Why Investment Fees Matter So Much

A 1% fee sounds like nothing. Over an investing lifetime it is one of the biggest costs you will ever pay.

The reason is compounding. Fees compound too, in the wrong direction.

The math

Suppose you invest $500 a month for 30 years and the market returns 7%. With no fees you end up with about $610,000.

With a 1% annual fee your return drops to 6%. You end up with about $502,000.

The fee took $108,000. You paid far less than that in actual charges, but the money you paid stopped compounding.

Mutual funds and ETFs charge an expense ratio. It is deducted from the fund daily, so you never see a bill.

Financial advisers often charge 1% of assets a year. Some funds also charge sales loads when you buy or sell.

401(k) plans can add administrative fees on top. Your plan documents list them.

Broad index funds charge 0.03% to 0.20%. That is the benchmark.

Anything above 0.5% needs a good reason. Above 1% the fund has to beat the market by a wide margin just to break even.

Most active funds do not manage that over long periods.

Check the expense ratio of every fund you own. It is on the fund's fact sheet.

Prefer index funds for core holdings. Ask any adviser exactly what you pay and what you get for it.

Run your own numbers in the investment fee calculator.