Most investors will never see a bill for the fees they pay. The cost is taken quietly from the value of the investment, which is why it is easy to dismiss one percentage point as small.
The example
Start with $10,000 and add $300 a month for 30 years. Suppose the investments return 6% a year after the cheapest costs, and compare that with the same investments after an extra 1% a year in fees (5% net).
| After 30 years | |
|---|---|
| 6% a year | about $361,600 |
| 5% a year | about $294,400 |
| Difference | about $67,200 |
The extra fee costs roughly 19% of the final pot, on money you put in yourself.
Why it is bigger than it looks
Fees do not only take a slice of this year’s return. They remove money that would otherwise have earned returns for the next 29 years. Costs compound, just as returns do. The longer you invest, the more that matters.
What to ask
- What is the total annual cost, including fund fees, platform fees and advice fees?
- What do I get for each layer of cost?
- What would a plain, low-cost alternative cost, and how does it compare?
Those are two of the five questions from the book, Cost and Alternatives. Try your own numbers in the cost-of-investing tool, and see Chapter 21 for how to read what you are charged.
Illustrative assumptions: constant returns, no taxes, monthly contributions. Real returns vary and are not guaranteed; this is general education, not personal advice.
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Try it with your own numbers
The cost of investing
Want the checklists that go with this? Checklists, questions and worksheets inspired by the book, for the next time money is on the table. Part of the Reader’s Letter: a few times a year, never more.
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More notes
Five questions to ask before any money decision
Time, Cost, Risk, Incentives, Alternatives: five plain questions that work on a loan, an insurance policy, an investment or a pension, whatever the pitch.
The quiet tax: what $1,000 buys in 20 years
Inflation never sends a bill, but it takes purchasing power every year. At 3% it removes almost half of what a sum of money can buy over 20 years.
The minimum payment trap: how $3,000 can take 15 years
Paying only the minimum on a credit card keeps the balance alive far longer than most people expect. A worked example, and the one change that fixes it.
General information and education only, not personal financial, tax, legal or investment advice. Figures are illustrative and use simplified assumptions.