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Fees Matter!
By JLP | February 5, 2008
Okay, we all know that investing involves fees. However, did you ever think about just how much you could spend in fees over a 20 or 30 year period? It’s probably a lot more than you think it is. Why? Because fees compound along with the growth of your investment. And, even in down years, you are still charged a managment fee.
To get an idea of just how big of a bite a managment fee can take out of an account, I put together a couple of graphics. The first one assumes a 20-year investment period of a $10,000 lump sum investment (not including mutual fund sales charges or loads). Each section of the graphic looks at a different annual rate of return along with different annual expenses. The returns were calculated by subtracting the annual management fee from the rate of return and using that number to get the growth factor. Then the growth factor was multiplied by the $10,000 lump sum to get the future value of the investment. Make sense? If not, the graphic should explain it:
Wow! A 3% management expense nearly ate up half of the growth of the investment! Granted, 3% is a very high expense ratio. I included it because some variable annuities charge that much per year if you get all their “bells and whistles.”
Anyway, if you thought that was bad, take a look at what happens over a 30-year period:
At the 3% expense ratio, the amount spent on management fees was actually MORE than the account was worth at the end of the 30-year period! For instance, take a look 10% ROR section of the last graphic. Assuming a 3% expense ratio, at the end of 30 years the account would be worth $76,123 but you would have spent over $98,000 in fees over the 30-year period. Compare that to the account with the .50% annual fee, which would have grown to over $152,000 over the same period. That’s quite a difference.
Bottom line: Fees matter. You’re not gonna get something for nothing, but there’s no reason to spend more than you have to.
More follow-ups to come…
Topics: Investing, Mutual Funds |
