When it comes to identifying what’s wrong with your investment portfolio, costs are probably not near the top of your list. But they should be!
In retirement, paying higher costs (through investment fees, expense ratios, and advisor fees) can reduce your income and overall balance, leaving you with less money to spend or pass on to your heirs.
On the other hand, investing in low-cost funds — coupled with reasonably priced financial advice — allows you to preserve more of your assets which could be utilized in any way you see fit.
A recent study estimates that there is currently over $16 trillion invested in mutual funds. This should come as no surprise considering mutual funds have long been viewed as an excellent way to grow and invest your wealth.
The problem is, there is a great disparity in the fees charged from one mutual fund to the next. What’s worse, these costs have a huge impact on the performance of your overall portfolio.
Why should you care?
High fees are the silent enemy of investment portfolios.
In fact, a study conducted by the Center for American Progress found that typical 401(k) fees of one percent per year would erase upwards of $70,000 from an average worker’s account when compared with lower-cost options.
Combine that with the fact that most Americans are already having difficulty trying to save enough for retirement, and it’s easy to see why investment costs are such an important factor.
So, let me ask you a question: how much are your mutual funds and investment advice costing you?
No idea? Well, you’re not alone.
Most people saving for retirement have no idea how much they’re paying in fees, and those that do, hardly know the full story.
What you should know
As I mentioned earlier, fees and costs are a huge determinant of the performance of your investment portfolio. Paying upwards of 2 to 3 percent in fees and/or commissions will significantly reduce your overall returns.
For example, the graph below shows the impact of fees on an average portfolio assuming a $10,000 per year investment with an 8% annual return.
*from the artofthinkingsmart.com
As you can see, going from 1% to 3% — which on the surface may not seem like a big jump — means you’re missing out on over $300,000.
Don’t go it alone
In a previous post, we discussed how competition among financial services firms presents unique opportunities for DIY investors to maintain a world-class quality portfolio for minimal cost. And it’s only getting better and better as competition increases and technology improves.
That being said, there is a mountain of data that argues the average person realizes higher portfolio returns (and less stress) by engaging with a qualified advisor than investing on their own. Now, while we know you’re far from average, chances are even you could use a little help from a financial expert.
So how can you take advantage of the financial knowledge that comes from working with an advisor, without absorbing costs that could substantially lower your net portfolio returns?
For starters, you must understand that while the advice of a professional can be beneficial, all advisors are not the same. Put another way, if you hire an advisor because they have a track record of producing higher returns but they charge higher-than-average fees, you may not be better off.
Objectively speaking, you’re not getting any extra value by paying higher expenses. In fact, I would argue that there is much less value attributed to an advisor that charges fees in the 1.5%+ range due to how much the cost lowers your net returns.
However, great net returns are possible with a qualified, transparent advisor who can explain all the costs associated with your portfolio in two minutes or less — jargon-free.
Think about it this way: if costs are complicated to understand, to whose advantage is the complexity? Yours or the firm creating the complexity?
I think we all know the answer.
Luckily, costs are one of many elements over which you have control — as long as you’re willing to invest the time and energy necessary to understand how much you’re paying, both directly and indirectly. As always, if you have questions about costs – or any of the other topics covered in this series – we should talk! Click here to schedule some time to discuss your unique situation and find out if Fox Financial is a good fit.