THE COST OF INVESTING

Most investors can tell you how their portfolio has performed at any given time. However, very few of these people can tell you how much they paid for this performance.  Many times fees are a major contributing factor of investor underperformance.

Depending on the type of investment, people are subject to various expenses, including:

• 12b-1 Fees: Annual sales commissions paid to the broker who sells you the mutual fund or annuity,

• Front Loads: One-time sales fee charged when investment is purchased,

• Back Loads: One-time sales fee charged when investment is sold,

• Redemption Fees: One-time fee charged if investment is sold before a specified timeframe, and

• Management Fees: Annual fees charged by the investment manager (usually as a percentage of assets under management),

In addition to these fees, a fund investor is subject to transaction fees and capital gains taxes. These expenses are a direct result of the amount of trading activity by the fund manager.

Total fees can range anywhere from 1% - 7%. Needless to say, these fees will quickly erode an investor’s rate of return and unnecessarily destroy an investment. Unfortunately, most people do not realize the impact that ONLY 1% annually will do over a long period of time.

Below is an example of the damage higher fees will have on your investments.

PAY LESS, EARN MORE

THE ASSUMPTION: You invest $10,000 a year for 30 years and your average annual return is 9%.

Obviously, we will have more money if we are only paying 1% of assets versus 2% of assets (annually) for investment management.  But, do we know what this number will amount to over time?

THE RESULT:

• 9% Net Return: Assets will grow to $1,363,075.
• 8% Net Return (1% increase in fees): Assets will grow to $1,132,832 or 17% less.
• 7% net return (2% increase in fees): Assets will grow to $944,608 or 31% less.

ANALYSIS:

If two investments are providing the same return, why should you pay more for one than the other? An examination of an investment’s fees is the simplest way to improve your returns. And by saving 1% - 2% on annual fees, you will dramatically improve your long-term return.