Investment is the key to growing your wealth over the years and building a retirement fund you can rely on. However, investing isn’t free—there are many costs and fees involved with the process, especially when it comes to ETFs and mutual funds.
All too many people begin their investment journey without considering the effects of these fees in the long term. Some don’t even realize they’re paying fees on their investments at all!
“Choosing investments with high fees could ultimately make the difference of hundreds of thousands of dollars in your retirement fund,” says Samuel Rad, financial planner in Los Angeles.
The impact of fees
Have you stopped to consider how much money you’ve lost due to investment fees? The costs of investment have the potential to significantly reduce the money you could be saving for your future in a few ways.
First, many fees are taken as a percentage of your investment year over year. These fees will compound with your returns, meaning, as your investments grow over the years, so do your costs. Over time, you stand to pay a lot of money in fees.
Second, the money that you’re paying in fees is money that could be growing in your investment account, meaning you’re losing even more potential profits.
This is why understanding the fees associated with your investment accounts—and their impacts—is so important. A fee of 1.0% might not seem like a lot at first, but as your wealth accumulates, 1.0% can cost you thousands of dollars!
Types of investment fees
There are numerous types of fees associated with investments. Most people will be faced with expense ratios, which are fees to cover administrative and operating costs for mutual funds. These fees are taken as a percentage of your investment and get deducted from your returns—and they’re not always small. Some expense ratios exceed 1.0% or even 1.5% and can significantly detract from your overall returns.
Other fees may come with the purchase or sale of investments and may benefit the broker (via commission) or the investment company. Some of these fees will be flat, such as a few dollars for each transaction, or a percentage of the investment on either the front or back end (called loads).
Pay attention to fees to maximize your investments
In order to best build your nest egg, you must pay attention to the investment fees you’re paying and take action if there are better options out there. If you don’t, you might be surprised to discover how much money is being lost.
If possible, check on a fund’s fees before you invest so you can calculate the potential cost of fees over time. If you currently hold investments, look to see what fees you’re paying and how they’re impacting your lifelong returns.
You don’t always want to choose funds with the lowest fees, though. Make sure to balance the fees you’d pay with the returns you expect from each fund. Take time to examine your options. Funds with higher fees may still earn you more than funds with lower fees—but you need to do the math.
Working with a financial advisor in Los Angeles is one of the best ways to discover how much you’re paying in fees, what these fees mean for your investment portfolio and what can be done to alleviate costs.
And, make sure you’re working with an advisor who isn’t recommending funds solely because they’ll earn good commissions on them—work with someone who will suggest the proper path for you and your retirement goals.