How fees impact your investment portfolio — and how to save on them
Investment-related fees are on a downward trajectory, The Wall Street Journal reported. Just recently, an index-tracking fund with a 0.2% fund fee arrived on the scene, which, per the Journal, is "the culmination of a decadeslong fee war among asset managers." Nowadays, it's possible to create "a fully balanced portfolio using ETFs without paying more than 0.05% in total fees," whereas just 20 years ago, that same portfolio would've carried "around a 1% average fee," according to the Journal.
Despite this good news for investors, it's still important to avoid getting too comfortable and stay vigilant about what fees you pay. Even seemingly small fees can take a big bite out of returns.
How can fees affect my investment portfolio?
It's easiest to see how investment fees can add up by taking a long-term view of an investment portfolio. Illustrated by Forbes, here's how fees would impact returns from a model portfolio comprised of 20% bonds and 80% stocks:
Now let’s assume the model portfolio charges an annual fee equal to 1% of its value. Seems like a very small amount, right? But over the course of 45 years, this seemingly insignificant fee would consume almost one third of the final portfolio balance. It would be worth around $1.1 million, fees having cost approximately $480,000 in total.
If the portfolio had only charged a 0.50% fee, the final value would be $1.3 million, with fees consuming only $216,000 over the life of the investment.
Further, according to Forbes, "higher fees don't translate into better after-fee returns" — and there's even evidence to suggest that "low fees tend to lead to higher investor returns." Per Vanguard, this phenomenon is due to the fact that "the fund managers charging these costs have a difficult time adding enough value to overcome the additional expense."
What types of fees should I look out for when investing?
Here's a look at some of the fees you may face when investing:
Management or advisory fees: This fee, per Fortune, "is the percentage of your portfolio that you pay to the advisor or financial institution that is managing your account."
Trading fees: You'll owe trading fees anytime you sell or buy an investment. The amount "may vary depending on the asset you’re buying or selling and how many trades are executed per month or year," Fortune explained.
Expense ratios: This fee applies to ETFs and mutual funds and is "expressed as a percentage of your average net assets," per Fortune.
Transfer fees: Transfer fees apply if you transfer funds from your account or make a wire transfer.
How can I save on investment-related fees?
So, how can you save on fees and retain more of the investment returns you make? Here are some tips to keep in mind:
Read the fine print: If you're aware of potential fees, you can act accordingly to avoid them. For example, "some brokerage firms will hit you with an annual fee if you don’t trade or if you don’t maintain a specific amount in your account," in which case you could either adhere to those rules or go with another brokerage, explained Investopedia.
Make sure a deal isn't too good to be true: Similarly, it's important to read the fine print to get wise to marketing tactics. As Vanguard explained, "some funds may charge extremely low expense ratios — but add front- and back-end loads," or they could jack up expense ratios after a temporarily low intro period.
Don't be so afraid of being passive: As Investopedia pointed out, "an easy way to lower the amount you pay in fees is to move to a low-cost fund like an index fund that tracks specific indices or an ETF."
Opt for a discount brokerage: Another cost-saving tactic is moving to a discount brokerage. While you might not have as much in terms of research and tools, you'll likely save on management fees. If you're not so keen to trade down, another possibility is to slow your trading activity. Not only will this cut back on transaction fees, it could result in "higher returns over the long term," noted Investopedia.
