Fees and Expenses Matter: Don’t Pay More Than You Need To

When you know the impact of little expenses, you will realize that there is nothing little in this world.

— Manoj Arora, Author

If you’ve ever ordered room service at a fancy hotel, you know that your club sandwich and soda will be marked up significantly from what you’d pay at the deli down the street. Many investment products are similarly marked up. And unlike an expensive sandwich, unnecessary investment costs can significantly eat into your returns over time.

In addition, a 2016 study by Morningstar, found that costs are the number one determinant of future performance. The higher the cost of an investment, the less likely it is to outperform its peers. And as the complexity of investments rise, so do their costs. Hedge funds, for example, typically charge 2% and 20% of any profits.

The good news is that it is getting easier and easier to understand what you are paying — and find lower cost alternatives.

Mutual Funds, especially those that are actively managed, also have a number of fees and expenses that can really add up. In fact, active funds are typically twice as expensive (or more) as index or asset class funds and generally don’t perform as well. This is why it is so important to read the prospectus carefully for any product you are considering and understand exactly how much you are paying. Investing isn’t free, but it doesn’t have to be overpriced.