We all enjoy keeping as much of our hard earned money as possible. So why would you throw your money out the window on fees? Today we're going to talk about why and how you should avoid pesky fees when it comes to your investments. We'll also talk about some basic strategies and assets you can obtain to maximize your capital and reduce your costs.
Types of Fees
Fees pop up in every asset class in the financial world. Brokerage firms naturally want to make money, and in order to do that they charge their customers small (sometimes not so small) tolls. Finding the correct fund or security to purchase with the lowest fees possible can make a huge difference. Fees act like negative compound interest and reduce your returns. We discuss how compound interest works in Beginner Investing: Compound Interest.
Management, redemption, and trading fees are all common in the investing world. Management fees, like the names suggests, are fees that brokers charge in order to pay their employees who are doing the research and deciding what to buy for the fund. Many ETFs and index mutual funds have low management fees because of the simplicity of the fund.
Redemption fees are charged to a long-term investment when the money is pulled out early. It is to discourage mutual fund timing, or in-and-out short-term trading of mutual fund shares. The range when redemption fees are charged ranges from a month to a year or longer.
Trading fees are fairly simple; every time you make a trade, you pay a trading fee. This is extremely relevant for short-term traders and derivatives traders. If your trading fees are between $7 and $10, you could be losing large amounts of cash on your short-term trades just from fees. These can add up over hundreds of trades and make a large dent in your bottom line.
Impact of Fees On Your Investments
We talked earlier about the impact of fees on your investments, but an example will help illustrate my point. An investment of $100,000 over 20 years at a 4% annual return, and .25% fees will accrue approximately $210,000. The same investment at 1% fees will end up with around $180,000. Over 20 years a grand total of $30,000 was lost in fees. The percentile difference between the two investment tracks is only .75%, but the numerical amount is mind blowing. Losing 30% of your initial investment in fees is crazy!
The difference between having money to last you throughout your retirement and coming up short can be decided on fees alone. Smart allocation of investments in low cost, consistent return assets will amount to an even, controlled growth of your investments over time.
Low Fee Investments
Let's talk about low fee investments. Are there assets that normally have lower fees? Where do I find them? Finding those elusive low fee, low risk, high return assets is what every investor is hunting for. The crew here at CollegeInvestr would like to help get you on the right track.
Some assets naturally have lower fees because of their simplicity. Like we mentioned earlier, index mutual funds and ETFs generally have lower fees. The management costs are much lower because the work involved for the investment company is minimal. The work has already been done. Most follow an index that is predetermined. The companies consisting the index have been around for years and compiling the fund is simple. I highly suggest ETFs and index funds personally.
Where can you find these low fee funds and ETFs? You can ask hundreds of investors and one name in particular will pop up repeatedly: Vanguard. Vanguard provides low fees because of the cost structure of the company. The grand scale (1.7 trillion in managed asset) allows Vanguard to charge minuscule fees and stay afloat. Vanguard goes offer managed funds, and some of them make respectable returns, but they are most known for their index fund expertise.
Overall, fees are a natural part of investing. However, crippling yourself and losing money needlessly is not. Do your research, look at all of the investing companies that offer your fund or asset, and pick the best one. A good combination of low fees and attractive return will steer you away from the rocks and into independent wealth.
My site CollegeInvestr.com covers topics ranging from basic budgeting to market research and commentary. My main focus is to provide information for young investors trying to build wealth and reduce student loans. If you’ve liked this article, come check out more of my material!
David's main goal is to provide finance and investing education to young college students looking to pay off student loan debt and increase wealth.
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