FEES NIBBLE MAY LOOK LIKE A BUT THEY STING LIKE A BITE
HOW TO PROTECT YOUR INVESTMENT
The best way to invest is with patience, avoiding emotional overreactions during short-lived downturns and allowing your money to grow over time. But while time can compound investment returns in a dramatic way, it can also compound your costs. That means even small fees can make a huge difference in your nest egg. Consider that if you invested $100,000 today with a 5% annual return and 1% in annual fees, you would wind up with about $320,000 in 30 years … but that same initial sum and rate of return would only result in $240,000 or so if you paid 2% in annual fees. So if you’re concerned about saving for retirement, don’t fall into the trap of focusing only on your investment gains. Keeping fees down can be just as important in the long term. you sell fund shares to take a cut. Sometimes these fees can take a big bite out of your nest egg — as high as 8.5% under current regulations — so make sure you know the fee structure before you invest in a high-priced fund.
ADVISORY FEES
If you’re getting advice on fund selection or portfolio construction, almost certainly the person who’s giving that advice is being compensated in one way or another. You want to understand how your adviser is being compensated, both to know what extra fees you’re paying and to see if there are any conflicts of interest, such as a commission for recommending certain funds over others. The good news for savers is that investment fees continue to decline. According to Morningstar research, the average expenses charged by mutual funds and ETFs declined yet again to a new record low in 2015; the average weighted expense ratio of U.S. funds fell to 0.61%, or $610 a year on a $100,000 investment.
BOTTOM LINE
There obviously are other elements to a successful investing strategy, says Russ Kinnel, director of manager research at Morningstar, including a good asset allocation and the discipline to save consistently. But he adds that keeping your expenses down is one of the simplest and most effective ways to ensure a successful retirement plan.
“It’s not hard to find good low-cost funds,” says Kinnel. “It may mean you have to pass up some of the shiny funds that put up huge returns, but it’s not hard.”
He adds that seeking out cheaper investment options is also one of the few things investors can control in a market that always tends to be full of uncertainty.
“If you focus on things you can control, like fees, like your savings rate, then the things you can’t control are going to have less of an impact,” Kinnel says. “If you understand your long-term goals and how you’re getting there, it makes things much less daunting.”