The Impact of Expenses on Your Returns

Check this out. Below is a summary of two portfolios I have been tracking. These portfolios are invested in EXACTLY the same thing with EXACTLY the same allocation. Yet, Portfolio A has had an average annual rate of return of 11.00% compared to Portfolio B’s 12.67%:

So, what accounts for the difference?

Portfolio A started out with $10,000 while Portfolio B started out with $100,000, while the account fee stayed the same ($199).

The account fee stayed the same because I’m simulating these portfolios using FOLIOfn‘s fee structure. Naturally, as the portfolio grows, the smaller the fee becomes as a percentage of the account value, which increases the net return.

There’s not a lot that can be done about this. Sure, you could probably find a cheaper brokerage firm (something I’ll go into later). For the most part, investors with smaller account values just have to suck it up and work on growing their portfolios. I definitely wouldn’t let this stop me from investing.

3 thoughts on “The Impact of Expenses on Your Returns”

  1. So, in your case the cost difference is the result of the respective size of the accounts, however, in many cases people pay higher fees for for no good reason. For example, instead of investing in a Vanguard S&P Index fund with an expense ratio of 0.18%, they invest in a more expensive S&P index fund with an expense ratio of 0.6% or 0.8%. Over paying for the same investment vehicle means that people are needlessly cutting down their investment returns. Costs are often self inflicted.

  2. Hey JLP:

    We’ve had kind of a serious situation going on over at my site: I am asking for some help from the personal finance bloggers to help spread the word.

    SEE: Press Release

    I sent out a press release to notify Canadians of a potential bogus demand letter scam.

    After a few postings on our forum about Deanna Natale and Natale Law Office in Feb-Mar 2007, there were hundreds of visits to our site from others who were presumably receiving the same letters.
    Main Thread:

    In the press release I’ve included some tips as to what people can do to determine if they’ve actually received a bogus demand letter.

    If you could write a small alert in your main area, it would be much appreciated.

  3. I think many people buy funds that have a higher expense ratio because of ignorance more than anything. It’s not like companies would really spend money to educate people on this since they are in essence moving people to the Vanguard Index Funds if they do so. Hopefully blogs like ours or independent 3rd party websites can spread the word enough so one day everyone can benefit!

    My Own Millions Blog

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