What if Carmen were to tell you that you could add an extra percentage-point or two to the returns on your investments each year? It’s easy: pay less for the privilege of investing, because the lower the fees you’re forced to fork over, the more value you can get out of your money.
Stephen Horan, head of private wealth for the CFA Institute, said that while you can’t control the market, you can control the fees you pay on your funds. People underestimate the impact of these fees, he said. For example, let’s say you have a $10,000 investment that grows at 8% a year. After 10 years, you may have $22,000 but if there is just a 2% fee associated, the returns are decreased to 6% and you end up with $18,000 – 23% less money. The fees add up.
There are three fees in particular you should try to avoid:
2. Management fees
A fee that goes directly to the portfolio manager and varies by the type of fund. Equity funds tend to have higher management fees than fixed income, and actively-managed funds have much higher fees than index funds (the average on an actively-managed fund is about 1.5% per year).
3. Undisclosed fees
These don’t show up in the fund prospectus, so you have to be extra vigilant. Undisclosed fees typically relate to trading. When the fund manager buys or sells stock, they need an institutional broker to execute the trade. The higher the portfolio turnover (the more trades that are made), the higher the trading costs and thus fees passed on to you. There are no limits to fees on portfolio turnover.
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