can take away multiples of your return if you do not manage them well.
For example, if you invested $100,000 today, earned 10% each year, and paid fees of 5% each year, you would have $374,500 in 30 years. If you invested the same amount of money but paid 3% in fees, you would have $700,000 in that same time frame. If you paid only 1% in fees, you would have $1,290,000. And if you paid no fees, you would have over $1,700,000.
Some tips on how to keep your investment expenses low
Mutual Fund Fees – Mutual funds should be a part of any well diversified portfolio. There are a few mutual fund companies that charge very reasonable fees and provide highly rated funds that cover any sector you may desire to invest in. Our two favorite are Vanguard and T Rowe Price. There fees are almost always below one percent and their funds consistently rank among the top tiers. There are thousands of small funds that charge high fees and do not offer better returns. We recommend avoiding these funds, as every fund you desire can be found at a low cost fund company.
Exchange Traded Funds – Exchange traded funds typically track a market index. They are typically passively managed and have fees even lower than the lowest mutual funds. If you want to buy low cost funds that track the market of an individual sector, then these funds are likely the best way to keep your investment fees low.
Financial Advisors – Fees from financial advisors can be higher than any other investing fees. They can come in many forms so make sure you know what to look for. We would recommend avoiding giving your money to a financial advisor to invest, but instead, if you need help, hire a financial planner or advisor to help you come up with a plan. Find an advisor that you pay by the hour, instead of as a percent of assets. Advisors make money in four different ways. Some charge a fixed percentage of the assets they manage. For example, if you invest $500,000 and they charge 2%, you would pay them $10,000 a year. The second way advisors charge is by the hour. Rates can range from $50 to a few hundred per hour, and you will be charged for the time they spend on your behalf as well as the time they spend with you. The third way financial advisors make money is through brokerage commision fees. While not all make a profit on these fees, some advisors trade through their own companies and often charge higher commissions than discount brokers. The fourth way brokers or financial advisors make money is by selling you funds that they get paid sales fees on. Some funds encourage advisors to sell their funds for them and pay them an extra sales fee if they do. These funds include load funds, whereby a fee is paid at the time of purchase and that fee goes to the advisor.
Brokerage Fees – Unless you need a lot of help with your investing, there is no reason to use any broker except for a discount broker. Discount brokers charge fees and commissions that are a fraction of traditional brokers. Many of the larger discount brokers now offer access to investment research as well as have brokers or free advisors that will help them choose investments.
In some cases it is worth paying some of these fees if you are earning a much higher percent than the low fee providers, but this is rarely the case. It is a fact that financial planners and money managers rarely perform better than the market averages, or than individual investors that stick to a simple diversified investing plan.
In summary, investment fees DO matter. Don’t invest in mutual funds that have high fees. Don’t pay a financial advisor more than a few percent of your assets each year. Don’t let your broker charge you for inactivity fees or high margin rates. These fees really do make a difference in your long term return.
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